Counterpoint: Was the EPIRA Law Successful at 17?

David Celestra Tan, MSK
28 June 2018

Was the EPIRA Law Successful after 17 Years?  That depends who you ask. If it is the giant conglomerates who benefited handsomely from the way it has been implemented it will of course be a resounding success. Their market caps increased by 500% during that period. The EPIRA Law saw the tectonic transfer of government generation and transmission wealth to the private sector. Meralco is now making 25% annual return on equity instead of the legal 12%.

On the other hand, if you ask the consumers and the country, it is a resounding failure.  We have the highest electricity rates in Asia and nowhere near the global competitiveness that the EPIRA law said it wants to achieve. The Philippines is no longer a manufacturing country as aresult. The Filipinos remain to be paying the highest due to overcharging, bad rate setting methodology, and continuing lack of true competition.

The debate is a classic case of the power cartel saying “the glass is half full” and the consumers and country is saying the “glass is half empty”.  It is true that there is enough supply. But we have failed in achieving least cost power.

The Business Mirror headline article on June 23, 2018 asked “have we learned the truth about the power sector?” To consumers, Yeswe have and it is not good. Rates are higher instead of lower. There is monopoly or cartelization instead of true competition. We don’t have least cost power.

The BusinessMirror article quoted some of the big players.

Counterpoints:

1. AC Energy (Ayala Group)

Epira is working. Just look at all the investments in power and the competitive rates in retail and WESM [Wholesale Electricity Spot Market],” said AC Energy President Eric Francia in a recent text message to the BusinessMirror.

Epira, most energy sector experts agree, has liberalized the Philippines’s electricity sector with at least three important provisions: deregulation and demonopolization of the power-generation sector; creation of the WESM, and liberalization and demonopolization of electricity distribution via the Retail Competition and Open Access.

More important, investments in the power sector started pouring in. More power-generating firms mean more power projects, thereby boosting the country’s power supply, ultimately benefiting consumers.

Amid the success of Epira, AC Energy noted some delays in implementing the law. “What’s needed is the full implementation of Epira, especially open access at the household level, so that all consumers can benefit from open competition,” added Francia.

MSK Counterpoints:

Competitive rates in retail is certainly NOT an accurate claim. There is demonopolization so to speak from the government owned NPC monopoly but there is uncontrolled and unaccountable monopolization, oligopolization, and cartelization of the generation sector that are even worse for the consumers.  What is worse than exploitive charging by a monopoly? The exploitive charging by several oligopolists in a cartel.

The so called competition in the distribution sector brought about by open access and retail competition will bring little net cost benefit to the consumers. They still pay Meralco the overcharged distribution rates. In fact not many realize that if a utility like Meralco “loses” customers it will pass on to the remaining consumers its distribution costs and stranded generation contracts. The administrative costs of availing of open access is at least five times its potential savings to most captive consumers.

Consumers will benefit more from true competition in the generation sector, from fairer rate setting and systems loss methodology, and from safeguards in pass on charges in the generation rate. 

2. Aboitiz Group

New, efficient and state-of-the-art plants, like Pagbilao 3, are being built by the private sector without government funding, without government guarantees and without government take-or-pay obligations. We believe this project is a testament that Epira is working,” observed Aboitiz Power Corp. President Antonio Moraza.

Aboitiz and TeaM Energy Corp. have partnered to invest close to $1 billion for a 420-megawatt (MW) Pagbilao 3 base-load in Pagbilao, Quezon Province.

The Philippine power industry has been transformed from a monopolized, politicized and heavily subsidized structure, to one that is competitive and bears the true cost of power, allowing the government to channel resources to other social services.

“This competitive structure was envisioned to attract investment, drive down power costs and empower the end user.

“I dare say that it is only the power sector that is building capacity in our country’s infrastructure requirements ahead of actual
demand, without any need of government’s funds or financial support,” added Moraza.

MSK Counterpoints:

The privatization of the power generation sector is only part of the objectives of the EPIRA Law. The other part is deregulation that requires the installation of true competition to protect the public interest. While the government may have been relieved of the burden of investing in power generation infrastructure, it has failed in protecting the public interest and assuring least cost power.

3. DM Consunji/Semirara Coal

In the view of Semirara Chief Executive Officer Isidro Consunji, the privatization of most state-owned power-generation assets has been successful.

“Offhand, I think privatization of the power-generation sector is successful,” he said in a text message.

Prior to Epira, the National Power Corp. owned the country’s generating capacity before privatization. At that time, these assets left a heavy dent on state coffers because of the high costs of maintaining them.

MSK Counterpoints:

National Power Corp. failed in sustaining reliable and cost efficient generation not because of the investments but because as a government institution it could not make sensible and timely operation and maintenance decisions to keep the plants running. This actually was cured by the introduction of  BOT IPP projects which are already private. NPC could have improved its power supply contracting terms.

Under NPC, the procurement of fuel, the cost of which are passed on to the consumers, were done by competitive bidding from unrelated party suppliers.  Now, procurement process for fuel which is 40 to 60% of generation charge is non-transparent especially when they buy from sister company fuel producers.

4. GE Philippines

Emmanuel de Dios, GE Philippines CEO and formerly Department of Energy (DOE) undersecretary, also noted a lot of power projects that came on stream for the past few years. “A lot of capacity still coming on stream. Indeed, we have come a long way. Not bad at all, because it takes years to put to bed a power project.”

