Cheaper

Although we grapple with an elevated inflation rate, not all goods are more expensive today that they were three or four years ago.

While fuel prices have been increased over the past week, they are still much cheaper than they were during the period when crude sold for over $100 per barrel a few years ago. Electricity, at least in the Meralco service area, is also much cheaper than they were – notwithstanding recent increase in tariffs due to a rise in generation charges.

During the bad old days before competition was enforced on the power generation sector, the Philippines used to have the second highest power prices after Japan. That high cost power regime nearly wiped out our manufacturing base as high power costs made our products uncompetitive.

With a more competitive power sector, driven by new plants producing power at lower costs (notably coal), we have managed to achieve more reasonable pricing for electricity. A recent survey done by the authoritative International Energy Consultants (IEC) involving 46 Asian markets underscores this.

The IEC study finds that Meralco’s average tariff (excluding VAT), computed in dollar terms, declined 4 percent since January 2016. The significance of this is magnified by the fact that, in all the other markets surveyed, electricity rates rose by an average of 12 percent. While the consumer price index for the same period rose 19 percent, Meralco residential rates went down 18 percent.

Meralco’s average tariff now ranks 24th out of 46 countries surveyed and 4 percent below the average of all these markets. Most of those with cheaper power rates than we have benefit from subsidies in various forms. Some of these subsidies cover over half of electricity prices. In our case, the full cost of power generation is passed to the consumer.

While power subsidies might bring short-term relief to consumers, they are patently unsustainable in terms of fiscal stability. We know this only too well. In the mid-eighties, the country was thrown into a debt crisis. A large part of the debt was incurred subsidizing power, fuel and water – policies implemented by a regime desperately buying popularity.

Malaysia, Indonesia, Thailand, Korea and Taiwan keep their power rates low through subsidies averaging at 41 percent. The subsidies in these countries – in the form of cash grants, subsidized fuel or deferred expenditure – add up to $800 billion.

Others with lower power rates than we have use nuclear power. Nuclear plants generate power at the least cost.

According the IEC managing director, Dr. John Morris, who supervised the region-wide study, Meralco’s residential customers now pay 8 percent below the global average. Morris observes: “This is an excellent outcome for consumers considering the Luzon power market is unsubsidized and the majority of electricity is produced using imported fuel.

Over the past two years, Meralco tariff increased by only 3 percent. This happens despite the double-barreled effects of rising fuel costs and the depreciation of the peso.

The power sector deserves to be commended for superior management of generation and distribution. The gains in efficiency, however, could be unraveled by continued delay in approvals for new power plants in the face of rapidly rising demand.

Conflicted

If a survey of public school teachers were taken today, the vast majority of them will likely vote in favor of conserving the existing “first-in, first served” automatic payroll deduction system for servicing their debts. The system allows for predictability that reflects in lower financing charges and easy access to emergency credit. 

Strangely, a party-list representative, ostensibly representing the teachers, has joined another colleague in demonizing the present payroll reduction system. He seeks to scuttle the “first-in, first-served” by means of an insertion in the General Appropriations Act (GAA).

Basically, the intended insertion seeks to prescribe by law a “priority list” of who gets paid first regardless of when the loan was incurred. As I pointed out in a previous column (Deductions, August 8, 2018), such an arrangement will introduce such an uncertainty into the system that many private lending institutions will either opt out of the business or increase financing charges to reflect the added risks of lending money to teachers.

Imagine if you are on a queue to pay for your groceries. Suddenly, the predictability of that queue is disrupted because some “priority” shopper is allowed to cut in. For the private lending institutions serving the financial needs of teachers, this raises the possibility they will either not be paid on time or not paid at all. That is an intolerable escalation of lending risks.

As it turns out, the party-list group this solon represents is supported by a lending business. Obviously, the insertion he wants put into the GAA will, at the very least, knock out some of the competition from the private lending institutions. At the very worst, he could bully his way into putting his business on the “priority list.” That guarantees monopolization of the business.

Whatever the final outcome, the teachers will be on the losing end if this legislator gets his way. The teachers will pay higher financing charges and suffer the sorrows of a monopoly. They will have less financing options when emergencies arise.

This solon should be called out for glaring conflict of interest. He is using the power to legislate he holds in order to favor a vested interest.

If it is not broke, don’t fix it.

The automatic payroll deduction system is not broke. Those who want to disrupt it have a hidden agenda on which the light of day must be shone.