Revisiting the 10-year old Philippine Electric Power Industry Reform Act of 2001 (R.A. 9136) and Its Local Implications

Introduction

After 10 years of implementation of the Electric Power Industry Reform Act of 2001 (Republic Act 9136), there is so much to be desired from its promised and potential reforms and improvements in the power industry and the lives of consumers.

The privatization effort of the National Power Corporation (NPC) and its massive debts continues. The electricity rate used and paid by millions of consumers keeps rising. The mismanagement of electric cooperatives and their inexplicable losses persists.

This is to revisit the law that sought, among others, to; 1) privatize the government agency tasked to generate, transmit, distribute, and supply energy to the country, 2) unbundle the power sectors to identify which is inefficient and incurring losses, 3) create a Wholesale Electricity Spot Market (WESM) to make the transaction transparent, open and competitive, 4) reduce the power rates.

In June 2011, the Philippine President, Benigno Aquino III, signed into law the extension of the implementation of lifeline electricity rate (subsidy) for poor consumers for another 10 years. The wisdom of the R.A. 9136 was that the lifeline rate would be unnecessary after 10 years of the Act because the electricity rate would have been affordable even by poor consumers.

On the contrary, after 10 years of R.A. 9136, the Philippines has the highest power rate in Asia.^[1] Thus, it is important to review the law in light of the current situation, context and its history.

History of R.A. 9136

It took the 10th and 11th Congresses, with the latter conducting a special session immediately after the May 14 national election in 2001, to enact the highly controversial law that aimed to restructure and privatize the power sector industry. The Electric Power Industry Reform Act of 2001 (R.A. 9136) came into being after seven years of hibernation, protests, lobbies, debates, consultations, and deliberations which had started in 1994.

An Impending Power Crisis

It was foreseen that the national demand for electricity would increase by nine percent (9%) annually for the next 10 years. To meet the demand 5,000 megawatts was needed in addition to the current capacity of 12,765 megawatts, including the productive capacity of new generation projects of National Power Corporation (NPC) and Manila Electric Company (MERALCO). To curb the shortfall, Government needed to infuse P38 billion annually into the development of the power industry, without which another crisis reminiscent of the 80s and 90s was expected.^[2] The burgeoning budget deficit pegged this year at P145 billion hindered the infusion of funds into the ailing, highly leveraged, and financially handicapped NPC.

NPC’s Swelling Debt

In December 2000, NPC’s debt reached P900 billion, nearly half of the government’s P2.179 trillion debt. It made each Filipino owe P11,842 to NPC creditors. This debt continued to swell with the shrinking of peso. The nearly P500 billion or 56% of the entire rising debt of NPC was connected to contracts with Independent Power Producers (IPP).^[3]

At the height of the power crisis in the early 90s, Executive Order No. 215 mandated NPC to negotiate with IPPs for power generation. When the crisis did not wane, Congress enacted Republic Act 7648 or the Electricity Power Crisis Act giving then the President Fidel Ramos authority to enter into contracts with these IPPs for numerous power projects. These included construction, rehabilitation, improvement and maintenance of power plants. In its contracts with IPPs, Government guaranteed the purchase of 75 to 80 percent of their production over 10 to 20 years. After rehabilitating some NPC plants, a stable and adequate supply of electricity was attained. Because of the guaranteed contracts with IPPs, the government was buying power that it did not need, at 20 to 40 centavos higher than the cost of NPC-generated power.^[4] It was reported that some IPP contracts were onerous and disadvantageous resulting to heavy financial losses for NPC. These were financial losses that were, in turn, charged to consumers through the Purchased Power Agreement (PPA).

Government’s Alternative

Financing an industry development program would have depleted the budget. Hiking power rates would have exacerbated the already worsening economic plight of end-consumers. Thus, the Government saw privatizing the industry as the most plausible alternative to solve the power problem. By encouraging private sector investment, government subsidies and funds for the power sector could then be channeled to other priority concerns.

At stake in the passage of RA 9136 was the government’s access to about $950 Million worth of loans from foreign sources. These loans would serve as a breather in the suffocating budget of the government.

Overview of R.A. 9136

RA 9136 aimed to de-monopolize certain aspects of the power industry. Instituting a more competitive structure was hoped to lead to increased efficiency and lower power rates. Other countries such as Argentina, Australia, United Kingdom, New Zealand which had reformed their power industry, experienced remarkable declines in electricity rates ranging from 14 to 44 percent.^[5]

Globally, privatization and restructuring have become the popular methods for reform in the context of a globalized market. Following this trend, RA 9136 was part of the government’s continuing commitment to liberation, deregulation, and privatization.

