Dark Power Rising The Philippine Power Industry Nine Years Under EPIRA (RA 9136)

Dark PowerRising

The Philippine Power Industry Nine Years Under EPIRA (RA 9136)

PAID!P e o p l e A g a i n s t I m m o r a l D e b tOfficial Publication of the Freedom from Debt Coalition

VOLUME 13 NO. 1 h t tp: / /www.fdc .ph November 2009

2 PAID! Dark Power Rising November 2009

PAID!P e o p l e A g a i n s t I m m o r a l D e b tOfficial Publication of the Freedom from Debt Coalit ion

VOLUME 13 NO. 1 h t tp: / /www.fdc .ph November 2009

Edited by:Maitet Diokno-Pascual and Wilson Fortaleza

Layout design:Alvin Gallardo

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November 2009 Dark Power Rising PAID! 3

� 10 Reasons Why Electricity Bills Are High

� A Dozen Ways to Reduce Electricity Rates

� ADB privatization policy aggravates climate crisis in the Philippines

Table of ConTenTs

4

7

28

Dark Power Rising in the privatized power industry

From state monopoly to de facto electricity oligarchy

TRANSCO: The Filipino’s Last L ine of Defense Against Privatization

The Undistributed Powers

Why WESM Won’t Work

33

43

ANNEXES 55


On May 12, 2008, the Joint Congressional Power Commission (JCPC) or PowerCom conducted a full blown public hearing on why electricity rates are high. The hearing was held in reaction to the 51.88 centavos per kWh spike in the price of power distributed by the Manila Electric Company (Meralco) in April 2008. It was also during that time an electrifying power struggle took place between the Lopezes and Government Service Insurance System (GSIS) President Winston Garcia.

The public hearing could have been a very good opportunity for all the stakeholders to assess the power situation in the country seven years after the passage of the Electric Power Industry Reform Act or EPIRA and to find appropriate remedies to the pestering problem of high electricity rates in the country, now one of the most expensive in the world. Unfortunately, what came into sight after the hearing was not a clear roadmap to get away from the crisis of high power rates but images of dark powers rising on the horizon – made more pronounced by a hideous power play between old and new players fighting for control of the privatized and restructured power industry. And the story goes on.

During that hearing, the Freedom from Debt Coalition submitted a

position paper entitled, “10 Reasons Why Electricity Bills are High”, presenting a broad and comprehensive analysis of the many factors that contribute to the high cost of power in the country. The paper tried to widen the perspective in making an anatomy of high electricity rates as it pointed to many issues such as privatization and the implementation of EPIRA, weak regulatory environment, corporate abuse and outright fraud, inefficiency, bad governance and corruption, among others – which the government and other players tried to hide or skew by singling out the Lopezes.

This was followed by another paper, “A Dozen Ways to Reduce Electricity Rates”, where the FDC called for a complete overhaul of the EPIRA and a decisive shift to clean and sustainable power. These two papers bolstered the Coalition’s efforts in bringing out and popularizing its critique of the EPIRA and the power privatization program and in introducing alternatives for a more democratic and sustainable power.

EPIRA nonetheless is in a complete mess, prompting PowerCom Chair Senator Miriam Defensor-Santiago to declare: “Pitong taon na ang ating Epira na gumawa ng pagbabago sa ating industriya ng kuryente, pero pagkatapos ng pitong taon, hindi pa rin nakamit yung tanging layunin na ibaba ang binabayad

sa kuryente. Ibig sabihin lahat kami ay failure. EPIRA is a failure. The Senate is a failure. The executive branch is a failure.”1

Aside from the unaddressed problem of high electricity rates, EPIRA enhances rather than destroys oligopoly2 in the industry. In fact, the much-touted wisdom of an electricity spot market was tested to its limits after the Wholesale Electricity Spot Market (WESM) succumbed to manipulations from traders who gamed the market to earn more income, as admitted one player. In a report to stockholders, the Aboitiz group declared a 124% increase in their income in 2007 due mainly from their “strategy” of trading power at the WESM during peak hours.3 This issue will be presented in another article, “Why WESM Won’t Work”.

These things, however, are not unexpected since the privatization of the National Power Corporation (NPC) merely transferred the State’s monopoly power to the private oligarchs without the intended benefits for the people. And in the case where the State merely surrendered the monopoly power of the NPC to private player(s), that power shift did not, in essence, alter the monopolistic nature of the industry and therefore the persistence of oligopoly.

This was clearly the case when the franchise to operate the national

Editorial

Dark Power risingi N T H E P R i v AT i z E D P O W E R i N D U S T R y


grid, which is a natural monopoly, was transferred to the National Grid Corporation of the Philippines (NGCP), a private consortium with reported close links to Malacañang. The sale of Transco allowed the private concessionaire to operate the national grid for up to 50 years. The deal, however, was deemed by many as gravely disadvantageous to the government since it was a product of an insidious power play in the industry, with groups closely identified with the First Family securing the bid under dubious circumstances. This will be discussed fully in a separate article, “Transco: The Filipino’s last line of defense against the onslaught of privatization in the electric power industry.”

Undeniably, this right to exercise monopoly power over a captive market is the biggest privilege the industry has bestowed to old and new players. The same is true even for private distribution utilities whose monopoly control over their own respective franchise areas was left uncontested. Consequently, this enormous opportunity to gain more wealth and power from a guaranteed and risk-free business gave rise to the ongoing power plays among the oligarchs.

The unfinished battle for control of Meralco between the Lopezes and Garcia was expected to erupt into a much bigger war when stockholders gathered again in May 2009 for their annual meeting. But in a sudden turn of events, prior to the meeting, Garcia assigned the task of a power grab to Danding Cojuangco by selling the GSIS shares4 (most likely with the full blessings of Malacañang) to the San Miguel Corporation5.

To foil the power grab attempt, the Lopezes sold some 20 percent of their

share to PLDT’s Manny Pangilinan6 reportedly to serve as counterbalance to the Cojuangco-Arroyo bloc’s planned take-over.

This ugly power play in the country’s largest private distribution utility provides a picture of how the nasty

political economy of private power comes into play, of course with more attention given to the issue of corporate control and high returns rather than to providing people with the most affordable, clean and efficient energy. Economically, the fight for corporate control is mainly a battle for economic hegemony over the more than four million captive Meralco customers in Luzon who bring in over P4-B annual net income7 for the company — a very lucrative and cash-rich business, indeed. Politically, having commanding control of Meralco

gives its owners economic advantage over the other players in the industry. And from that vast economic base emerges an enormous political power especially in this country where political influence is the best guarantee for this kind of business to prosper.

In the Visayas and Mindanao region, the Aboitiz family, a familiar name in the industry has silently expanded its empire

over private distribution business. An article, “The Undistributed Powers”, provides an analysis and baseline data on the current ownership structure of the distribution sector all over the country. It also includes information on the areas covered by the electric cooperatives and updates on which

This ugly power play in the country’s largest private distribution utility provides a picture of how the nasty political economy of private power comes into play, of course with more attention given to the issue of corporate control and high returns rather than to providing people with the most affordable, clean and efficient energy.


Dark Power Rising in the Privatized Power Industry

option the ECs have preferred in their response to the implementation of EPIRA.

Furthermore, the competition among the power oligarchs is not only confined within the distribution sector. The restructured power industry under the EPIRA regime pried open the whole industry for private exploitation. The more players, the better for the industry since it was envisioned by the government that private sector participation will usher in competition which in turn would bring efficiency into the system, and “eventually” lower rates to consumers. The government has in fact provided many incentives and undue compromises in the EPIRA just to entice private sector participation. One such incentive was the National Government’s assumption of the NPC’s P200-B debts8. Another is the P1.03 tariff rate hike granted to NPC in 2004. Sovereign guarantees extended to IPPs were also honored. Congress also made sure that EPIRA allows cross-ownership9 to attract investors to venture into both the generation, transmission and distribution sector. The Asian Development Bank, World Bank and other international financial institutions (IFIs), on the other hand, provided loan facilities to the government and the private sector to finance the country’s power sector reform program.10

But only a few players came in. And more obviously, they came from the same group of oligarchs who, in one way or another, have been in the industry since the last century. In

the generation sector for instance, the main contest is also between the Lopezes and the Aboitizes. The Lopez clan, aside from having their own big IPPs, acquired many of the geothermal and other NPC plants in Luzon and Visayas. They are now also into exploration after gaining control of the Philippine National Oil Company-Energy Development Corporation (PNOC-EDC). Meanwhile, the Aboitiz group, reported to be closer to the First Family, got most of the hydro and other NPC plants in Mindanao, some in the Visayas and also some in Luzon. And more buyouts and joint ventures are expected as the rest of NPC assets, including the NPC IPPs are lined up for full privatization. A baseline data on the current ownerships of generation companies (GENCOS) is provided in another article, “From state monopoly to de facto electricity oligarchy.”

There are other players who have ventured into or have shown interests in power. The Abayas of CEPALCO is one. Davao’s Alcantara family which owns the Alsons Consolidated Resources, Inc., is also on power generation and exploration. Some new big names to mention are SM’s Henry Sy, Metrobank’s George Ty, and now San Miguel’s Danding Cojuangco. Others in the periphery are industry names like former Energy Secretary Francisco Viray and businessman Victor Del Rosario. Certainly, the only chance for them to be able to catch up with the well-entrenched oligarchs is to follow the same route – through rent-seeking which could only be worse under the present regime.

To some extent, there are little battles that complete the picture of the ongoing power play in the entire power industry. And that is happening in the sector of electric cooperatives (ECs) — between those who campaign to remain under the National Electrification Administration (NEA) and those who prefer to register under the Cooperative Development Authority (CDA), notwithstanding moves by politicians to keep hold of or gain foothold of the ECs in their respective areas. However, debates in this area are still confined to the matter of what advantage(s) an EC can get from putting itself under the supervision of the CDA or remaining under the NEA, and not on how to transform these ECs into genuine cooperatives that contributes to local economic development.

Clearly for the past seven years, a battle line has been drawn between the government and industry oligarchs in the implementation of the power sector reform program in the country under the EPIRA. Sadly, however, it was neither a battle to bring down the power rates nor a war to provide clean and sustainable energy to the people. It was mainly a battle for control and ownership of the privatized power. This fight for control of the privatized power does not only make the ongoing power play so intense. The process has also created an assembly of dark power – a horde of new and recycled rent-seekers who are out to extract more wealth and political power by gaining monopoly control of the most lucrative business in the country today, at the chronic expense of the consumers.

endnotes1 On the Powercom hearing on Monday (12

May 2008), http://www.miriam.com.ph/labels/Renewable%20Energy%20Bill.html

2 A market condition in which sellers are so few that the actions of any one of them will materially affect price and have a measurable impact on competitors.

3 Aboitiz Power Financial Report, Annual Stockholders Meeting 2008.

4 GSiS shares to Meralco amounts to 295.50 million in 2008 representing 36.5 % of the total share.

5 San Miguel Corporation is the country’s largest food conglomerate. Lately it diversified into infrastructure, heavy industries, and now in power.

6 PDi 03/14/2009

7 Meralco Annual Report 2007

8 EPiRA, Sec. 32

9 EPiRA, Sec. 45 (a)

10 Private Sector Development in the Electric

Power Sector: A Joint OED/OEG/OEU Review

of the World Bank Group’s Assistance in the

1990s, July 21, 2003


executive summary Set forth in the Electric Power Industry Reform Act of 2001 (EPIRA) or Republic Act No. 9136 are premises of a restructured power industry and a regime of fair and free competition in the country’s power sector as means to achieve quality, reliable and affordable supply of electric power for the public.

The EPIRA was designed primarily to increase efficiency, enhance investment and encourage competition in the power sector. The privatization of the National Power Corporation’s (NPC) assets is seen as a key to dismantling the monopoly in the electricity industry and in bringing about competition in the power sector thus provides greater efficiency in the generation, transmission and distribution of electricity. But doubts remain as to power industry restructuring under the EPIRA will result to realization and attainment of those benefits.

By and large, the EPIRA’s provisions are simply too forbidding to create competition and to de-monopolize the industry. EPIRA is actually creating a market which is headed for greater concentration in the hands of multinational corporations and primarily local elites. The reforms

envisioned by the EPIRA have actually resulted to the creation of an electricity oligarchy.

The success of reforms in the power sector in fact rely on the degree of competition policies introduced in the market and less on the coverage of privatization which is in contrary with the EPIRA’s provision on NPC privatization (Patalinghug and Llanto, 2004). In particular, introducing and enforcing strong competition policies and framework might matter more than the extent of ownership. The provision in the EPIRA on the cross-ownership is weak. A total prohibition of one entity from one or more sub-sectors of the electricity industry is

more superior to putting a limitation of 30% on a company or related group to own, operate, or control of the installed generating capacity of a grid and/or 25% of the national installed generating capacity.

With the creation of the wholesale electricity spot market (WESM) model in which distribution utilities retain their exclusive service territories and buy power from competing generators, there is an urgency to expand market

power monitoring and mitigation measures considering the generation sector is characterized by relatively few dominant power generation companies. However, several studies argue that “one of the prerequisites for this model to succeed is the existence of a sufficient number of unaffiliated suppliers (Kessides, 2004)”. The EPIRA’s provision on cross-ownership breaks this competition rule.

The EPIRA’s competitive provision depends on applying non-discriminatory access to existing systems through the implementation of the WESM. This provision is inferior to a situation where both divestment and open access are demanded to

de-monopolize the industry1. The potential of market abuse is real which market power abuses will result in wealth

transfers from end-consumers to power producers. Therefore in curtailing the exercise of market power abuse and anti-competitive behavior in the electricity industry, “more effective are structural remedies than imposition of behavioral rules as provided by the EPIRA (Abrenica and Ables, 2001).”

Fundamentally, the EPIRA has no effective solution to the problems besetting the power industry. It simply

From State Monopoly to de facto Electricity OligarchyA study of the development of privatization of NPC Assets

Fundamentally, EPIRA has no effective solution to the problems besetting the power industry. It simply transfers the monopoly privileges from the State to private interests.

By Jerbert Briola



transfers the monopoly privileges from the state to private interests and thus allowing the ‘gains’ to be kept as excess profits by the privatized monopoly instead of being shared with the consumers through lower electricity rates.

IntroductionWith the passage of the EPIRA in 2001, the country has embarked on the process of power industry restructuring and deregulation. From the vertically-integrated industry, the power industry was unbundled into four sectors: generation, transmission, distribution and supply. The primary objectives of the restructuring are to increase operational efficiency and reduce dependency on government funding by increasing competition and private sector participation in power sector activity. Another major reform embodied under the EPIRA is the privatization of the NPC’s generation assets (including the Independent Power Producers contracts).

The EPIRA was to set in motion the liberalization of the power industry through the privatization of at least 70% of NPC’s assets. The Power Sector Assets and Liabilities Management Corporation (PSALM) is created to manage the sale and privatization of NPC’s assets. Besides managing the privatization of NPC’s assets, PSALM is also tasked to renegotiate the IPP contracts based on the review of the Inter-Agency Committee established for this purpose. Unless it is extended by law, PSALM has a corporate life of 25 years from the effectivity date of the EPIRA.

The main aim of the EPIRA is to enable retail consumers to choose their electricity provider. EPIRA however states that retail competition and open access2 in the electric industry can be declared only when all of the preconditions have been fulfilled. These preconditions3 are: (i) privatization of at least 70% of NPC’s generating assets, (ii) the transfer to IPP contract administrators (private entities) of the management and control of at least 70% of the total energy output of power plants under Independent Power Producers (IPPs) contracts, (iii) initial removal of cross subsidies, (iv) unbundling of transmission and distribution charges, and (v) establishment of wholesale electricity spot market. Then retail competition will begin wherein end-users with an average peak demand of 1 MW will become contestable market4.

There are 31 generation assets (see Table 1) identified for privatization with an aggregate capacity of 5,914.1-MW (including decommissioned or retired power plants). The total installed capacity excluding decommissioned or retired power plants is 4,454.8-MW. These do not include the Agus and Pulangui hydroelectric power plants in Mindanao which cannot be privatized earlier than 10 years as provided by EPIRA5. The 70% privatization requirement for open access and retail competition only covers the interconnected grids of Luzon and Visayas. Hence, the Mindanao power

Table 1. List of NPC’s generation assets for privatization

Fuel type Power plantsInstalled capacity(in MW)

Location

Calaca* 600.00 Calaca, Batangas

Coal Masinloc* 600.00 Masinloc, zambales

Limay combined cycle*

620.00 Limay, Bataan

Diesel Navotas i and ii 310.00 Navotas, Metro Manila

Panay i* 36.50 Tinocuan, Dingle, iloilo

iligan i and ii 114.00 Mapalad, iligan City

Bohol* 22.00 Tagbilaran City

Diesel/Bunker Panay iii 110.00 Dingle, iloilo

Geothermal MakBan* 410.00 Laguna and Batangas

Tiwi* 275.00 Tiwi, Albay

BacMan 150.00 Albay and Sorsogon

Palinpinon* 192.50 valencia, Negros Oriental

Tongonan/Leyte* 112.50 Lim-ao, Kananga, Leyte

Hydro Magat* 360.00 Ramon, isabela

Angat 246.00 Norzagaray, Bulacan

Binga* 100.00 itogon, Benguet

Pantabangan* 100.00 Pantabangan, Nueva Ecija

Ambuklao* 75.00 Bokod, Benguet

Masiway* 12.00 Pantabangan, Nueva Ecija

Barit* 1.80 Buhi, Camarines Sur

Cawayan* 0.40 Sorsogon City, Sorsogon

Amlan* 0.80 Amlan, Negros Oriental

Agusan* 1.60 Manolo Fortich, Bukidnon

Loboc* 1.20 Loboc, Bohol

Talomo* 3.50 Tugbok, Davao City

Generation assets that have been retired

Bataan Thermal 225.00 Limay, Bataan

Manila Thermal 200.00 Ermita, Manila

Sucat Thermal 850.00 Sucat, Muntinlupa City

Cebu ii Diesel 54.00 Toledo City, Cebu

Aplaya Diesel 108.00 Jasaan, Misamis Oriental

Decommissioned power plant

General Santos Diesel

22.30 General Santos City

TOTAL CAPACITY 5,914.10

Source: Power Sector Assets and Liabilities Management (PSALM)Note: *privatized



plants such as Agusan and Talomo hydroelectric power facilities are not included.

The 70% privatization target is seen as a crucial condition needed for the WESM to operate. The WESM is a main component of the reforms in the power industry to encourage competition in the sector and bring down the costs of electricity. It is a marketplace for the trading of electricity and a venue for generators/sellers to offer their outputs and specify their bid prices to buyers in 24 one-hour trading periods only. It also serves as a mechanism to encourage investors to participate in the generation sector and attract buyers of the NPC’s assets.

But it is widely seen that the delay in the privatization of the NPC’s assets has set back on the timetable for the opening of WESM. According to the EPIRA, WESM’s commercial operation would be one year after the actual commencement date of Open Access and Retail Competition (OARC) in the Luzon Grid. The WESM began commercial operations on June 23, 2006 in Luzon and is already in its 34th month of commercial operations. The Trial Operation Program (TOP) of WESM in Visayas is now being implemented. The first target of OARC was 2004 as provided by the EPIRA6.

With the sale of what are considered two big-ticket power plants in 2007, the 600-MW Calaca coal-fired power plant and 600-MW Masinloc coal-fired power plant are widely touted as the test case for the government’s privatization blueprint. Masinloc was sold for $930M to the Masinloc Power Partners Co. Ltd.7 While Calaca fetched $786.53M from the consortium of Calaca Holdco Inc. now Emerald Energy Consortium. The consortium is wholly owned by Suez-Tractebel8 through its wholly-owned subsidiary Belgelectric Finance B.V.

Before the 600-MW Masinloc power plant was sold by the government, it had been mired in controversy in December 2004. The Calaca and

Masinloc power plants were sold in 2007 but not without a series of failed biddings mainly because of the absence of transition supply contracts9 assigned to the sale of these power plants. Thus, the government has attached a 287-MW power supply contract to Calaca and another 265-MW for Masinloc when the said two power plants were finally sold. When sold last October 2007, a transition supply contract from Napocor was attached to the Calaca power facility to make it more palatable to the bidders.

However in January 2009, the winning bidder of the 600-MW Calaca power plant10, the Suez-Tractebel decided to back out of the deal citing the deterioration of the power plant since its bidding date on October 16, 2007. It will be noted that one of the conditions for the turnover of the power plant to the winning bidder is that it should be delivered “as is, where is” to the new owner, or in the same condition as it was during the bidding date.

The problem resulted from the unsuccessful sale of the Calaca power facility will not only affect the revenue flow for the PSALM but will also directly affect the implementation of OARC as provided under the EPIRA. The sale of 600-MW Calaca power facility was supposed to achieve the 70 percent privatization level of the NPC’s assets which is required before an open access is implemented. Under the Energy Regulatory Commission (ERC) guidelines, the interim open access (IOA) will not start unless the Calaca power facility sale has been consummated.

Then in July of 2009, the Calaca power facility was sold to DMCI Holdings Inc. at $361.71M bested the only other bidder, Banpu Power Ltd. of Thailand, which submitted a $280-million bid. The Calaca facility has been allocated a 287-MW power supply contract, or about 48 percent of the plant’s rated capacity. MERALCO will take 169 MW of the contracted energy.

Between 2001 and 2009 (table 2), twenty one power plants were sold. The Lopez and Aboitiz groups acquired the ownership of twelve of these power generation facilities, while nine power plants (Barit, Cawayan, Loboc, Masinloc, Calaca, Panay-Bohol, Amlan and Limay) have been sold to other private entities (including one electric cooperative). The 100-MW Pantabangan and 12-MW Masiway power plants were sold as one package11 in September 2006 to the Lopez-owned First Gen Corporation. In December 2006, Aboitiz Power Corporation acquired the 360-MW Magat power plant. The 75-MW Ambuklao and 100-MW Binga generation facilities were sold as one package fetched $325 M from SN Aboitiz Power Hydro Inc. (SNAP Hydro) in 2007.

In 2008, the 747.53-MW Tiwi-MakBan geothermal complex considered as big-ticket item on the auction block was the first geothermal power facility sold by the government. PSALM attached a total of 475-MW in power supply contracts to the sale, thus providing the new owner AP Renewables Inc. with a ready market sale for its electricity output. AP Renewables Inc. bested that of Lopez-owned First Luzon Geothermal Energy Corp. AP Renewables is a domestic corporation wholly owned by the Aboitiz Power Corporation (APC). APC is 75.59% owned by Aboitiz Equity Ventures.

On September 9, 2009, Green Core Geothermal Inc., a wholly-owned subsidiary of Energy Development Corporation (EDC) of the Lopez group bagged the 192.5-megawatt Palinpinon and 112.5-MW Tongonan geothermal power facilities package for $220 million. It edged out the $200 million tender posted by Therma Power Visayas of the Aboitiz Group, the only other bidder in the asset sale.

Taking into account the momentum for the sale of NPC’s assets, the privatization of the power industry is moving at a slow pace. Nearly eight years after the passage of the EPIRA, the preconditions for open access and



Table 2. List of privatized power plants as of September 2009

Power Plant Year privatized Capacity (in MW) Grid Winning Bidder Price

(US$ M)1.Talomo Hydroelectric March 25, 2004 3.50 Mindanao Hydro Electric Development Corp. 1.37

2. Agusan Hydroelectric June 4, 2004 1.60 Mindanao First Generation Holdings 1.53

3. Barit Hydroelectric June 25, 2004 1.80 Luzon People’s Energy Services inc. 0.48

4. Cawayan Hydroelectric Sept. 30, 2004 0.40 Luzon Sorsogon ii Electric Cooperative, inc. 0.41

5. Loboc Hydroelectric Nov. 10, 2004 1.20 visayas Sta. Clara international Corp. 1.42

6-7. Pantabangan-Masiway Hydro Sept. 7, 2006 112.00 Luzon First Gen Hydropower Corp. 129.00

8. Magat Hydroelectric Dec. 14, 2006 360.00 Luzon SN Aboitiz Power Corporation 530.00

9. Masinloc Coal-Fired Thermal July 26, 2007 600.00 Luzon Masinloc Power Partners Co. Ltd. 930.00

10-11. Ambuklao-Binga Hydroelectric Nov. 28, 2007 175.00 Luzon SN Aboitiz Power Hydro inc. 325.00

12-13. Tiwi-Makban July 30, 2008 747.53 Luzon AP Renewables inc. 446.89

14.-15. Panay and Bohol Diesel Nov. 12, 2008 168.50 visayas SPC Power Corporation 5.86

16. Amlan Hydroelectric Dec. 10, 2008 0.80 visayas iCS Renewables inc. 0.23

17. Calaca Coal-Fired Thermal July 8, 2009 600.00 Luzon DMCi Holdings inc. 361.71

18. Power Barge 118 July 31, 2009 100.00 Mindanao Therma Marine inc. 14.00

19. Power Barge 117 July 31, 2009 100.00 Mindanao Therma Marine inc. 16.00

20. Limay Combined-Cycle Aug. 26, 2009 620.00 Luzon San Miguel Energy Corporation 13.50

21. Palinpinon-Tongonan Geothermal Sept. 2, 2009 305.00 visayas Green Core Geothermal inc. 220.00

TOTAL 3,897.33 $2,997.40 B

Source: PSALM

retail competition have not yet been fulfilled. The Asian Development Bank (ADB) noted the pace of power sector reforms in the Philippines is similar to that of other countries. The ADB in its study said “(w)orldwide the experience is that the risks of sector reforms are usually underestimated and that implementation takes longer than anticipated.”12 A former NPC President suggested that this is the prevailing case because the government has been following a flawed strategy of privatizing before restructuring.13 The sale of NPC’s assets14 will help bring down the debt level, but every year of delay in privatization according to the ADB study means opportunity costs running close to $1 billion. These are in terms of foregone interest, a drop in asset values due to wear and tear, and continuing losses from the operation of these assets.

The twenty one power plants that have already been sold and privatized translates to 3,897.33-MW generating capacity or equivalent to about 87.48% of the total 4,454.8-MW installed generating capacity scheduled for

privatization in the Luzon and Visayas grids. The total revenues earned from the sale of these generation assets have already reached $2,997.4B (P145,733.58B at peso-dollar rate P48.62=$1).

However, owing to the slow pace of privatization, PSALM revised its target for the sale of the remaining NPC’s generation assets. PSALM’s indicative privatization plan for the NPC’s generation assets in Luzon and Visayas shows a 50% target for 2007. Based on the stage of the privatization of NPC’s power plants, the government hopes to achieve 70% privatization level by 2008 while the complete privatization is by end of 2009.

PSALM reported that the delay in the privatization is attributed to a confluence of factors such as investors’ interest and plant-specific concerns including operations and maintenance agreements for multipurpose hydro power facilities, fuel supply agreements and land-related issues. The absence of supply contract between power producers and its prospective market

i.e. distribution utilities, electric cooperatives etc. poses a major reason for the delay.