5. Meralco

Joe Zaldarriaga, Meralco’s spokesman, said Epira has encouraged competition, especially in the power-generation business. The law, he said, also increased efficiencies in distribution, as evidenced by all-time low system-loss levels. “If we look at it, further current retail rates approximate that of around eight years back, which, perhaps, shows that the market is working as it is,” he said.

MSK Counterpoints:

Meralco claims it with a straight face. It is true “Epira has encouraged competition in the power generation business” but it had failed to do so due to apathetic regulation, a situation Meralco appear to try maintain.

The DOE with ERC started holding public consultation hearings on a proposed Competitive Selection Process in 2014 and in June 2015 finally passed the policy on CSP. The Meralco and PIPPA lobbied first for the delay in the policy and later for voluntary CSP.  Then they lobbied ERC for swiss challenge as a bonafide way of CSP. Finally in January 2016 they wrote ERC requesting again to do a “price challenge” for compliance with CSP.  ERC turned them down. Then on March 15, 2016 the ERC mysteriously extended the CSP implementation to April 30, 2018. And the rest is history. We now have a monopolization and cartelization of the power generation sector.If we judge the EPIRA LAW as implemented by the ERC , it certainly has not been working for consumers and country.

6. Department of Energy

One of the delays they were referring to is the implementation of the Retail Competition and Open Access (RCOA), a landmark policy meant to give consumers the choice to choose their own supplier of electricity to encourage competition in the generation and supply sector.

“Epira is incomplete without RCOA,” DOE Undersecretary Felix William Fuentebella said. He could not stress enough how vital this policy is in order for consumers to fully appreciate the benefits of the law.

It may be recalled that the Supreme Court (SC) issued a temporary restraining order (TRO) against a DOE circular and Energy Regulatory Commission (ERC) resolutions days before some of the RCOA rules were supposed to take effect.

In particular, power users consuming an average of at 1 MW per month are required to source power from a licensed retail electricity supplier. At present, the majority of power consumers are being supplied by Meralco, the country’s largest distribution utility firm.

MSK Counterpoints:

A compulsory RCOA deserves to be held up in the SC. Large power users will source their power from licensed retail electricity supplier if it makes good business and management sense and not be forced to do so. The RES industry must earn its market by offering value and not by martial law style enforcement from the government.  The RCOA rules as proposed by ERC fail to consider that large users are industrialists whose main core competence is running their business. Many of them may not want to be distracted by very complex and risky RCOA rules. The EPIRA Law mandated open access and freedom of choice for consumers.  That freedom of choice include the democratic choice to stay with the stability of its distribution utility. 

Rather than complaining about the delay, we think the DOE and ERC must get the message and recalibrate the RCOA rules.  The RCOA must earn its existence by offering a compelling business proposition to large users.  In fact we still believe that consumers, large and small, contestable and captive will benefit more from true competition in the bulk power generation supply and not in the distribution level.

7. Senate Committee on Energy

Senate Committee on Energy Chairman Sherwin T. Gatchalian, meanwhile, noted that there are debates going on whether electricity prices in the country have indeed gone down to a level that most Filipinos can afford.

“Epira is supposed to make the market efficient, among others. When it comes to spot market prices, the lowering of cost has been achieved. But that is only a small component. What Epira didn’t cover is CSP [competitive selection process]. Still, 80 percent of the power contracts are sourced bilaterally and only 20 percent from the spot market. The CSP should have been included in Epira,” he said.

MSK Counterpoints:

It is true the EPIRA did not specifically mandate CSP. However it is profuse all over the law about the need for competition, for anti-monopoly, for achievement of least cost power, for market domination limits all of which can be achieved only by true competition, one of its tools being a CSP.  Section 45 also while allowing a DU to buy up to 50% of its supply from an affiliated company, did NOT prohibit competitive bidding. So an ERC that is faithful to its mandate to protect the public interest should have required CSP even if the EPIRA Law did not specifically require so.

A case of conveniently limiting to the letter and overlooking the spirit of the law. It could also be a case of the lawyer’s mentality dominating the interpretation and implementation of the letters of the law as they are trained. There were not enough people keeping an eye on the public interest responsibility of the ERC.  This was what happened when the ERC approved in December 2013 an 80% increase in the Meralco generation rates, a whopping P4.15 per kwh in just one month, “because that is allowed in the rules”!

The need to urgently correct the treason of Rule 11 of the EPIRA IRR does not require amending the law itself. Rule 11 is illegal. A good start to correct is the implementation of the new formula for determining “concentration of capacity” by the ERC that included an “ownership” test and an “operation” test, two of the three requirements of the EPIRA Law that its IRR watered down by only requiring control.  The new formula was “deferred” by the current ERC Commissioners on March 15, 2016.

EPIRA Law is an imperfect law that could have been implemented perfectly by construing ambiguities from the prism of public interest. Now, amending the law and making it “perfect” does not guarantee that it will also be implemented properly. How far do we go to take away the discretion of regulators who have shown that they cannot be trusted with discretionary leeway?  We hope we get regulators who would be willing to rectify the errors of the past.

What is perplexing is why no one in authority and government is stepping up to lead the rectification of both the letter and the implementation of the Epira Law for the people?  This is the tragedy of our generation and we cannot be proud of it.  Our fate is our own doing but we have no right to consign our kids and future generations to years of exploitive power rates.  Shame on us.

Otherwise, come its 22nd anniversary, the EPIRA Law will be an even bigger failure!

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