The Electric Power Industry Reform Act: Are consumers finally getting a break?

The key to the controversial power bill signed into law last Friday is a smooth transition period.

The Electric Power Industry Reform Act (EPIRA), which will take effect 15 days after publication in two major newspapers, includes provisions that avoid the pitfalls of previous deregulation and privatization of other industries, on the one hand, and that protect consumers from sudden price fluctuations, on the other hand.

For consumers, EPIRA’s immediate effect is lower power rates in their July billing statements.

Section 72 states: "Upon effectivity of this Act, residential end-users shall be granted a rate reduction from the National Power Corp (NPC) rates of P0.30 per kilowatt hour. Such reduction shall be reflected as a separate item in the consumer billing statement."

The 30-centavo per kilowatt hour reduction may go even higher when the review of all contracts NPC has entered into with independent power producers (IPPs) is completed.

Under section 28 of EPIRA, the review will be made by an inter-agency committee composed of the Secretary of Finance, the Secretary of the Department of Justice and the Director General of the National Economic and Development Authority. "In cases where such contracts are found to have provisions which are grossly disadvantageous, or onerous to government, the committee shall cause the appropriate government agency to file an action under the arbitration clauses provided in said contracts or initiate any appropriate action under Philippine laws."

Within three months from the time EPIRA takes effect or by September, NPC will also have to renegotiate all purchased power agreements (PPAs) and energy conversion agreements entered into with the Philippine National Oil Co.-Energy Development Corp. (PNOC-EDC) for its geothermal plants in Palimpinon, Tongonan and Mt. Apo. These contracts will be reviewed by the Energy Regulatory Commission (ERC).

If amended, these contracts must be approved by the Joint Congressional Power Commission, an oversight committee composed of members of the Lower House and the Senate. All savings from these amended contracts will be passed on to end-users.

Stranded costs

Although the consumer’s billing statement in July will reflect a lower kilowatt hour rate, it will also introduce another item called the universal charge.

The universal charge, which will be determined by ERC, will pay for commitments made by government before EPIRA such as the stranded cost recovery of NPC and private utilities, missionary electrification, equalization of royalties on indigenous/renewable energy, the cross-subsidy removal scheme and an environment charge equivalent to P0.0025 per kilowatt hour for watershed rehabilitation and management.

The much ballyhooed stranded costs are not additional costs as they are already included in the consumer’s present billing statement. Stranded cost is the excess or differential between the cost of electricity contracted by the NPC and private distribution utilities and the actual selling price in the market under a deregulated environment.

If the selling price and market price are the same when deregulation sets in, then there are no stranded costs. It is, however, assumed the market price will be lower than the present contracted costs.

NPC’s stranded debts are another matter. The consumer will have to bear the cost of these financial obligations which will not be absorbed by future buyers of NPC assets.

Removing cross subsidies

For deregulation to work and to reflect the real cost of electricity, cross subsidies will be phased out within three years. There are currently three types of subsidies:

* inter-class subsidy –an amount distribution utilities like the Manila Electric Co. (Meralco) charges industrial and commercial end-users so it can charge other customers such as hospitals less.

* inter-regional grid cross subsidy –an amount NPC charges customers in a viable regional grid so it can reduce the rates it charges customers in a less viable regional grid. An example of a viable grid is Luzon, which currently subsidizes the rates of Visayas and Mindanao.

* intra-regional grid cross-subsidy –an amount NPC charges utility companies with higher load factors and delivery voltage so it can reduce the rates it charges utility companies with lower load factors and delivery voltage located in the same regional grid. The load factor refers to the efficient usage of electricity over a certain period of time.

Although the removal of the cross subsidy will theoretically raise power rates for the poor, a provision in EPIRA creates a socialized pricing mechanism called a "lifeline rate", which insulates marginalized end-users or those who cannot afford to pay the full cost of power from the impact of the cross subsidy removal for at least ten years.

For industry, the immediate impact of EPIRA will not be lower rates as much as increased global competitiveness. The Philippines has currently the second highest power rate in Asia, next only to Japan.

New suppliers

The electricity industry is currently made up of three major sectors. These are:

* generation –Although NPC remains the biggest player, power generation was opened up to the private sector through Executive Order 225 in the early 1990s. IPPs have existing contracts with NPC and with some private utilities such as Meralco.

* transmission –This refers to the high voltage wires that transmit electricity from the generator to the distribution system.

* distribution –This refers to the system of wires and associated facilities needed to deliver electricity at a low voltage level to the end-users.

In a deregulated set up, another sector will be added. This is the supplier of electricity, which will sell, broker, market or aggregate electricity to end-users.

Within a year of EPIRA’s effectivity, a wholesale electricity spot market will be set up to ensure market competition in the market. Spot market rules will include establishing the merit order dispatch for each time period or which seller will be dispatched first; determining the market clearing price for each time period; and administering the market.

The wholesale spot market will provide the mechanism for identifying and setting the price of actual variations from the quantities transacted under contracts between sellers and buyers of electricity.

All generating companies, distribution utilities, suppliers and bulk consumers/end-users may join the spot market.

Natural monopolies

The transmission and distribution sectors will remain regulated due to the nature of their businesses. To reduce the cost to consumer, only one set of wires and facilities are needed for the power industry. The profits of these companies will have a cap of not more than 12% return on rate base (RORB), a measure of profitability.

Under EPIRA, the still-to-be created national transmission company (transco), which will act as the system operator of the nationwide electrical transmission and sub-transmission system, will provide "non-discriminatory access to its system to all electricity users".

Retail competition and open access on distribution wires will be implemented not later than 2004, subject to several conditions:

* establishment of the wholesale electricity spot market;

* approval of unbundled transmission and distribution wheeling charges;

* initial implementation of cross-subsidy removal scheme;

* privatization of at least 70% of the total capacity of NPC’s generating assets in Luzon and Visayas; and

* transfer of the management and control of at least 70% of the total energy output of power plants under contract with NPC to IPP administrators.

Upon implementation of open access, large industries and consumers using at least one megawatt such as medium-sized industries and malls will be able to buy their electricity directly from generators such as Mirant and Enron or from suppliers other than the supply company of their distribution utility such as Meralco or Visayan Electric Co.

After two more years or by 2006, consumers using 750 kilowatts such as condominiums and subdivisions will be allowed to buy electricity directly from various suppliers.

Under EPIRA, new electricity suppliers may use the low voltage wires of existing distribution utilities like Meralco and VECO, after paying a wheeling charge (which is similar to a toll fee) set by the ERC.

As the industry watchdog, the ERC will be able to come down hard on the transco or power distributors for favoring a particular group or for turning down the business of legitimate competitors.

While there are fears arising from the change in the status quo, the opening up of the power industry and the privatization of NPC are expected to give the economy that much-needed shot in the arm in time for globalization. In the end, that is what the Filipino consumers want.