Electric Coops need Better Management More Than Private Sector Money

David Celestra Tan, MSK
12 November 2018

Electric coops nationwide are providing unsatisfactory service and higher rates leading to popular calls for their privatization.

But why are they failing and what will privatization give them? Commonly believed or assumed is, private money will cure its ills. It might surprise many people, but electric coops have access to money to improve their facilities. Where they fail is in management that rear its ugly head in many forms and inabilities. The reason for bad management is also caused by various systemic influences. Let us count the ways

1. Politicization and political interference

The Board of Directors of Electric Coops are elected every three years which make them vulnerable to influence by who else but by the local political kingpins who can help them get elected. It is not uncommon that candidates are convinced by local officials to withdraw in favor of a chosen one. While in most areas the local political leaders do not necessarily interfere with the affairs of the Electric Coop even after they have helped some local leaders get elected as Coop Directors,  some Congressmen and Governors become very assertive and consider the EC in their province as their kingdom. In off-grid areas, this extends to the contracting of power supply leading to high rates and improper equipment and contract configuration and no true competitive selection process. It is good that the DOE under Sec. Cusi no longer allows unsolicited proposals and swiss challenge, the favorite scheme of many EC’s intending to manipulate the bidding process.

The service in one island electric coop got aggravated when powerful local politicians hindered NEA and DOE efforts to improve the EC management by replacing a clearly non-performing GM.

This political interference is happening despite the prohibition by the new NEA Law 10531 of local officials interfering with the affairs of local EC. Most of the large Coops targeted by the big players for acquisition already have overtures and meetings with the large DU’s encouraged by the local politicians. About five years ago the Board of Directors of a large coop was offered by intermediaries P50 to 100 million to approve a sale of the coop.

2. Corruption that leads to ill-conceived and overpriced power supply contracts

Before the enforcement of the “Competitive Selection Process” policy in 2015, the President of a large coop signed with impunity power supply contracts right and left leading to over-contracting. The local member consumers got hit with an estimated P400 million in additional generation charges. EC directors and officials used to make some money in the procurement of materials and equipment. Now they discovered that sponsoring power supply contracts are even more lucrative specially the onerous ones.

Are private owners of Distribution Utilities better behaved? The resulting overcharge to electric consumers are worse.

3. Regulatory Bottleneck at ERC

Electric Coops do not have problems sourcing money to finance their needed capital improvements to meet the growing needs of their cities and service areas.  Local banks are lining up to lend them money. So that is not where the problem is.They need however to show the corresponding revenue to service those financing. That comes in the form of an approval by the Energy Regulatory Commission of their “Capex” programs and the rate recovery mechanisms. EC’s have been waiting as much as five years for their Capex approval from ERC and the recent legal problems at the Commissioner level made matters worse. We understand Palawan completed their Capex filing with the ERC in early 2016. Given the circumstances, there is only one authority in the country who can order the relieving of this debilitating bottleneck at the ERC and that is President Duterte. We hope he can be made aware. An emergency issuance of provisional approvals (PA) would help a lot if we really want quicker improvements in distribution lines like additional substations, new and upgraded distribution lines, and better line service equipment.

Why are private DU’s like Meralco, Davao Light, and Visayan Electric able to get their very complex PBR rate approved by the ERC? What are they able to do that Electric Coops cannot do?

4. Administrative oversight by NEA

The Administrative oversight by NEA over all Coops including those under CDA have been reiterated by the NEA law 10531. Although sometimes the decisions of NEA are thought to be inconsistent and uneven, in general their oversight provide a level of order and discipline in many wayward coops.  Where they may be lacking is in providing technical and power supply contracting guidelines and assistance to coops.

5. Power supply confusion by NPC

NPC suffers from a confusion in its role in the missionary areas. The EPIRA law says they are responsible for assuring reliable power delivery services in the SPUG areas. In fact that is the residual role of NPC. But the EPIRA IRR encouraged it to privatize whenever private sector is interested. Consequently, NPC has been putting only rental generators in the fourteen (14) largest islands that were declared in 2005 as first wave for privatization under DOE Circular 2004-01-001. Rental generators being high speed machines using regular diesel are both expensive and have limited reliability.

DOE reports show that the missionary subsidy for islands that have been privatized like Palawan, Oriental Mindoro, Tablas recorded reductions. But those still under NPC like Occidental Mindoro, Catanduanes, Marinduque have increased subsidies in the hundreds of millions a year. And worse, still unreliable service.

Outside the fourteen largest islands, NPC should be clearly allowed to install permanent and cost effective power supply in these isolated off-grid islands. Their idea of hybrids incorporating renewable energy is a good strategy that we hope they will be supported to implement seriously.

Privatization of Electric  Coops.

Should electric coops be privatized? Maybe the better question is will it be better for consumers in terms of better service and better rates?
Are Meralco, Aboitiz, and San Miguel takeovers better assurance of better electric service? Ask us who have been suffering in the Meralco area with atrocious rates and it is continuing. Ask those who are in Cebu and their even higher generation rates and systems loss in the 13% range.