Another cause of delay is the waiting period of PSALM for the approval of NPC’s creditors in the sale of power plants before the completion of the sale and transfer of NPC’s assets to winning bidders. The transfer of management control of at least 70% of the total energy output of power plants under NPC-IPP contracts also had its share in the slow process of privatization.

supply and demand situationThe country’s electric grid with about 15,937.1-MW is divided into three: Luzon grid accounts for about 76.3% of the total installed capacity, Visayas represents about 11.4% and Mindanao accounts for about 12.1% (table 3). The generation sector consists of the following: (i) NPC owned and operated generation facilities; (ii) NPC-owned plants, which consist of plants operated by Independent Power Producers (IPPs), as well as IPP-owned



and operated plants, all of which supply electricity to NPC; and (iii) IPP-owned and operated plants that supply electricity to customers other than NPC.

As of 2008, the country has 107 power plants (operational) i.e. NPC owned and operated, NPC-IPPs and non-NPC with a total installed generating capacity of 15,937-MW.

Based on DoE data in 2008, of the 15,937.1-MW total installed generating capacity, 13,205-MW or 83% is said to be dependable capacity. Although no additional power plant went online in 2007, the increase was due to the reconciliation of data between DoE, NPC and PSALM. Coal-fired power plants have the largest share in terms of installed capacity, contributing 4,213-MW or 26.44% of the mix. Majority of these coal plants are located in Luzon. Oil-based power plants accounted for 3,616-MW or 22.69% of the total capacity. Hydroelectric power plants, which is the main source of electricity in Mindanao accounted for

3,289-MW or 20.64%. Natural gas fired power plants in Luzon grid amounted to 2,834-MW or 17.78%; geothermal power plants which are mostly located in Visayas grid accounted for 1,958-MW or 12.29% to the total installed capacity. Other renewable energy such as wind and solar accounted for only 0.16% of the capacity generation mix15.

Power generation is undertaken by the NPC, by IPPs and by privately-owned generation facilities. Some utilities and electric cooperatives also have their own generating units, but the energy output of these are generally small. Gross power generation in 2008 (table 5) reached 60,821 gigawatt-hours (GWh), 2.03 percent higher than 59,612 GWh in 2007. Natural gas fired power plants remain the dominant source of fuel for power generation with 19,576 GWh or 32.19% of the total country’s generation. This marks the fourth consecutive year in which natural gas-fired had the biggest share on gross generation since replacing coal-fired in 2005 (DOE Power Statistics 2008).

Table 3. Indicative Privatization Targets for Generating Assets, 2008-2009

Year Grid Plants Fuel typeRated

capacity (MW)

2008 Luzon Tiwi* Geothermal 289.00

Luzon Makban * Geothermal 458.53

Mindanao iligan i & ii Diesel/ Bunker

114.00

visayas Panay* Diesel 146.50

visayas Bohol* Diesel 22.00

visayas Amlan* Hydro 0.80

Sub-Total of Operating Capacities/Year (excluding Iligan I & II)

916.83

Sub-Total of Operating Capacities/Year 1,030.83

2009 Luzon Angat Hydro 246.00

Luzon Navotas i & ii Diesel 310.00

visayas Palinpinon* Geothermal 192.50

visayas Tongonan* Geothermal 112.50

Luzon Bacman Geothermal 150.00

Sub-Total of Operating Capacities/Year 1,011.00

T O T A L (without Iligan I and II) 1,927.83

T O T A L 2,041.83

Source: PSALM. *sold as of September 2009

Table 4.Power plants Installed capacity (in MW)

Luzon 55.00 12,172.02

visayas 31.00 1,831.60

Mindanao 21.00 1,933.40

National 107.00 15,937.10

Source: Department of Energy, 2008

Table 5.

2008 Gross Power Generation by Utility (in GWh)

Generation in GWh % share

NPC 12,743.00 21.00

NPC-SPUG 448.00 1.00

NPC-iPP 27,972.00 46.00

Non-NPC 19,658.00 32.00

Total generation 60,821.00 100.00


Generation MWh % share

NPC 15,151,017.00 25.00

NPC-SPUG 437,372.00 1.00

NPC-iPP 26,155,930.00 44.00

MERALCO iPP 14,413,361.00 24.00

Non-NPC 3,454,109.00 6.00

Total generation 59,611,788.00 100.00



NPC 17,299,198.00 30.50

NPC-iPP 23,172,666.00 40.80

MERALCO iPP 14,308,642.00 25.20

RECs/other iPPs 2,003,624.00 3.50




NPC 15,780,230.00 27.90

NPC-iPP 24,716,762.00 43.70

MERALCO iPP 13,985,901.00 24.70

RECs/other iPPs 2,084,846.00 3.70


Source: Department of Energy



This was followed by coal at 28.24%. Meanwhile generation from hydro electric power plants fell by 13.84%, from 9,939 GWh in 2006 to 8,563 GWh in 2007. Likewise, generation from geothermal power plants decreased by 2.39% from 10,465 GWh in 2006 to 10,215 GWh in 2007 due to outages experienced by Macban, Bacman and Tiwi geothermal plants in Luzon.16

The share of NPC to the total generation by utilities fell by 9.77 % contributing 15,588 GWh or 26.15% of the mix in 2007. This was due to the transfer of Pantabangan-Masiway hydropower plant complex to First Gen on November 18, 2006 and Magat hydropower plant to SN Aboitiz on April 26, 2007. Contributions from NPC-IPPs accounted for 26,156 GWh or 43.88% of the total electricity generation while from non-NPC power plants contributed 17,867 GWh or 29.97% of the mix. Non-NPC power plants are those of Meralco IPPs and privately-owned generation facilities. Of the 17,867 GWh, the Meralco IPPs have a 24 % share (14,413,361 GWh) of the total generation in 2007. DoE data shows the share of IPPs of Meralco in total power generation grew from 2% in 1997 to 24% in 2007. In contrast, the share of NPC (including its IPPs) fell from 97 percent to about 70 percent.

Out of the total installed capacity of 15,937.1-MW (table 4), the NPC owned and operated generation facilities accounted for 22% or 3,554.48-MW (includes Tiwi-MakBan geothermal power complex). The large portion of installed capacity is under the operation of NPC-IPPs accounted for 47% or equivalent to 7,547.21-MW. And the non-NPC power plants accounted for 30% or 4,837.02-MW.17

Based on DoE data in 2008, in the sale of Tiwi-Makban hydro facilities, NPC’s market share of its remaining generating assets was reduced to 2.8 percent in the Luzon Grid while for the national grid its share is 12.4 percent. Aboitiz Power Corporation market share in the Luzon grid grew to 9.0 percent with its acquisition of privatized power plants to include Magat hydro, Ambuklao-Binga hydro complex and Tiwi-Makban geothermal facilities. NPC-IPPs maintain the bulk of the share with 69.6 percent in the national grid.

Luzon accounted for about 74% of all energy demand, which is 76% of the national installed generating capacity. Visayas, on the other hand, shared for roughly 12% of demand, boasted of only 11.4% of total installed generating capacity. Mindanao has about 14% of all energy demand that translated to 12% of the country’s total installed capacity.

The generation capacities today far exceed consumption levels. The country consumed 59,612 GWh18 in 2007. The demand for electricity at peak levels is only in the range of 8,000-MW to 9,000-MW (table 5). The bulk of installed capacity is in Luzon, 12,172.02-MW, where the peak demand reached 6,643-MW in 2007. Over the past five years, Visayas has watched peak demand increase from

Table 8. List of NPC owned and operated power plant in Luzon as of September 2009

Power plant Capacity (in MW) LocationNavotas i and ii diesel 133.38 Navotas, Metro Manila

Limay combined-cycle* 620.00 Limay, Bataan

MakBan geothermal* 442.80 Calauan, Laguna

BacMan geothermal 150.00 Bacon, Sorsogon

Tiwi geothermal* 275.69 Tiwi, Albay

Angat hydroelectric 246.00 Norzagaray, Bulacan

Total 529.38

Source: Department of Energy note: *privatized

Table 9. List of NPC-IPP in Luzon as of April 2008

Power plant Capacity (in MW) Location

Pagbilao i and ii coal-fired* 728.00 Pagbilao, Quezon

Sual i and ii coal-fired* 1,294.00 Sual, Pangasinan

San Antonio natural gas 3.00 Echague, isabela

Subic diesel 116.00 Subic, zambales

Bauang diesel 235.20 Bauang, La Union

ilijan natural gas 1,271.00 Batangas City

Hopewell gas turbine 310.00 Navotas, Metro Manila

San Roque multi-purpose 345.00 San Manuel, Pangasinan

Ampohaw-Bineng hydro 18.35.00 Sablan, Benguet

Caliraya-Botocan-Kalayaan (CBK) 755.50 Kalayaan, Laguna

Bakun hydroelectric 70.00 Alilem, ilocos Sur

Casecnan hydroelectric 165.00 Pantabangan, Nueva Ecija

Northern Mini Hydro Corp. 12.40 Bakun, Benguet

Malaya Thermal 650.00 Pililia, Rizal

TOTAL 5,973.45

Source: Department of Energy *privatized

Table 6. Installed capacity as of April 2008 (in MW)NPC owned

and operated NPC-IPP* Non-NPC TOTAL

Luzon 1,867.18 5,973.45 4,330.64 12,172.02

visayas 570.50 861.28 402.24 1,831.60

Mindanao 1,116.80 712.48 104.14 1,933.40

National 3,554.48 7,547.21 4,837.02 15,937.10

Source: Department of Energy *PNOC-EDC power plants are included in NPC-IPP power plants

Table 7. Peak demand (in MW)Grid 2007 2006 % change

Luzon 6,643.00 6,466.00 2.74

visayas 1,102.00 1,066.00 3.38

Mindanao 1,241.00 1,228.00 1.06

TOTAL 8,986.00 8,760.00 2.58




903-MW in 2002 to 1,102-MW in 2007, while installed capacity reaches 1,831.6-MW. That same year, peak demand was at 1,241-MW in Mindanao compared to the installed capacity of 1,933.4-MW.

In Luzon, there are 55 power generation facilities. Six are NPC owned and operated generation facilities19. These power plants have a total installed generating capacity of 1,867.18-MW while there are 13 NPC-IPPs with a combined installed capacity of 5,973.45-MW. 36 non-NPC power plants have a total generating capacity of 4,330.64-MW.

In Visayas, there are 31 power generation facilities of which nine are NPC owned and operated (table 9) with a total installed generating capacity of 570.5-MW, 5 are NPC-IPPs (table 10) with a combined installed generating capacity of 861.28-MW, and 17 non-NPC power plants (table 11) have a total installed generating capacity of 402.24-MW.

In Mindanao, there are 21 power generation facilities the biggest of which is the 727-MW Agus hydroelectric power complex. While 4 power plants are NPC owned and operated (table 12) with a total installed generating capacity of 1,116.8-MW, 6 are NPC-IPPs (table 13) with a total installed capacity of 712.48-MW. The 11 non-NPC power generation facilities have a combined installed capacity of 104.14-MW (table 14).

from government monopoly to private monopolyIn economics, privatization turns over the control of an enterprise from government to the private sector. If the enterprise is run inefficiently by government (which is mostly the case) then theoretically privatization is likely to result in greater production efficiency and lower prices

Table 10. List of non-NPC power plant in Luzon as of April 2008


Calaca coal-fired* 600.00 Calaca, Batangas

Masinloc coal-fired 600.00 Masinloc, zambales

Quezon Power 511.00 Mabalacat, Pampanga

Asia Pacific Energy Corp. 50.00 Bauang, La Union

Duracom iii and iv 109.00 Navotas, Metro Manila

Angeles diesel 30.00 Angeles City

Tarlac Electric 18.90 Capas, Tarlac

Trans Asia Power 52.00 La Union

Magellan Cogen** 63.00 Rosario, Cavite

Sta. Rita natural gas 1,060.00 Sta. Rita, Batangas

San Lorenzo natural gas 500.00 Sta. Rita, Batangas

MakBan Ormat 15.73 Bay, Laguna

Manito 1.50 Albay

Magat hydroelectric 360.00 Ramon, isabela

Pantabangan-Masiway 112.00 Pantabangan, Nueva Ecija

Ambuklao-Binga 175.00 Bokod, Benguet

Cawayan hydroelectric 0.40 Guinlajon, Sorsogon

Barit hydroelectric 1.80 Buhi, Camarines Sur

NiA Baligatan 6.00 Benguet

Aqua Grande 4.50 Pagudpod, ilocos Norte

Amburayan 0.20 Sudipen, La Union

Dawara 0.53 Suyo, ilocos Sur

Bachelor 0.75 Natividad, Pangasinan

Sal-angan 0.50 itogon, Benguet

Club John Hay 0.50 Baguio City

Magat A and B 2.52 Ramon, isabela

Tumauini 0.25 Tumauini, isabela

Dulangan 1.60 Oriental Mindoro

Balugbog 0.65 Nagcarlan, Laguna

Palapaquin 0.40 San Pablo City, Laguna

San Juan river 0.15 Kalayaan, Laguna

yabo 0.20 Pili, Camarines Norte

NorthWind Project 25.00 Bangui, ilocos Norte

TOTAL 4,330.64

Source: Department of Energy *privatized last July 28, 2009 **Magellan Cogen: for confirmation on the operation of the power plant

Table 11. List of NPC owned and operated power plant in Visayas as of April 2008


Power Barge (PB) 103 32.00 Estancia, iloilo

Panay diesel power plant i 36.50 Dingle, iloilo

PB 101 32.00 iloilo

PB 102 32.00 Obrero, iloilo

Bohol diesel power plant* 22.00 Tagbilaran City

Panay diesel power plant iii (Pinamucan)*

110.20 Dingle, iloilo

Palinpinon geothermal* 192.50 valencia, Negros Oriental

Leyte geothermal* 112.50 Tongonan, Leyte

Amlan geothermal* 0.80 Amlan, Negros Oriental

TOTAL 570.50


Table 12. List of NPC-IPP in Visayas as of April 2008


Cebu thermal i and ii 109.30 Naga, Cebu

Cebu diesel 37.80 Toledo City, Cebu

Cebu Land-Based Gas Turbine i and ii

55.00 Cebu City

Tongonan geothermal ii and iii (Leyte A)

610.18 Tongonan, Leyte

Northern Negros geothermal 49.00 Bago City

TOTAL 861.28




to consumers. The government enterprise activity will first have to be de-monopolized and greater private sector participation is encouraged. Otherwise, the monopoly privileges will simply be transferred to the private interest, and any resulting efficiency gains will be kept as excess profits by the privatized monopoly instead of being shared with the consumers through lower prices.

Steve Thomas, an academic who has closely followed the electricity reforms throughout the world, observes the tendency towards monopolization as a result of these reforms. “After initially unbundling electricity monopolies into several firms, many countries saw those companies vertically and horizontally reintegrated through mergers and acquisitions. In many cases, therefore, power liberalization resulted in the creation of electricity oligarchies. These tend to be dominated by powerful multinational and transnational corporations.”20

With the passage of the EPIRA, the power industry began its own process of power industry restructuring and deregulation. This restructuring characterizes greater

reliance on competition and market forces which are expected to increase efficiency and enhance investment in the power industry. The EPIRA has specific provisions dealing with monopoly such as policies on cross-ownership, open access and wholesale electricity spot market but none on mergers. The EPIRA’s aims of retail competition and open access in the power industry are unlikely to be realized since the provisions of the law on anti-competitive behavior. Suffice it to say that it will make the system from once-government monopoly to private monopoly. It also opened up the real possibility of excesses and market abuses by few dominant players thus further exacerbating the burden on consumers due to oppressive power rates.

It is important to place strict limits on market share and cross-ownership in the power industry to prevent market power abuse. But the risk of market power abuse in the EPIRA is inherent because the cross-ownership provision in the law is insufficient and weak. In fact, it does not forbid a company or related group to own, operate, or control 30% of the installed generating capacity of a grid and/or 25% share of the national grid. In 2008, the ERC has determined the total installed generating capacity in each grid and has set the market share limitations (see table 18).

The leading private sector participant in the generation industry is the Lopez-owned First Gen Power Corporation and its affiliates with 19.8 percent share in the Luzon grid and 15 percent of the national grid. Thus, outright disallowance of cross-ownership is deemed superior to a stipulation on open access because the cross-ownership provision of the EPIRA exposes the industry to more competitive risks and “opens the possibility for a distribution company to enter into supply contracts with its generation subsidiaries and create hidden profits for the conglomerate (Patalinghug and Llanto, 2004).”

The lessons from California’s power sector restructuring experience can be cited to prove the potential for market power abuse in a deregulated power sector. It was

Table 15. List of NPC-IPP in Mindanao as of April 2008


Southern Philippines Power Corporation

59.00 Alabel, Sarangani

Power Barge 117* 100.00 Nasipit, Agusan del Sur

Power Barge 118* 100.00 Maco, Davao del Norte

Western Mindanao Power Corporation

113.00 Sangali, zamboanga del Norte

Mt. Apo geothermal i and ii 108.48 Kidapawan, South Cotabato

Mindanao coal-fired thermal 232.00 villanueva, Misamis Oriental

TOTAL 712.48


Table 14. List of NPC owned and operated power plant in Mindanao as of April 2008


Power Barge (PB) 104 32.00 Brgy. ilang, Davao City

iligan diesel i and ii 102.70 Dalipuga, iligan City

Agus hydroelectric complex 727.10 Lanao del Sur/del Norte

Pulangi hydroelectric 255.00 Maramag, Bukidnon

TOTAL 1,116.80


Table 13. List of non-NPC power plant in Visayas as of April 2008


Toledo Power Corporation (Sangi station)

88.80 Toledo City, Cebu

Panay Power Corporation 74.88 La Paz, iloilo

Panay Electric Company 19.85 iloilo City

Toledo Power (Carmen station) 45.8 Toledo City, Cebu

Cebu Private Power 70.00 Cebu City

Janopol hydroelectric 5.00 Bohol

Loboc hydro 1.20 Loboc, Bohol

Mantayupan 0.50 Barili, Cebu

Basak 0.50 Badian, Cebu

Matutinao 0.72 Badian, Cebu

Ton-ok 1.08 Calbayog City, Samar

Henabian 0.81 St. Bernard, Southern Leyte

TOTAL 402.24




demonstrated most vividly by the California electricity crisis at the onset of this century. The California crisis revealed that competition and antitrust regulation in place at that time were not sufficient to impede or prevent the exercise of market power abuse by a number of generation companies.

From the lessons of California’s power sector restructuring, market power abuse has been identified and is possible to occur therefore it is necessary that mitigation measures i.e. strong regulation and enforcement policies are in place to prevent these power generation firms from causing harm to consumers. Given the constraints inherent in the market, the market power abuse of private companies is real possibility to happen.

The generation sector has a number of large companies and distribution utilities such as Lopez-owned generation company First Gen has Meralco and Panay Electric Company (PECO) as its distribution firms while Aboitiz-owned distribution utilities are Visayan Electric Company (VECO), Davao and Cotabato Light and Power Companies, have ever been thriving and more profitable under the transition to a privatized regime. These companies, either deliberately or unwittingly, have the ability to price their output at higher than competitive prices. Looking at the WESM indicators of market concentration you will get the picture that the Lopez-controlled First Gen, and the Aboitiz-owned power generation and distribution utilities dominate the power industry.

Market power abuses result in wealth transfers from consumers to producers simply because the law allows

it. A strong monitoring and prevention of market power abuse is an important task of the power sector regulator—that the ERC can and will live up to this task is in serious doubt. The competitive provision in the EPIRA relies on implementing non-discriminatory access to existing systems. This provision is inferior to a situation where both divestment and open access are demanded to de-monopolize the industry. Open access provision relies on effective monitoring and enforcement of regulatory rules which is unlikely given the performance of government regulatory agencies like the ERC which has a dismal track record and also doubt remains as to their “independence”. Learning from the experience of California’s power restructuring and other countries, it is more effective to impose structural remedies in curtailing the exercise of market power abuse and anti-competitive behavior in the industry than just impose a set of behavioral rules.21

Table 16. List of non-NPC power plant in Mindanao as of April 2008


Mindanao Energy Systems 18.90 Brgy. Tablon, Cagayan de Oro City

Cotabato Light and Power Company 10.00 Cotabato

Davao Light and Power Co. 58.69 Davao City

Agusan mini-hydro 1.60 Manolo Fortich, Bukidnon

Bubunawan 7.00 Baungon, Bukidnon

Talomo 3.70 Brgy. Mintal, Talomo, Davao City

Balactasan 0.27 Lamitan, Basilan

Kumalarang 0.68 Lantawan, Basilan

Mountain view 0.80 valencia, Bukidnon

Matling 1.50 Malabang, Lanao del Sur

Solar Photovoltaic 1.00 Brgy. indahag, Cagayan de Oro City

TOTAL 104.14


Table 17.

GridInstalled

generating capacity (kW)

% Market share limitation

Installed generating

capacity (kW)Luzon 10,060,904.00 30.00% 3,018,271.20

visayas 1,637,270.40 30.00% 491,181.10

Mindanao 1,703,348.00 30.00% 511,004.40

National 13,401,522.40 25.00% 3,350,380.60

Source: PSALM

Table 18. Installed Capacity and Share Per Grid

Luzon Visayas Mindanao PhilippinesNPC* 282.32 438.32 440.32 1,661.44

NPC-iPP** 6,217.57 785.46 668.48 7,671.51

TOTAL NPC and NPC-iPP 6,499.89 1,223.78 1,609.28 9,332.94

First Gen 1,608.50 69.00 1.60 1,679.10

Aboitiz 908.59 119.60 57.77 1,085.96

Other iPPs 1,043.92 224.89 34.70 1,303.51

Sub-total iPPs 3.561.02 413.49 94.07 4,068.58

TOTAL 10,060.90 1,637.27 1,703.35 13,401.52

Share in percentage per grid

NPC 2.81 % 26.77% 55.23% 12.40%

NPC-iPP 61.80% 47.97% 39.25% 57.24%

TOTAL NPC and NPC-iPP 64.61% 74.75% 94.48% 69.64%

First Gen 15.99% 4.21% 0.09% 12.53%

Aboitiz 9.03% 7.30% 3.39% 8.10%

Other iPPs 10.38% 13.74% 2.04% 9.73%

Sub-total iPPs 35.39% 25.25% 5.52% 30.36%

TOTAL 100% 100% 100% 100%

Source: 13th EPIRA Implementation Status Report (May to October 2008)



In relation to this, Diokno-Pascual emphasized the Asian Development Bank (ADB) findings from a fact-finding mission it sent to the ERC, in preparation for a technical assistance grant to the ERC. The main findings of this mission are as follows:22

z “employees are unable to undertake thorough analysis due to lack of knowledge and skills in regulation and rate setting methodologies”

z “the document tracking and filing system is poor as business processes are not clearly defined”

z “staff are inexperienced in handling consumer complaints and dispute resolution.”

The Philippine Institute for Development Studies (PIDS) argued the provision in the EPIRA on privatization of NPC’s assets that has overlooked the probability that the “success of reforms may hinge more on the degree of competition introduced in the market and less on the extent of privatization”. PIDS further said Caves and Christensen (1980) found no evidence of inferior performance by the government-owned railroad compared to that of the privately-owned railroad. Estache and Rossi (2002) showed that the efficiency is not significantly different in private water companies than in public ones. And Kwoka (1996) “found that competitive pressures are more important than ownership in explaining electric utilities’ performance in the US.” In the U.S. where state-owned and privately-owned electric companies competed, there was little difference in performance. Similarly, in the U.S., where electricity supply was provided by the state-owned monopoly, performance was lower than in states where privately-owned monopoly supplied electricity.23 As if the Philippines had not had enough painful lessons from past privatization projects, private ownership does not automatically bring about a competitive situation that creates more efficiency and higher consumer welfare.

As of April 2008, the continuing sales of NPC’s assets had increased private sector share (NPC-IPPs and non-NPC power generation facilities) in the generation sector with 90.5% combined share in Luzon total installed capacity and 82.2 % share in the national grid. But even as the EPIRA’s envisioned de-monopolization of the power industry has come to fruition, the restructuring of the power industry is actually creating a market that is heading for greater concentration among a handful of private players in the industry.

snapshot of power players in the industrySince the passage of EPIRA, the share of Lopez-owned generation companies and Meralco’s IPPs in total power generation has increased significantly. This is largely due to the Lopez-owned natural gas plants which began commercial operations around the same time EPIRA was passed. In 2007, First Gen bought out the shares of its Dutch

partner, Spalmare Holding BV, in the Philippine National Oil Company-Energy Development Corporation (PNOC-EDC). First Gen now owns a 60% stake in PNOC-EDC. First Gen and its subsidiaries owned or have controlling interests in 13 generation facilities nationwide with (see tables 19, 20 and 21) a total installed capacity of 3,515.66 MW. This translates to about 23 percent share of the national grid.

First Generation and its affiliates accounted for 13% of the total generation facilities in Luzon with a total installed generating capacity of 2,421.6 MW. It translates to 20 %

share over the total Luzon installed capacity of 12,172.02 MW or 15% share in the country’s total grid.

In Visayas, First Gen and its subsidiaries have shares and investments in three generation facilities with a combined installed generating capacity of 984.03 MW. This account for 53% share of Visayas grid.

While in Mindanao, First Gen has two generation facilities with total installed generating capacity of 110 MW or 5.6 % share of Mindanao grid.

Meralco is the most dominant distribution utility in the Philippines. It has a franchise area of 9,337 sq. km. serving 23 cities and 88 municipalities including Metro Manila, the entire provinces of Bulacan, Rizal and

Table 19.Luzon Location in MW

1.Quezon Private Power Mauban, Quezon 511.00

2.Bauang Diesel Bauang, La Union 235.60

3.San Antonio natural gas Echague, isabela 3.00

4. Sta. Rita natural gas Sta. Rita, Batangas 1,060.00

5. San Lorenzo natural gas Sta. Rita, Batangas 500.00

6-7. Pantabangan-Masiway hydro complex

Pantabangan,Nueva Ecija 112.00

TOTAL 2,421.60

Table 20.Visayas Location in MW

1. Panay Electric Company iloilo City 19.85

2. Tongonan Geothermal Tongonan, Leyte 610.18

3. Northern Negros Geothermal Bago City, Negros Occidental 49.00

4. Palinpinon Negros Oriental 305.00

TOTAL 984.03

Table 21.Mindanao Location in MW

1. Mt. Apo Geothermal plant i and ii

Kidapawan, North CotabatoPower

108.40

2. Agusan Hydroelectric Manolo Fortich, Bukidnon 1.60

TOTAL 110.00



Cavite; parts of the provinces of Laguna, Quezon and Batangas; and 17 barangays in Pampanga. The franchise area covers around 19 million people, almost a quarter of the entire Philippine population of 80 M which accounts for approximately 50% of the gross domestic product (GDP), 31% from Metro Manila alone. MERALCO’s total energy sales grew 1.1% from 24,806.2M kWh in 2005 to 25,077.5M kWh in 2006. The number of customers likewise rose by 1.6% from 4,317,064 in 2005 to 4,388,086 in 2006, 88% of which are residential customers.24

Meralco’s supply contracts with its IPPs e.g. Lopez-owned Sta. Rita and San Lorenzo power plants are singled out as classic cases of the disadvantageous nature of the cross-ownership provision of EPIRA. Meralco had a 10-year contract for the supply of electricity (CSE) from NPC beginning January 1, 1995. But in 2002 it opted to buy some of its electricity from its IPPs instead of from NPC. And Meralco has been accused of buying power from its affiliated IPPs at higher prices compared to the price charged by NPC.

