Energised Debate

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Over the past several weeks a battle has been brewing in the Philippine press over who is to blame for the country's high-energy prices. The dispute, which began as an argument over energy-pricing policies, has evolved into a power struggle over the future ownership of the country's largest power distributor, Meralco.

The government, led by the Government Service Insurance System (GSIS), argues that they are in a better position to manage Meralco than its current owners. They contend that the Lopez family, who narrowly control the Meralco board, has evaded government rules that are intended to keep rates down and cap the company's profits.

These rules stipulate that power companies such as Meralco must charge their customers a similar price to the rate at which the energy is purchased on the spot market. In theory, this protects the consumer from gouging and limits the industry's profits. In practice however, pricing policies are significantly more complex.

Aside from the spot energy costs, Meralco also charges its customers fees for administrative duties and systems' loss -energy that is lost to pilfering or technical inefficiencies. This grey area in pricing policies is the primary target of the government's recent crackdown.

When asked what he would like to see changed at Meralco, Winston Garcia, the chairman of the GSIS, told OBG that administrative bureaucracy and system loss had to be better controlled.

"It's too top heavy and something has to be done about it. According to reports that we have received, there are more supervisors and executives than rank-and-file [employees]. This is something that has to be addressed." Garcia went on to say that the firm had done nothing about its system loss levels, which he estimated at above 10%.

Other complaints include conflict of interest issues involving energy and equipment supply contracts with other Lopez-owned firms. Of particular concern to the government is a P12.99bn ($296m) "take or pay" contract that Meralco signed with the Lopez-owned First Gas Corp in 2000. Such contracts have provisions obligating the buyer to pay for a predetermined volume of electricity regardless of whether it is actually delivered or used. In this case, Meralco paid for 1000 MW of energy but was only delivered 300 MW.

While the fact that two Lopez-owned companies exchanged money for goods that were never delivered may raise eyebrows, the Meralco management team claims that nothing the firm has done is illegal or irregular.

Jose Soler, a utility infrastructure specialist at Solerex, told OBG, "Take-or-pay contracts are essential to doing business in the utilities industry. These contracts insure investors, who often have huge upfront capital costs, a steady stream of revenue. Without such contracts, no investor or bank would finance the building of any power plant or water treatment plant."

Similarly, passing on administrative and systems losses to customers is routine. This is particularly true in emerging markets, where energy pilfering is rife and traditional collection methods are ineffective.

Of particular importance to Meralco's case is the fact that the Energy Regulatory Commission (ERC) specifically approved all of Meralco's major supply contracts and its overall pricing mechanism.

Several prominent senators who had previously blamed Meralco for the nation's high-energy costs are now turning their anger against the regulators and regulatory framework.

"The ERC is sleeping on the job. It has not been proactive in its role of protecting the consumers," Senate Minority Leader Aquilino Pimentel Jr told the local press last week.

To address such issues, Pimentel and many of his colleagues in the senate are pushing for legal changes that would strengthen the government's hand in the sector.

Such a move, however, would directly conflict with the current regulatory framework laid out in the Electric Power Industry Reform Act of 2001 (EPIRA). These reforms, which are just now bearing fruit, were meant to vastly reduce the government's role in the energy sector, increase competition, and encourage private investment.

An open letter signed by the Joint Foreign Chambers of the Philippines (JFCP) argued, "Amending EPIRA will result in a highly unstable legal framework for the industry and investors. Further, such action would impact on the credibility of, and put at risk, the ongoing power sector reforms."

Instead of debating the legal changes on the senate floor, the foreign chambers and the private-sector parties they represent would rather see the EPIRA reforms to their completion. This would involve a 70% decrease in the government's direct ownership of power production and the creation of a well-functioning spot market to dictate prices.

With strong forces on either side of the issue, many believe the decision will ultimately fall to President Gloria Macapagal Arroyo. With control over the ministries and widespread support in the House of Representatives, any changes to EPIRA must receive her consent.

On the one hand, siding with Meralco's critics and the senators who favour regulatory change could be seen as a step backwards by investors and the private sector. On the other hand, favoring Meralco and the foreign chambers of commerce is expected to be politically difficult. Both parties have been vilified in the press and are not particularly popular among the masses. Compromises in such politically charged cases are difficult but may prove to be the only way forward.

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