An alternative solution to the PPA problem
June 5, 2002 | 12:00am
Last year, when President Arroyo pushed vigorously for the passage of Republic Act No. 9136, or the Electric Power Industry Reform Act ("EPIRA"), she assured everyone that this would translate directly to lower electric bills.
One year later, Filipinos everywhere – rich and poor, households and businesses – are groaning with the weight of the increased costs of their electric bill.
The ‘bitter bill’. It is a "bitter bill" that we all must shoulder, made more bitter by the assurances and promises of a less than reliable President.
Nearly half our electric bill now consists of the Purchase Power Adjustment, or PPA. The PPA is broad enough to allow power generators and distributors to pass on to consumers the cost of its mistakes and inefficiencies as well as the burden of the onerous contracts entered into by them with independent power producers or IPPs.
Although end-users have been charged the PPA since the early 1990’s, it was only with the passage of the EPIRA that charging the PPA – and eventually a "universal charge" – to the end-users was legitimized.
The increasing inability of the people to pay their electric bills has resulted in an uproar to amend the EPIRA and overhaul the energy sector. Our electric bills are just too much, they say.
And yet many people find themselves unable to do anything. Hidden in technical jargon, the PPA is something people cannot really understand. All they know is that their electric bills are mounting, and they are perplexed at the animal that the PPA is.
In order for us to get a better understanding of – and solution to – the problem of PPA that we face today, it is crucial to study the power sector its history.
Background of the Power Sector. There are three sectors in the power industry – (1) generation, (2) transmission and (3) distribution.
Generation sector. Before June 1987, the National Power Cor-poration ("NPC") monopolized the gene-ration sector. It was only with the passage of Executive Order No. 215 (Series of 1987) in June 1987 that private sector participation in the power sector was allowed.
From that time, an increasing number of Independent Power Producers ("IPPs") entered the sector, generating and selling electricity to NPC and distribution utilities.
The EPIRA privatizes NPC and breaks it into five (5) generating companies ("GENCOs") to increase competition in the power generation market.
Transmission sector. The NPC transmits electricity to distributors and large industrial customers via high voltage wires. It is also responsible for constructing the transmission grid highway interconnecting the main islands nationwide.
The EPIRA priva-tized the transmission sector, but provided that it would remain a monopoly under the direct regulation of the government.
Distribution sector. Distribution utilities directly supply electricity to end-consumers. The biggest distributor is Meralco, which services 62 percent of consumers nationwide. Other distri-bution utilities such as Aboitiz, Cepalco and Davao Light, and electric cooperatives, service the remaining 38 percent of the consumers.
The solution. Clearly something must be done quickly. But the solution we seek is one that truly addresses the needs of the people. It is a solution that strips the costs charged to the consumer to the bare essentials.
( In a knee-jerk reaction, President Arroyo sus-pended the imposition of NPC’s PPA. Senate Bill No. 2140 follows President Arroyo’s lead, suspending the imposition of NPC’s Power Purchase Cost Adjustment, or PPCA – a component of the PPA, while encouraging distribution utilities to refinance their own stranded costs – without obliging them to do so and without placing a cap on how much they can pass on to consumers under their PPA.
Unfortunately, these solutions are not enough. They are merely band-aid solutions to a problem that needs an amputation. The approach is merely cosmetic and does not delve into the real reasons for the outrage of a wronged consuming public.
I do not even think that these solutions will buy temporary peace for the end-users. They have already wisened up to the broken promises and band-aid solutions of this administration.
( Does the bill lower significantly the burden borne by our consumers in their monthly electric bill? No – it does not.
How does it propose to reduce our PPA?
( First, it provides for tiered NPC stranded costs. For households consuming up to 300 kilowatt hours a month: the first 50 kilowatt hours would be exempt from universal charge corresponding to NPC’s stranded contract costs;
the second 50 kilowatt hours would be charged at 21 centavos per kilowatt hour (P0.21/kwh) cor-responding to NPC’s stranded contract costs;
consumption above 100 kilowatt hours would be charged at 42 centavos per kilowatt hour (0.42/kwh) corresponding to NPC’s stranded contract costs.
Second, it places a cap on the recovery of NPC stranded contract costs at forty two centavos per kilowatt hour (P0.42/kwh).