New Industry Structure . Prior to RA 9136, the power industry was divided into three major sector-generation, transmission, and distribution. NPC was the monopoly in the power generation until Executive Order (EO) No. 215 opened the generation sector to IPPs. In 2001, IPPs generated almost half of the country’s electricity. With RA 9136, four (4) major sectors would be established—generation, transmission, distribution, and supply.

The generation and supply sectors would be competitive, that is the price of electricity would be market-driven and unregulated. The transmission and distribution sectors on the other hand, would remain natural monopolies, with the huge capital requirement to establish distribution/transmission infrastructures acting a barrier to entry into the industry. RA 9136 would create a National Transmission Corporation (TRANSCO) that would perform the electrical transmission function of NPC using the high voltage backbone system. On the other hand, distribution utilities should operate the medium to low voltage distribution systems. In these two sectors, rates of transmission should be regulated and approved by the Energy Regulatory Commission (ERC), and an independent, quasi-judicial regulatory body.

The ERC is tasked to issue Certificate of Compliance to any additional generation company, and a license to new suppliers. For transmission and distribution, the Congress of the Philippines has an exclusive power to grant franchises. In the case of electric cooperatives, the National Electrification Commission (NEC) under the National Electrification Administration (NEA) would continue handling the franchises for five (5) more years after the enactment of RA 9136.

Distribution utilities, such as the electric cooperatives (e.g. CASURECOs) that operate as suppliers, are monopolies. The totality of electricity end-users in their franchise areas is a captured market. With the new industry structure, distributors would continue to own the transmission infrastructure. However, the implementation of open access and retail competition would encourage the emergence of a supply sector, thus allowing competition to distribution utilities functioning as suppliers. Captured markets would become contestable markets when the total demand of its users achieved a certain threshold level. This level initially set at 1 megawatt would eventually be lowered by the ERC until it equalized with the household demand level ultimately making a household a contestable. With open access, suppliers would be allowed access to a distribution utility’s transmission infrastructure, for a fee determined by the ERC, to supply contestable markets. With open access and retail competition, aggregators could emerge. These entities were seen to aggregate the demand of end-users to a level set for a contestable market. Aggregators could then purchase their supply from the Wholesale Electricity Spot Market (WESM) and/or enter into bilateral contracts with power generators.

Wholesale Electricity Spot Market . Within a year from the effectivity of RA 9136, the Department of Energy (DOE) would establish a Wholesale Electricity Spot Market (WESM). The WESM would act as a “physical,” open, and competitive market where buyers and sellers of electricity can transact business. One of the rules that would be operative within the WESM was the dispatching of sellers with the lowest price. Informed within the WESM of the demand for electricity, sellers pegged the price for their supply and the seller with the lowest price would be allowed to sell first, and so on. All industry participants could become members of the WESM. An Autonomous Group Market Operator would eventually be created to adapt and implement the operating rules of the WESM.

Rates and Charges, Rate Reduction, Cross-Subsidies and Universal Charge . For greater transparency in pricing methods and rationality of prices, RA 9136 required all industry players to identify, unbundle, itemize and segregate rates and charges, that is, from generation, transmission, distribution to supply rates and charges. RA 9136 mandated P0.30/kwh rate reduction from NPC rates for residential consumers. A lifeline rate—a socialized pricing mechanism for marginalized end-users would be instituted, albeit for a limited period. Except for the lifeline rate, all other, intra-grid, and inter-class of consumers cross subsidies would be removed. However, a Universal Charge which would be collected from all end-users could be used for payment of the stranded debts, IPP contract costs, cross-subsidies (e.g. lifeline rate), watershed rehabilitation and management, missionary electrification by NPC, and equalization of the taxes and royalties applied to indigenous or renewable energy sources vis-à-vis imported energy fuels.

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^[1] Philippine Star, “Phl power cost now highest in Asia.” 28 July 2011. See http://www.philstar.com/Article.aspx?publicationSubCategoryId=66&articleId=710471

^[2] Department of Energy (DOE) Publication, Electricity Industry Reforms: A Primer

^[3] Philippine Star, 14 February 2001

^[4] IBON Facts & Figures Special Release, The Agenda Behind Power reform (Manila: IBON Foundation, Inc.) 31 May 2001

^[5] DOE Publication, Electricity Industry Reforms: A Primer