Reducing Power Costs

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The government of the Philippines plans to use state funds to address high power rates. Acknowledging it must do something about the rising cost of energy, the government announced last week that it intends to use more of the state's gas royalties, National Power Corp (Napocor) profits and wholesale electricity spot market (WESM) fees to reduce electricity charges.

According to the Department of Energy (DoE), electricity rates in the Philippines are $0.912 per kilowatt-hour for residential users, $0.933 for commercial and $0.811 for industrial consumers. The rates are higher than in other countries in the region.

Cabinet Secretary Ricardo L Saludo told reporters that President Gloria Macapagal Arroyo would be "issuing an order for billions of pesos in gas royalties, Napocor profits and WESM charges to be used in cutting power charges".

Saludo later told local media, "Whether or not oil prices go up we need to address this. This is made more urgent by the plight of the exporters. This has been in the mind of the president since 2001. That is why she called for the passage of power reforms."

Saludo is referring to the Electricity and Power Industry Reform Act (EPIRA), which was introduced by the current administration in 2001. Its purpose is to ensure the quality, reliability, security and affordability of electric power.

Saludo is correct when he talks about the plight of exporters. The export industry is led by its electronics industry, which represents almost two thirds of the country's exports and has been one of the hardest hit industries by the appreciation of the peso combined with a high cost of power. President of the Semi-conductor Electronics Industry of the Philippines Inc (SEIPI), Ernesto Santiago, told OBG, "The aspect of their business (export) that is being affected is local transactions, which are labour costs and wages and cost of power. We believe that to offset the strengthening of the peso against the dollar, we are asking the government to give us some discount on power rates. The reason is that power is a dollar-dependent industry. They are buying oil abroad and they are gaining now because of the exchange rate."

The government's gas royalties come from their 10% stake in the Malampaya gas project, which is the country's main source of natural gas and is located just off the coast of Palawan in the south. State-owned Philippine National Oil Co-Exploration Corp (PNOC-EC) is part of the consortium that runs the operation. The group disclosed that P3.4bn ($82.4) of its P4.9bn ($118.8m) gross revenue last year came from the project. Meanwhile Napocor's net income from electricity sales last year was P90bn or P69bn ($1.7bn) net.

Napocor President Cyril C del Callar confirmed that the government has approached him to discuss using the state-owned firm's funds to help reduce power costs.

"We were asked to prepare a statement [...]. There are no details yet and we still have to take a look at everything," he told local media.

In September the DoE brokered a deal between Napocor, Meralco, the country's largest electricity distributor, and the Philippine Economic Zone Authority in order to cap rates on generation charges for companies located in ecozones at P3.52 ($0.085) per kilowatt-hour, which is roughly 20% lower than the average market price. A budget report released by the DoE is suggesting a further expansion of its lifeline rate subsidy for customers with limited incomes or who use 100 kWh or less per month. The discounts given to these customers are paid for by all other Meralco customers. The exact plan in terms of how to use the money in order to trim power costs is still unclear.

"It is with the DoE and the DoF (Department of Finance) and they will work out certain technicalities. They are looking at the financial and legal matters and how it can be allocated. They will look at the financial status of entities being used to make sure this would not have an adverse effect," said Saludo.

Saludo has been quick to point out that the measures being taken will not be a "subsidy". However, whatever it is called, it could not come at a better time. Many of the investment firms in the Philippines have told OBG that high power rates and political stability are the main concerns for potential foreign investment.

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