Third, it suspends the collection of NPC’s PPCA or Power Purchase Cost Adjustment for a period of 3 years for households and 1 year for commercial and industrial users.
Fourth, it requires distribution utilities to reduce their PPA cor-responding to the reduction in and suspension of NPC’s stranded costs.
These measures are unfortunately inadequate.
We commend the move to impose tiered stranded cost collection. Around 8 million households con-sume less than 100 kilowatt hours a month, and another 1.5 million households consume between 100 to 300 kilowatt hours a month.
While suspending the collection of NPC’s PPCA – which accounts for around 65 percent of NPC’s PPA – will provide short-term relief, this is just deferred collection of stranded costs. End-users will find themselves paying for these costs over the amortization period of 15 to 25 years.
The deafening silence of Senate Bill No. 2140 on the obligation of distribution utilities to reduce their own PPA is conspicuous.
( In May 2002, P1.43 of our PPA per kilowatt hour went to Meralco. This is over 43 percent of the total PPA for the month. (Source: Meralco)
Yet the bill does not provide for any cor-responding obligation on the part of distribution utilities to reduce their own PPA. The bill limits the obligation of the distribution utilities to carrying over the reduction of NPC’s PPCA to the end-user – which is just fair. But insofar as reducing the PPA of the distribution utility – the bill is silent. And this is not fair.
( The proposals in Senate Bill No. 2140 translate to a reduction in total PPA of only 73 centavos per kilowatt hour (P0.73/kwh).
Worse, Senate Bill No. 2140 authorizes the President to bind the government as primary obligor of loans of PSALM and NPC. This sets a dangerous precedent subject to great abuse, and highly anomalous energy loans will be paid using the national government’s guarantee.
PSALM and NPC should go through regular channels to secure govern-ment guarantees and not secure a shortcut in this bill.
This is not enough. The consumers want – and deserve – a solution which truly reduces their electric bills. We need to pull the plug on the PPA.
( We in the minority have come up with an alternative solution that we believe cuts out the fat from our electric bills. We studied the energy sector and closely went through each provision of the EPIRA, studying the reasons why our electric bills are so high.
This alternative solution seeks to lessen the hardship on consumers by pre-venting power generators and distributors from passing on the costs of their inefficiency, mistakes and questionable onerous contracts they have entered into to the end-users through the following means:
( First, cost-sharing of stranded costs of NPC between the NPC and the end-users, the amount to be shouldered by end-users shall be limited to twenty three centavos (P0.23). government should take a bigger hit for the inefficient and onerous IPP contracts it has entered into throughout the years.
NPC stranded costs for May reached P1.22 per kilowatt hour. With this proposal alone, PPA will directly go down by 99 centavos per kilowatt hour.
Second, distribution utilities will be allowed to charge stranded costs to end-users as part of the universal charge, but only for a maximum amount of twenty three centavos per kilowatt hour (P0.23/kwh).
Distribution utilities shall be required to refinance their stranded costs and recover the cost of refinancing from the universal charge. In all cases, a definite cap of twenty three centavos per kilowatt hour (P0.23/kwh) shall be imposed – for the recovery of stranded contract costs and refinancing costs by a distribution utility.
Third, distribution utilities will only be allowed to collect a maximum of twenty three centavos per kilowatt hour (P0.23/kwh) for their PPA (as opposed to the earlier limit on stranded contract costs). This is a reduction of P1.20 per kilowatt hour in the PPA of Meralco alone.
(Our alternative measure requires a stringent review of NPC’s stranded costs. It also allows a panel composed of international experts to review and renegotiate IPP contracts of the NPC and distribution utilities, the benefits of which will translate directly to lower rates for the consumers.
But on top of looking at our problems with the PPA and stranded costs, our alternative lays down important reforms in the power industry which were not addressed by the EPIRA.
( First, it provides for retail competition and open access on distribution wires by June 1, 2003, subject only to two realistic conditions: one, the establishment of the wholesale electricity spot market; and two, the approval of unbundled transmission and distribution wheeling charges.
The EPIRA provided too many preconditions to open access, and we removed all that in the hopes of spurring true competition and market access.
Second, our alternative measure strikes down the inefficient means of distribution utilities in setting electric rates. The current system provides for return on rate base or RORB, where the distribution utility sets a revenue requirement and works backward, charging costs and determining the rate base to support the revenue requirement.