The Meralco-NPC dispute continued through 2003, when, after mediation talks in the first half of the year, a settlement was reached on July 15, 2003. The Agreement was brought to the ERC, for its approval on April 15, 2005. In a joint filing to the ERC on January 20, 2006, NPC and Meralco showed that the net settlement amount payable to NPC and for collection from customers once approved by the ERC has been reduced from P20.05B to P14.32B. As of March 26, 2006, hearings on the joint application have already been completed and the case is still pending resolution by the ERC. (MERALCO Annual Report 2006).

In Mindanao, the dominant private power generation company is the Aboitiz Power Corporation. Aboitiz

and its subsidiaries have six power plants with a total installed capacity of 676.39 MW or 35 percent share of

the total Mindanao grid. Nationwide, Aboitiz owned or have controlling interests in 20 generation facilities with a combined installed capacity of 2,288.87 MW or 14 percent share of the national grid.

Aboitiz and its subsidiaries owned or have controlling interests in 10 generation facilities in Luzon which are equivalent to 12.3 percent of Luzon grid.

While in Visayas, it has two generation facilities with 119.7 MW or 6.53% share of the total Visayas grid.

Aboitiz also owns interests in various electricity distribution utilities that distributed 3,498 GWh of electricity to approximately 616,261 customers in the Philippines. The Visayan Electric Company or VECO is the second largest power distribution utility serving Metropolitan Cebu (Cebu City, Mandaue City, Talisay City, Naga City including the municipalities of Consolacion, Liloan, Minglanilla and San Fernando. Next on the list, the Davao Light and

Table 22.

Cities Municipalities Area Covered (sq.km)

Estimated Population (millions)

Metro Manila 13 4 636.00 10.99

Rizal 1 13 1,309.00 1.51

Bulacan 2 22 2,625.00 2.08

Cavite 3 20 1,297.00 1.91

Laguna 2 17 1,281.00 1.68

Quezon 1 10 1,780.00 0.79

Batangas 1 2 409.00 0.36

Pampanga - - - 0.06

Total 23 88 9,337 19.38

Source: MERALCO Annual Report 2006

Table 23.Mindanao Location in MW

1. Cotabato Light and Power Company Cotabato 10.00

2. Davao Light and Power Davao City 58.69

3. Southern Philippines Power Corporation Alabel, Sarangani 59.00

4. Western Mindanao Power Corporation Sangali, zamboanga City 113.00

5. Talomo Hydro Talomo, Davao City 3.70

6. Mindanao Coal-fired Thermal i and ii

PHiviDEC industrial Estate, villanueva, Misamis Oriental

232.00

7. Power Barge 118 Compostela valley 100.00

8. Power Barge 117 Agusan del Norte 100.00

TOTAL 676.39


1. Duracom Unit 3 and 4 Navotas,Metro Manila 109.00

2. Ampohaw-Bineng Hydroelectric Sablan, Benguet 18.35

3. Magat hydroelectric Ramon, isabela 360.00

4-5. Ambuklao-Binga itogon, Benguet 175.00

6. Bakun hydro Alilem, ilocos Sur 70.00

7. Northern Mini Hydro Bakun, Banguet 12.40

8. Sal-anga (Philex) itogon, Benguet 0.50

9. Tiwi-MakBan geothermal complex

Albay, Laguna and Batangas

747.53

TOTAL 1492.78

Table 25.Visayas Location in MW

1. Cebu Private Power Corp. Cebu City 70.70

2. East Asia Utilities Corp. Cebu City 49.70

TOTAL 119.70



Power Company is the third largest distribution utility in the Philippines. Its franchise area covers Davao City, and Panabo City and the municipalties of Carmen, Santo Tomas and Dujali in Davao del Norte. Also in Mindanao, Aboitiz owned the Cotabato Light and Power Company serving the area of Cotabato City (including municipality of Dina-ig and parts of Sultan Kudarat province.

Aboitiz first power distribution utility in Luzon is the San Fernando Electric Light and Power Company which is considered the country’s seventh largest distribution utility serving San Fernando, Pampanga. The newest power distribution owned by Aboitiz is the Subic Enerzone Corporation which manages the whole power distribution system within the Subic Bay Freeport Zone. Mactan Enerzone Corporation of Aboitiz manages the Mactan Export Processing Zones (MEZ 2) while the power distribution system within the West Cebu Industrial Park is managed by Aboitiz-owned Balamban Enerzone Corporation.

The Global Business Power Corporation, a subsidiary of The Metrobank Group and the Global Formosa consortium is also a major player in Visayas with its six generation facilities with a combined

installed capacity of 249.48 MW. It controls 13.6% share of Visayas grid, next to First Gen’s 37% share.

Trans-Asia Power Generation Corporation of Executive-Vice President Victor Del Rosario. Trans-Asia Power is a subsidiary of Philippine Investment Management, Inc. (PHINMA). DOE former Secretary Francisco Viray is the current president. Trans-Asia

power has two power generation facilities, one in La Union (52 MW) and another in Guimaras province (3.40 MW) with a total installed capacity of 55.4 MW.

The Abaya-owned Cagayan Electric Power and Light Company (CEPALCO) have three

generation facilities and a distribution utility which covers the City of Cagayan de Oro and the municipalities of Tagoloan, Villanueva and Jasaan all in Misamis Oriental including the 3,000-hectare PHIVIDEC Industrial Estate. CEPALCO’s three generation facilities with a combined installed capacity of 26.9 MW have 1.4% share in Mindanao grid.

In terms of power generation by NPC-IPPs, three power generation facilities are under Mirant (TeaM Energy) with a total installed capacity of 2,332 MW. These are the 728-MW Pagbilao coal-fired in Pagbilao, Quezon, 1,294-MW Sual coal-fired in Sual, Pangasinan and the 310-MW

Hopewell power plant in Navotas. Mirant’s share in Luzon grid is 19 percent.

Under the Korea Electric Power Company (KEPCO) are the 1,271-MW Ilijan natural gas power plant and 650-MW Malaya thermal power plant. It also has controlling interest in SPC Power Corporation (former Salcon Power

Corporation) which owns the 109.3 MW-Naga Power Plant I and II in Naga City, Cebu, and 168.5 MW Panay and Bohol Diesel Power Plants. KEPCO power generation facilities have a combined installed capacity of 2,030.3 MW. Its two power generation facilities in Luzon i.e. Ilijan and Malaya have 15.7% share in Luzon grid.


1. Sangi Power Plant Toledo City, Cebu 88.80

2. Panay Power Corp. La Paz, iloilo 74.88

3. Carmen diesel Toledo City, Cebu 45.80

4. 20-MW bunker fuel La Paz, iloilo 20.00

5. 15-MW bunker fuel Nabas, Aklan 15.00

6. 5-MW bunker fuel New Washington, Aklan 5.00

TOTAL 249.48

Table 27.Location in MW

1. Mindanao Energy Systems Brgy. Tablon, Cagayan de Oro City 18.90

2. Bubunawan hydro Baungon, Bukidnon 7.00

3. Solar photovoltaic Brgy. indahag, Cagayan de oro City 1.00

TOTAL 26.90



endnotes1 Patalinghug, Epictetus and Gilbert M Llanto, “Competition Policy and

Regulation in Power and Telecommunications”, Philippine institute for Development Studies, Discussion Paper Series No. 2005.

2 Open access refers to the system of allowing any qualified person the use of transmission, and/or distribution system, and associated facilities in which electricity end-users are free to choose where to get their supply of electricity.

3 EPiRA, Section 31.4 Contestable market refers to the electricity end-users who have a

choice of a supplier of electricity.5 EPiRA, Section 47-i.6 Retail competition and open access should have started not later

than three years after the law was passed.7 it was established as a special purpose company through which

Singapore-based AES Transpower Pte. Ltd. would bid for and hold the Masinloc power plant.

8 Suez-Tractebel is a Belgium-based utility company and one of the world’s top independent power producers.

9 A transition supply contract is a power supply agreement offered to NPC customers which state-owned generation facilities are still undergoing privatization.

10 Calaca coal-fired thermal power plant was sold to DMCi Holdings inc. last July 8, 2009 in the amount of $361.71M.

11 EPiRA, Chapter v, Section 47 (g)12 ADB Operations Evaluation Department, “Sector Assistance Program

Evaluation of Asian Development Bank Assistance to Philippines Power Sector,” September 2005, SAP:PHi 2005-09, p. 36

13 Congressional Planning and Budget Department, House of Representatives, Occasional Paper No. 5, Feb. 2007.

14 As of April 2009, the proceeds of the privatization of generation assets made NPC’s debts to $5B from $7B.

15 The generation mix refers to the proportion of the different fuel types used by NPC in the production of electricity.

16 ibid.17 ibid.18 ibid.19 includes Tiwi-MakBan geothermal plant complex20 Maitet Diokno-Pascual, “The Third Way: Shifting to People Power”,

unpublished, December 2005 21 Epictetus Patalinghug and Gilbert M. Llanto, “Competition Policy and

Regulation in Power and Telecommunications”, Philippine institute for Development Studies, Discussion Paper Series No. 2005-18.

22 Asian Development Bank (ADB), “Proposed Technical Assistance to the Republic of the Philippines for institutional Strengthening of Energy Regulatory Commission and Privatization of National Power Corporation,” December 2004, TAR:PHi37752-01, p. 1.

23 Epictetus Patalinghug and Gilbert M. Llanto, “Competition Policy and Regulation in Power and Telecommunications”, Philippine institute for Development Studies, Discussion Paper Series No. 2005-18.

24 MERALCO Annual Report 2006.

References:12th and 13th EPiRA implementation Status Reports, Department of

Energy.

Asian Development Bank, Proposed Loan and Political Risk Guarantee,

Republic of the Philippines: Privatization and Refurbishment of the

Calaca Coal-Fired Thermal Power Plant Project, Project Number 41958,

April 2008.

Aboitiz Power Corporation website, www.aboitiz.com

Department of Energy website, www.doe.gov.ph

First Philippine Holdings Corporation Annual Report 2007.

Freedom from Debt Coalition website, www.fdc.ph

National Power Corporation Annual Report 2007.

MERALCO Annual Report 2006.

Occasional Paper No. 5, Congressional Planning and Budget

Department, House of Representatives, February 2007.

Patalinghug, Epictetus and Gilbert M Llanto, “Competition Policy and

Regulation in Power and Telecommunications”, Philippine institute for

Development Studies, Discussion Paper Series No. 2005.

Pascual-Diokno, Maitet, (unpublished) “The Third Way: Shifting to

People Power”, December 2005.

Philippine Power Fact Sheet, Freedom from Debt Coalition (FDC),

Quezon City.

Power Sector Assets and Liabilities Management website, www.psalm.

gov.ph

Power Statistics 2007, Department of Energy.

“Praymer sa Presyo ng Kuryente”, Freedom from Debt Coalition (FDC),

June 2, 2008, Quezon City.

Rimban, Luz and Shiela Samonte-Pesayco, “Trail of Power Mess Leads

to Ramos”,

Philippine Center for investigative Journalism (PCiJ), August 2002,

Quezon City.

Rules and Regulations to implement Republic Act No. 9136 entitled

Electric Power industry Reform Act of 2001, February 27, 2002.

Wholesale Electricity Spot Market website, www.wesm.ph



IPP NAME INSTALLED CAPACITY, MW IPP SPONSOR LOCATIONilijan Natural Gas Combined Cycle 1271.00 Kepco ilijan Corp. ilijan, Batangas

Sual Coal Units 1& 2* 1294.00 Mirant Power Corp. Sual, Pangasinan

Pagbilao Coal 1&2* 728.00 Mirant Power Corp. Pagbilao, Quezon

Bauang Diesel Power Plant 235.00 Bauang Private Power Bauang, La Union

Subic Diesel Power Plant 116.00 Enron Power Corp. Subic, zambales

Casecnan Multi Purpose Hydro 165.00 National irrigation Administration Casecnan, Nueva Ecija

San Roque Multi Purpose Hydro 345.00 Marubeni/Sithe San Manuel, Pangasinan

Bakun Hydro 100.75 AEv-NMHC-others Alilem, ilocos Sur and Benguet

Leyte B Geothermal 610.18 PNOC-EDC Tongonan, Leyte

TOTAL = 10 4,864.93

*privatized

annex b. lIsT of eXIsTInG PoWeR PlanTs

annex a: list of IPP Plants in luzon Grid for Transfer to IPP administrators

Luzon (as of September 2009)

PlantsCapacity MW

Location Proponent Owner Type of contract

Year CommissionedInstalled Dependable

Coal 3,783.00 3,055.70

Pagbilao Unit 1 364.00 364.00 Pagbilao, Quezon TeaM Energy Therma-

Luzon BOT-ECA 3/7/1996

Pagbilao Unit 2 364.00 364.00 Pagbilao, Quezon TeaM Energy Therma-

Luzon BOT-ECA 5/26/1996

Calaca 1 300.00 142.93 Calaca, Batangas DMCi Holdings inc. NON-NPC Privatized

July 8, 2009 9/5/1984

Calaca 2 300.00 160.71 Calaca, Batangas DMCi Holdings inc. NON-NPC Privatized

July 8, 2009 6/5/1995

Masinloc i 300.00 203.81 Masinloc, zambales

AES Transpower Pte. Ltd NON-NPC Privatized

July 26, 2007 6/18/1998

Masinloc 2 300.00 165.37 Masinloc, zambales

AES Transpower Pte. Ltd NON-NPC Privatized

July 26, 2007 12/1/1998

Sual i 647.00 590.87 Sual, Pangasinan TeaM Energy

San Miguel Energy Corporation

BOT-ECA 10/23/1999

Sual 2 647.00 562.01 Sual, Pangasinan TeaM Energy

San Miguel Energy Corporation

BOT-ECA 10/5/1999

Quezon Private Power Limited 511.00 460.00 Mauban,

QuezonQuezon Private Power Ltd. Philippines NON-NPC 5/1/2000

Asia Pacific Energy Corp. 50.00 42.00 Mabalacat, Pampanga

Asia Pacific Energy Corp. (APEC) NON-NPC 7/1/2006

Diesel 783.08 678.09

Enron Subic 2 116.00 114.46 Olongapo, zambales

Enron Power Corporation (USA) NPC-iPP BOT-ECA 2/22/1994

Duracom Unit 1 and 2 133.38 113.00 Navotas, Metro Manila NPC PSALM NPC 9/1/1995

East Asia Diesel (Duracom Unit 3 and 4) 109.00 109.00 Navotas, Metro

Manila East Asia Utilities NON-NPC 9/1/1995

Note: installed Capacity for NPC/NPC-iPP as per NPC Power Economics Dept. data. Assuming the privatization of Calaca and Masinloc,Ambuklao-Binga. Dependable capacity of NPC/NPC-iPP based on 2007 Average Dependable Capacity. Magellan Cogen: for confirmation on the operation of the power plant.




PlantsCapacity MW



Angeles Pi DPP 30.00 30.00 Angeles City Angeles Electric Corporation NON-NPC 12/5/1994

Bauang Diesel Power Plant 235.20 225.33 Bauang, La

UnionFirst Private Power Corp. NPC-iPP BOT-ECA 8/30/1994

FCvC DPP 25.60 23.70 Cabanatuan City Cabanatuan Electric Corporation NON-NPC 1/15/1996

Tarlac Electric 18.90 12.60 Capas, Tarlac Tarlac Electric inc. NON-NPC 6/17/1905

Trans Asia Power 52.00 50.00 La UnionTrans Asia Power Generation Corporation

NON-NPC

Magellan Cogen (CEPzA) 63.00 0.00 Rosario, Cavite Magellan Cogen

Utilities NON-NPC

(ceased operation by June 30, 2003)

7/1/1995 - 1/1/1997

Natural Gas 2,834.00 2,565.42

San Antonio 3.00 3.00 Echague, isabela PNOC-EDC NPC-iPP 7/1/1994

Sta. Rita combined-cycle natural gas-fired Power Plant

1,060.00 1,000.00 Sta. Rita, Batangas First Gas Power Corp. NON-NPC 6/2000 10/2001

KEPCO ilijan Natural Gas Power Plant 1,271.00 1,062.42 Brgy. ilijan,

Batangas City KEPCO (ilijan) NPC-iPP BOT-ECA/GSPA 6/5/2002

San Lorenzo natural gas-fired Power Plant 500.00 500.00 Sta. Rita,

Batangas First Gas Power Corp. NON-NPC 9/1/2002

Gas Turbine 930.00 600.73

Hopewell Gas Turbine Power Plant 310.00 0.00 Navotas, Metro

Manila Mirant (Navotas) Corp. NPC -iPP BOT-ECA 8/16/1990 3/18/1993

Limay combined-cycle gas turbine Power Plant 620.00 600.73 Limay, Bataan San Miguel Energy

Corporation NON-NPC BTO-OMR 5/14/1993 12/10/1994

Geothermal 885.72 439.43

Makiling-Banahaw (MakBan) Geothermal Power Plant 1

63.20 58.13 Calauan, Laguna AP Renewables inc. NON-NPC Privatized in July 30, 2008 4/26/1979

MakBan 2 63.20 43.84 Calauan, Laguna AP Renewables inc. NON-NPC Privatized in July 30, 2008 7/25/1979





MakBan 7(D) 20.00 18.25 Calauan, Laguna AP Renewables inc. NON-NPC Privatized in July 30, 2008 10/16/1995

MakBan 8(D) 20.00 12.56 Calauan, Laguna AP Renewables inc. NON-NPC Privatized in July 30, 2008 11/12/1995

MakBan 9(E) 20.00 17.10 Calauan, Laguna AP Renewables inc. NON-NPC Privatized in July 30, 2008 5/22/1996





PlantsCapacity MW



Makban 10(E) 20.00 12.54 Calauan, Laguna AP Renewables inc. NON-NPC Privatized in July 30, 2008 5/27/1996

Bacon-Manito (BacMan) Geothermal Power Plant i-1

55.00 23.24 Bacon, Sorsogon

NPC PSALM NPC 9/10/1993

Bac Man i-2 55.00 0.00 Bacon, Sorsogon NPC PSALM NPC 12/12/993

Bac Man ii-1 20.00 0.00 Bacon, Sorsogon NPC PSALM NPC 3/15/1994

Bac Man ii (Botong) 20.00 10.34 Bacon, Sorsogon NPC PSALM NPC 3/17/1998

Tiwi Geothermal Power Plant 1 59.00 13.53 Tiwi, Albay AP Renewables inc. NON-NPC Privatized in

July 30, 2008 1/11/1979

Tiwi 2 59.00 26.36 Tiwi, Albay AP Renewables inc. NON-NPC Privatized in July 30, 2008 5/25/1979





MakBan Ormat 15.73 0.00 Bay, Laguna Ormat inc. USA NON-NPC BTO 2/28/1994

Manito 1.50 1.50 Albay NON-NPC 10/1/1998

Hydro 2,281.22 2,034.86

Large Hydroelectric Plants 2,246.85 2,005.55

San Roque Multi-purpose Project 345.00 345.00 San Manuel,

PangasinanSan Roque Power Corporation (SRPC) NPC-iPP BOT-PPA 5/1/2003

Ampohaw and Bineng Plants 18.35 8.98 Banengbeng,

Sablan, Benguet

Hydro Electric Development Corp. (Phils.)

NPC-iPP BOO-EPSA 1/1/1993

Kalayaan Pumped-up Hydroelectric Power Plant 1 & 2

354.00 354.00 Kalayaan, Laguna

Electric Power Development Co., Ltd. NPC-iPP BROT-PPA 8/13/1982

4/25/1982

Kalayaan 3 & 4 355.00 355.00 Kalayaan, Laguna

Electric Power Development Co., Ltd. NPC-iPP BROT-PPA 5/1/2004

Magat Hydroelectric Power Plant 360.00 317.00 Ramon, isabela SN Aboitiz Power, inc. NON-NPC Privatized

Dec. 14, 20068/14/1983

10/24/1983

Caliraya Hydroelectric Power Plant 23.50 23.50 Lumban,

LagunaElectric Power Development Co., Ltd. NPC-iPP BROT-PPA 1942 / 1947 / 1950

Botocan Hydroelectric Power Plant 23.00 21.94 Majayjay,

LagunaElectric Power Development Co., Ltd. NPC-iPP BROT-PPA 1946-48

Angat Hydroelectric Power Plant 246.00 205.24 Norzagaray,

Bulacan NPC PSALM NPC 10/16/1967 6/16/1986

Pantabangan-Masiway Hydroelectric Power Plant

112.00 111.00 Pantabangan, Nueva Ecija

First Gen Hydro Power Corp. NON-NPC Privatized

Sept. 7, 20064/1/1977 5/1/1977,

2/27/1981





PlantsCapacity MW



Ambuklao Hydroelectric Power Plant 75.00 0.00 Bokud, Benguet SN Aboitiz Power, inc. NON-NPC Privatized

Nov. 28, 2007 12/23/1956

Binga Hydroelectric Power Plant 100.00 78.82 itogon, Benguet SN Aboitiz Power, inc. NON-NPC Privatized

Nov. 28, 2007 1/19/1960

Bakun AC Hydroelectric Power Plant 70.00 35.06 Alilem, ilocos

SurLuzon Hydro Corporation NPC-iPP BOT-PPA 2/6/2001

10/10/2000

Casecnan Hydroelectric Power Plant 165.00 150.00 Pantabangan,

Nueva Ecija

CE Casecnan Water and Energy Company, inc. a subsidiary of the U.S. firm MidAmerican Energy Holdings Company (formerly known as California Energy).

NPC-iPP BOT-PPA 4/5/2002

Small Hydroelectric 34.37 29.31

Cawayan Hydroelectric Power Plant 0.40 0.40 Guinlajon,

Sorsogon

Sorsogon Electric Cooperative (SORECO) ii

NON-NPCPrivatized September 30, 2004

6/1/2002

Barit Hydroelectric Power Plant 1.80 1.80 Buhi, Camarines

SurPeople’s Energy Services inc. NON-NPC

Privatized June 25, 2004

9/1/1957

NiA-Baligatan 6.00 6.00 Benguet NON-NPC NON-NPC 1979

Northern Mini Hydro Corporation 12.40 7.34 Bakun, Benguet Northern Mini Hydro

Corporation (NMHC) NPC-iPP BOO-EPSA 1/1/1993

Aqua Grande 4.50 4.50 Pagudpod, ilocos Norte

ilocos Norte Electric Cooperative (iNECO) Non-NPC 1983

Amburayan 0.20 0.20 Supiden, La Union

La Union Electric Cooperative (LUELCO) Non-NPC 1991

Dawara 0.53 0.53 Suyo, ilocos Sur ilocos Sur Electric Cooperative (iSECO) Non-NPC 1981

Bachelor 0.75 0.75 Natividad, Pangasinan

Pangasinan Electric Cooperative (PANELCO) Non-NPC 1983

Sal-angan Plant 0.50 0.50 itogon, Benguet Philex Mining Corp. Non-NPC 1988

Club John Hay 0.56 0.56 Baguio City Non-NPC

Magat A&B 2.52 2.52 Ramon, isabela isabela Electric Cooperative (iSELCO) i Non-NPC 1984, 1985

Tumauini 0.25 0.25 Tumauini, isabela

isabela Electric Cooperative (iSELCO) ii Non-NPC 1992

Dulangan 1.60 1.60 Oriental Mindoro

Oriental Mindoro Cooperation (ORMECO) Non-NPC 1990

Balugbog 0.65 0.65 Nagcarlan, Laguna Phil. Power Dev. Co. Non-NPC 1930

Palapaquin 0.40 0.40 San Pablo, Laguna Phil. Power Dev. Co. Non-NPC 1930

San Juan River 0.15 0.15 Kalayaan, Laguna Kalayaan ice Plant Non-NPC

inarihan 0.96 0.96 Naga, Camarines Sur

Bicol Hydropower Corp. Non-NPC 1998

yabo 0.20 0.20 Pili, Camarines Sur PROSAMAPi Coop. Non-NPC





PlantsCapacity MW



Oil Thermal 650.00 645.83

Malaya Thermal Power Plant 1 300.00 300.00 Pililla, Rizal KEPCO NPC-iPP ROM-ECA 9/15/1995

Malaya Thermal Power Plant 2 350.00 345.83 Pililla, Rizal KEPCO NPC-iPP ROM-ECA 9/15/1995

Wind

NorthWind Power 25.00 8.75 Bangui Bay, ilocos Norte

NorthWind Power Development Corp. NON-NPC June 2005

LUZON 12,172.02 10,028.80

PHILIPPINES 15,937.10 13,204.80


LIST OF EXISTING POWER PLANTS Visayas (as of April 2009)

PlantsCapacity MW

Location Proponent Owner Type of contract Year Commissioned

Installed DependableCoal 198.10 155.37

Sangi Power Plant 88.80 55.00 Toledo City, Cebu

Global Business Power Corporation NON-NPC 1993

Naga Power Plant 1 52.50 48.58 Naga, Cebu Salcon Power Corporation NPC-iPP ROMM-ECA September 1981

Naga Power Plant 2 56.80 51.79 Naga, Cebu Salcon Power Corporation NPC-iPP ROMM-ECA December 1986

Diesel 603.73 419.08

Panay Power Corp. 74.88 69.00 ingore, La Paz, iloilo City

Global Business Power Corporation NON-NPC 1999

Panay Electric Coompany 19.85 0.00 iloilo City Panay Electric Company

(PECO) NON-NPC 1969

Carmen Diesel Power Plant 45.80 37.40 Toledo City,

CebuGlobal Business Power Corporation NON-NPC BOO 1993

Cebu Private Power Corp. 70.00 61.72 Cebu City Cebu Private Power

Corp. NON-NPC 1997

East Asia Utilities (MEPzA) 49.70 42.00 Cebu City East Asia Utilities NON-NPC 1998

Power Barge (PB) 103 32.00 19.06 Estancia, iloilo NPC PSALM NPC April 1981

Panay Diesel Power Plant 1 36.50 19.78 Tinocuan,

Dingle, iloilo NPC PSALM NPC May 1981/Aug 1983/1993

PB 101 32.00 22.80 iloilo NPC PSALM NPC 1978 / 1986 / 1989

PB 102 32.00 23.09 Obrero, iloilo NPC PSALM NPC April 1981

Bohol Diesel Power Plant 22.00 18.00 Tagbilaran City SPC Power Corporation NON-NPC

Privatized December 2008

1978

20 MW Bunker Fuel 20.00 18.00 La Paz, iloilo Global Business Power Corporation NON-NPC

15 MW Bunker Fuel 12.60 7.60 Nabas, Aklan Global Business Power Corporation NON-NPC

Note: installed Capacity for NPC/NPC-iPP as per NPC Power Economics Dept. data. Dependable capacity of NPC/NPC-iPP based on 2007 Average Dependable Capacity



LIST OF EXISTING POWER PLANTS Visayas (as of April 2009)

PlantsCapacity MW

Location Proponent Owner Type of contract Year Commissioned

Installed Dependable

5 MW Bunker Fuel 5.00 5.00New Washington, Aklan

Global Business Power Corporation NON-NPC

Guimaras Bunker C oil-fired Power Project

3.40 3.40San Miguel, Jordan, Guimaras

Trans Asia Power Generation Corporation NON-NPC

Panay Diesel Power Plant iii (Pinamucan)

110.20 42.08 Dingle, iloilo SPC Power Corporation NON-NPCPrivatized November 2008

transferred March 2005

Cebu Diesel Power Plant 1 37.80 30.15 Naga, Cebu SPC Power Corporation NPC-iPP ROMM-ECA 1978 - 1989

Gas Turbine 55.00 48.17

Cebu Land-based GT 1 27.50 24.75 Naga, Cebu NPC-iPP ROMM-ECA

Cebu Land-based GT 2 27.50 23.42 Naga, Cebu NPC-iPP ROMM-ECA


Palinpinon Geothermal Power Plant 1

112.50 105.40 valencia, Negros Oriental

Green Core Geothermal inc. NON-NPC Privatized Sept.

