First of two parts
The events of the past three months have exposed the utter failure of the twin policies of privatization and deregulation in the power sector, as mandated and implemented under the Electric Power Industry Reform Act or EPIRA. The unprecedented and artificial spike in rates last November was foreseen but not prevented by an inutile Department of Energy (DOE), taken advantage of by colluding industry players, and then given an imprimatur by an inept and beholden Energy Regulatory Commission (ERC). That something like that could happen is a testament to how EPIRA and its implementing agencies have failed in its promise of providing consumers with cheap and stable electricity. (Read my previous 3-part series on Meralco’s rate hike)
Meralco’s onerous P4.15 rate hike is, of course, just the latest in a string of EPIRA-related anomalies in the power industry. In a comprehensive report on the impact of EPIRA on the power industry 10 years after the law was implemented, the People Opposed to Warrantless Electricity Rates (POWER) came up with the following striking observations:
• Power rates doubled since EPIRA was implemented, with Meralco increasing its rates by more than 112 percent and National Power Corporation (NAPOCOR) by more than 95 percent in 10 years. Power rates in the country are among the highest in the world and more increases are yet to come when consumers start paying for Napocor’s stranded debts and stranded costs.
• Supply remains a big problem with hardly any additional capacity implemented under EPIRA.
• An oligopoly exists and monopolistic practices abound, with only three groups controlling 52 percent of generation capacity – San Miguel Corporation (SMC), Aboitiz and Lopez and Meralco controlling 70 percent of distribution in Luzon.
• Despite selling its major power plants and assets to pay for its debts, NAPOCOR remains mired in debt. From 2001 to 2010, it shelled out $18 billion to service its financial obligations yet its debt hardly decreased from $16.4 billion in 2001 to $15.8 billion.
Such factual observations are totally the opposite of the stated objectives of EPIRA.
So what the hell went wrong?
Problem of policy
Proponents of the neoliberal policies of privatization and deregulation say this is basically a problem of implementation. That if only EPIRA were properly implemented, then everything would have been fine.
They point out, for example, that the government dilly-dallied in selling our state-owned power plants, resulting in additional debts and stranded costs. That the WESM rules are flawed and its requisites have not been met, leaving the system vulnerable to gaming. That the ERC is incompetent and corrupt. That the DOE is short-sighted and refuses to take on a more pro-active role. That bureaucratic red tape is still making it too difficult for investors to put up much needed power plants.
I will not argue. These are all true. But more than a mere implementation issue, what we have here is a more basic problem of a flawed policy. Privatization practically transferred on a silver platter the entire power industry to a class of conniving oligarchs and foreign investors whose lust for profits were unbridled by deregulation. Meanwhile, government washed its hands of any responsibility, content with the proceeds of Napocor’s fire sale and happily enjoying the commissions and under the table crumbs given to them by the industry players.
Like most textbook, first world solutions to peculiar, third world problems, EPIRA and its neoliberal prescriptions were bound to fail. The theory of capitalistic free competition (with a Wholesale Electricity Spot Market or WESM to boot) tempered by a competent and incorruptible regulator (in this case the ERC) certainly looked good on paper. Privatization and deregulation were supposed to entice new investors leading to more competition, increased supply and decreasing prices. To protect the system from anti-market behavior and monopoly practices, an independent ERC was supposed to police the industry.
Alas, it was too good to be true. Applied to an industry dominated by monopolies and oligopolies in a country ruled by political dynasties and corrupt bureaucrats, privatization and deregulation became a recipe for disaster.
Tailor fit for abuse
Among EPIRA’s many flaws, the following stand out:
1. Sections 6 and 29 declaring power generation and supply as non public utilities and therefore not subject to regulation. This is the basis for the dreaded automatic generation rate adjustment (AGRA) mechanism that allows Meralco to automatically pass on generation costs however onerous.
2. Section 30 creating the Wholesale Electricity Spot Market (WESM), a psuedo spot market easily manipulated by industry players to jack up power rates.
3. Sections 32 and 33 allowing the National Power Corporation (NPC) and distribution utilities to pass on to consumers the burden of their past mistakes via recovery of stranded costs and stranded debts.
4. Section 45 allowing for cross ownerships between power generators and distributors, institutionalizing connivance and anti-competitive behavior.
5. Chapter V privatizing the NPC, Section 21 privatizing the national grid, and Section 71 limiting the government’s power to directly intervene in the power industry. This has led to an inutile government held hostage by private power corporations.
The end result: high power rates, constant supply shortages, and a government that is helpless in the face of a crisis.
I remember the early EPIRA days when government officials and power industry players insisted that EPIRA would “de-politicize” the industry. That electricity rates would be set based purely on economic considerations. Well, EPIRA served merely to limit the politics of power rates among ERC, Malacañang and the big boys in the power industry. The non-populist, market-determined, “true cost” of power was also the most profitable for the owners of these private utilities.
Take the case of Meralco. Research by IBON Foundation show that Meralco’s profits grew by 56.3% annually in the past six years. From its reported net income of Php2.6 billion in 2008, Meralco saw its profits balloon by more than six times to an all-time high of Php16.3 billion in 2012. For 2013, the power distributor expects its net income to further grow to more than Php17.5 billion – or almost seven times its profits in 2008.
Generating companies are also making a killing. The average Return on Equity (ROE) of 15% in the Philippine power industry is higher than in most industries.
But should we be surprised? After all, what privatization privatizes is ownership over the means of production. What deregulation deregulates is the new owners’ rate of profit. And through it all government abdicates on its duty to protect the public interest.
Could EPIRA’s proponents not have seen this? Of course they did. Knowing how laws are made in this country, EPIRA’s lobbyists and proponents in Congress knew exactly what they were crafting – a law that would ensure maximum profits for private business with as little government interference as possible. (Next: Options for a state-led power industry)