2 power executives offer answers
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| Mr. Ernesto B. Pantangco, PIPPA President |
Mr. Luis Miguel Aboitiz, AP SVP |
If anchored on the promise of deregulation for the power industry, a choice between ‘high’ or ‘higher energy prices’ could not have been the case for the Filipino consumers. From the start, the mindset inculcated and policy stimulus presented to them was that: by dismantling the monopoly of state-run National Power Corporation (NPC) and allowing competition to thrive in the marketplace, electricity consumers are supposed to benefit from better choices and lower rates.
In this interview with executives of the country’s two leading power companies, energy reporter Myrna M. Velasco queried on the factors triggering consumers’ incessant complaints over soaring electricity rates.
Mr. Ernesto B. Pantangco, president of the Philippine Independent Power Producers Association (PIPPA) and Mr. Luis Miguel Aboitiz, senior vice president for generation, trading and marketing of Aboitiz Power Corporation, explained why power rates have gone up in recent years, what prospects are in store that will eventually pull them down; and what does it really mean to have lower electric bills.
Conspicuously, the public is quick to render judgment that the deregulation of the industry has been rendering “disappointing results”.
Nevertheless, Mr. Aboitiz contradicts such conclusion as he noted that the benefits of competition are still forthcoming. The starting point, he says, is injecting efficiencies into the country’s power system and rectifying market distortions (i.e. elimination of subsidies and reflecting true cost after years of freeze or artificially-low pricing) so real competition can come into play. Eventually, he added, these measures will help bring in the long-desired consumer benefit of having lower electricity bills.For the meantime, Mr Aboitiz points out, consumers gain leverage of cutting down their electric bills by managing their energy usage (consumption) efficiently.
Mr Pantangco, for his part, notes that there are several measures on how lower electricity rates can be achieved. He emphasized though that firm government action is needed at instituting key policies -- such as the rationalization of taxes of fuels used for power generation.
He explains that the increase in electricity rates cannot be blamed to deregulation per se, since there are other major factors that exerted pressure on market-determined pricing for the industry – among them fuel costs that have spiked significantly in years.
More prescriptive details can be gleaned in the following Q& A with these two power industry executives:
Question:The deregulation and restructuring of the power industry was partly built upon promises that Filipino consumers will eventually benefit from lower electricity rates and better services – the reality though is, that appears still to be an elusive goal. If that will ever happen, how long will the consumers wait?
Ernesto B. Pantangco: The power industry players have always been consistent in the declaration that cheaper electricity rates will only occur when competition (on a level playing field) and open access have been achieved. That is the reason why the industry players have continually supported the privatization of NPC assets and contracts. It is not an elusive goal but can be achieved realistically by end of 2nd half of 2010.
It should be noted that electricity rates are also dependent upon the world prices of a major raw material for production which is fuel whether coal, natural gas (prices are indexed to coal), geothermal (geothermal resource sales contract or GRSCs are indexed to coal as well), crude oil, etc. If world prices for said products decrease then corresponding production costs will also decrease accordingly and must be passed through to the consumer.
An important and immediate consideration for decreasing electricity prices is the amount of royalties paid to natural gas (currently accounts for 1/3 of Luzon’s power supply).
With the proposed Senate and Congressional bills decreasing the government share from the royalties of natural gas from 60% to 3%, if passed and implemented will result in lowering of energy prices.
Based on 2008 estimates, possible price reductions ranging from P1.15/kwh (if allocated to 60% load factor customers) to P3.16/kwh (if allocated only to 80% load factor customers) can be achieved. In addition, power price reductions are possible through additional discounts to lifeline users as well as residential and commercial users through elimination of the subsidies required to support the marginalized users.
Another important development is the Renewables Energy Act which gives major incentives to existing and new power generation companies involved in geothermal, hydro, wind and other renewable sources of electricity. Incentives such as duty free importations, decline in royalties, decrease in income tax from 30% to 10%, etc. are anticipated to be passed on to consumers in the form of cheaper electricity production costs.
So, cheaper and more affordable electricity prices are distinctly possible in the very near future provided the above measures are implemented.
Luis Miguel Aboitiz: The concept of "low electric rates" is simplistic and can be misleading. The real effect is not easy to explain.
a) Deregulation will only occur in the generation segment; transmission and distribution are still regulated. "Lower rates" will therefore only affect about 40% of the consumer's bill.
b) "Lower" does not mean lower than before. What it meant is that a private, competitive generation sector will be more efficient and costs less than a regulated, government-operated provider. I would also like to point out that, in government hands, the true cost of (inefficient) generation was not reflected in the consumers’ bills. This is because, as costs increased, much of the payments for these costs were financed with more and more debt. So the costs were essentially deferred through the incurrence of future liabilities -- just look at the balance sheet of NPC and how it has grown over the last 15 years. Look also at the changes in its debt-to-equity ratio.
c) Lower electric rates will benefit the more efficient consumers, but hurt the less efficient ones. Before the reforms, everyone was treated equally so the efficient ones were subsidizing the inefficient ones. Those who consume more at night or consume power evenly 24 hours a day will benefit from the lowest generation rates. Those that only consume power during the day and between 6pm and 9pm at night will pay the most. For example, large residential consumers of Meralco can opt for time-of-use metering. Those that do and who do their laundry on weekends or at night will see a big drop in their monthly electrical bills.
d) Lastly, the "lower cost" will not only be reflected through the bill but through other measures. For example, with a sufficient ancillary market, we will have fewer blackouts, better voltage and more stable frequency regulation. The same is true for the privatization of the transmission concession. Many of the recommended TransCo improvements for the transmission system were not implemented for lack of funds or for fear of increasing transmission rates. A private transmission entity (NGCP) which will be negatively impacted if it operates an unreliable network will do its best to install and operate a reliable transmission network (assuming the ERC approves its infrastructure improvement applications).