2, 2009 May / July / Aug 1983

Palinpinon Geothermal Power Plant 2

80.00 78.21 valencia, Negros Oriental

Green Core Geothermal inc. NON-NPC Privatized Sept.

2, 2009 1/1/1994 5/5/1995

Leyte Geothermal Power Plant 112.50 80.94 Lim-ao,

Kananga, Leyte NPC PSALM NPC 3/10/1983 6/18/1983

Tongonan Geothermal Power Plant

610.18 584.29 Tongonan, Leyte PNOC Philippines NON-NPC BOO-PPA July 1996 / 1997

Northern Negros Geothermal Power Plant

49.00 12.00Bago City, Negros Occidental

PNOC Philippines NPC-iPP

Hydro 10.61 10.49

Janopol Hydroelectric Power Plant

5.00 5.00 Bohol Bohol Electric Cooperative (BOHECO) NON-NPC May 1992

Amlan Hydroelectric Power Plant

0.80 0.77 Amlan, Negros Oriental iCS Renewables inc. NON-NPC

Privatized December 2008

May 1961

Loboc Hydroelectric Power Plant 1.20 1.11 Loboc, Bohol Sta. Clara intl Corp. NON-NPC Privatized Nov.

10, 2004

Mantayupan 0.50 0.50 Barili, CebuCebu Electric Cooperative inc. (CEBECO)

NON-NPC 1985

Basak 0.50 0.50 Badian, Cebu CEBECO NON-NPC 1986

Matutinao 0.72 0.72 Badian, Cebu CEBECO NON-NPC 1990

Amanjuray 0.00 0.00 Lawaan, Eastern Samar

Eastern Samar Electric Coop (ESAMELCO) NON-NPC 1991

Ton-ok 1.08 1.08 Calbayog, Western Samar

Samar Electric Coop (SAMELCO) NON-NPC 1983

Henabian 0.81 0.81 St. Bernard, Southern Leyte

Southern Leyte Electric Cooperative (SOLECO) NON-NPC 1982

TOTAL VISAYAS 1,831.60 1,493.90

PHILIPPINES 15,937.10 13,204.80

Note: installed Capacity for NPC/NPC-iPP as per NPC Power Economics Dept. data. Dependable capacity of NPC/NPC-iPP based on 2007 Average Dependable Capacity



LIST OF EXISTING POWER PLANTS Mindanao (as of April 2009)

PlantsCapacity MW



Diesel 594.29 477.94

Mindanao Energy Systems 18.90 18.90 Brgy. Tablon, Cagayan de

Oro CityMindanao Energy Systems NON-NPC 8/25/1995

Cotabato Light and Power Company 10.00 7.50 Cotabato Cotabato Light NON-NPC

Davao Light and Power Company 58.69 42.00 Davao City Davao Light NON-NPC 6/5/1995

Southern Philippines Power Corporation 59.00 55.35 Alabel, Sarangani Alsons/Tomen

(Phil/Japan) NPC-iPP BOO-ECA 3/26/1998

Power Barge 104 32.00 23.92 Brgy. ilang, Davao City NPC NPC

Power Barge 117 100.00 99.76 Nasipit, Agusan del Norte Therma Marine inc. NON-NPC BTO-ESOM 2/26/1994

Power Barge 118 100.00 90.69 Maco, Davao del Norte Therma Marine inc. NON-NPC BTO-ESOM 7/20/1994

Western Mindanao Power Corp. 113.00 100.00 Sangali, zamboanga City Alsons/Tomen

(Phil/Japan) NPC-iPP BOO-ECA 12/121997

iligan Diesel Power Plant i 62.70 39.82 Dalipuga, iligan City NPC PSALM NPC 3/22/1992

iligan Diesel Power Plant ii 40.00 0.00 Dalipuga, iligan City NPC PSALM NPC

BOT(Turned Over last Sept. 2006)

7/11/1993


Mindanao i (Mt. Apo) 54.24 49.75 Kidapawan, North Cotabato PNOC Philippines NPC-iPP BOO-PPA 12/15/1996

Mindanao ii (Mt. Apo) 54.24 49.75 Kidapawan, North Cotabato PNOC Philippines NPC-iPP BOO-PPA 6/17/1999

Hydro 997.65 902.39

Large Hydroelectric Plants 982.10 889.39

Agus River Hydroelectric Power Plant Unit 1

40.00 37.69 Marawi City, Lanao Del Sur NPC PSALM NPC 6/23/1992

Agus 1 Unit 2 40.00 33.63 Marawi City, Lanao Del Sur NPC PSALM NPC 3/30/1994

Agus 2 180.00 162.71 Saguiaran, Lanao Del Sur NPC PSALM NPC 6/6/1979 11/27/1979

Agus 4 158.10 149.73 Baloi, Lanao del Norte NPC PSALM NPC 3/16/1985 4/16/1985

Agus 5 55.00 52.32 Buru-un, iligan City NPC PSALM NPC 2/9/1985 3/8/1985


Note: installed Capacity for NPC/NPC-iPP as per NPC Power Economics Dept. data. Dependable capacity of NPC/NPC-iPP based on 2007 Average Dependable Capacity.ROM-ECA (Rehabilitate-Operate-Maintain/Energy Conversion Agreement)ROMM-ECA (Rehabilitation-Operation-Maintenance and Management Agreement/Energy Conversion Agreement)BROT-PPA (Build-Rehabilitate-Operate-Transfer/Power Purchase Agreement)BTO-ESOM (Build-Transfer-Operate/Electricity Supply, Operation and Maintenance Agreement)BTO-OM (Build-Transfer-Operate/Operation and Maintenance AgreementBTO-OMR (Build-Transfer-Operate/Operation-Maintenance-Repair Agreement)BOO-ECA (Build-Operate-Own/Energy Conversion Agreement)BOO-EPSA (Build-Operate-Own/Electric Power Supply Agreement)BOO-PPA (Build-Operate-Own/Power Purchase Agreement)BOT-ECA (Build-Operate-Transfer/Energy Conversion Agreement)BOT-ECA, GSPA (Build-Operate-Transfer/Energy Conversion Agreement/Gas Sale and Purchase Agreement)BOT-PPA (Build-Operate-Transfer/Power Purchase Agreement)BROT-PPA (Build-Rehabilitate-Operate-Transfer/Power Purchase Agreement)



LIST OF EXISTING POWER PLANTS Mindanao (as of April 2009)

PlantsCapacity MW




Pulangi Hydroelectric Power Plant 4 255.00 225.77 Maramag, Bukidnon NPC PSALM NPC 12/21/1985

6/21/1986

Small Hydroelectric Plants 15.55 13.00

Agusan Mini-hydroelectric Power Plant

1.60 1.60 Manolo Fortich, Bukidnon FG Bukidnon Power Corp. NON-NPC Privatized as

of June 2004 12/28/1957

Bubunawan Mini-hydroelectric Power Plant

7.00 4.89 Baungon, Bukidnon Bubunawan Power Company inc. NON-NPC 9/22/2001

Talomo Hydroelectric Power Plant 3.70 3.26 Brgy. Mintal, Talomo,

Davao City HEDCOR NON-NPCPrivatized as of March 2004

10/1/1998

Balactasan 0.27 0.27 Lamitan, BasilanBasilan Electric Cooperative (BASELCO)

NON-NPC 1983

Kumalarang 0.68 0.68 Lantawan, Basilan BASELCO NON-NPC 1989

Mountain view 0.80 0.80 valencia, Bukidnon NON-NPC 1982

Matling 1.50 1.50 Malabang, Lanao del Sur Matling industrial Corp. NON-NPC

Solar 1.00 1.00

Solar Photovoltaic Power Plant 1.00 1.00

Sitio Lomboy, Brgy. indahag, Cagayan de Oro City

Cagayan Electric Power and Light Co.

NON-NPC October 2004

Coal Thermal 232.00 201.25

Mindanao Coal-fired Thermal Power Plant i 116.00 105.00


STEAG NPC-iPP BOT-PPA Sept.16, 2006

Mindanao Coal-fired Thermal Power Plant ii 116.00 96.00


STEAG NPC-iPP BOT-PPA Nov. 15, 2006

TOTAL MINDANAO 1,933.40 1,682.10

PHILIPPINES 15,937.10 13,204.80

Note: installed Capacity for NPC/NPC-iPP as per NPC Power Economics Dept. data. Dependable capacity of NPC/NPC-iPP based on 2007 Average Dependable Capacity.ROM-ECA (Rehabilitate-Operate-Maintain/Energy Conversion Agreement)ROMM-ECA (Rehabilitation-Operation-Maintenance and Management Agreement/Energy Conversion Agreement)BROT-PPA (Build-Rehabilitate-Operate-Transfer/Power Purchase Agreement)BTO-ESOM (Build-Transfer-Operate/Electricity Supply, Operation and Maintenance Agreement)BTO-OM (Build-Transfer-Operate/Operation and Maintenance AgreementBTO-OMR (Build-Transfer-Operate/Operation-Maintenance-Repair Agreement)BOO-ECA (Build-Operate-Own/Energy Conversion Agreement)BOO-EPSA (Build-Operate-Own/Electric Power Supply Agreement)BOO-PPA (Build-Operate-Own/Power Purchase Agreement)BOT-ECA (Build-Operate-Transfer/Energy Conversion Agreement)BOT-ECA, GSPA (Build-Operate-Transfer/Energy Conversion Agreement/Gas Sale and Purchase Agreement)BOT-PPA (Build-Operate-Transfer/Power Purchase Agreement)BROT-PPA (Build-Rehabilitate-Operate-Transfer/Power Purchase Agreement)


The National Transmission Corporation (TransCo) is a Philippine government corporation currently operating the country’s critical power transmission grid created in 2001 by the Electric Power Industry Reform Act (EPIRA).Previously an integral part of the state-owned National Power Corporation (NPC or Napocor), the TransCo assumed all of Napocor’s substation and transmission assets since March 1, 2003.

The grid, which needs about $850 million over the next five years for upgrades and expansion, was valued at P138 billion ($3.3 billion) in 2006 – a “crown jewel” indeed. TransCo’s assets include approximately 21,319 circuit-kilometers of transmission lines including a submarine cable system, 93 substations, and approximately 24,310 million volt amperes substation capacity, and a broadband-ready fiber optics network.

But the value of TransCo goes beyond simply its monetary value. With EPIRA already

TRANSCO

An appeal to stop the granting of a National Franchise to the National Grid Corporation of the Philippines

by James Matthew Miraflor and Job bordamonte29 september 2008

T h e F i l i p i n o ’ s l a s T l i n e o F DeFense againsT p r i vaT i z aT i o n


TRANSCO: The Filipino’s Last Line of Defense Against Privatization

facilitating the privatization of the three major sectors of the power industry – generation, distribution, and supply – the government’s direct ownership, management and control to TRANSCO is the last line of defense for the Filipino people against the specter of privatization haunting the power industry.

Affirming the national importance of electricity, the Freedom from Debt Coalition (FDC) firmly opposes the privatization of TransCo. We believe that electricity as a critical element of national development and social progress should not be treated as a purely private arena confined to a few powerful groups. Privatizing transmission is the jugular that will once and for all put an end to the government ever being able to play a crucial developmental and balancing role in a sector that, since the passage of EPIRA, has shown its monopolistic nature more often, and more audaciously, than the promised competition.

FDC believes that as a natural monopoly – the sole vital link among major sub-sectors in the power industry –TransCo properly belongs to the state and must remain under its control. Transmission is an essential service that requires huge capital investments that must be spread over the economic life of the wires in order for it to be affordable to consumers. As the California market manipulation experience has shown us, control over transmission can be abused to unduly and unreasonably raise prices at the expense of consumers and favored suppliers. Strong regulation and a public-service oriented transmission, rather than a private-profit-oriented transmission, are needed in order to ensure the availability, reliability and affordability of electricity. Cost-effective production and a reasonable return on capital should hold sway over the price of electricity rather than market forces that, given the concentration in the sector, can be so easily abused and influenced. TransCo’s privatization will simply

pass on state ownership of a monopoly to a private entity. It does not remove or alter the monopolistic nature of transmission, which, in the pursuit of private profits, can be abused to unjustly raise electricity prices to the detriment of consumers.

I. Why Privatization of Transco is Wrong.“So why are governments around the world ignoring public opinion? How have governments been persuaded that electricity is just a commodity that should

be traded in the market place like pork bellies, rather than an essential service that needs to be controlled and supplied by governments to ensure its availability, reliability and affordability?”

- Prof Sharon Beder, recipient of the World Technology Award for Ethics (2001) and one of Australia’s most influential engineers

The TransCo privatization is not only wrong in principle. The sale of the country’s electrical industry backbones has serious practical repercussions and ominous developmental and security ramifications. Let us take stock of these one by one:

losses to the GovernmentThe government could potentially lose revenues of some P123 billion to P249 billion if it relinquishes the operation of TransCo to the private sector. As a monopoly and with operations covering the entire country, TransCo surely rakes in handsome revenues for the government. It can earn P375 billion for 25 years with its annual income of P15 billion while it will only earn P126 billion ($1=P42) if

the concession contract is bidded at $3 billion or P252 billion if bidded at $6 billion.

A related issue to this is who would pay for TransCo’s liabilities. Of course, the winning consortium, the National Grid Corporation of the Philippines (NGCP), can conveniently tap the combined ADB-World Bank $500 million guarantee to their rate application. At any rate, Napocor was planning to pay about P5.29 billion pesos in TransCo-related debts this year and officials said they might have

to borrow up to $777 million to be able to do so. Both PSALM and Napocor officials said the proceeds from the sale of their assets would not be enough to cover Napocor’s debts, which would make it necessary to consider other options such as swaps and options, resulting to more indebtedness for Napocor and ultimately, for the government and taxpayers.

Consumer WoesAt the receiving end are the consumers. Philippine electricity rates continue to be one of the highest in Asia, second to Japan. Electricity rates are also expected to rise as a consequence of privatization as investors would try to recover their investments the soonest time possible. Economist Maitet Diokno-Pascual of the FDC said that high electricity prices are being used to lure in investors. She said that the situation is due as well to the overpriced excess capacity from the contracts with independent power producers (IPPs) that the Ramos administration entered into during the energy crisis in the early 1990s. Professors from the University of the Philippines also observe a contradiction between the

TransCo’s privatization will simply pass on state ownership of a monopoly to a private entity. It does not remove or alter the monopolistic nature of transmission, which, in the pursuit of private profits, can be abused to unjustly raise electricity prices to the detriment of consumers.



government’s mandate in the EPIRA to make electricity affordable, with the intention to maximize non-tax revenues through privatization. Placing priority on the latter will result in higher electricity prices, when the goal of affordable electricity must take precedence over the latter.

There is also the lurking danger that consumers are bound to shoulder a large part of TransCo’s $1.5 billion liabilities. Using the Performance Rate Based Methodology (PBR), the NGCP can actually recover its 25-year $3.95 billion investments within a short 7 to 10 years time PBR means that the NGCP can collect their investments in advance from consumers.

Already burdened by generation and distribution tariffs, consumers would also have to bear the additional burden of pass-on charges from TransCo congestions. TransCo’s congestion problems also translate to pass-on charges to consumer. For example, Energy Secretary Reyes revealed early September 2008 that Transco’s San Jose, Bulacan substation has made WESM prices volatile for the past months.

Workers’ baneThere is the labor issue, where the job security of 6,000 employees are imperilled. Discussed in a coordination meeting between Transco’s workers union, Mintrea, and the NGCP last 22 July 2008 in Davao City, are the following:

1. “Date of NGCP start of operation is November 3, 2008”

2. “NGCP has no existing Table of Organization”

3. “employees will start working under NGCP but their positions and salaries will stay as it were until the end of

4. the 165 -day transition period”

5. and “at the start of the 166th day, employees are considered NGCP personnel and will undergo

6-month provisionary period. Hiring plan is based on what NGCP needs”. [underscoring supplied]

Mintrea employees also said: “MINTREA is currently negotiating the employment terms of all TransCo employees… The present workforce, if deprived of continuing serving TransCo and replaced by others whose roots were not planted and foots not set on the same ground TransCo where are now would be bad for TransCo, worse for the economy and even worst for the entire Filipino people.”

II. Questionable Transactions, Controversial auctionThe TransCo bidding would go down in history as one of the most questionable business transactions. Business and political leaders still gape in awe at the magnitude of the scandal surrounding its privatization. The $3.95 billion Transco privatization deal raises more questions than the $329 million ZTE, P728 million fertilizers and P2 billion swine scam.

The tale of power-play and rent-seeking that surrounded the TransCo sale was preceded by a tumultuous attempt to conduct a bidding. It was the Power Sector Assets and Liabilities Management (PSALM) Corporation that was tasked to dispose TransCo. PSALM is the government-owned and controlled corporation created the EPIRA that was to manage the orderly sale, disposition and privatization of Napocor, with the objective of liquidating all of Napocor’’s financial obligations and stranded contract costs.

It is only after three failed bidding attempts had there been a successful TransCo bid. In the December 12, 2007 auction conducted by the PSALM, the consortium of the State Grid Corp. of China, Monte Oro Grid Resources Corporation (MOGRC) and Calaca High Power offered $3.95 billion and won the bid to operate the country’s electric distribution system for 25 years.

State Grid Corp., owned by the People’s Republic of China, is China’s largest electricity provider. It ranks 29th in the Fortune Global 500 list of the world’s largest companies by revenue this year. MOGRC is 100-percent owned by Monte Oro Resources and Energy Inc., wherein A. Brown Company Inc. (ABCI) has an 18.47-percent interest. Monte Oro has been associated with businessman Ricky Razon, who runs key ports in Manila and abroad and is a key supporter of President Macapagal-Arroyo.

The controversy-marred auction was the biggest Philippine privatization on record, more than twice the $1.6 billion price for the former military camp in Fort Bonifacio. Non-transparency and bias marred the bidding of TransCo. A petition was filed to the Supreme Court by some bidders who were barred from bidding despite being qualified enough.

Outbidded by a “scant” $45 million is the consortium comprising San Miguel Energy Corp., TPG Aurora BV of the Netherlands and TNB Prai Sdn Bhd of Malaysia, which offered $3.905 billion. Two Rivers Pacific Holdings Corporation and its partner Terna-Rete Electtrica Nazionale S.P.A. did not participate in the final bidding while the consortium of Citadel Holdings Inc. and Power Grid Corp of India Ltd. backed out.

The Monte Oro-led winning consortium incorporated into the National Grid Corporation of the Philippines (NGCP) and applied for a franchise with Congress. The NGCP is 60 percent owned by Filipinos and 40 percent by Chinese investors. It has an authorized capital stock of P2 billion and a paid-up capital of P500 million. The President and CEO of NGCP is Walter Brown. Its Chief Technical Officer is Mr. Qiantu Ruan. Walter Brown has close ties with Diosdado “Buboy” Macapagal Arroyo, the brother of Pres. Gloria Macapagal-Arroyo. The consortium is required to pay 25 percent of the winning bid 30 days after securing the congressional



franchise with the balance to be spread in 20 years. The amount will be used by the government to cover portions of Napocor’s $7.2-billion debt. The TransCo workers’ union, Mintrea, fact sheet said that TransCo’s sale was “a sweetheart deal” for NGCP because it stands “to earn between P18 billion and P20 billion in net profits annually.”

Curiously, PSALM’s current president is Jose C Ibazeta, a close business associate of Enriquez Razon Jr. and Disosdado “Buboy” Macapagal. It can be remembered that Razon acted as the treasurer of President Arroyo’s TEAM Unity senatorial slate in elections last May, while Macapagal, an investment banker, is Pres. Arroyo’s brother.

In the Senate, Senator Jamby Madrigal explained last year (December 2007) that if the Monte Oro consortium wins the bid for TransCo, the transmission and distribution of energy resources would be monopolized by the Aboitiz Group, which is already involved in power distribution and generation. She said that “[a]s early as Oct. 27, 2006, this bidding was already tainted when Mrs. Gloria Arroyo met with the president of State Grid of China – Mr. Liu Zhenya. At that time, State Grid of China already made known its interest in bidding for TransCo and Malacañang named Monte Oro Grid Resources as its partner… This bid should not even start because it’s highly anomalous.”

III. security concern: TransCo as a national digital broadband backboneWorse, with TransCo privatization, it is not just simply transferring the monopoly/control of this strategic utility from the government to private. Placing the 21,319 circuit kilometers transmission lines nationwide with broadband capacity under a private operator is a national security concern. As one lawmaker quipped: “It is important that whoever controls Transco must be loyal to the Nation.”

The problem is not just that the 21,319

circuit kilometers transmission lines nationwide will be run by private sector — but that a foreign government, China, will practically co-manage it. It virtually transfers the control of the switchboard from the Philippine government to the foreign government via a foreign company – the State Grid Corporation of China, which is owned by the People’s Republic of China. Cong. TG Guingona asserted in his privilege speech last January 2008 that TransCo was worth more than $3 billion. According to the lawmaker, La Costa vice-chairman Bobby de Ocampo, stated that La Costa was intent on bidding at a minimum of $6 billion had it been allowed to participate. He said that the TransCo bidding is the “purchase of two government assets for the price of one electric power transmission and a national broadband backbone”, because “the same electricity transmission grid has fiber optics that is being used as a communications backbone,” he explained.

The broadband capability of TransCo is confirmed by economist and ADB consultant on power, Emmanuel “Noel” de Dios, regarding the National Broadband Network (NBN) controversy:

“It is important to note that there are in fact, already two such functioning backbones (As a matter of fact, there are already two other backbones under government control, but which are unused, the French protocol backbone under the office of the press secretary, and that of the National Transmission Company (Transco). This only underscores the redundancy of the NBN project).” [underscoring supplied]

Incidentally, the aborted NBN project was also transacted between a Chinese corporation and the Philippine government. The $329 million NBN project funded by the Chinese Export Import (CEXIM) Bank is supposed to be implemented by the Department of Transportation and Communication (DOTC) with the Chinese firm Zhong Xing Telecommunication Equipment

(ZTE) Company as the contractor. Attached with the NBN project, is another aborted project, the P26.48-billion Cyber Education Project (CEP) also funded by the CEXIM Bank.

With these two mega-projects at the forefront, the extent of Chinese interest on investing on strategic and backbone infrastructures then became a matter of investigation for some news investigators, notably Ricky Carandang who linked the sudden spurt of Chinese Official Development Assistance (ODA) and loans to the Joint Marine Seismic Undertaking accord between the Philippine and Chinese governments. The so-called “Spratly Deal” reportedly threatens to relax our claim to the oil and natural gas-rich islands.

IV. TransCo, Global Privatization Mania, and the Predatory RegimeAt present, the full-scale privatization of electricity in the Philippines is now nearing completion. Majority of the NPC power plants are already being sold while the establishment of so-called “market competition” in Luzon are now moving towards the islands of Vizayas and later on in Mindanao.

Where did the Philippine power privatization frenzy come from?

In order to answer this, we have to understand that privatization is not just a local phenomenon. There is such a term called “Washington Consensus”, coined in 1989 by John Williamson, which basic policy prescriptions involved government spending cuts, privatization of government services and assets, and deregulation of business activities – all in the name of free markets, competitiveness, efficiency and economic growth. It was adopted willingly in many developed nations and imposed on developing nations by the World Bank and the IMF as conditions of their loans. Ultimately, it is an idea that places faith in market mechanisms in resolving the national and global-level fiscal and economic quagmires.



With the Washington consensus, the public sector was deemed “bloated and inefficient.” Publicly-owned and state-regulated electricity monopolies were claimed to be so wasteful and inefficient that private companies competing in a free market could save enough money to both cut prices and make a profit.

It is unfortunate for the proponents of the consensus, that their rhetoric had largely remained unfounded, and had even been used for pure private gain. In the power sector, for example, the cumulative evidence of one hundred years of electricity provision all over the world proved that publicly-owned electricity enterprises have consistently provided electricity at no greater cost than privately-owned enterprises and often for prices that were far less than those charged by private companies.

To quote Professor Sharon Beder (June 2005), recipient of the World Technology Award for Ethics (2001) and one of Australia’s most influential engineers:

“The privatisation of electricity is not something that citizens have demanded nor wanted. In general, there has been very little public participation in electricity reform decisions and as the consequences are observed, there have been many bitter protests against electricity privatisation. Popular uprisings have occurred in Argentina, India, Indonesia and Ghana. Protests have halted privatisation proposals in Peru, Ecuador and Paraguay. In the Dominican Republic several people were killed during protests against blackouts imposed by privatized companies. In South Africa thousands marched during a two day general strike to protest privatisation, which they labelled ‘born-again apartheid’. In Papua New Guinea students were killed when thousands rallied against the planned privatisation of government services including Elcom, the electricity authority. Even in China, workers protested the sale of a power plant in Henan province to a private company and threatened to ‘block the state highway and lie on the railroad while the trains run over us’.

Today, no less than the former Senior Vice President and Chief Economist of the World Bank sharply criticizes neo-liberal prescriptions that promote modern day privatization schemes. Joseph Stiglitz, also the recipient of the Nobel Memorial Prize in Economic Sciences (2001), stressed last July 2008:

“The world has not been kind to neo-liberalism, that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called “Washington Consensus” in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation. For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top… Today, there is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well. Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory.”

In the Philippines, after more than seven years of implementation of EPIRA, the anti-monopoly and pro-competition provisions of the said law remains very weak. This not to mention the poor protection and inefficient regulation the consumers are getting from the Energy Regulatory Commission (ERC).

This, plus the current state of the Philippine political economy, paved the way for an enhanced “electricity oligarchies” in the whole of power industry. High level rent seekers are riding on the crest of the global privatization mania to corner much of the loot. The predatory regime is behaving like a Mafia organization anew in this scandal.

The high level of corruption, the rampant rent-creation and rent-seeking activities of the elite, even prompted no less than Supreme Court Chief Justice Reynato Puno comment that the greed of a few families has made it difficult for most Filipinos to enjoy the good life. “These families,” he says, “have perpetuated their stranglehold on our country’s wealth, dynasty after dynasty. There is no end to their greed, no border to their covetousness.”

V. ConclusionThe issue has spilled onto the political plane, beyond Senate technical legalese. We can only hope that Senators who are opposed to TransCo privatization uncover the whole truth behind the controversial bidding of TRANSCO and reverse the privatization process.