This system breeds inefficiency, since there is no reward for lower costs and more efficient performance, the distribution utility being guaranteed their revenue requirements under the RORB scheme.
Our alternative solution recommends a better mode of setting electric rates for distribution utilities, one that is performance-based and promotes efficiency in operations.
We are therefore proposing the adoption of a performance based revenue system where revenue will depend on lower costs and more efficient operations by June 1, 2003. This system is used in the United Kingdom, Australia, Argentina and various states in the United States.
( In the meantime, while the RORB system is used, we propose the exclusion of costs and items that should not be charged by the distribution utilities to the consumer, including:
Systems losses in excess of four and a half percent (4 1/2 percent) of total energy purchased.
( Revaluation of assets shall not be allowed, and only assets which are actually used and useful to the distribution of electricity shall be included in the rate base.
Reducing the costs passed on to the consumer and lowering the rate base will result in a lower revenue requirement – and lower charges to the end-users.
( Our alternative measure prohibits cross-ownership and bilateral contracts between generation companies and distribution utilities, and allows only limited cross-ownership among generation companies. This will allow greater transparency and increased competition in all levels of participation in the power sector.
( Finally, distribution utilities shall be required to undertake a competitive and transparent bidding process for the purpose of entering bilateral contracts and purchasing assets.
( Our measures will translate to a reduction in PPA of Two pesos and twelve centavos per kilowatt hour (P2.12/kwh), reducing PPA from Three pesos and thirty centavos (P3.30) to one peso and eighteen centavos (P1.18) per kilowatt hour.
But more importantly, these measures strike where the problem exists, and provides a comprehensive plan to improve the power sector and lower charges passed on to the end-user.
We need to take a comprehensive view in studying the power sector and remedying the high cost of electric bills borne by our countrymen.
( The most opportune time to reform the power sector and bring cheaper power to our countrymen is now. Just as the groundswell against the PPA has reached a feverish pitch, the legislative franchise of the biggest distribution utility – Meralco – is soon up for renewal.
Mr. President, what we are discussing now is not a small problem. It is a matter of life or death – of light and darkness – for our poor countrymen and our country.
We cannot provide half-baked solutions which do not go to the core of the problem. What we need is a true and lasting solution to permanently bring down electric bills and push the power sector towards efficiency. And our country towards competitiveness.
We owe this much and more to our countrymen.
Thank you!
One year later, Filipinos everywhere – rich and poor, households and businesses – are groaning with the weight of the increased costs of their electric bill.
The ‘bitter bill’. It is a "bitter bill" that we all must shoulder, made more bitter by the assurances and promises of a less than reliable President.
Nearly half our electric bill now consists of the Purchase Power Adjustment, or PPA. The PPA is broad enough to allow power generators and distributors to pass on to consumers the cost of its mistakes and inefficiencies as well as the burden of the onerous contracts entered into by them with independent power producers or IPPs.
Although end-users have been charged the PPA since the early 1990’s, it was only with the passage of the EPIRA that charging the PPA – and eventually a "universal charge" – to the end-users was legitimized.
The increasing inability of the people to pay their electric bills has resulted in an uproar to amend the EPIRA and overhaul the energy sector. Our electric bills are just too much, they say.
And yet many people find themselves unable to do anything. Hidden in technical jargon, the PPA is something people cannot really understand. All they know is that their electric bills are mounting, and they are perplexed at the animal that the PPA is.
In order for us to get a better understanding of – and solution to – the problem of PPA that we face today, it is crucial to study the power sector its history.
Background of the Power Sector. There are three sectors in the power industry – (1) generation, (2) transmission and (3) distribution.
Generation sector. Before June 1987, the National Power Cor-poration ("NPC") monopolized the gene-ration sector. It was only with the passage of Executive Order No. 215 (Series of 1987) in June 1987 that private sector participation in the power sector was allowed.
From that time, an increasing number of Independent Power Producers ("IPPs") entered the sector, generating and selling electricity to NPC and distribution utilities.
The EPIRA privatizes NPC and breaks it into five (5) generating companies ("GENCOs") to increase competition in the power generation market.