We can count with our fingers the number of coops that would be attractive to these investors. They are the good (big and progressive) areas with bad service. It is unlikely that private investors will go to truly distressed coop area where the govt is hemorrhaging. Lanao, Sulu, Basilan, Albay, Tawi-Tawi.

The real targets of the big guys are the big coops and big islands. Batangas, Negros, Palawan, Mindoro, Laguna, Quezon, Pampanga, Camarines, Tagum Davao, Gensan, Zamboanga, Marinduque, Masbate, Baguio and Northern Luzon.

Electric Coops Need better Management more than private sector money

In a recent speech, President Duterte pointed to the need of coops to increase their sources of energy. Finding willing investors in power generation has not been a problem. In fact in many islands EC’s have existing contracts that are way over their demand and reserve requirements. As examples, Mainland Palawan has a demand of 50mw and available supply of more than 75mw. That is a 50% reserve way over the standard 25%. Sometimes it is mismanagement of contracts. One NPP with a contract of 13.5mw capacity was allowed to deliver only 6.5mw to “match” their contracted energy. When the coop needed the 6mw for peaking, the power supply contractor did not have to deliver, resulting to brownouts in Puerto Princesa. And the DOE and ERC were not made aware of the major contract degradation. On the power transmission side, NPC reportedly had not finished the needed transmission lines to bring power to the North of Palawan leading to bad service in those areas.

Oriental Mindoro has a demand of 45mw and total contracted supply of about 45mw but with a coming supply of mini-hydro of 18mw and wind of 10mw. Meanwhile it relies more on emergency rental generators.  One problem of Oriental Mindoro is most of their contracted power supply are in the North so when the NPC North-South transmission grid got damaged by the typhoons in Dec 2015 and 2016, the Southern towns got cutoff from supply. A power supply augmentation project in the South had been endorsed by the DOE but its management had been uncooperative in its implementation. It has been 2 years since the last hurricane and the NPC power line is still 20 kilometers short. Who can mobilize the funding and get this done?

There would be many takers in power generation investments provided there is true competition and level playing field.

It is normally the interference of local politicians that prevent timely and cost effective power generation supply contracting. One large island just south of Luzon have not gotten a private power generator to install permanent power supply solutions for the last 12 years despite the dismal brownouts because the governor insisted on a relative putting together his consortium. From all indications the GM and the management were good and know what they are doing. However, up to today the 10 odd interested potential investors are still waiting. Now another well connected player using high cost generators is profiting from emergency generators. Consequently that islands missionary subsidy will increase from P303 million in 2016 to P921 million in 2020.

In another big island the local politicians engaged NEA and DOEin a tug of war in putting in a good manager for the mismanaged coop. DOE with determination eventually won but after more than a year of further deteriorating service.

How then do we go about insuring  better Management in the electric coops?

A Coop GM now require more diverse skills than when the EC system was being built by NEA. Then it is mostly technical and administrative skills. Now they should be adept at finance management, regulatory navigation, political navigation, power supply planning, and if you are on the grid, the intellectual depth to learn the intricacies of the WESM market. Perhaps NEA should start a school for General Managers.

First the choice of GM should be based on Merit. Depending on the particular situation of a coop, some prefer to open the positions to outsiders so that the best candidate can be found. Others feel that it must come from local talent so they are familiar with local sensitivities and customs. Even others would like to promote from within. Candidates can be drawn from the all of the above. NEA is a screening process and it has been quite effective.  It is only when there is political interference that less qualified applicants get chosen and that leads to service disasters.

Second there must be continuing training programs of line managers and supervisors. Management is a team not just the GM.

Third, they must be sufficiently compensated. It is not easy to manage an electric coop and typically it is one of the most complex and critical enterprise in the island or area.

Fourth and most important, they should be allowed to do their job of running an electric distribution utility. If anything they should  be supported by local officials on service improvement programs.

It is not all the local politicians. Let us hope the DOE, ERC, NEA, NPC with the inspiration from the Office of the President can bring about quick resolution of the bottlenecks. Let us all hope better management can be installed and encouraged in the coops. That is what they need not private sector takeover and investments.

In any case, there are deep issues that are yet to be resolved before an EC can be privatized…specially the good performing ones.

1. Who decides on the fair market value of the EC facilities? Will the Privatization be subjected to bidding?
2. Who are the owners that need to be paid? How about the government advances that have been given to these electric coops over the years?
3. How will the improvement of services and rates be guaranteed as a justification for privatization? What happens if the private operator fails? Suppose he is charging higher rates?
4. What happens to existing long term power supply agreements? Will they be honored?
5. Will the newly privatized DU still be entitled to missionary subsidies? Will there be a 5 year phase out of subsidies?
6. Will it be a franchise grab at the Legislative Franchising Committee?
7. Would the consumer satisfaction of Meralco and Aboitiz be a barometer for their take over of more DU’s? What happens to increasing consolidation of the distribution sector and further market domination?

At the end of the day, it should be sustainable improvement of services and lower rates to the consumers that should be the driving consideration.

Privatization of these Coops may not necessarily be the answer.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com