Considering all the arguments raised above such as the inefficient regulation, weak provisions on the anti-monopoly and pro-competition of EPIRA, unabated power rates increase, national security concern and the ugly state of power play we have been witnessing as a product of privatization – letting go of the very “heart” of the whole power system should not only be a question of legal obligation, simply because it is one of the major requirements of the power sector reform program of the government. More than anything else, it is our moral responsibility to protect the interest of the Filipino against the continuing ill effects of private investors drive for profit in the electricity industry.

The Freedom from Debt Coalition believes that the ownership, control and management of the transmission lines should remain in public hands. This is our last line of defense against the onslaught of privatization as we continue to work for a genuine power reform law that can provide us with an affordable, clean, sustainable and renewable energy.


IntroductionThe service of bringing appropriate load requirements to every household, industry and commercial establishment is the function of the distribution system in the power industry. The distribution system is defined as “the system of wires and associated facilities belonging to a franchised distribution utility extending between the delivery points on the transmission and sub-transmission system or generator connection and the point of connection to the premises of the end-user.”1 It is therefore the most important link that connects people to the source of power, and vice-versa. This kind of service (or business) is being performed by those who operate the system – in the Philippine context either by a private corporation, an electric cooperative, or by an LGU-controlled utility. Currently there are a total of 18 private investor-owned distribution utilities (PIODUs), 1 LGU-owned, and 119 Rural Electric Cooperatives (RECs) operating all over the country. (See Annex A for complete list.)

The distribution system’s proximity to consumers makes this sector of the power industry closely connected with

the people compared to the generation and transmission sectors. Thus, reliability, security, and affordability of services are highly demanded from the distribution utilities, such that it remains highly regulated even under the Electric Power Industry Reform Act or EPIRA. Yet despite this pervading environment of state regulation, which ironically was a policy renounced in the case of the downstream oil industry, the sector remains attractive to business and. in fact. is becoming a venue of major power plays and corporate battles in the whole industry. In other words, there is more than the rub here. What makes this sector very desirable to private players is no secret to policy makers. A DU’s business thrives not because of “free market” or of “deregulation” but by the franchise area(s) accorded to it by Congress. This right to operate a distribution system in an assigned franchise area effectively transformed this system into a natural monopoly and it is from there that a DU exercises its market power over a captive market granted to them by the state. It is also a cash-rich business, with a steady flow of cash revenue guaranteed from the monthly payments of consumers.

Moreover, aside from exercising monopoly power over a franchise area, a PIODU is also allowed full cost recovery plus an allowable return of up to 12% on its investment, or even higher under the new rate setting methodology called performance-based rate (PBR). It is different however for electric cooperatives which were assigned the task of total electrification of the country but do not enjoy the privileges of the PIODUs.

Recognizing this very nature of the distribution sector, the EPIRA never aimed at removing this “monopoly” character of the system despite having used the term “de-monopolization”. What the law intends to is to merely disperse the ownership structure in the DU (not more than 25% of the voting shares of stock) but which can only be made possible if owners of that controlling shares are not yet listed in the Philippine Stock Exchange (PSE). Thus, in the case of the Lopezes and the Aboitizes for instance, two big names in the business for several decades now, the major challenge is not from the possibility of losing their monopoly grip of the sector but rather on the opportunities provided to them by the EPIRA to expand their holdings in the distribution sector and beyond.

The Undistributed PowersPOWEr PLAYS IN DISTrIBUTION UTILITIESBy Wilson Fortaleza



Hence, the battle for control of Meralco cannot be qualified as an outcome of a “de-monopolization” process, nor is it a product of ownership dispersal or democratization. It is a dirty power play pure and simple, between the old and emerging oligarchs the outcome of which will be neither for the broadening of ownership base of the industry, as claimed in the EPIRA, nor for the democratization of ownership and control of public utilities as espoused by the Freedom from Debt Coalition.

In short, despite the “de-monopolization” façade of the EPIRA, powers remain undistributed in the distribution sector.

Developments in the distribution sectorThe history of the power industry, according to Meralco’s Oscar Lopez in his speech before the Foreign Correspondents Association of the Philippines (FOCAP) forum in November 2006, can be analyzed in terms of the “swinging of the pendulum” – from private power in the pre-martial law period to public power during the martial law years, and that pendulum is swinging back once more in favor of private power after the passage of the EPIRA in 2001.2

Oscar Lopez is the current patriarch of a clan that operated the first private and Filipino-owned power system in the country. In 1961, Oscar’s late father, Eugenio Lopez, acquired full ownership of the Meralco, then the Manila Electric Railroad and Light Company, from the Detroit-based American investors. Before the acquisition, the private company, which began operating in 1903, was the dominant power company in Luzon. By the outbreak of WWII, Meralco operated not only in Manila but as far as Dagupan in Pangasinan down to Naga in the Bicol region. According to Lopez, it was only after WWII that Meralco relinquished its franchise operations in 45 municipalities in 10 provinces to concentrate its attention

to the Manila Metropolitan area.

To his recollection, Lopez described the 1960s as a “Golden Age” for Meralco. Meralco then was both in the generation and distribution businesses. Its generating capacity increased fivefold, from 300,000 KW in 1961 to 1,500,000 KW in 1972. Its sales went from 1,700 gWh in 1961 to 5,100 gWh in 1972 as its customer base grew from 370,000 to 600,000. During that time, Meralco sourced 30-40 percent of its power requirements from the National Power Corporation. Lopez also claimed that during those times, Meralco rates were the lowest in Asia and those in 43 of the 50 states in the United States.

The combined economic and political crisis of the 1970s ended Meralco’s Golden Age. On the economic side, the oil crisis, inflation and the floating exchange rate pushed Meralco deep into debt. And the final death blow came after the declaration of Martial Law when the late dictator, Ferdinand Marcos, ordered the takeover of Meralco through Presidential Decree No. 40. PD 40 ordered all Meralco power plants sold to NPC when the latter was mandated to operate a single integrated system of generation and transmission.

The period of martial law in effect dissolved private power after the power industry was “nationalized” by virtue of the expanded powers of the NPC. Meralco then was managed by Benjamin “Kokoy” Romualdez, a known Marcos crony.

Rural electrification It is interesting to note here that the 1960s, the time described by Oscar Lopez as the “Golden Age” for Meralco was also the time the government had begun to embark on a national rural electrification program. Citing “profit-orientation” of the private utilities, the government conceded that electrification was limited to high-density urban areas where electric utility operations were considered

viable. With this condition, the government realized that the rural areas were deprived from being program beneficiaries.

According to the National Electrification Administration (NEA), most of the remote areas in the 1960s were bereft of electricity, some of which only had it for six to eight hours and only after nightfall. This condition kept the rural economy tied entirely and exclusively to agriculture. Factories and businesses naturally preferred to locate in the cities where electric power was easily acquired.3

Thus, in 1960 the Electrification Administration (EA) was created by Republic Act (RA) 2717 to carry out the country’s electrification policy. The agency was authorized P25 million to be loaned out to the electric utility operators for financing the construction and operation of generating plants, electric transmission and distribution systems for the furnishing of electric energy, particularly in the rural areas. In 1966, the US, through the United States Agency for International Development (USAID), provided assistance to the Rural Electrification Program. A contract with the National Rural Electric Cooperative Association (NRECA) of the United States was executed. The NRECA made feasibility studies for pilot projects. Two Rural Electric Cooperatives (RECs) were set up, one in Mindanao and the other in Visayas. These were the Misamis Oriental Rural Electric Service Cooperative, Inc. (MORESCO) and the Victorias-Manapla-Cadiz Rural Electric Service Cooperative, Inc. (VRESCO), respectively.4

In 1969, the NEA was created by virtue of Republic Act 6038, which declared the total electrification of the Philippines on an area coverage basis as a national policy objective. PD 269 issued in 1973 transformed NEA into a corporation wholly owned and controlled by the government, with borrowing authority and corporate powers, and increased its capitalization



to P1 billion to further strengthen and enable the RECs to become effectively established and operationally viable.5

During the period 1985-1989, NEA was able to organize 117 ECs servicing some 2.8 million households. Now the total ECs number 119, servicing approximately eight million households.6 The NEA targets total barangay electrification by 2009 and total electrification of consumer connections by 2020.

The empire strikes back: The return of private powerThe Lopezes reclaimed the Meralco, including all its franchises, after the fall of Marcos in 1986. The family claimed to be victims of martial law and thus justified their right to their restored holdings. How they got that so easily, courtesy of the Aquino regime, has been the subject of debates and discussions in business and political circles since the post-Edsa regimes. Claims that the Lopezes won their fortunes back through rent-seeking simply do not vanish away. For it was also through this same method of rent-seeking that the family built its massive fortunes since the time of Quezon, and perhaps until the present and into the future.

An opinion column printed in the Business Mirror (5/23-24/2008) provides a glimpse of history on how the Lopezes got to where they are now. The article makes reference to the book Greed and Betrayal, written by journalist Cecil Arillo, which relates how the Lopez family grew to be so financially and politically powerful under 10 presidents, from Manuel Quezon to Cory Aquino. Arillo implies that the phenomenal growth of the Lopez financial empire largely sprung from its control of Meralco.

“Since Meralco was acquired by the Lopezes, it was transformed from a highly profitable organization distributing power to the Greater Manila Area into a hydra-headed monster that branched out into real estate and construction, petroleum refining and the manufacture of electric goods and merchandise.

“Ever since the Lopezes took over Meralco, they were able to secure approval for several rate increases using their political influence in the Public Service Commission, at the same time raking in huge profits at the expense of the consumers.”7

Documents cited in the book reveal how the Lopezes defied the powers of the president, evaded government efforts to collect legitimate taxes and earned more from its crude oil importation. They were also able to raise money through loans guaranteed by the government. Arillo also belied the claim that the Lopezes sold their Meralco shares to the Meralco Foundation under duress during

martial law, saying that the deed of sale was guaranteed by the Philippine National Bank through a letter of credit it issued to the foundation for the purchase of the Benpres shares of stock. The foundation also assumed Benpres’ P9.5-million debt on stock subscription and an obligation to pay Benpres P48.6 million on its equity, payable by installment over a 10-year period at a 10-percent interest on the unpaid balance.8

Another book, The Anarchy of Families: State and Family in the Philippines, edited by the renowned American historian Alfred McCoy, attributed the growth of the Lopez Empire, then headed by Eugenio Lopez, Sr., to trickery and maneuverings, and employment of violence to forward their interests.

“After the war, when they joined the national economic elite, the Lopez brothers moved into a world of corporate connections remote from the provincial violence that marred postwar democracy. But before the war, they had engaged in provincial struggles, with clear territorial manifestations over bus routes, waterfronts, precincts and congressional districts. The territorial specificity of local politics created a zero-sum game, a win-or-lose situation, that made violence a necessary instrument for every player.”

After the war, McCoy wrote, the Lopez brothers used ABS-CBN and the Manila Chronicle to their advantage (Eugenio as media mogul and Fernando as politician). They took over and established several profitable ventures, one of which is Meralco. The empire then grew bigger and bigger until they were stripped off of power by the Marcos regime. The family, however, was able to stage a political and economic come back after the downfall of Marcos, by using what McCoy described then as the practice of “rent-seeking”. 9

In his book, The Rise of Ersatz Capitalism in South-East Asia, Kunio Yoshihara identified the Lopezes as ‘capitalists-turned politicians’ who entered politics to advance their business interests. Yoshihara referred to Fernando Lopez, the brother of Eugenio, who became a powerful member of the Nacionalista Party and became Vice-President before martial law. For Yoshihara, capitalists who try to establish government connections for business advantage can be called rent-seekers “because they are essentially seeking opportunities to become recipients of the rent the government can confer by disposing of its resources, offering protection, or issuing authorization for certain types of activities it regulates.”10

The Lopez family has continuously refuted charges of rent-seeking. But it cannot be denied that of all the victims of martial law, it was they who were compensated virtually in full while claims of thousands of other victims of martial law remain entangled in court battles. From



then on, the Lopezes quickly recovered their fortunes and began to amass more. Today, the Lopez group’s Benpress Holdings Corporation holds majority control in several other companies in power, media and entertainment, real estate, construction, business solutions, among others. It controls the country’s largest distribution utility, and now the largest exploration company, the Philippine National Oil Company-Energy Development Corporation (PNOC-EDC).

The power crisis which spilled over into the Ramos administration in the early 90s was eventually transformed into a great business opportunity for the Lopez family. The Ramos administration invited the Lopezes to build its own IPPs, a gas-fired generation plants to “align” the interest of Shell and the government in the flourishing Malampaya Deep Water Gas to Power project. This was in recognition of the fact that the project could not proceed if not fully integrated with the downstream power projects. The Lopezes also own Meralco which controls more than 70 percent of the country’s electricity market in Luzon. Thus, Gas Sales and Purchase Agreements (GSPA) with First Gas’ Sta. Rita and San Lorenzo power stations were signed in January and April 1998 respectively.12 GSPA was also signed for NPCs Ilijan power plant in 1997. In other words, entering into IPPs enabled the Lopezes to favor its companies and use Meralco as a milking cow for its affiliates.

According to a report by the Philippine Center for Investigative Journalism (PCIJ), Meralco took advantage of Napocor’s shrinking market and the lucrative IPP contracts it bagged from the Ramos administration to justify high PPA charges.13

And the fraud continues. In 2002, the Supreme Court ordered Meralco to refund some P28-B it illegally collected from the consumers since 1994. The decision upheld the 1997 findings of the Commission on Audit which found Meralco guilty of committing an illegal act for listing its income tax as part of its operating expense.

Under the Arroyo administration, the Lopezes tried to negotiate a deal to settle a botched contract with NPC. The

Settlement Agreement which was signed in July 15, 2003 (reportedly in the presence of President Arroyo and Oscar Lopez) intended to modify the last three years of a 10-year supply contract which began in 1994. The Agreement stipulates that Meralco shall compensate NPC some P27.515 billion for energy contracted but not consumed for the last three years of the contract, stretching from 2002 to 2004. In turn, NPC shall compensate Meralco an amount of P7.465 billion for its failure to adequately provide transmission services to Meralco’s IPPs, and turn over the directly-connected customers to Meralco. The net settlement amount of P20.05 billion was thus arrived at by subtracting the claims of both parties. Meralco and NPC jointly filed with the Energy Regulatory Commission (ERC) for the recovery of the computed net settlement amount; which will be passed on to consumers over a period of five years. The case is still pending before the ERC.

But in a sudden twist of events, the Office of the Solicitor General (OSG) has opposed the settlement agreement, creating signals that there was indeed animosity between the administration and the Lopezes. And this hostility became more pronounced last year when GSIS President Winston Garcia, who represents the government’s shares in Meralco, launched a failed power grab against the Lopezes.

Aside from the Meralco, another Lopez firm, the Panay Electric Company (PECO) which covers the Iloilo franchise area was also found to have committed fraud and was also ordered by the ERC to reduce its rates by P2/kWh. The FDC chapter in Iloilo which caused the filing of the complaint against PECO claimed that the ERC decision exposed PECO’s malpractices in rate-making by inserting some assets in in their rate base like their property in Benigno Aquino Highway with an appraised value at P51-million. PECO brought the case to the Court of Appeals and the latter issued a TRO on the implementation of ERC’s order. But in September 2005, the CA upheld ERC’s decision. PECO has reduced its rates, but has yet to refund some P1.5 billion it has illegally collected from the consumers from May 2004 to May 2005.

Let us not also forget the fact, however, that this kind of privileges was not only extended by past and present governments to the Lopezes. In fact, the Arroyo administration, through the First Family is reportedly closer to the Aboitizes, prompting many sectors to raise the issue of an emerging cronyism in the government. Rumors were even ripe then that the Aboitizes were behind Winston Garcia’s failed bid to topple the Lopezes out of Meralco.14

This is not the first time that the Aboitiz family has been involved in controversies in the power sector. During the Aquino administration, allegations that they made money out of the power crisis from the sale of small power generators were also hurled against them. Today, allegations that energy deals are designed intently to favor

Lopez-Owned Distribution UtilitiesDISTRIBUTION UTILITY FRANCHISE AREAS CUSTOMER BASE

Manila Electric Company (MERALCO)

Mega-Manila (Metro Manila, Bulacan, Cavite, Batangas, Laguna and Quezon Province)

4.5 million

Panay Electric Company (PECO) iloilo City 43,000

Clark Electric Distribution Corp.11

Clark Special Economic zone in Pampanga

1,000 customers, consisting mostly of large industrial companies at the economic zone

figure 1. DU’s share in energy sales



the Cebu-based power tycoon are too convenient to ignore.

Obviously here, the granting of favors and privileges to businesses is definitely the work of politics, as rules and policies are deliberately crafted to favor vested interests. The Lopezes and the Aboitizes, for instance, made it sure that EPIRA becomes an opportunity rather than a threat to their empires. And this was made possible with the backing of former Senators John and Serge Osmena who both chaired the Senate and House’s energy committee when EPIRA passed Congress. The two Osmenas, although not on good terms, are both known political allies of the Lopezes and the Aboitizes.

These tales of fraud and rent-seeking politics in the power industry belie the fact that private power is far better than public power, a common view held by those who favor the commoditization of essential services, whatever it costs to consumers. While Marcos used state power to favor his cronies and displace his opponents, the Lopezes, and increasingly the Arroyo and Aboitizes are using the altar of private power to consolidate and expand their wealth and power.

The distribution sector under the ePIRaAs envisioned, EPIRA should have ushered an era of competition that would result to lower costs as a consequence of the dismantling of monopolies. The restructuring of the power supply should likewise provide a secure and reliable supply of clean power to consumers.

The visions of EPIRA, however, remain pipe dreams as the law was craftily designed to contradict itself to protect monopoly interests in the industry. The Lopezes and Aboitizes who strongly lobbied to have the EPIRA enacted to their favor have succeeded in inserting provisions which bolstered their position in controlling both the distribution and generation sector.

Thus, the “cross-ownership”15 and “de-monopolization”15 sections of EPIRA allowed them to venture into generation and distribution without having to worry about divestments or possible dilution of their controlling shares to several of their power-related companies.

Accordingly, what the Lopezes got the Aboitizes also reaped. Hence, eight years after its implementation, only the state monopoly was clearly dismantled. The well-entrenched private monopolies remain pretty much in control and their power is growing even bigger each day as they acquire new captive markets.

Total energy sales in 2007, according to the DoE, reached 48,009 gWh. Based on Meralco’s 2007 annual report, it sold 26,219 gWh or 55.61 percent of the total energy sales. On the other hand, Aboitiz-owned DUs sold 3,915 gWh or equivalent to a 8.15 percent share in energy sales. It is assumed here that the remaining 17,875 gWh

of the total energy sales represents the 37.23 percent market share of the 119 ECs, an LGU-owned utility, and industry direct connect.

Furthermore, a quick look at the current ownership structure of PIODUs easily leads to a conclusion that no de-monopolization process has ever happened in the sector. On the contrary, a concentration has been emerging as owners consolidate their positions to keep their footholds in

their empire while spanning their wings wide to consolidate or acquire new franchise areas. Meralco is one example. Rather than partitioning Meralco to invite more players into the system, Congress in 2003 granted Meralco a mega-franchise which is a consolidation of 52 existing franchises which covered the spans of Metro Manila, Bulacan, Laguna, Cavite, Pampanga, Batangas and Quezon. No doubt Meralco is the country’s largest private distribution utility today, servicing a customer base of 4.5 million in 25 cities and 86 municipalities, and with an annual net income of more than P4-B.17

In economics, having such a very huge captive market must result to lower cost due to the principle of economy of scale. The contrary is happening. Meralco, the biggest DU, charges the highest distribution rate in the country. And one major reason for this is its self-dealing transactions in the supply of power. Meralco supplies come from its own affiliates. Meralco

also gets some 50 percent of its power requirements from its sister IPPs.

The Lopezes’ reported alliance with PLDT’s Manny Pangilinan is viewed by many as a masterstroke to prevent a Cojuangco takeover. The alliance gave the Lopez empire a big advantage over a hostile group which is reportedly being backed by Malacañang.

The Aboitiz Power Corporation (APC) comes second to Meralco having in



control of seven DUs all over the country. APC is owned by the Aboitiz family, a familiar name in the industry since the 1930s. Like the Lopezes, the Aboitizes are now also into generation especially on hydro and thermal power. The Cebu-based empire considered the power privatization, “a once-in-a-lifetime opportunity and something we were not going to miss out on.”18

The Visayan Electric Company (VECO) is the second largest DU in the country while Davao Light and Power Company is third. The rest of the DUs in the list were acquired by the APC after the EPIRA was passed in 2001.

In its financial report to stockholders on 2008, The APC reported a 124 percent increase in its revenue from P4.1 billion in 2007 from P1.8 billion in 2006. P1.5 billion came from the distribution business, a 52 percent increase from the previous year of P995 million. At the beginning of EPIRA, APC’s revenue was recorded at P1.6 billion, thus, from 2001 to 2008, the company’s revenues increased by 193.75 percent.

There are other DUs owned by well-known business or political families such as the Cagayan de Oro Light and Power Company (CEPALCO) owned by the Abaya family and the Cabanatuan Electric Corporation owned by the Vergara family. The only remaining

utility owned by a local government unit (LGU) is the Public Utilities Department (PUD) of Olongapo City. The Provincial Electrical System, now Bohol Light Company Inc., used to be owned and run by the Provincial Government of Bohol. But in August 2000, this was acquired by the Consortium of Salcon International, Inc.(SII), Salcon Power Corporation (SPC), and Pure and Palm Inc.

The 119 electric cooperatives, on the other hand, retained its control of around eight million customers. Under the EPIRA, the RECs were given two options: to register either as a stock cooperative under the CDA or a stock corporation under the Securities and Exchange Commission (SEC). EPIRA’s Implementing Rules and Regulations (IRR), however, gave them a third option - to remain under NEA. Because of this, two opposing camps are now competing within the RECs. Those who are in favor of remaining under the supervision of NEA argue that the CDA lacks the technical and financial capabilities to assist the cooperatives. The pro-CDA camp on the other wanted to maximize the tax incentives enjoyed by CDA-registered cooperatives. They are also against the NEA where the system of supervision, they claim, is undemocratic thus proscribing

the RECs development into genuine cooperatives. To date, only 10 of the ECs have so far registered with the CDA.

This obvious quandary over what to do with the RECs can be directly attributed to EPIRA’s predisposition to primarily secure the interest of private power in the restructuring of the distribution sector. EPIRA was enacted without a clear conceptual framework on democratizing the ownership and control of the PIODUs as well as the RECs. The RECs in particular are areas where democratic ownership and governance are most relevant to people since consumers already own them in the first place. And the same can also be invoked even on the PIODUs had the concept of de-monopolization not been reduced to mere scrap of paper. Furthermore, the RECs are good vehicles in promoting new alternatives to the old setup of power – that is if these electric cooperatives, in the words of Maitet Diokno-Pascual, “are transformed into community enterprises that are economically and financially viable, that are environmentally sustainable, and that operate under a healthy and mutually sustaining relationship with the community it serves.”19

DISTRIBUTION COMPANY PERCENTAGE OF OWNERSHIP (2008) FRANCHISE AREAS CUSTOMER BASE

Davao Light and Power Company, inc. 99.90%

Davao City, Davao del Norte municipalities of Carmen, Panabo, Santo Tomas and Dujali

247,341

Cotabato Light and Power Company, inc. 99.90%

Cotabato City, part of Maguindanao municipalities of Datu Odin Sinsuat (formerly Dinaig) and Sultan Kudarat

26,379

visayan Electric Company 55.00%

Metropolitan Cebu (which includes Cebu City, Mandaue City, Talisay City, Naga City, municipalities of Consolacion, Liloan, Minglanilla and San Fernando

296,003

San Fernando Electric Light and Power Company 43.80% San Fernando, Pampanga 64,585

Subic Enerzone Corporation 100.00% Subic Bay Freeport zone NA

Balamban Enerzone Corporation 100.00% MEz 2 export processing zone NA

Mactan Enerzone Corporation 100.00% West Cebu industrial Park 50 companies

Source: Aboitiz Power Corporation Website, http://www.aboitiz.com/



But the most obvious reason for this dilemma was the government’s presumption that private investors are interested only in putting their money to economically viable areas, thus, the missionary role of electrification is negligently left to the RECs and the SPUGs which functions under EPIRA were in fact expanded and made more complicated, like trading in the spot market.

According to Pascual, the RECs shall assume new specific roles under the deregulated regime of EPIRA. These are as follows:

1. To acquire from TRANSCO the subtransmission assets in their respective franchise areas. According to the EPIRA (Section 8), the RECs are to be given a 20-year concessional financing from TRANSCO for these assets; however, RECs are required to give first priority to amortizing these loans out of the net income derived from the subtransmission assets. TRANSCO is supposed to determine the value of said assets.

2. To submit annual distribution development plans to the National Electrification Administration (Section 23).

3. To participate in the wholesale electricity spot market (Section 31).

4. To meet performance obligations, technical and financial viability standards as required by the NEA in exchange for the transfer to PSALM of their debt obligations. (Sections 58 and 60)

Unfortunately, ailing RECs are also lined up for privatization. Several of them are now under the Investment Management Contract (IMC) scheme. These are: Pampanga II and Pampanga III Electric Cooperatives (PELCO II and PELCO III), Camarines Sur I,

Camarines Sur III and Camarines Sur IV Electric Cooperatives (CASURECO I, CASURECO III, CASURECO IV), and Central Pangasinan Electric Cooperative (CENPELCO). Of these six, PELCO III is the most advanced, with due diligence already conducted by Castalia Strategic Advisor. Five prequalified investors have been identified as follows: Aboitiz Equity Ventures, Salcon Power, Trans-Asia Power Gen, Asiaphil Manufacturing Industries, and Benguet Electric Cooperatives, Inc.20

The IMC, according to Pascual, is the vehicle through which the RECs will be privatized.

ConclusionMr. Oscar Lopez’s analogy of a swinging pendulum in describing the power industry is packed with rock-hard intention to promote private power over public power. The context when he delivered that speech was a looming scenario of a government takeover of Meralco through the GSIS. What was not mentioned by Mr. Lopez, however, was their position that behind Winston Garcia’s attempt at a power grab is a “mafia” – a “Cebu Mafia” -- reads one poster believed to have been published by the Meralco camp. Behind Garcia’s move, many pundits have said, is the Aboitiz family owing to their established business and political relations in Cebu. The Aboitiz family on the other hand is believed to be closely connected with the First Family. And who’s- behind-who is a never ending puzzle in the power industry that has become a battle zone for private powers which wanted control of the whole industry.

This is the story of the power industry today, eight years after the enactment of EPIRA. Eight years after the NPC monopoly was broken, power play ensued among private players to consolidate their empires, conquer new fronts, and re-divide the spoils.

The generation and distribution sector of the industry is basically a contest between these two superpowers – The Lopezes and the Aboitizes. But both are also watchful of emerging big players with the entry of powerful tycons who possess the same mastery in the art of rent-seeking. Public power, indeed, is now out in the balance of that pendulum. What we have now is a revitalized private power presiding over a fully-privatized public service industry.

It was therefore not a public power’s takeover of Meralco that Mr. Lopez was afraid of when he stirred up the specter of a swinging pendulum. It was rather a hostile takeover by industry rivals backed by a friendly government. Thus it is the height of hypocrisy to equate moves by the government to become a tool of rival private interests as something that represents a threat of a return to “public power”. The Lopez empire knows better. It just so happens that the empire is not in good terms now with the same government of rent-seekers.