Transmission sector. The NPC transmits electricity to distributors and large industrial customers via high voltage wires. It is also responsible for constructing the transmission grid highway interconnecting the main islands nationwide.
The EPIRA priva-tized the transmission sector, but provided that it would remain a monopoly under the direct regulation of the government.
Distribution sector. Distribution utilities directly supply electricity to end-consumers. The biggest distributor is Meralco, which services 62 percent of consumers nationwide. Other distri-bution utilities such as Aboitiz, Cepalco and Davao Light, and electric cooperatives, service the remaining 38 percent of the consumers.
The solution. Clearly something must be done quickly. But the solution we seek is one that truly addresses the needs of the people. It is a solution that strips the costs charged to the consumer to the bare essentials.
( In a knee-jerk reaction, President Arroyo sus-pended the imposition of NPC’s PPA. Senate Bill No. 2140 follows President Arroyo’s lead, suspending the imposition of NPC’s Power Purchase Cost Adjustment, or PPCA – a component of the PPA, while encouraging distribution utilities to refinance their own stranded costs – without obliging them to do so and without placing a cap on how much they can pass on to consumers under their PPA.
Unfortunately, these solutions are not enough. They are merely band-aid solutions to a problem that needs an amputation. The approach is merely cosmetic and does not delve into the real reasons for the outrage of a wronged consuming public.
I do not even think that these solutions will buy temporary peace for the end-users. They have already wisened up to the broken promises and band-aid solutions of this administration.
How does it propose to reduce our PPA?
( First, it provides for tiered NPC stranded costs. For households consuming up to 300 kilowatt hours a month: the first 50 kilowatt hours would be exempt from universal charge corresponding to NPC’s stranded contract costs;
the second 50 kilowatt hours would be charged at 21 centavos per kilowatt hour (P0.21/kwh) cor-responding to NPC’s stranded contract costs;
consumption above 100 kilowatt hours would be charged at 42 centavos per kilowatt hour (0.42/kwh) corresponding to NPC’s stranded contract costs.
Second, it places a cap on the recovery of NPC stranded contract costs at forty two centavos per kilowatt hour (P0.42/kwh).
Third, it suspends the collection of NPC’s PPCA or Power Purchase Cost Adjustment for a period of 3 years for households and 1 year for commercial and industrial users.
Fourth, it requires distribution utilities to reduce their PPA cor-responding to the reduction in and suspension of NPC’s stranded costs.
These measures are unfortunately inadequate.
We commend the move to impose tiered stranded cost collection. Around 8 million households con-sume less than 100 kilowatt hours a month, and another 1.5 million households consume between 100 to 300 kilowatt hours a month.
While suspending the collection of NPC’s PPCA – which accounts for around 65 percent of NPC’s PPA – will provide short-term relief, this is just deferred collection of stranded costs. End-users will find themselves paying for these costs over the amortization period of 15 to 25 years.
The deafening silence of Senate Bill No. 2140 on the obligation of distribution utilities to reduce their own PPA is conspicuous.
( In May 2002, P1.43 of our PPA per kilowatt hour went to Meralco. This is over 43 percent of the total PPA for the month. (Source: Meralco)
Yet the bill does not provide for any cor-responding obligation on the part of distribution utilities to reduce their own PPA. The bill limits the obligation of the distribution utilities to carrying over the reduction of NPC’s PPCA to the end-user – which is just fair. But insofar as reducing the PPA of the distribution utility – the bill is silent. And this is not fair.
( The proposals in Senate Bill No. 2140 translate to a reduction in total PPA of only 73 centavos per kilowatt hour (P0.73/kwh).
Worse, Senate Bill No. 2140 authorizes the President to bind the government as primary obligor of loans of PSALM and NPC. This sets a dangerous precedent subject to great abuse, and highly anomalous energy loans will be paid using the national government’s guarantee.
PSALM and NPC should go through regular channels to secure govern-ment guarantees and not secure a shortcut in this bill.
( We in the minority have come up with an alternative solution that we believe cuts out the fat from our electric bills. We studied the energy sector and closely went through each provision of the EPIRA, studying the reasons why our electric bills are so high.
