POLICY ISSUES THAT THE GOVERNMENT NEEDS TO RESOLVE BEFORE THE PRIVATIZATION OF ELECTRIC COOPS

David Celestra Tan, MSK
February 6, 2019

We are getting ahead of ourselves on the issue of privatizing electric coops. None the least is whether this will be even good for the consumers. Second is whether the takeover by the private sector is actually the solution to what ails them.

1. Do we want to change policy and the law?

In cases where the Electric Coop is ailing and failing to provide the satisfactory service, the official policy of the state is outlined in RA 10531. First to rehabilitate them by NEA and where they can no longer operate to allow the entry of the private sector. So if we want to deviate from this policy, we first must change the law. Pulling their public utility franchise from under their feet without due process as defined in RA 10531 would be a subversion of our own laws and the policy of the state that is enshrined in that law. It would be an abuse of franchising authority by Congress anyway.

Either we amend the RA 10531 or establish a more transparent reevaluation process of cancelling franchises anchored on due process and mindful of disruption of public services whenever we shake the franchise tree.

2. Does the Government have a right to impose privatization to well performing EC’s specially on the grid? What is the Power of the Legislative Franchising Committee?

The irony of the private sector entrepreneurs who are coveting EC franchise areas is that they only want plum areas like Negros, Cebu, Iloilo, Batangas, Bataan, Pampanga, and some in Mindanao. And there is just no reason even for the government and the Legislative Franchising Committee to consider revoking the franchise of these performing Coops.

The main difference between the ability of a private sector operator and an EC in dealing with the brownout problem is not really money but in managing the interference of local government officials who protect their proteges and the contracts of their sponsored power generators and hence hinder the obvious solutions.

The Congressional and Senate Franchising Committees should not even entertain applications for franchises on existing areas because that is borderline immoral. It is like entertaining someone’s marriage proposal to someone who is happily married. Worse, it is like lobbying with the Priest who married the couple?

On that note, Is the Legislative Franchising Committee only blessing the own-will decision of a couple to marry (the owners and the community in compliance with the laws of the state) or do they have the power to unmarry a couple and choose a replacement spouse?

If the Legislative Franchising Committee would like the power to revoke, they at least must put in the proper due process that is consistent with RA 10531. Or at least supersede that law. At least we need clear rules with due process as a civilized and democratic country.

The role of NEA in these on-grid EC’s is to assure proper management, administration, and governance. It is not missionary unless there are unviable areas that as a government program it wants to electrify.

3. Missionary Nature of Electrification in Off-Grid areas.

Maybe we should revisit why the government is providing electric services on missionary basis in these far-flung areas in the first place. Rightly so it is the policy of the state to provide electricity to all its citizens wherever in these 7,107 islands of ours and since most of them are not “commercially viable” for the profit oriented private sector, the government will have to step up to do it. Meralco that makes 25% per year profit on their investment has not even electrified satisfactorily all the remote areas in its territory. Example Verde Island and Talim island in the middle of Laguna Lake and parts of Laguna and Quezon. Can you expect the Aboitiz group to go into Basilan, Sulu, Lanao, Tawi Tawi, and all the small islands?

The Philippine government decided to accelerate the electrification of these islands by launching the U.S. style electric cooperative system, developed and promoted through the NEA (National Electrification Administration) in early 1970’s.

Now we are in 2019 and most Electric Coops are successful (albeit not perfect, just like Meralco). Maybe 10 to 15% have failed or failing. And some 14 off-grid islands have grown in population and economy that they theoretically have sufficient scale to become Commercially viable, meaning they will no longer need missionary subsidy. These larger islands have actually been identified by the DOE as early as 2005 to be commercially viable for the private sector to take over the generation sector where the Government owned Napocor had proven to be ineffective, too slow, and too expensive. (No offense).Their average generation cost was P18 per kwh. The Transmission services remained with Napocor and the distribution operations stayed with the Electric Coop. This was supposed to be the first step towards the graduation of these islands from missionary subsidies (initially in the generation sector).

4. Privatizing Distribution when Privatizing Generation is only halfway done after 14 years

It has been 14 years since 2005, and the privatization of power generation has stalled at 7 islands since 2010 and the rest remained with Napocor. New Power Providers have taken over Palawan, Oriental Mindoro, Masbate, Catanduanes, Siquijor, Bantayan Island, and Tablas Island. And power generation subsidy has come down to an average of less than P5.00 per kwh, mainly for fuel costs.

According to data culled by Bayan Muna from the DOE MEDP 2016 to 2020, the missionary subsidies for these 7 islands amounted to P3.6 billion in 2015 and for those served by Napocor at P3.5 billion. However, from 2016 to 2020 the missionary subsidy for Napocor served islands soars to P14.133 Billion in year 2020. The subsidy for NPP served areas increased only to P4.7 billion by 2020.

On a per kwh basis, the NPP served areas has an average subsidy of P5.00 per kwh. Unfortunately Napocor served areas still has an average of P14 per kwh in missionary subsidies about the same level before the NPP’s took over those other islands with big improvements in power reliability.