Unfortunately the prospect also looks dim in the area where people have the immediate chance of exercising control over public power. Eight years after, the situation of electric cooperatives looks more of the same, or even worse.

One of the major benefits expected from using cooperatives to deliver power, according to a 1980 study conducted by the USAID, “was the participation by rural people which would have a spill-over effects to other development activities.” But these expectations, the study said, has been largely unfulfilled because the process of decision-making, membership influence over the ECs has been minimal. These problems of the past still beset the RECs today. And the government has made no effort to address them.

Truly, it has been a very disempowering eight years under the EPIRA and the regime of Gloria.



endnotes1 “Distribution System,” Sec. 4. Definition of

Terms, EPiRA. 2 Remarks of Oscar M. Lopez, Chairman and

CEO of Benpres Holdings Corporation at the FOCAP Forum held at the Palm Grove, Rockwell Club, Makati City on November 27, 2006

3 http://www.nea.gov.ph/home.htm4 ibid.5 ibid.6 NEA Media Release, October 28, 20087 http://www.businessmirror.com.

ph/0523&242008/opinion03.html8 ibid9 “Rent-seeking”, according to Alfred McCoy, is

characterized by the political manipulation

of the regulatory powers of the state over businesses to favor a few, paving the way for installation of business empires. A classic example of this, added McCoy, was how the Lopezes were able to establish (before the Martial Law) and reestablish (after Edsa) their conglomerates by exacting favors from the powers-that-be whom the family had earlier helped to gain political might. it’s patronage politics on the national scale.

10 yoshihara, Kunio, “The Rise of Ersatz Capitalism in South-East Asia”, Ateneo De Manila University Press, 1988

11 “Meralco takes over Clark power firm” by Donnabelle L. Gatdula, The Philippine Star. February 1, 2008.

12 http://www.malampaya.com/web/F_project2.html

13 http://www.pcij.org/stories/print/ramos.html

14 Power Shifts by Marichu villanueva, Philstar 5/23/08

15 EPiRA, Sec. 4516 EPiRA, Sec. 2817 Meralco Annual Report 200718 Aboitiz Power Annual Report 200719 Maitet Diokno-Pascual, Electric Cooperatives

and the EPiRA, April 2006.20 ibid.

Market shares of DUsDU Total Customer Base Total gWh Sales Income

Lopez DUs

Meralco 4,500,000.00 26, 219.00 PhP4.04-B*

PECO 43,000.00 NA

Clark Electric Distribution Corp 1,000.00 NA

Total 4,544,000.00

Aboitiz DUs

Davao Light and Power Company, inc. 247,341.00 1,331.00

Cotabato Light and Power Company, inc 26,379.00 0.021384

visayan Electric Company 296,003.00 1,683.00

San Fernando Electric Light and Power Company 64,585.00 0.000070794

Subic Enerzone Corporation NA NA

Balamban Enerzone Corporation NA 50.00

Mactan Enerzone Corporation 50.00 46.00

Total 637,000.00 3,915.00 PhP1.5-B**

119 Electric Cooperatives + 1 LGU-owned 8,000,000.00 17,875.00 NA

*based on Meralco’s 2007 Annual Report** based on APCs 2007 Annual Report

Private Distribution Utilities1 Cotabato Light & Power Company, inc. (COLiGHT)

2 visayan Electric Company, inc. (vECO)

3 Cagayan Electric Power and Light Company, inc. (CEPALCO)

4 iligan Light and Power inc. (iLPi)

5 Angeles Electric Cooperative (AEC)

6 La Union Electric Company, inc. (LUECO)

7 Cabanatuan Electric Corporation (CELCOR)

8 Davao Light and Power Company (DLPC)

9 Dagupan Electric Corporation (DECORP)

10 Manila Electric Company (MERALCO)

11 Panay Electric Company, inc. (PECO)



List of Electric Cooperatives

ARM

M

1 Lanao del Sur Electric Cooperative, inc. (LASURECO)

2 Maguindanao Electric Cooperative, inc. (MAGELCO)

3 Sulu Electric Cooperative, inc. (SULECO)

4 Siasi Electric Cooperative, inc. (SiASELCO)

5 Cagayan de Sulu Electric Cooperative, inc. (CASELCO)

6 Tawi-tawi Electric Cooperative, inc. (TAWELCO)

CAR

7 Abra Electric Cooperative, inc. (ABRECO)

8 Kalinga Apayao Electric Cooperative, inc. (KAELCO)

9 Mountain Province Electric Cooperative, inc. (MOPRECO)

10 ifugao Electric Cooperative, inc. (iFELCO)

11 Benguet Electric Cooperative, inc. (BENECO)


REG

iON

3

25 San Jose City Electric Cooperative, inc. (SAJELCO)

26 Nueva Ecija ii Electric Cooperative, inc. (NEECO ii)

27 NEA Management Team (NEECO iii)

28 Nueva Ecija i Electric Cooperative, inc. (NEECO i)

29 Tarlac i Electric Cooperative, inc. (TARELCO i)

30 Tarlac ii Electric Cooperative, inc. (TARELCO ii)

31 zambales i Electric Cooperative, inc. (zAMECO i)

32 zambales ii Electric Cooperative, inc. (zAMECO ii)

33 Public Utilities Department (PUD) Olongapo City

34 Pampanga Rural Electric Cooperative, inc. (PRESCO)

35 Pampanga i Electric Cooperative, inc. (PELCO i)

36 Pampanga ii Electric Cooperative, inc. (PELCO iii)

37 Peninsula Electric Cooperative, inc. (PENELCO)

Private Distribution Utilities12 San Fernando Electric Light and Power Company, inc. (SFELAPCO)

13 Tarlac Electric inc. (TEi)

14 Bauan Electric Light System (BELS)

15 ibaan Electric and Engineering Corporation (iEEC)

16 Mansons Corp.

17 Bohol Light Company, inc. (BLCi)

18 Mactan Electric Company, inc. (MECO)

19 Clark Electric Distribution Corporation (CEDC)

20 Subic Enerzone Corporation

21 Balamban Enerzone Corporation


REG

iON

1

12 ilocos Norte Electric Cooperative, inc. (iNEC)

13 ilocos Sur Electric Cooperative, inc. (iSECO)

14 La Union Electric Cooperative, inc. (LUELCO)

15 Pangasinan i Electric Cooperative, inc. (PANELCO i)

16 Central Pangasinan Electric Cooperative, inc. (CENPELCO)

17 Pangasinan iii Electric Cooperative, inc. (PANELCO iii)

REG

iON

2

18 Batanes Electric Cooperative, inc. (BATANELCO)

19 Cagayan ii Electric Cooperative, inc. (CAGELCO ii)

20 Cagayan i Electric Cooperative, inc. (CAGELCO i)

21 isabela ii Electric Cooperative, inc. (iSELCO ii)

22 isabela ii Electric Cooperative, inc. (iSELCO i)

23 Quirino Electric Cooperative, inc. (QUiRELCO)

24 Nueva vizcaya Electric Cooperative, inc. (NUvELCO)


REG

iON

4

38 Lubang Electric Cooperative, inc. (LUBELCO)

39 Batangas i Electric Cooperative, inc. (BATELEC i)

40 Oriental Mindoro Electric Cooperative, inc. (ORMECO)

41 Occidental Mindoro Electric Cooperative, inc. (OMECO)

42 Busuanga island Electric Cooperative, inc. (BiSELCO)

43 Palawan Electric Cooperative, inc. (PALECO)

44 Aurora Electric Cooperative, inc. (AURELCO)

45 Quezon i Electric Cooperative, inc. (QUEzELCO ii)

46 First Laguna Electric Cooperative, inc. (FLECO)

47 Quezon i Electric Cooperative, inc. (QUEzELCO i)

48 Marinduque Electric Cooperative, inc. (MARELCO)

49 Romblon Electric Cooperative, inc. (ROMELCO)

50 Batangas ii Electric Cooperative, inc. (BATELEC ii)

51 Tablas island Electric Cooperative, inc. (TiELCO)



List of Electric CooperativesRE

GiO

N 5

52 Camarines Norte Electric Cooperative, inc. (CANORECO)

53 Camarines Sur i Electric Cooperative, inc. (CASURECO i)

54 Camarines Sur ii Electric Cooperative, inc. (CASURECO ii)

55 Camarines Sur iii Electric Cooperative, inc. (CASURECO iii)

56 Albay Electric Cooperative, inc. (ALECO)

57 Masbate Electric Cooperative, inc. (MASELCO)

58 Camarines Sur iv Electric Cooperative, inc. (CASURECO iv)

59 First Catanduanes Electric Cooperative, inc. (FiCELCO)

60 Sorsogon ii Electric Cooperative, inc. (SORECO ii)

61 Sorsogon i Electric Cooperative, inc. (SORECO i)

62 Ticao island Electric Cooperative, inc. (TiSELCO)

REG

iON

6

63 Aklan Electric Cooperative, inc. (AKELCO)

64 Capiz Electric Cooperative, inc. (CAPELCO)

65 iloilo iii Electric Cooperative, inc. (iLECO iii)

66 iloilo ii Electric Cooperative, inc. (iLECO ii)

67 Antique Electric Cooperative, inc. (ANTECO)

68 iloilo i Electric Cooperative, inc. (iLECO i)

69 vMC Electric Cooperative, inc. (vRESCO)

70 Central Negros Electric Cooperative, inc. (CENECO)

71 Guimaras Electric Cooperative, inc. (GUiMELCO)

72 Negros Occidental Electric Cooperative, inc. (NOCECO)

REG

iON

7

73 Bantayan Electric Cooperative, inc. (BANELCO)

74 Cebu iii Electric Cooperative, inc. (CEBECO iii)

75 Camotes Electric Cooperative, inc. (CELCO)

76 Cebu ii Electric Cooperative, inc. (CEBECO ii)

77 Cebu i Electric Cooperative, inc. (CEBECO i)

78 Negros Oriental i Electric Cooperative, inc. (NORECO i)

79 Negros Oriental ii Electric Cooperative, inc. (NORECO ii)

80 Bohol i Electric Cooperative, inc. (BOHECO i)

81 Bohol ii Electric Cooperative, inc. (BOHECO ii)

82 Province of Siquijor Electric Cooperative, inc. (PROSiELCO)

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83 Northern Samar Electric Cooperative, inc. (NORSAMELCO)

83 Samar i Electric Cooperative, inc. (SAMELCO i)

84 Biliran Electric Cooperative, inc. (BiLECO)

85 Samar ii Electric Cooperative, inc. (SAMELCO ii)

86 Eastern Samar Electric Cooperative, inc. (ESAMELCO)

87 Leyte iii Electric Cooperative, inc. (LEyECO iii)

88 Leyte ii Electric Cooperative, inc. (LEyECO ii)

89 Leyte v Electric Cooperative, inc. (LEyECO v)

90 Leyte i Electric Cooperative, inc. (LEyECO i)

91 Leyte iv Electric Cooperative, inc. (LEyECO iv)

92 Southern Leyte Electric Cooperative, inc. (SOLECO)


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93 zamboanga City Electric Cooperative, inc. (zANECO)

94 zamboanga del Sur i Electric Cooperative, inc. (zAMSURECO i)

95 zamboanga del Sur ii Electric Cooperative, inc. (zAMSURECO ii)

96 zamboanga City Electric Cooperative, inc. (zAMCELCO)

97 Basilan Electric Cooperative, inc. (BASELCO)

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98 Camiguin island Electric Cooperative, inc. (CAMELCO)

99 Misamis Oriental ii Electric Cooperative, inc. (MORESCO ii)

100 Misamis Oriental i Electric Cooperative, inc. (MORESCO i)

101 Misamis Occidental i Electric Cooperative, inc. (MOELCi i)

102 Misamis Occidental ii Electric Cooperative, inc. (MOELCi ii)

103 Bukidnon ii Electric Cooperative, inc. (BUSECO)

104 Bukidnon i Electric Cooperative, inc. (FiBECO)

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105 Davao del Norte Electric Cooperative, inc. (DANECO)

106 Davao Oriental Electric Cooperative, inc. (DORECO)

107 Davao del Sur Electric Cooperative, inc. (DASURECO)

108 South Cotabato i Electric Cooperative, inc. (SOCOTECO i)

109 South Cotabato ii Electric Cooperative, inc. (SOCOTECO ii)

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110 Lanao del Norte Electric Cooperative, inc. (LANECO)

111 North Cotabato Electric Cooperative, inc. (COTELCO)

112 Sultan Kudarat Electric Cooperative, inc. (SUKELCO)

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113 Dinagat island Electric Cooperative, inc. (DiELCO)

114 Surigao del Norte Electric Cooperative, inc. (SURNECO)

115 Surigao del Sur i Electric Cooperative, inc. (SURSECO i)

116 Agusan del Norte Electric Cooperative, inc. (ANECO)

117 Agusan del Sur Electric Cooperative, inc. (ASELCO)

118 Surigao del Sur ii Electric Cooperative, inc. (SURSECO ii)


PArT I: The Unfolding of WESM

WESMWon’T Work

Why

IntroductionThe establishment of the Wholesale Electricity Spot Market (WESM) is a necessary reform component of the Electric Power Industry Reform Act (EPIRA). Its main thrust is to promote and facilitate “unfettered” competition in the power industry, the consequence of which is the attainment of EPIRA’s overall objective of bringing down electricity rates.

WESM is therefore the cornerstone of the Philippine power industry’s transformation from a regulated to a deregulated regime. Thus, its success could bolster the argument that this model can work in the Philippines despite a humiliating experience in the United States and other developed countries. Its failure would prove otherwise - that this model will not work, especially in this country where the market is not only relatively weak and small but is also strategically ruled or captured by well-entrenched industry players and oligarchs.

Barely three months after WESM was launched, a case of possible abuse of market power was lodged before the Energy Regulatory Commission against the Power Sector Assets and Liabilities Management Corporation

(PSALM). Also in May 2008, during a public hearing conducted by the Joint Congressional Power Committee (JCPC), Prof. Rowaldo Del Mundo of the UP School of Engineering, disclosed that Meralco’s purchases from the WESM in 2007 and the 1st quarter of 2008 increased its power cost by PhP0.30/kWh. This was because Meralco’s purchases from WESM were PhP 1.00 to PhP 2.00/kWh higher than its average purchases from NPC and its IPPs (see boxed article on the next page).

The Aboitiz group, on the other hand, declared in its 2007 financial report to stockholders that the rise in its income by more than double (124%) was mainly due to its strategy of trading its generated electricity at WESM during peak hours.

A preliminary assessment conducted by no less than the Market Assessment Group of the Philippine Electricity Market Corporation (PEMC), WESM’s designated operator, points to a menu of factors such as market concentration and absentee demand-side participation, among others, contributing largely to the malfunctioning of the spot market, giving credence to arguments that this

model was doomed from the start. One year after WESM began, prices were volatile, capacities being offered for sale were consistently below available capacities, and bilateral contracts dominated the sale and purchase of electricity.

Yet, despite the overwhelming evidence of market failure as illustrated in its 2007 Annual Market Assessment Report (AMAR), the PEMC prefers to downplay these events as mere “hangovers” from the industry’s previous regime, “birth pains” the industry has to undergo as part of the restructuring under EPIRA. For PEMC, full competition is yet to be attained, thus the industry cannot afford further delays in the privatization process.

Consisting of the market players themselves, PEMC people would probably be the last to recognize that the persistence of market concentration is rooted not in the delay of privatization but more in the inherent failure of EPIRA to break the monopoly structures in the industry and establish a strong regulatory framework. As PEMC, which prides itself in making the market transparent, gathers and publishes the market data, it cannot for long be blind

by Maitet Diokno-Pascual and Wilson fortaleza



to the fact that rather than deconstruct the state-owned monopoly of the National Power Corporation, EPIRA is powerless to transfer ownership of this monopoly to a few power players. PEMC itself warns that greater market concentration renders it vulnerable to possible gaming or outright manipulation. Granting that it is in its infant stage — merely three years old —WESM is not designed as a self-healing mechanism for the industry to move forward

and produce EPIRA’s desired results of competition and cheaper electricity.

It has been three years since WESM opened its trading floor, and in these three years, the promised decline in power rates as envisioned by EPIRA has failed to materialize.

This paper looks into the workings of WESM since it started

UP Professors’ critique of WESMExcerpts from “Reducing Power Rates by at least P2.00/kWh”, a collaborative work by UP School of Engineering Professors Edna Espos, Allan Nerves, Ivan Benedict Nilo Cruz and Rowaldo del Mundo. Selected Tables below were part of Prof. del Mundo’s presentation before the JCPC last July 5, 2008.

The establishment of the Wholesale Electricity Spot Market (WESM) is pre-mature and an expensive distraction from more pressing problems facing the industry. While WESM supports the privatization of NPC’s assets by providing a ready market in the absence of retail competition and open access; spot prices have increased rather than decreased the cost of electricity. MERALCO’s purchases from WESM in 2007 and in the first quarter of 2006 increased its power cost by PhP0.30 per kWh.

Prices of the WESM are set by NPC/PSALM who account for approximately 70% of the capacity traded in the market. The occasional softening of WESM prices has less to do with competition than on the generating capability of NPC/PSALM plants and other factors such as transmission constraints. For instance, MERALCO’s announced reduction in generation charges for May was attributed to the early onset of the rainy season which lowered demand and increased generating capacity of NPC/PSALM plants; while the price spikes in August were due to severe transmission constraints.

The enormous market power of NPC/PSALM shows up in the market’s Herfindahl-Hirschman Index (HHI) and Price-Setting Frequency Index (PSFI). The HHI is way past 1,800 while PSFI shows the dominance of NPC plants and MERALCO’s IPPs in price setting. The other conditions for an efficient spot market are also missing. These are: no transmission bottleneck; no supply constraints; availability of hedging facilities to avoid price volatility and trading losses; and, vigorous enforcement of competition law. As an auction, the spot market will always be vulnerable to gaming. The vigorous enforcement of competition law is essential to deter anti-competitive conduct by its participants. ERC’s action on the alleged abuse of market power by NPC/PSALM in 2006 manifest the regulator’s inability to correctly and vigorously implement its competition rules.

Bidding at WESM is price-based which allows the dominant generators to exploit their market power and game the market. The rules should be changed to cost-based bidding where generators bid their actual or forecast variable cost and the dispatch schedule is drawn-up accordingly. The spot price will be a combination of the System Marginal Price and a capacity payment to encourage investments. Cost-based bidding has been successfully employed in Latin America (some in transition to price-based bidding) and resulted in increased private investment in generation and operating efficiency.

Is Meralco providing its customers the cheapest electricity?— NO, according to UP Professor Rowaldo del Mundo

According to Prof. Rowaldo del Mundo, MERALCO’s power supply purchases from WESM for 2007 and the first quarter of 2008 are PhP1.00 to PhP2.00 higher than NPC and IPP average rate. The impact of this was increased cost of PhP0.30 per kWh for Meralco customers.

Tables below show that MERALCO bought more from WESM during off-peak, an average of 19.23 percent compared to 10.50 percent during peak hours. They did the same for its IPPs, an average of 64.33 percent and 44.36 percent, respectively. According to PEMC, Meralco IPPs such as FGPP’s Sta. Rita, San Lorenzo and QPPL were price-setters next to NPC’s Pagbilao CFTPP and KEPCO Ilijan during OFF-PEAK (AMAR 2007, pp 56-58).

Possible gaming? PeMC says Yes. eRC sees none.

As shown in the table above, Meralco favored its IPPs off-peak more than NPC or WESM even though NPC rates are lower than Meralco’s IPPs during off-peak.

Actual Purchases, PEAK and OFF-PEAK

PeriodPEAK OFF-PEAK

NPC IPPS WESM NPC IPPs WESMJan - Sep 2007 41.49% 43.82% 14.70% 9.34% 64.13% 26.53%

Oct 2007 - Mar 2008 53.21% 42.14% 4.65% 23.39% 62.33% 14.28%

Jan 2007 - Mar 2008 44.01% 44.32% 11.67% 14.43% 64.36% 21.21%

Summary of Purchases - Ave. Rate (Php/kWh)Period NPC IPPs WESM

Jan-Sep 2007 5.4396 4.1743 6.2260

Oct 2007 - Mar 2008 4.3170 4.1036 6.6546

Jan 2007 - Mar 2008 4.9296 4.1773 6.2048

Comparison with Average Rates: TOU Only vs. TOU + Ecozone Rates

Period TOU + WESM WESM DifferenceJan-Sep 2007 5.1312 4.7820 0.3492

Oct 2007 - Mar 2008 4.1766 3.9105 0.2661

Jan 2007 - Mar 2008 4.6973 4.3930 0.3043



operating in 2006. In particular, it attempts to assess the implementation of WESM in relation to EPIRA’s objectives of promoting competition and bringing down power rates.

As mentioned earlier, a preliminary assessment of the WESM has already been conducted by the PEMC itself. This paper draws extensively on this self-assessment. Recognizing however that PEMC’s study was short of calling a spade a spade, thus, more substantive analyses on EPIRA and the political economy of the Philippine electricity market was deemed necessary to better understand why competition in the industry is practically dead and why WESM, as argued here, cannot and will not achieve its intended aims.

The Wholesale electricity spot MarketOn June 23, 2006, the WESM was finally launched and set into operation three days later, with financing from the Asian Development Bank (ADB). The launch was two years behind the schedule set under the EPIRA and the coverage was limited to the Luzon grid only since the technical and market requirements for the Visayas and Mindanao operations remained absent. The main requirement was that at least 70 percent of the generating assets — also not met—of the National Power Corporation’s (NPC) should have been privatized. This also caused the delay in the implementation of retail competition and open access.

Proclaimed publicly as a mechanism to facilitate competition and efficiency in the power industry, WESM elicited positive reactions from industry players. Federico Lopez, president of First Gen Corporation of the Lopezes, the country’s largest Filipino-owned independent power generation company, said that should the objectives of EPIRA be met “the country would benefit from affordable and reliable electricity supply.” Also, Edgardo Bautista of Mirant Philippines (now TeaM Energy), a Napocor-contracted IPP and one of the largest in the Philippines, was quoted as saying that, “The passage of the Power Reform Act is seen by Mirant as an opportunity to participate in bringing about the objectives of the Power Reform Act—to ensure that reliable, quality electricity will be made available at reasonable price. It is an opportunity for us (Mirant) to participate in making that happen.”

The objective of WESM is to establish a competitive, efficient, transparent and reliable market for electricity where: (a) a level playing field exists among WESM Participants; (b) trading of electricity is facilitated among Participants within the spot market; (c) third parties are granted access to the power system in accordance with the Act (EPIRA); (d) prices are governed as far as practicable by commercial and market forces, and (e) efficiency is encouraged [WESM Rules 1.2.5 (WESM Objectives), p2]

WESM aims to: 1) provide incentives for the cost-efficient

dispatch of power plants through an economic merit order, 2) create reliable price signals to assist participants in weighing investment options (to invest in additional generating capacity), and 3) protect a fair and level playing field for suppliers and buyers of electricity, wherein prices are driven by market forces.

But the ultimate reason for establishing the WESM is to bring down power rates in accordance with EPIRA’s objectives.

The Department of Energy (DoE) together with industry participants was mandated by EPIRA to formulate the WESM Rules to govern its operations. Adopted in June 2002, the WESM Rules provide the mechanism for determining the price of electricity (those that are not covered under bilateral contracts) to be traded in the spot market. The price determination methodology contained in the Rules required the approval of the Energy Regulatory Commission (ERC).

The WESM is operated by the Philippine Electricity Market Corporation (PEMC), a private non-stock, non-profit corporation constituted by the DOE in November 2003. The PEMC Board is shared “equitably” by representatives from electric power industry participants: market operator (1 director), system/transmission operator (1 director), supplier (1 director), generators (4 representatives), distributors (4 representatives two of which are from rural electric cooperatives), and four independent members of the board. The Energy Secretary chairs the PEMC Board.

PEMC acts as the Market Operator (MO) of WESM. It performs a dual function. One is formulating the rules and guidelines of WESM operations through the Philippine Electricity Market Board (PEM Board) and regulating the conduct of market players. The other is performing the Market Operations (MO) function, for purposes of undertaking the preparatory work and operation of WESM.

Industry participantsIndustry participants such as the (a) generation companies; (b) distribution utilities; (c) suppliers; (d) IPP administrators; (e) end-users; and (f) other similar persons (or entities) may be authorized by the ERC to become eligible members of the WESM.

Under EPIRA, other than generators and distributors in the supply sector, new players were added — the electricity suppliers. An electricity supplier is a person or entity authorized by ERC to sell, broker, market or aggregate electricity to end-users in the franchise area of a distribution utility. In layman’s terms these electricity suppliers are “agents” who will aggregate demand of end-users in a contestable market and market or broker electricity from



a generator. Through open access, this electricity supplier will be using wires of the distribution utility in selling electricity to end-users and impose “supplier’s charge”, a charge that excludes charges for generation, transmission and distribution wheeling (the charge imposed for using wires in transmitting electricity to end-users).

On January 26, 2007, seven months after its launch, WESM had 25 registered generators and 157 customers (Table 1). These customers are the purchasers of electricity from generators in different categories (private distribution utilities, electric cooperatives, industrial and commercial loads, and government offices).

How does WesM work?An electricity spot market is a trading place where electricity is traded between buyers and sellers on an hourly basis to meet the power demand on competitive basis at marginal cost.

In principle, an electricity spot market is similar to any commodity market where commodities (i.e., wheat, potatoes, oil) are traded. But technically and procedurally, it differs in many aspects since electricity cannot be stored, and therefore must be traded continuously. One trading day in a spot market is divided into 24 one-hour trading periods.

As a power trading place, a spot market allows generators

of electricity (power plants) representing the supply side (sellers), and buyers of electricity (distribution utilities), representing the demand side, to trade (the buying and selling transactions) electricity.

The typical steps or procedures in power trading are as follows:

Step One: Trading participants submit hourly bids to the Market Operator (MO) (PEMC) stating their price of, and demand for, electricity. Price bids reflect only the energy costs.

At this stage, trading participants — e.g., generators, distributors, suppliers, aggregators, and other participants authorized by the ERC — submit their hourly bids to PEMC. There are 24 one-hour trading periods in a day at the spot market but practically, bidding takes place 24 hours in advance. In the case of sellers (i.e., generators), they will state their price of electricity per MW in a given trading hour. Note that a plant can be dispatched only if it enters a bid and wins. This explains why Meralco IPPs bid zero to ensure dispatch.

Price offers and bids differ from hour to hour. During peak hours when the demand for electricity is high, the price of electricity goes up, and conversely the opposite during off-peak hours. Using Gross Pool concept all generators connected to the power grid shall submit their offers for both price and quantity for energy for central scheduling and dispatch. For buyers (i.e., distributors), they will also state their corresponding demand for electricity at a given trading hour.

Step Two: Market Operator matches bids using the Market Dispatch Optimization Model (MDOM), which takes into account market requirements and physical system constraints. Demand and supply of electricity are stacked into merit order based on price offers, with the cheapest-bid plant being dispatched first.