This alternative solution seeks to lessen the hardship on consumers by pre-venting power generators and distributors from passing on the costs of their inefficiency, mistakes and questionable onerous contracts they have entered into to the end-users through the following means:
( First, cost-sharing of stranded costs of NPC between the NPC and the end-users, the amount to be shouldered by end-users shall be limited to twenty three centavos (P0.23). government should take a bigger hit for the inefficient and onerous IPP contracts it has entered into throughout the years.
NPC stranded costs for May reached P1.22 per kilowatt hour. With this proposal alone, PPA will directly go down by 99 centavos per kilowatt hour.
Second, distribution utilities will be allowed to charge stranded costs to end-users as part of the universal charge, but only for a maximum amount of twenty three centavos per kilowatt hour (P0.23/kwh).
Distribution utilities shall be required to refinance their stranded costs and recover the cost of refinancing from the universal charge. In all cases, a definite cap of twenty three centavos per kilowatt hour (P0.23/kwh) shall be imposed – for the recovery of stranded contract costs and refinancing costs by a distribution utility.
Third, distribution utilities will only be allowed to collect a maximum of twenty three centavos per kilowatt hour (P0.23/kwh) for their PPA (as opposed to the earlier limit on stranded contract costs). This is a reduction of P1.20 per kilowatt hour in the PPA of Meralco alone.
(Our alternative measure requires a stringent review of NPC’s stranded costs. It also allows a panel composed of international experts to review and renegotiate IPP contracts of the NPC and distribution utilities, the benefits of which will translate directly to lower rates for the consumers.
But on top of looking at our problems with the PPA and stranded costs, our alternative lays down important reforms in the power industry which were not addressed by the EPIRA.
( First, it provides for retail competition and open access on distribution wires by June 1, 2003, subject only to two realistic conditions: one, the establishment of the wholesale electricity spot market; and two, the approval of unbundled transmission and distribution wheeling charges.
The EPIRA provided too many preconditions to open access, and we removed all that in the hopes of spurring true competition and market access.
Second, our alternative measure strikes down the inefficient means of distribution utilities in setting electric rates. The current system provides for return on rate base or RORB, where the distribution utility sets a revenue requirement and works backward, charging costs and determining the rate base to support the revenue requirement.
This system breeds inefficiency, since there is no reward for lower costs and more efficient performance, the distribution utility being guaranteed their revenue requirements under the RORB scheme.
Our alternative solution recommends a better mode of setting electric rates for distribution utilities, one that is performance-based and promotes efficiency in operations.
We are therefore proposing the adoption of a performance based revenue system where revenue will depend on lower costs and more efficient operations by June 1, 2003. This system is used in the United Kingdom, Australia, Argentina and various states in the United States.
( In the meantime, while the RORB system is used, we propose the exclusion of costs and items that should not be charged by the distribution utilities to the consumer, including:
( Revaluation of assets shall not be allowed, and only assets which are actually used and useful to the distribution of electricity shall be included in the rate base.
Reducing the costs passed on to the consumer and lowering the rate base will result in a lower revenue requirement – and lower charges to the end-users.
( Our alternative measure prohibits cross-ownership and bilateral contracts between generation companies and distribution utilities, and allows only limited cross-ownership among generation companies. This will allow greater transparency and increased competition in all levels of participation in the power sector.
( Finally, distribution utilities shall be required to undertake a competitive and transparent bidding process for the purpose of entering bilateral contracts and purchasing assets.
( Our measures will translate to a reduction in PPA of Two pesos and twelve centavos per kilowatt hour (P2.12/kwh), reducing PPA from Three pesos and thirty centavos (P3.30) to one peso and eighteen centavos (P1.18) per kilowatt hour.
But more importantly, these measures strike where the problem exists, and provides a comprehensive plan to improve the power sector and lower charges passed on to the end-user.
We need to take a comprehensive view in studying the power sector and remedying the high cost of electric bills borne by our countrymen.
( The most opportune time to reform the power sector and bring cheaper power to our countrymen is now. Just as the groundswell against the PPA has reached a feverish pitch, the legislative franchise of the biggest distribution utility – Meralco – is soon up for renewal.
We cannot provide half-baked solutions which do not go to the core of the problem. What we need is a true and lasting solution to permanently bring down electric bills and push the power sector towards efficiency. And our country towards competitiveness.
We owe this much and more to our countrymen.
Thank you!
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