Hike in power rates raises inflation risks

Philippine regulators have allowed the country’s power producers to raise their rates by around six percent, a move seen as adding to upward pressure on inflation and raising the chances of an interest rate rise.

The surge in world oil prices to a 21-year-high has raised inflation pressure in Southeast Asia, where most countries are net oil importers. Philippine inflation has risen steadily this year, hitting 4.5 percent in the 12 months through May from 4.1 percent in the year to April and 3.4 percent in the year to January.

Philippine power producers, including state-owned National Power Corp. (Napocor), are being allowed the rise to reflect the high oil price, the country’s energy regulator said.

"We have no other recourse but to grant the rate adjustment application of generating companies, including Napocor, to help them stay viable," Energy Regulatory Commission Chairman Rodolfo Albano said in a statement released late Thursday.

The hike comes on top of a 4.2 percent rise in the generation portion of rates charged by top power distributor Manila Electric Co. (Meralco) announced earlier this week, and a steep increase in public transport fares.

The government appealed to Meralco to defer its hike "for reasons of social amelioration and relief" and to give the economy – which grew at its fastest pace in five years in the first quarter – more time to adjust to the jump in oil prices.

But Meralco officials told a news conference they planned to go ahead with the hike.

"The order is for us to immediately implement it," said Gil San Diego, vice president of the firm.

They said it was still unclear how much the six percent rise in power producer rates would add to customers’ bills.

Interest Rate Pressure

Meralco, with around four million customers around Manila, is Napocor’s largest customer and would normally pass on any increase in generation rates directly to consumers, after a public tribunal vetted the rise.

If passed, Napocor’s latest hike would be reflected in Meralco customers’ billings in August, Albano said.

"Higher energy costs will definitely add to the already rising inflationary pressures from the hike in wages, petrol and transportation costs," Danny Suwanapruti at economic analysis firm Forecastweb told Reuters.

"All these inflationary pressures will be negative for the peso and if the peso breaches 56, then we expect the central bank to take action via intervention initially followed by a rate hike."

The central bank has kept its key interest rates steady since a cut of 25 basis points on July 2, 2003. But rising inflation together with the prospect of a US Federal Reserve rate hike in the coming months have raised expectations of a tightening.

Consumers got some relief on Thursday when Meralco was ordered to refund P13 billion, in line with newly approved rules to protect the rights of electricity users.

Meralco officials disputed that figure on Friday, however, saying the refund should be a little over P2 billion.

Meralco, 25 percent owned by the government, is nearing the end of a P30 billion refund scheme that was ordered by the Supreme Court after years of overbilling.