At this stage PEMC matches the bids (from buyers) with offers (from seller) before scheduling the dispatch. The dispatch is to begin from the lowest bid up to the ‘point’ where supply meets the demand at a given trading hour. This ‘point’ is called the market clearing price (MCP) that is set by the last dispatched generator (power plant) which met the demand. The price of the last generator is expectedly higher than the earlier dispatch. The established MCP will also be the basis for determining the prices in the other locations (or the Locational Marginal Price [LMP]).

Table 1: Registration Status After the Launching of WESM (As of January 26, 2007)Participants Classification Number Registered MWGenerators 25.00 20.00 11,412.00

1. NPC-Owned (Trading Teams)

8.00 8.00 2,661.00

2. PSALM (NPC-iPPs) (Trading Teams)

4.00 4.00 6,159.00

3. First Gas Power Corp. / FGP Corp.

2.00 2.00 1,500.00

4. Quezon Power Philippines Company

1.00 1.00 500.00

5. First Gen Hydro Power Corp

1.00 1.00 112.00

6. Other iPPs 9.00 6.00 480.00

Customers 157.00 16.00 6,642.00

1. Private Distribution Utilities

11.00 3.00 4,875.00

2. Rural Electric Cooperatives

45.00 13.00 1,219.00

3. industrial & Commercial Loads

80.00 0.00 482.00

4. Government Offices/installations

21.00 0.00 66.00

Source: WESM

spot Market - bilateral Contract Quantity Ratio (Whole Market)6/26/2006 to 12/25/2006



Take note that the MCP is the price paid to ALL winning bidders for the trading hour concerned. So even if a bid of zero is offered by a supplier (such as Meralco IPP or PSALM/NPC trader), the price paid to the zero-price bidder is the MCP.

Step Three: Market Operator submits the dispatch schedule to TransCo, the System Operator (SO), for implementation.

After matching the bids and offers, PEMC sends instructions to TransCo for the scheduling of dispatches of generators using the principle of lowest price first to dispatch. Electricity from a generator will be transmitted to a distribution utility (DU) via the TransCo’s transmission lines.

Step Four: Suppliers and buyers of electricity settle respective payments through WESM. Under its price determination methodology, the total cost of electricity is computed using the market clearing price (spot price), market fees, and charges for ancillary services. In the case of bilateral power supply contracts however, the involved trading participants have the option of settling directly with their contracting parties OUTSIDE the market, using the contract pricce rather than the WESM price.

How have WesM players behaved? To expect the highly concentrated Philippine electricity market to respond positively under the WESM is to assume theory to reign over reality. Such an expectation is at best naivete or a simplistically blind faith in markets. For competition to flourish in the market, the PEMC itself

admitted that the first requirement is the presence of many small players — in other words, a market with many buyers and sellers competing among themselves and too small in size to wield influence over the price and quantity of the traded commodity. (This however does not

always apply in the electricity spot market; see section below.) Other requirements include homogeneity of the commodity, mobility of capital, and price discovery and full transparency of information.

Is that the case now in the country’s electricity market? PEMC’s AMAR 2007 already concedes that the Philippine electricity market is highly concentrated. In fact, rather than de-monopolizing, the power sector is becoming increasingly concentrated.

According to PEMC, the demand side (buy-side) in the Luzon grid is basically dominated by Meralco, with 74 percent share in consumption. It is followed at a far second by 119 electric cooperatives at 14 percent (taken as a whole; separately, electric cooperatives have peak demand ranging from half a megawatt to below 100 MW), industry direct-connect at 8 percent, and other utilities for a 4 percent share. See graph below.



But where did Meralco and other utilities primarily purchase their power needs? Data shows they were from bilateral contracts and not from the spot market, a clear indication that WESM at best is marginal. PEMC added that for most of the year (2006) Meralco and other distribution utilities were “passive” participants in the spot market and the trend that took precedence, on the contrary, was the rise of bilateral contracts. As of the end of 2006, bilateral contracts accounted for almost 80 percent of the market, as shown below.

Distribution utilities are mandated by EPIRA to source at least 10% of their total demand from the WESM. It should not be interpreted, however, as a cap for trading. What is provided under Section 45 (c) of EPIRA is for the first five (5) years from the establishment of WESM, no DU shall source ninety percent (90%) of its total demand from bilateral power supply contracts. This is to avoid abuse of market power and anti-competitive behavior (which is also absurd considering the ratio). Section 23 supersedes this ‘misconstrued’ cap as DUs, as provided, shall have the obligation to supply electricity in the least cost manner to its captive market.

Theoretically, traded electricity is supposed to be the least cost since it is priced at marginal cost. If that is the case, DUs should have preferred to buy at WESM as mandated. Ironically, despite the abundance of tradeable electricity, WESM trading is constrained and resulted to high settlement prices.

On the supply side (generation), the NPC and PSALM still maintain a dominant role because of the slow pace of privatization. As of 2007, the combined NPC-NPC-IPP and NPC-SPUG account for 70 percent of the total generating capacity. But the Lopez-owned IPPs are running second, getting 24 percent of the share, while the remaining 6 percent are shared by other non-NPC utilities including the Aboitiz group. This kind of ownership structure in the generation side shows the “high concentration index” of the Philippine electricity market, as expounded by PEMC.

What is the impact of this kind of market concentration on EPIRA’s objective of promoting competition? We have a single dominant buyer in the shape of Meralco, which has sister IPPs with whom it has entered into bilateral contracts. Imagine what clearing price the WESM can match if Meralco (which accounts for more than 70 percent of the demand-side market) stays out of or remains a passive player in the spot market. Under the WESM Rules, demand-side bidding was made optional. But when it decides to actively buy (which Meralco has done), Meralco offers enormous economic opportunity in favor of the

seller/s (generator/s), which in most cases happen to be its own affiliates. This explains why Meralco IPPs, with only a 25% share of installed capacity, are able to capture 40% of electricity bidded and sold through WESM.

Clearly this is not competition at work but monopsony power at play — market power held by the buyer on the basis of its size and command of the market, as well as its organic links with some IPPs.

On the part of suppliers, the government in early 2007 controlled 77 percent of installed generating capacity, giving it a monopoly of the market. Market power held by suppliers can be exercised by withholding capacity (creating a shortage where none actually exists), gaming (using its leverage in the market as a crucial supplier to raise prices above cost), and even outright manipulation (price fixing and the like; see section below).

Now the big question: Why is WESM like this? For one, the market was already concentrated prior to EPIRA, and as discussed earlier, WESM is not designed to prevent a government monopoly from being passed on to a few power players in the private sector. For another, EPIRA’s provisions and safeguards against anti-competitive behavior are weak and were significantly watered down by the legislators themselves (especially those with obvious links to the industry players). EPIRA allows cross-ownership between generation, supply and distribution. Another provision enables Meralco, with the biggest single hold over the Philippine electricity market, to favor its affiliates in generation and supply up to 50 percent of its electricity requirement.

Furthermore, WESM rules allow players to settle their bids through bilateral contracts, thus, the buyers’ preference is tilted towards bilateral contracts as they are more desirable under a monopsony setup, while at the same time maximizing their membership in WESM to gain more profit or win favors for their affiliates.



Market Power definedWhen a generating firm has an ability to maintain higher prices by reducing its output or offering to sell electricity at a price significantly above cost, it has market power. When it behaves in such a manner, it is said to be exercising market power.

The actions of offering to sell electricity at a high price (higher than cost), and of failing to generate electricity when the cost of doing so is below market price, denote the exercise of market power. (Severin Borenstein, James Bushnell and Frank Wolak, “Diagnosing Market Power in California’s Restructured Wholesale Electricity Market,” National Bureau of Economic Research Working Paper 7868, http://www.nber.org/papers/w7868, p. 5)

There are two kinds of market power: vertical and horizontal. Vertical market power is a concern in the Philippines because the EPIRA allows cross-ownership between distribution (which is regulated), and generation and supply (both of which have been deregulated). Vertical market power refers to the control or dominance of a firm or business group in two related activities (such as generation and distribution), which it employs to raise prices and profits. Says the US Department of Energy:

“Vertical market power is exercised when a firm involved in two related activities, such as electricity generation and transmission, uses its dominance in one area to raise prices and increase profits for the overall enterprise.” (“Horizontal Market Power in Restructured Electricity Markets,” DOE/PO-0060, March 2000, p. 1.)

Horizontal market power refers to the control by a firm of a single activity, e.g., power generation (where its share of total capacity is significant), which it can use to drive up prices, thereby profiting from the exercise. Studies of the electricity markets in the US and the UK show that horizontal market power exists in these restructured electricity sectors, and has been exercised. Note that these markets are much larger than that of the Philippines, with less dominant players than in the Philippines. Enron, for example, which was found to have manipulated the electricity market in California, accounted for only 6 percent to 8 percent of generating capacity.

Horizontal market power refers to the control by a firm of a single activity, e.g., power generation (where its share of total capacity is significant), which it can use to drive up prices, thereby profiting from the exercise. Studies of

the electricity markets in the US and the UK show that horizontal market power exists in these restructured electricity sectors, and has been exercised. Note that these markets are much larger than that of the Philippines, with less dominant players than in the Philippines. Enron, for example, which was found to have manipulated the electricity market in California, accounted for only 6 percent to 8 percent of generating capacity.

The report of the Market Surveillance Committee of the PEMC defines market power and the abuse of market power as follows:

“When a trading participant with substantial share of the market can significantly increase its price offer without the fear of not being dispatched and when the independence and sense of competition among the players in the market has been circumvented in order to control price on the market, there is an abuse of market power.”

Note that in all definitions above, the action referred to is that of one firm, by virtue of its hold or advantage in the market, to cause prices in that market to rise above costs, so that it can gain more profits. A firm such as this, by its own actions, without necessarily entering into a price fixing arrangement with other players in the market, can cause prices to rise and thus benefit from the exercise of its market power. To quote economists who have researched extensively on market power in the electricity industry:

“In contrast to price-taking firms, a firm with market power can unilaterally influence the market price by withholding output at the margin or raising the price at which it is willing to sell this marginal output. Market power is enhanced when demand is relatively inelastic, as well as when the supply of other firms is inelastic, such as during peak production times in electricity markets. High storage costs also enhance market power, since inventories are not available as an alternative supply source if a firm tries to exercise market power. For this reason, electricity markets are more vulnerable to the exercise of market power than are other energy markets such as the one for gasoline.” (Severin Borenstein, James Bushnell and Frank Wolak, “Diagnosing Market Power in California’s Restructured Wholesale Electricity Market,” National Bureau of Economic Research Working Paper 7868, http://www.nber.org/papers/w7868, p. 6; emphasis added)

PArT II: Market Power and its Abuse



Vertical Power in the Philippine electricity IndustryEPIRA tolerates vertical power in the Philippine electricity industry, through its cross ownership provision and by allowing distribution utilities to source up to half of their electricity needs from affiliated generators. By virtue of its franchise (again, granted by the State), size, and sister companies in the generation sector, Meralco is the most striking example of vertical power in the country’s power sector. Meralco’s franchise covers nearly three-fourths of the demand for electricity in Luzon. It has affiliates with the capacity to supply up to 25 percent of the electricity needs of consumers in Luzon (2006 data), but who actually provided more than this, thanks to their bilateral contracts with Meralco. With the entry of Danding Cojuangco into Meralco, and with his acquisition of the Limay thermal plant in Bataan and the controversial hydropower plant in Laiban, Rizal, one can only expect this vertical giant to grow even taller.

Another vertical power in the making is the Aboitiz Group’s distribution utilities and generating plants. While no other utility comes close to the giant that is Meralco, the Aboitiz Group is a dominant force both in generation and distribution in Mindanao, Cebu, and parts of Luzon outside the Meralco franchise area. It has acquired through bidding several hydropower and geothermal plants of Napocor. (See article “From State Monopoly to a De Facto Electricity Oligarchy”)

In its Annual Market Assessment Report on the first year of WESM operations, the PEMC, while recognizing the “potential monopsony power” of Meralco, also observes that Meralco has not exercised the vertical power it enjoys in the electricity sector, appearing instead to be “passive buy-side participants”. Because Meralco and other distribution utilities simply pass on their generation costs to their consumers, PEMC says there is little, if any, incentive for them to raise WESM prices.

Nevertheless, being in a position of a monopsony, and having the backing of EPIRA to keep affiliates in generation and supply, and to purchase up to half of its own needs from its affiliates, gives Meralco a strategic advantage in the Philippine power sector. The enormity of its franchise enhances this advantage enjoyed by no other player in the industry. This alone renders uncompetitive the wholesale electricity spot market.

More recently, in December 2008, Congress with the approval of President Arroyo granted a franchise to the National Grid Corporation of the Philippines, a joint venture involving Monte Oro, a Philippine company, with the National Grid Corporation of China. In the granting of the franchise through Republic Act 9511, Congress and Mrs. Arroyo redefine cross ownership and the provisions on cross ownership in the EPIRA (R.A. 9135). The new

definition in the Transco franchise law is watered down. Instead of maintaining the total ban on cross ownership between transmission and other sections of the electricity industry (distribution, generation and supply), R.A. 9511 allows cross ownership up to one percent of the outstanding shares of the other industry player. Cross ownership beyond this percentage is not allowed among relatives and spouses within the fourth civil degree of consanguinity, but not prohibited for more distant relatives and their spouses. In other words, there could be cross ownership between transmission and generation and distribution. EPIRA’s already weak cross ownership provision just got weaker. Vertical power in the Philippine electricity industry is apparently here to stay.

Horizontal Power in the Philippine electricity IndustryTaken as one, PSALM and the NPC enjoy a substantial share of the generating wholesale electricity spot market. At the start of the WESM they held 56.7 percent of installed capacity of all registered generators. With privatization of NPC’s generating assets we expect the latter’s horizontal power in generation to decline. But today this remains significant.

PSALM alone has enough capacity to supply 90 percent of the current peak demand of 6,500 MW. Originally, PSALM had four trading teams responsible for selling the electricity of 15 IPPs of the Napocor. In March 2007, PSALM reduced the number of trading teams to three. This action, according to PEMC, “further consolidates the concentration of this market power along with the tendency to set the price.” (AMAR 2007, p. 25)

PEMC monitors the price setting behavior of WESM and keeps a record of the hourly trading offers and results. Among the information it compiles and analyzes is that of hourly trading price — its level (usually in pesos per megawatt hour), which generating plant set the price for the particular trading hour, etc. By looking at which plant sets the price one has an indication of which plant enjoys market power. Considering that the exercise of market power is most evident during peak hours, we focus on trading behavior during these times.

In the first year of WESM’s operation, the top six generators setting the price most often during peak hours (from 10 percent to 33 percent of the time) were PSALM-traded plants. Pagbilao set the peak price 33 percent of the time, followed by Kepco which set the peak price 23 percent of the peak trading time during the year. The power plants Limay, Sual, Bauang and Subic Enron each set the peak price from just below 10 percent to below 20 percent of all peak trading hours in the first year of WESM.

During off peak hours, the three generators that set the off peak price most often in the first year of WESM were



Meralco IPPs: Sta Rita, San Lorenzo, and Quezon Power. These three set the off-peak trading price for over 25 percent of the time. But PSALM’s peak price setters — Pagbilao and Kepco — managed to set the off peak price for over 15 percent to below 25 percent of the time, even during off-peak.

Over the same period, the generators considered crucial suppliers belonged to PSALM. (A generator is considered a crucial supplier if its supply is needed to close the demand during a peak trading hour for 20 percent or more of all peak trading hours in a certain period.) In its first year of operation, WESM’s crucial suppliers were (from the top) Sta. Rita, Kepco, Pagbilao, San Lorenzo, Quezon Power and Masinloc. Sta. Rita and Kepco, on the average, were crucial suppliers for half the time.

Of the crucial suppliers, only two generators: Pagbilao and Kepco – again, both PSALM traded plants – were also the price setters during peak hours. PEMC remarks:

“The conjunction of being a pivotal supplier as well as a price setter at the same time increases the probability for the plant concerned to exercise market power. The high frequency that Kepco Ilijan and Pagbilao CFTPP were in these conjunctions throughout the year increased the opportunities for the two plants to manifest their bearing on the market. In fact, Kepco Ilijan and Pagbilao CFTPP were subjected to investigation as a result of the September-October price surge.” (AMAR 2007, p. 58)

What this data point to is that PSALM enjoys market power by virtue of its substantial share of generation supply; by the ability of some of its plants to set clearing prices during peak hours and do so for 20 percent or more of trading time during peak hours; and by virtue of some of its plants being crucial suppliers in the wholesale electricity spot market.

The market data also show that some generating plants of PSALM are the top price-setters even though they are not always the top-ranking crucial supplier. According to the PEMC, this indicates the exercise of “some market power to influence price despite not playing a pivotal supplier role in the market.”

Ways market power can be exercisedMarket power can be exercised through various ways: economic withholding – unscheduled outage of power plant; withholding the supply of coal or other fuel needed for generation, resulting in the non-offer of capacity by the affected plant; bidding or offering a higher price, knowing that such a bid would raise the market price; coordinated bid raising among trading teams that are supposed to act independently of each other.

Capacity withheldData from WESM clearly show that installed and available capacity of electricity always exceeds demand. But the Philippine electricity market has consistently exhibited a “capacity gap” offers to supply electricity are “normally” half of available capacity. The PEMC in its market assessment of the first year of WESM concludes:

“...[O]ffers were depressed with no sign of raising them to the desired rated or available capacity level, generating in the process price spikes that sting the market at large. The situation raised the unavoidable dilemma of whether there was a deliberate attempt for some quarters to withhold the capacity to game the market.” (AMAR 2007, p. 20)

The same report explains further:

“The Philippine market exhibits enough available capacity to supply all the energy requirements but offers are artificially low, generating in the process spikes in prices or in some cases market failure in the form of pricing error notices....No matter what conditions were prevailing in the market at each time, the ratio of the average offered capacity to average available capacity ranged between 55 to 66 percent during the first twelve months of WESM’s operations. This highlighted the consistency of the market in not offering almost half of the available capacities.” (AMAR 2007, p. 27)

Note the words above: all energy requirements can be supplied by the market but offers are “artificially low.” Remember one indication of market power and its exercise: refusing to supply electricity when the cost of generating it is less than the market price.

bidding strategyWhen prices rise, but there is no change in demand for electricity or supply of electricity, this may be a sign that an industry player with market power is exercising it.

In the first fourth months of the WESM’s commercial operation, the load weighted average price (LWAP) went from PhP2,788 per mWh in the first month, to PhP3,079 per mWh in the second month, to PhP4,853 per mWh in the third month and PhP6,770 per mWh in the fourth month. The LWAP hit a maximum of PhP62,179 per mWh in the fourth month, from a maximum of only PhP19,799 per mWh in the first month.

This price hike occurred without any significant change in demand and supply conditions.



z Peak demand in the first four months of WESM operations stayed steady, ranging from 5,900 MW to 6,100 MW.

z The minimum demand likewise showed little variation in the same period, ranging from 3,300 MW to 3,500 MW.

The supply conditions also showed no significant change in the third and fourth months compared with the first two months.

z The maximum offers to supply electricity ranged from 7,000 MW to 7,900 MW from June to October 2006, while the minimum offers ranged from 4,400 MW to 5,400 MW.

Clearly, the market conditions do not explain the price escalation that took place in the third and fourth months of the WESM operations. What changed was the bidding behavior of key players.

According to the Market Surveillance Committee, on 30 August 2006 from 10 o’clock to 11 o’clock in the morning, three trading teams of PSALM offered the same bid for the Ilijan, Pagbilao and Sual plants, despite each plant facing different cost structures. The Committee found the following unusual:

z identical bids of three different plants traded by three separate teams of PSALM beginning on the same day, at the same trading interval and on the same first block

z continuing for trading intervals 11 to 21 thereafter

z different bids for the same trading hour the day before and the week before

The table in the following page presents the energy offer of the four trading teams of PSALM during the trading interval in question (10:00 to 11:00) on the morning

of 30 August 2006. These offers are compared with the corresponding offer by each team for the same trading hour a week before (23 August 2006) and a day before (29 August 2006). As the table shows, prior to 30 August 2006, the bids for the Ilijan, Pagbilao and Sual plants were different. The uniformity of the bids is evident on 30 August 2006.

The Committee thus concluded:

“PSALM, acting as one through its three trading teams, exercised market power. They were able to set the market price to a level that they wanted during peak hours. Since the production costs were well below the PhP10,000/MW and above offered during the third billing month, they abused market power during the peak hours which market power would not have been there had the three trading teams acted competitively and independently with each other.”

fuel Procurement strategyIn its annual market assessment report for 2007, the PEMC singled out the National Power Corporation for its unique position of being a dominant electricity supplier and trading participant in WESM, and at the same time, “an exclusive procurer and importer of fuel from whom all government-owned fuel-dependent generating plants get their supply of oil and coal.” (AMAR 2007, p. 26)

By being the sole procurer and importer of fuel for the IPPs, the NPC through its procurement strategy can actually determine which plant — even the plant whose electricity it isn’t trading — can offer its electricity in the market and when. “If fuel is not delivered on time by NPC, these plants may not be able to operate due to fuel constraints thereby affecting their bidding strategies in the spot market and therefore put in peril the market balance and effectively impact the market price.”

PSALM’s Energy Offer, 30 Aug 2006, Trading Hour 10:00-11:00 a.m.

Supply Offer (MW)Price Offer (PhP per mWh)

30 Aug 06 Day Before Week AgoPSALM Team 1

Casecnan 50 200 200 200

Hedcor Benguet 26 200 200 200

NiA Baligatan 6 8,000 5,000 100

KEPCO ilijan GO1 355 10,000 3,900 2,000

KEPCO ilijan GO2 355 10,000 3,900 2,000

PSALM Team 2

Bakun 40 300 300 300

Bauang GO1 none none none none



Source: Philippine Electricity Market Corporation (PEMC)



PArT III: Why WESM will fail: Ten reasons“That competition cannot be depended upon to protect the consumer from high prices and poor service has been fully demonstrated.” (“Application of Long Acre Company,” Electrical World 52:1, at 8-9 (July 4, 1908))

The above conclusion was made in 1908, based on New York City’s experience then with competition in the electricity industry.

There are several reasons why the so called market reforms embodied in the WESM will fail.

ONE, the industry structure, especially in the Philippines is geared toward monopoly rather than competition. Market demand is too small in the Philippines for there to be a proliferation of players to compete in a level playing field.

TWO, ownership and control of the industry is concentrated in the hands of a few. Data of the PEMC in fact show greater, rather than diminishing, concentration.

THREE, the law that gave rise to WESM, thanks to the influential lobbying of industry players and their relatives in Congress, contains provisions that allow cross ownership and bilateral contracts with affiliates — provisions that ensure that the market will not be a level playing field.

FOUR, as shown in California before EPIRA was passed,

and in our own WESM in the early months of its inception, the market can be gamed.

FIVE, where the electricity market was deregulated, it has been shown that the decline in electricity prices came about as a result of regulatory orders or in our case, legal mandates, which can be effective only temporarily. In the long run, prices have to increase to give investors in power generation, transmission and distribution their required returns.

SIX, evidence from the US shows that where electricity restructuring and deregulation did take place, industrial prices did not fall compared with the period prior to restructuring and compared with other states in the US that did not restructure. In other words, evidence and studies abroad have concluded that creating WESM does not lead to lower prices. There is no reason to expect that the Philippines, given its tiny market and highly concentrated electricity sector, will be an exception.

SEVEN, the rules of WESM are designed in such a way that a uniform price is paid to all plants regardless of their costs. For example, hydroelectric plants generally face lower costs and can offer lower bids than other plants in order to get dispatched. But these plants are generally paid more than they bid, because WESM rules require a uniform market clearing price paid for all generation during

PSALM’s Energy Offer, 30 Aug 2006, Trading Hour 10:00-11:00 a.m.

Supply Offer (MW)Price Offer (PhP per mWh)

30 Aug 06 Day Before Week AgoSual GO1 230 10,000 4,528 4,528

Sual GO2 out out out out

PSALM Team 3

Limay_A none none none none

Limay_B none none none none

San Roque 45 2,000 2,000 300

Malaya GO1 out out out out

Malaya GO2 none none none none

Pagbilao GO1 125 10,000 5,000 2,000

Pagbilao G2O 125 10,000 5,000 2,000

PSALM Team 4

Subic none none none none

Botocan 10 1,000 1,000 1,000

Caliraya 10 1,000 1,000 1,000

Kalayaan GO1 80 1,000 1,000 1,000

Kalayaan GO2 80 1,000 1,000 out

Kalayaan GO3 80 none none 1,000

Kalayaan GO4 out out out out Source: Philippine Electricity Market Corporation (PEMC)



a particular hour. In this sense baseload plants cost more, and consumers pay more for baseload electricity. In other words, inherent in the design of WESM is a tendency for electricity prices to go up rather than decline.

EIGHT, deregulation and electricity restructuring requires increased monitoring and highly competent market administration. This is costly. Also it requires a non-politicized Energy Regulatory Commission with the expertise to understand market power and abuse. This is highly unlikely, as evidenced by the ERC’s dismissal of the market abuse case involving PSALM.

NINE, a simulation study done by economist Sarosh Talukdar shows that in a market with ten industry players each having an equal 10 percent share of total capacity, suppliers behave in a way to raise the price of electricity to

monopoly levels — even when supply is double demand. What more when the industry is highly concentrated as in the Philippines.

TEN, deregulation requires huge excess capacity in order to ensure that no pivotal supplier exists. (In the Philippines, as discussed in earlier sections, pivotal suppliers exist — mostly plants traded by PSALM.) Deregulation also requires that transmission system must be capable of carrying electricity over greater distances. To quote a study published by the Carnegie Mellon Electricity Industry Center: “The cost of the additional generation and transmission needed to support a competitive market is so great that we doubt that the savings from a competitive market would be able to offset this amount.” For a country like the Philippines, this can only mean more debts on top of even more expensive electricity.

ReferencesErramon I. Aboitiz, “Aboitiz Power Corporation 2008 Annual Investors’ Briefing,” June 2008.

Seth A. Blumsack, Jay Apt, and Lester B. Lave, “Lessons from the Failure of U.S. Electricity Restructuring,” Carnegie Mellon Electricity Indus-try Center Working Paper CEIC9-05-09, http://wpweb2.tepper.cmu.edu/ceic/PDFS/CEIC_05_09.pdf (downloaded 16 February 2008)

Severin Borenstein, James Bushnell and Frank Wolak, “Diagnosing Market Power in California’s Restructured Wholesale Electricity Market,” National Bureau of Economic Research Working Paper 7868, http://www.nber.org/papers/w7868, p. 5

Rowaldo R. del Mundo, Allan C. Nerves, Bienvenido Malquisto Jr., Ivan Benedict Cruz and Edna A. Espos, “Analysis of Power Supply Pur-chases of MERALCO for the year 2007 and first Quarter of 2008,” University of the Philippines, 2008.

Lester B. Lave, Jay Apt, and Seth Blumsack, “Rethinking Electricity Deregulation,” Carnegie Mellon Electricity Industry Center Working Paper CEIC-04-03, http://wpweb2.tepper.cmu.edu/ceic/PDFS/CEIC_04_03.pdf (downloaded 16 February 2008)

Maria Teresa D. Pascual and Arturo Nuera, “Governance in Electricity Regulation — The ERC Decision on Alleged Market Abuse by PSALM,” Philipppine Electricity Governance Initiative, 2007.