One major reason the privatization on many of these islands has stopped is because the Department of Energy under current Secretary Cusi is disallowing the “swiss challenge” or unsolicited proposal types of Competitive Selection Process (bless his heart) that the EC Board of Directors have been requesting to favor their preferred power generation suppliers, no different than the way Meralco had been fighting so they can pick and choose their power generators. Now the EC’s are tailor-making the terms of the bidding to their preferred suppliers. It happens even for new PSA’s in places currently served by NPP’s.

Is power cost and subsidy reduction, which is passed on to the national consumers as a UC-ME charge, a recognized objective in missionary areas?

5. Who do you buy the assets of the Coop from? And how do you value them?

This is a matter that needs to be cleared before we embark on taking away franchises and taking the path towards privatization if we are to do it with minimum disruption of electric services.
Note that technically the value of the ownership of the member consumers have increased exponentially after the government decided to condone their debts in 2001 as part of the enticement for the Epira Law of 2001. Its probably at least 1,000 times their original membership contributions. Do they get paid via a 50% reduction in their monthly bill for 2,000 months?

Note also that in the end the consumers will also pay for the value of the assets because the new private owner will seek recovery of his buying price from the consumers?

6. In cases where the Coop franchise had to be tendered, should not the government share in the proceeds?

We had mentioned that technically the coop members own the distribution utility and should keep the benefits of selling the utility. But there is an argument to be made for the government to auction franchises and in the case of the EC’s the government continued in investing in nurturing the off-grid communities through subsidies, loans, and management development through the years, and can justifiably ask for a share in the proceeds of privatization.

7. The Disruption by Carpetbaggers and flippers

Let us face it. Theoretically, it is supposed to be to the public interest that the distribution systems and franchise is turned over to the private sector, in case that is necessary, at lower costs so that it will result to lower rates to consumers. However, there will be those opportunists who will promise to take over the public service franchise and provide least cost power then turn around and flip the asset and its valuable franchise. Will there be a deterrent against carpetbaggers and flippers? Well connected enterprising individuals who will just sell controlling interests and management of the distribution system for a fat profit. Of course, who ever bought it at a premium will try to recover that from the consumers, clearly something against the public interest that the government therefore has a duty to safeguard against. Do we put in rules against this or be fatalists and accept this as part of our capitalist system?

8. Do you continue providing missionary subsidy to the privatized island?

Of course we can make it palatable by saying it is the consumers that the government is subsidizing not the private distribution utility. But that is for the birds. We know that part of the missionary subsidy will go to the private owners. So is it legal to subsidize? Note that one of the favorite come-ons by private Franchise applicants is the government will no longer subsidize power costs. Just like Solar Para sa Bayans franchise. (and that remains to be seen.)

9. How about the existing power supply providers with long term contracts beyond the current franchise term of the EC?

Related to missionary subsidy, Will the new private franchise holder not recognize the contracts or shorten them and say they should go after the old EC? He can claim that he cannot afford those contracts since the government is no longer providing the subsidy. These New Power Providers have invested billions in 20 year contracts on the presumption that the Legislative Franchising Committee will not unduly cancel the franchises unless the EC has irreversibly failed financially. Masbate, Lanao, Albay?

These missionary subsidies for the NPP’s are covered by a missionary subsidy agreement with Napocor. Will the government do the right thing and honor the subsidy agreement but with an intensified effort for missionary cost reduction over a transition period?

10. Should the government allow the complete consolidation of the power distribution sector by allowing the two dominant players and their allies to take over and add more electric coops to their already 80% hold on the nationwide distribution market?

If we genuinely care about promoting true competition, anti-monopoly, anti-market domination, and cartelization we will not. Let us all understand that the ongoing consolidation and cartelization of the power generation sector is happening because Meralco has the market power and is exploiting it to the hilt. Will the likes of San Miguel, DMCI, Metrobank, Aboitiz commiserate to become Meralco PowerGen’s minority partner if it were not for the market power of Meralco to dispense with the utilities 5,500mw power requirement? And when the DOE and the ERC finally put in rules on CSP, somehow the regulatory “sea parted” and suddenly Meralco has a 3,551mw contract with their minority partners in tow in seeming conquests.

Do we allow the obliteration of one national pride in public service, no matter how imperfect, that the Philippine government at least has sustained over the years? And after we developed the remote areas we will turnover it to the private sector? Many Coops no longer need government money even if they are not run well. So why allow the private sector to takeover? Will this be good for the consumers?

We believe that the Department of Energy and the Legislature should focus on the 14 large islands and the technically failed EC’s as defined under Section 20 of the IRR for RA 10531.

Let us test the current laws, rules, and organizations in fixing the serious problems of Davao Del Norte, Lanao, Aleco. Let us test whether the current energy family can pay attention and do something about the burgeoning missionary subsidies in many islands.

Let us try to put things in order by creating clearer rules when privatization of an off-grid area becomes necessary. This includes establishing clearer rules at the Legislative Franchising Committee especially in the renewal or cancellation of distribution utility franchises.

We hope also that the standards of performance for retention of DU franchises will be the same for EC’s and the private Utilities like Meralco and VECO.

For now until these are clear, we are getting ahead of ourselves talking about privatizing electric coops. There is just too much at stake. Let us do it right.

Next: The Government and Government Officials role in Weakening EC’s

Matuwid na Singil sa Kuryente Consumer Alliance Inc
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david.mskorg@yahoo.com.ph