Philippine Electricity Market Corporation Market Surveillance Committee, “Report to the PEMC Board on the ECO Investigation Report on the Alleged Competitive Behavior/Market Power Abuse by PSALM,” 20 November 2006. https://www.wesm.ph/files/Market%20Surveillance%20Committee%20Report%20on%20the%20ECO%20Investigation%20Report%20on%20the%20Alleged%20Anti-Competitive%20Behavior.pdf (downloaded 16 February 2008).

Philippine Electricity Market Corporation, “WESM Annual Market Assessment Report (26 June 2006 to 25 June 2007),” (downloaded 4 De-cember 2007)

Philippine Electricity Market Corporation, “Wholesale Electricity Spot Market (WESM) Rules,” Section 1.2.5, 2002. http://www.wesm.ph/page.php?p=44 (downloaded 15 August 2009)

Republic Act 9136, “An Act Ordaining Reforms in the Electric Power Industry, Amending for the Purpose Certain Laws and for Other Pur-poses,” 4 June 2001.

Republic Act 9511, “An Act Granting the National Grid Corporation of the Philippines a Franchise to Engage in the Business of Conveying or Transmitting Electricity Through High Voltage Back-Bone System of Interconnected Transmission Lines, Substations and Related Facilities, and for Other Purposes,” 1 December 2008.

US Department of Energy, “Horizontal Market Power in Restructured Electricity Markets,” DOE/PO-0060, March 2000, p. 1.


The Freedom from Debt Coalition (FDC) believes that the issue of high electricity prices is a result of a confluence of factors, from bad governance to corruption to mismanagement to rent-seeking to framework concerns. It is also more complex than what media portrays or what some politicians would want us to believe. We attempt to identify these factors as our contribution to gaining a fuller understanding of the problem of unabated expensive electricity.

FDC argues that the skyrocketing price of electricity emanates from structural, management, policy, governance and paradigmatic causes. FDC believes that these problems cannot be resolved fully without transforming the electricity industry into one that is more responsive and accountable to the people, and more environmentally sustainable. Meanwhile, it would greatly help the consumer for the government to target specific rate-hiking factors and introduce immediate reforms, with the end-in-view of course, of more comprehensive changes sooner rather than later.

We believe electricity is expensive because of the following:

1. The Energy Regulatory Commission (ERC) allows MERALCO, other distribution utilities (DUs) and the National Transmission Commission (Transco) to earn over and above what used to be the statutory return on rate base of 8-12%. The Electric Power Industry Reform Act (EPIRA) allowed ERC to change the system of tariff setting, and it did. But the systems it now follows allows both transmission and distribution companies to earn far more than what they were allowed to earn in the past. And as far as generation and supply companies are concerned, the ERC has little if any say in the prices they charge because generation and supply are deregulated under EPIRA.

2. The Arroyo government wants to attract private investors to purchase the assets of the National Power Corporation (NPC), and for the assets to become attractive, electricity rates have to be high. The higher the winning bidder bids, the higher the electricity price we have to pay in the future so the winning bidder can recover its investment.

This can be observed with the nature of recent electricity rate hikes. Following the suggestion of the Asian Development Bank (ADB), the NPC petitioned rate hikes in order to attract investors since no investor would invest without proof of financial viability. Out of the PhP1.98/kWh NPC petitioned in 2004, PhP1.03/kWh was approved by ERC in 2005 – the highest rate hike in the history of the ERC. Transmission charges also increased from PhP0.7716/kWh in May 2006 to PhP0.9163/kWh in July 2006 (which is contrasted with almost flat prices from November 2005 up to May 2006) as the privatization and the bidding process is about to start.

3. The Arroyo government did not renegotiate the contracts with NPC’s independent power producers or IPPs. These contracts require NPC to purchase electricity whether or not these are actually generated or dispatched, and to supply fuel to IPPs that are in operation. The price NPC agreed to pay for this electricity was overstated to begin with, and many of these contracts have clauses that allow the IPP to raise rates over time. NPC also bears the risk of peso devaluation and the risk of the cost of fuel, such as oil and coal, going up.

ReprintedAfter MERALCO, the country’s largest electricity distributor and supplier, announced last April an increase in its generation charges by 51.88 centavos per kilowatt hour (kWh), rumors of a brewing government takeover began spreading like wildfire. Signals are there, experts say, as shares of both the government and the Lopezes each jumped to more than 30%, with the Lopezes having a slight fractional advantage.

The recent government actions to pin down MERALCO and target the Lopezes, however, only serve to narrow the discourse to a simplistic formula: Electricity rates are high; for which MERALCO and the Lopezes are to blame. MERALCO is no doubt an easy and guilty target. But there are more reasons for electricity rates in the Philippines being among the highest in Asia. And the Arroyo government is equally to blame, if not more so.

10 reasons Why Electricity Bills Are High A position paper submitted to the: Joint Congressional Power Committee (JCPC)

by the freedom from Debt Coalition May 12, 2008

ANNEXES


ANNEX: 10 Reasons Why Electricity Bills Are High

We have been paying for these contracts in our electric bills for over a decade, and we continue to pay for these today, although this is less transparent, thanks to unbundling. With world oil and coal prices hitting all time highs, with the peso now at PhP40 to the dollar compared with PhP26:$1 when these contracts were signed, the cost of these contracts are an excessive burden on ordinary Filipino electricity consumers. Even consumers that do not have electricity at home are also made to pay for these contracts because the government guarantees all of NPC’s obligations to the IPPs.

4. EPIRA allows MERALCO to purchase at most half of its electricity requirements from its sister companies or IPPs. Besides the problem of NPC with the IPPs, we have the problem of MERALCO’s contracts directly with its own IPPs. EPIRA also allows cross ownership between generation and distribution. A closer look at the ownership of most of MERALCO’s IPPs will show that they are owned by the Lopezes. Examples include the Santa Rita, the San Lorenzo Natural Gas, and the Quezon Coal-fired Power Plants. Whatever guarantees the government gives to its IPPs, MERALCO also gives to its IPPs. MERALCO has always claimed that it does not earn from the high generation charges of its IPPs, and that it is merely passing on to its IPPs whatever it charges its customers for generation. MERALCO is telling the truth. But that is not the entire picture. For while MERALCO doesn’t itself earn from the high generation charges of its IPPs, the Lopezes do. A simple review of the financial statements of the Lopez holding company and its generation companies will show this.

This results to a clear double-whammy for the consumers. At one end, NPC must still pay for the unsold electricity it gets from IPPs because of the take-or-pay provision – an undue costs which will later be part of NPC’s stranded cost to be passed on later to the consumers.

At the other end, MERALCO pays its IPPs more than what it would have paid NPC, if it bought the electricity from NPC during the same hours that MERALCO was buying from its IPPs. As NPC rates vary from hour to hour, becoming

more expensive when demand for electricity peaks, we must compare on an hourly basis what MERALCO pays its IPPs with what it would have paid NPC if it bought electricity from NPC instead of its IPPs.

Fortunately during the May 6, 2008 dialogue at the ERC, members of FDC and EmPower Consumers obtained a copy of Meralco’s electricity suppliers and their respective cost and share for the months of March and April. Data shows that the cost of power from MERALCO’s IPPs is higher than that of NPC’s.

NPC-generated electricity is cheaper because there is a PhP0.30/kWh mandated reduction required by EPIRA for electricity generated by NPC or its IPPs. The electricity MERALCO buys from its IPPs are not subjected to this 30 centavo mandated reduction.

5. High electricity prices breeds inefficiency, which further raises the cost of electricity. The power sector is inherently inefficient. Average capacity utilization of Transco’s transmission lines, according to an ADB report, is only at 12%. We are paying for the investment and loans incurred to set up a transmission grid and on the average, only 12% of the capacity is being utilized. With regard to generation, dependable capacity in the Philippines amounted to 13,639MW at the end of 2006, but that same year, peak demand for electricity was only 8,760MW. We pay for capacity we don’t use, and this is such a heavy burden on consumers that we economize on our use of electricity even further. However, the less we consume of electricity, the more we have to pay of unused capacity. This is a vicious cycle similar to a debt trap. Industries cannot survive such

a set-up; poor consumers, even less so.

This is manifested in electricity consumption data obtained from the Department of Energy: Electricity consumption grew by 10.6% in 2003, then by a lower 3.2% in 2004, then by an even lower 2.5% in 2005. In 2006 electricity consumption grew by only 1.1%. Today it is residential and commercial users who hold a bigger share of total consumption. The thing is, residential and commercial consumers have peak hours when their demand for

SupplierMarch 2008 April 2008 Increase / Decrease

Feb ’08 cost Energy Share Mar ’08 cost Energy Share Cost Energy ShareNPC and WESM 4.8673 42.13% 5.3692 45.11% 0.5020 2.98%

NPC 4.5231 31.87% 4.0173 35.96% (0.5058) 4.09%

WESM 5.9356 10.27% 10.6822 9.15% 4.7466 -1.12%

Major iPPs 4.0588 57.84% 4.5496 54.87 % 0.4908 2.98%

QPPL 3.7253 12.28% 6.4340 6.87% 2.7088 -5.41%

Sta. Rita 4.1659 29.69% 4.2749 31.31% 0.1090 1.62%

San Lorenzo 4.1165 15.87% 4.2888 16.68% 0.1723 0.81%

Philpodeco 5.7245 0.02% 3.9352 0.02% (1.7893) 0.00%

Total 4.3998 100.00% 4.9192 100.00% 0.5194

Source: Meralco


ANNEX: 10 Reasons Why Electricity Bills Are High

electricity is strong. Beyond that, demand is very low. This leaves the power sector with a huge inefficient setup: Base load demand is weak but one has to have extra capacity for use during the peak hours. This also means that one has to spend on additional capacity that will most likely get used only during peak hours. This is clearly wasteful and inefficient.

6. Other ERC decisions have rendered the cost of electricity high. One such decision is the ERC’s dismissal of the Power Sector Assets and Liabilities Management Corporation (PSALM) market abuse case alleged by the Philippine Electricity Market Corporation (PEMC), the operator of the Wholesale Electricity Spot Market (WESM). The ERC dismissed this for lack of sufficient evidence, despite the detailed market data submitted by PEMC clearly showing that PSALM exercised its market power to raise the WESM spot price. The dismissal by ERC will cost consumers an additional PhP14B.

7. EPIRA-mandated removal of subsidies. Following the logic of privatization and market-reforms, EPIRA states that instruments such as cross-subsidies which distort the “real” price of electricity should be removed. This is in keeping with the transformation of the electricity industry from a public service industry to a commodity market. The prices should be subjected to market rules alone – and considerations such as equity and justice in the provision of electricity should be abolished. Households no longer enjoy subsidies from the industrial and commercial sectors, and households in Mindanao and Visayas are no longer being subsidized by households in Luzon. These households that no longer enjoy the subsidies of the pre-EPIRA days have experienced a hike in rates as a result of the removal of these subsidies.

Even the lifeline rate today is not what it used to be. In the logic of subsidy, better off consumers subsidize the more disadvantaged ones. This may work in cities like Manila but in areas that are by and large poor, the lifeline rate is symbolic more than real and it is actually the less poor who are subsidizing the poorer.

8. Unfair and unjust practices of industry players that the ERC is ineffectual to regulate, or may even condone. ERC has not provided more substantial solutions to recurrent abuse (overcharging and corporate malpractice) of DUs such as MERALCO. There had already been a number of times when MERALCO was proven to have engaged in such unscrupulous practice, yet MERALCO can and will probably engage in such practice because of the lack of fundamental action on the part of the ERC. For example:

z In 2002, ERC discovered PhP0.50/kWh unjustified over-recoveries of MERALCO from the PPA. It reached PhP12.3 billion as based in December 2001 computations.MERALCO was asked to refund it to the consumers.

z In 2003, the Commission on Audit discovered that MERALCO overcharged its customers by PhP0.017/kWh through inclusion of income tax as operation

expense which it passed on to consumers from 1994 to 2002. The Supreme Court subsequently ordered MERALCO to stop this practice and to refund the consumers by as much as PhP30 billion.

z Also in 2003, FDC questioned ERC’s giving of provisional authority to MERALCO to raise their rates by as much as PhP0.12/kWh. Fortunately for the consumers, the Supreme Court junked the ERC decision in January 2004 because it violated certain rules during its own hearings.

z In June 2004, MERALCO again applied for PhP0.1327/kWh increase through Generation Rate Adjustment Mechanism (GRAM). The Supreme Court again junked the petition in February 2006 as MERALCO did not follow the prescribed process (lack of hearing and publication).

But MERALCO is not the only one engaged in abusing and deceiving the consumers. The Panay Electric Company (PECO), also known to be owned by the Lopez family, had also been asked by the ERC to refund the consumers PhP2/kWh it earned due to overcharging.

9. Value Added Tax (VAT). Because of the ballooning fiscal deficit of the government, which is in part caused by guaranteed obligations of Government-Owned and -Controlled Corporations (GOCCs) like NPC, the 12% VAT now includes oil and electricity which was exempted before (zero-rated) in the previous consumption tax regime because it was categorized as “socially-sensitive” – raising its prices will translate to rising prices of other commodities. According to some studies, VAT raises electricity prices by PhP0.60/kWh to PhP0.90/kWh. It is estimated that the government earned at least PhP7.668 billion from VAT in the electricity industry in 2005.

One of the more controversial applications of VAT in electricity is the imposition of VAT to system loss, electricity which had been generated but not used. It is unjust to impose consumption tax on goods and services not actually consumed.

10. Corruption and Mismanagement

z In NPC. Corruption in National Power Corporation (NPC) artificially inflates generation charges. This includes allegations of “overpricing” in the process of buying coal and oil supply for NPC-owned power plants and NPC-IPP’s.

z In PSALM. The privatization of NPC plants is anomaly-ridden, the most outstanding proof of which is the halted sale of the Masinloc Power Plant to the winning bidder – the YNN. Aside from the fact that YNN capacity is questionable (it failed to pay down payment despite three extensions), sale of Masinloc to YNN will only raise electricity prices form PhP2.80 to PhP4.80/kWh. What is more revolting is this case is that, according to a COA report, PSALM officials gave themselves PhP10-million bonus because of the “successful” closing of the failed transaction with YNN.


Recently, Finance Secretary Margarito Teves, together with the newly-formed Economic Team Study Group created by the Arroyo administration, boasted of six government measures that would bring down rates by as much as 64 centavos per kilowatt hour (kWh). From asking the Distribution Utilities (DUs) to absorb the Value Added Tax (VAT) on systems loss starting July, to mandating Local Government Units (LGUs) to utilize 30 percent of their share of the National Wealth Tax to reduce electricity rates, these measures only serve to highlight the government’s strategy of resolving the staggering hike of consumer electricity prices in the country by passing the buck to the next guy without sacrificing anything. The Coalition believes that while these proposals may soften the blow of electricity rate hikes, the fundamental cause of the whole price surge is the underlying government paradigm of private sector control of supply and deregulation of a highly concentrated market. Thus, the administration’s palliatives which pander to such a paradigm will not keep electricity rates down. FDC consequently rejects the Arroyo administration’s unsustainable, and at times unfounded, populist rhetoric, serving only to raise false hopes of future security for ever-struggling and increasingly insecure consumers.

Strategically, we are calling for a complete and substantial overhaul of the Electric Power Industry Reform Act (EPIRA) which is one of the major reasons why electricity rates remain high. After seven years of implementation, EPIRA has brought about a transition from government monopoly to an enhanced private monopoly—worse, a hundred percent increase in power rates. The promised competition embodied in Wholesale Electricity Spot Market (WESM) is one of form with little substance. Hence, instead of rate reduction, we now have one of the highest rates today.

What we are actually witnessing appears to be a new kind of competition among leading and dominant players in the power sector with Malacañang seemingly in the leading role supported by Ricky Razon in TRANSCO, the Aboitizes in the generation sector and Winston Garcia’s presence in MERALCO.

In this paper, FDC aims to offer, vis-à-vis the plethora of

proposals by Secretary Teves and other interest groups, what it believes to be more sustainable, democratic, and pro-consumer solutions to the Philippine electric power quagmire.

The following measures are proposed:

1. Remove oil and power from VAT coverage. This will effectively reduce electricity rates by at least P0.80/kWh. In addition, a reduction of at least P4/liter of VAT on oil will cut down the generation cost of oil-based power plants. In 2007, oil-based power plants contributed 18 percent to total generation. When the capacity of natural gas plants, hydropower plants and coal-fired plants is not available for whatever reason, the oil-based power plants are put into operation to provide the electricity the other plants cannot supply.

2. Refund to consumers the overcharging by DUs and NPC. In the April billing of Meralco, the biggest distribution utility charged its customers P0.89/kWh more than it should have, if the ‘least cost’ provision of section 23 of EPIRA were to be followed. Meralco billed its customers P4.90/kWh in generation charge in April when the ‘least cost’ power during that time was National Power Corporation’s P4.01/kWh. Meralco and other DUs still have to fully comply in the decision made by ERC to refund around P13 billion for meter and bill deposits provided under the Magna Carta for Residential Consumers. Aside from Meralco, another Lopez-owned DU, the Panay Electric Company (PECO), still owes the Ilonggos a P2.89-billion refund from the amount it illegally collected from its customers.

3. Stop the operation of WESM. Contrary to its mission of providing good choice and cheap supply of electricity, the Wholesale Electricity Spot Market has become a trading center of the most expensive electricity in the country. In March, its peak trading was P10.68/kWh. In April, it reached almost P12/kWh. WESM in the Philippines is running a small market whose supply is controlled by a few—the government through PSALM and NPC, and whose demand is largely that of only one utility—Meralco,

ReprintedOn May 12 this year, the Freedom from Debt Coalition (FDC) submitted to and presented before the Joint Congressional Power Commission (JCPC) its position paper titled “10 Reasons Why Electricity Bills Are High.” In the said paper, the Coalition explained the confluence of factors causing high electricity rates—from bad governance to corruption to mismanagement to rent-seeking to framework concerns. Recognizing the complexity of the issue, FDC attempted to identify these factors as the Coalition’s contribution to gaining a fuller understanding of the problem of unabated expensive electricity.

A Dozen Ways to Reduce Electricity Rates Towards Sustainable and Pro-Consumer Electric Power industry freedom from Debt Coalition 17 June 2008


ANNEX: A Dozen Ways to Reduce Electricity Rates

which has sister independent power producers whom it favors in its purchase of electricity. According to WESM’s own data, the Philippine electricity market is highly concentrated. Furthermore, studies of electricity restructuring have shown that even in less concentrated markets, a deregulated market can be effective only when it is heavily administered. This is costly, something that adds to the already high cost of electricity we are paying. The same studies also conclude that the functions of an independent market operator can be undertaken by an independent and competent regulator.

4. Remove royalty taxes on the use of renewable energy. Royalty taxes on natural gas from Malampaya in the last quarter of 2007, according to Meralco, amounted to P1.61/kWh. The policy change will not only bring down generation cost but also encourage investments in REs, which should be the way of the future, starting today.

5. Amend RA 7832 or the “Anti-electricity and Electric Transmission Lines/Materials Pilferage Act of 1994” by rationalizing further the allowable limits provided to PDUs, electric cooperatives and Transco to recover their systems losses from the consumers. Pass-on charges, particularly those from administrative and other non-technical losses should not be allowed.

6. Review tariff rates of NPC given its decreasing liabilities, i.e. from P900 billion to P300 billion, with National Government writing-off P200-billion NPC debts. This is on top of fifteen (15) rate adjustments for cost-recovery since the unbundling of rates (Generation Rate Adjustment Mechanism and the Incremental Currency Exchange Rate Adjustment).

7. Adjust tariff rates of electric cooperatives. Some P18-billion debts of electric cooperatives were passed on to and absorbed by Power Sector Assets and Liabilities Management Corporation (PSALM) after the passage of EPIRA. But up to now, tariff rates of electric cooperatives are not yet fully adjusted to reflect the consequence of this debt condonation.

8. Reform the Energy Regulatory Commission. In the past six years, the Commission has been remiss in its duty of protecting the interest of consumers. Worse, ERC’s presence only serves as false semblance of consumer protection, preventing more adequate, substantial, and effective measures to be taken. Thus, reforms must be undertaken to improve ERC:

a. Depoliticize the ERC. Competence and integrity must be the main criteria for the selection of ERC commissioners, most especially its Chairperson.

b. Democratize the ERC. ERC as an institution, while retaining its quasi-judicial nature, should proactively re-focus itself from merely answering legal questions of rate increases towards meeting more substantive public concerns, such as the question of consumers’ capacity-to-pay. Moreover, ERC must accord full representation for consumers by giving them at least one seat.

c. Prohibit the ERC in granting a provisional authority for all kinds of cost recovery application. ERC should be empowered to decide directly on electricity price adjustments.

d. Stop the implementation of ERCs new rate methodology. The use of performance based rate methodology allowed DUs and Transco to enjoy returns that are higher than the previously mandated return on rate base (RORB) of 8 to 12 percent.

9. Renegotiate IPP contracts. Consumers should not be made to pay for electricity they did not consume. Onerous provisions such as the ‘take-or-pay’ guarantees provided by the government to both the NPC and Meralco IPPs must be removed. These guarantees assured the IPPs that they were to be paid fully for their generation capacities regardless of whether these contracted capacities are actually delivered or consumed. In preparation for the renegotiation, a performance and technical audit must be conducted among the IPPs to ensure if contracted capacities are optimized and actually delivered.

10. Public investment for potential RE sources. If the government is concerned about the country’s sustainable energy future, it must invest in renewable energy now rather than wait for the private sector to come in later. Strategically, REs would provide not only the cleanest but also the most cost-effective energy in the country, particularly in the context of current skyrocketing prices of oil and coal. The Philippines is the second largest producer of geothermal power in the world, next to the United States, with installed capacity of more than 1,900 MW. Production in this area can be further optimized. Also, initial production of natural gas showed promising prospects of increased production. These vast resources, including those from other renewable energy sources such as hydro, wind and solar, must be made top priority in future energy plans. Aside from these, a new study revealed that the country has a vast potential in renewable energy—some 204,000 MW of capacities from geothermal, hydro, ocean, wind, natural gas and solar sources.

11. Promote community-based power systems. The country’s archipelagic setup is a disincentive to a centralized power system. Our national grid made the cost of transmission excessively high because of its low utilization, a mere 22 percent according to the Asian Development Bank. Advance technologies in power generation, decentralization of power and democratization of ownership of the industry, and adequate government support can make this framework extremely possible.

12. Eliminate corruption and mismanagement in NPC, National Transmission Corporation (Transco) and DUs which tend to artificially inflate prices. Open the books of these utilities for comprehensive audit, and set the policy of procurement in a long-term contract manner in order to avoid or minimize the effect in the fluctuation of prices in the international market.


MANILA, Philippines – The privatization policy in the power industry is not only one of the major reasons why electricity rates in the country is extremely high, but also a policy prescription that aggravates the problem of climate change.

This was according to the Freedom from Debt Coalition in reaction to an on-going activity sponsored by the Asian Development Bank dubbed “Climate and Clean Energy Week 2009.”

Describing the activity as a “mere talk shop and road show” for profit-oriented corporate private sector, the group urged the Bank to stop the policy and instead focus on how to bring electricity rates down and, at the same time, to address climate crisis.

“The ADB relies so much on the private sector initiatives on climate change, while being conscious of the fact that the private sector is also the main contributor to global warming. It is also public knowledge that private sector’s past and ongoing projects contributing to climate change received funding from the Bank itself,” said FDC advocacy coordinator Job Bordamonte.

FDC cited as an example the Power Sector Reform Program (PSRP) – a program initiated and funded by the ADB, which promotes private sector participation in the power sector. The program takes away from the State the responsibility of generating, transmitting, and distributing power, thus heavy reliance on private power which produces energy from dirty sources became the main feature of the restructured and privatized power industry in the Philippines since the early 90s.

Experts say that the power industry is a major contributor to climate change with power plants utilizing fossil fuels such as coal and diesel contributing the highest amount of CO2 emissions to the atmosphere.

FDC said that energy production in the Philippines relies heavily on coal, diesel and natural gas which comprise 64.7 percent of the power generation mix. Combined renewable sources such as hydro, geothermal, wind and solar power is only 35.27 percent of the mix, or a 29.43% difference.

In addition, during the implementation of the ADB-initiated Electric Power Industry Reform Act (EPIRA), at least four new coal-fired power plants are scheduled to be built in the Visayas region. Further, the two biggest coal-fired power plants in the country located at Pagbilao, Quezon and Masinloc, Zambales, both owned by US-based power companies, are undergoing capacity expansion. And as of late, a new coal power plant owned by the Korea Electric Power Corporation (KEPCO) and SPC Power Corporation (KSPC) is being constructed in Barangay Colon in Naga, Cebu.

Other non-renewable energy facilities that are targeted for expansion are the Ilijan natural gas-generating facility in Batangas and the Sual coal facility in Pangasinan.

FDC added that under the power reform program, the three main islands of Luzon, Visayas and Mindanao will be inter-connected. Centralized grid requires the building of large-scale power plants to respond to an increasing demand in capacities.

“In order to optimize this kind of highly centralized grid structure, the consumption level (demand) must also be high as well as the dispatch of electricity (supply). The higher the demand and supply of electricity, the higher the gas emissions from the kind of energy sources being utilized. A centralized grid also intensifies the use of fuel-based must-run-units (MRUs) as back-up to the main grid,” FDC added.

In stressing these points, FDC is putting forward the following demands in order for climate change to be effectively addressed:

z Redirection of existing dirty energy financing to adaptation and mitigation measures and energy efficiency projects as a form of reparation to the decades of ecological debt owed by the north to the south;

z Financing of renewable energies as one form of restitution for countless years of debt domination that hampered Southern countries capacity to develop alternative technologies and development strategies;

z The sovereign and democratic management and control of funds for mitigation, adaptation and the development of clean, safe and renewable energy; And for the World Bank, ADB and other similar institutions with a horrible track record to be kept from any form of control and involvement over the disposal and use of these funds;

z Stop to all false solutions such as agro-fuels and carbon trading;

z Rejection of all loans, aid and subsidies for fossil fuel extraction, dirty technologies and exploitation of natural resources that violate our national patrimony and the rights of indigenous peoples;

z An end to imposition of all conditionalities (e.g. privatization, liberalization and deregulation) by international financial institutions and northern governments through loans, aid and debt cancellation; and,

z Total and unconditional cancellation and repudiation of debts that have contribute to climate change, and all other illegitimate debts and “obligations” claimed from us by the north and lending institutions.1

The solution to climate change, the group said, cannot be found from the world’s biggest polluters themselves (the corporate private sector) and their long-time financiers (the ADB and IMF-World Bank).

note:1 Bali Declaration on international Financial institutions, Debt and

Climate Change. 08 December 2007

aDb privatization policy aggravates climate crisis in the Philippines – fDC

Press statement16 June 2009

freedom from Debt Coalition#11 Matimpiin Street, Barangay Pinyahan, Quezon City, Philippines 1100

+63(02)9246399 (telefax). +63(02)[email protected]

http://www.fdc.ph

Dark Power Rising The Philippine Power Industry Nine Years Under EPIRA (RA 9136)

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