PH electricity tariffs still 2nd-highest in Asia
During the competitiveness summit in 2006, some 1,000 representatives from various business groups and the private sector identified the top sources of noncompetitiveness in the Philippines.
They used the Harvard approach of Michael Porter’s Diamond as guided by the Asian Institute of Management and other experts in strategy formation.
The high cost of energy was cited as one of the major hurdles to competitiveness and they also identified factors that determine competitiveness.
These are: 1) Quality of human resources, 2) Professional public offices, 3) SMEs access to finance, 4) Ease of doing business, and 5) Strategic infrastructure/logistics networks.
While some progress on these factors has been achieved during the last five years, especially in the last two years, there has been no improvement in making the cost of electricity competitive.
We were therefore pleased to learn that Meralco had commissioned the International Energy Consultants to conduct a study on the current situation and compare our retail electricity tariffs with the region and the rest of the world. We were invited together with other business practitioners from various groups to the presentation of the report by Dr. John Morris, president of IEC. It was a well-researched study with a clearly arranged program which encouraged questions from the floor.
The following points were highlighted.
— Meralco distribution charges are fair and reasonable, as compared to other countries. Distribution accounts for only 16 percent of the total retail electricity tariffs, but it acts as the collector of the other 84 percent which is promptly forwarded to the other concerned agencies.
— The cost of electricity remains the second-highest in Asia due to generation charges (65 percent of retail tariff). Transmission charges, bloated with other charges, account for 9 percent of the retail tariff; more of this later.
The balance of 10 percent is composed of VAT and other charges/taxes.
— On fuel and capital costs, which account for half of the generation charges, Dr. Morris claimed that fuels are priced according to international prices. However, he refers only to FOB prices, not delivered prices to the generating plants, which include duties, taxes or royalties. And does he take into account the high corporate income tax (60 percent) on Semirara coal or the royalty charges on Malampaya natural gas?
— The other Asian countries have large oil and gas deposits so they can impose moderate taxation on the components of power as a development competitive strategy for reasonable power cost which ensures employment and productivity of their peoples.
As some brilliant economists espouse, the fiscal earnings foregone by governments with lower impositions on the components of power can be offset by corresponding reductions in the national budget especially on social projects for poverty alleviation (since there will be much less poverty). No wonder their engaged citizenry are more positive contributors to entrepreneurship, innovations, civic values, etc.
— While transmission seems to be conducted reasonably well considering the geography and demand imbalances in our archipelagic terrain. However, this is saddled with regulator-imposed universal charger covering certain inefficiencies, outstanding loans, lack of aggregation of small distribution units (cooperatives). This part remains nontransparent and must be cleaned up.
Dr. Morris admits that new independent power producers should be encouraged by lowering barriers to entry. Access to long-term power purchase agreements with credit-worthy offtakers will expand in an environment of good governance and free market Retail Open Access.
On long-term marginal cost of supply, Dr. Ben Austria of UP questioned why our cost continues to be the highest in Asia when our generating plants are generally old. One would expect that the sunk costs on fixed assets will be smaller now in present value terms unless replacement costing is the basis of calculation but this is debatable.
On this basis, recalculation of our LRMC at par with the others would generate another source of cost reduction by P1.60 per kilowatt-hour.
In essence, Dr. Morris’ study supports the recommendation by the Management Association of the Philippines and other business groups some years ago via the National Competitiveness Council that the cost of power can be reduced by addressing the four low-hanging fruits.
These four steps are mentioned in the five-year Power Development Program and reported in our article last year.
1.) Open access must be started immediately to achieve a free market competition environment, which will encourage new IPPs to participate in the generation sector, and will lower the cost of funds employed.
2.) Restructure the electric cooperative model to achieve good governance and more economic aggregation. This study is already being initiated by the Institute of Corporate Directors in collaboration with the NEA.
3.) The high cost of fuels is a fact but it should not be further burdened with additional levies, taxes, royalties, since our president’s strategic goal is to reduce poverty by generating jobs/livelihood. As mentioned earlier, the revenues foregone by government can be offset by corresponding reductions in the national budget on social projects such as the poverty assistance (since there will be much less poverty).
A high-level discussion called by government on this proactive policy will be welcomed by the private sector.
4.) A national energy conservation movement to be imposed by government with private sectors as partners with clear metrics (10 percent savings in 18 months?) and with clear system of “perks/bitters.”
This was institutionalized during the time of Secretary Geronimo Z. Velasco. Japan employed such a template during the Fukushima nuclear accident, getting 19 percent savings quickly.
Our objective is to maximize the use of existing facilities by reducing wasteful consumption, which will reduce capital requirements, cost of funds and other direct costs.
JICA/ADB will be ready to assist us in this laudable project.
Our recommended four low-hanging fruits for reduced power cost are supported clearly by the IEC Report.
It is also a “given” that for the power sector to be considered world-class, the regulators in the Energy Regulation Board should be competent in this field, with highest governance values, and with business understanding about its vision/mission of bringing our poverty level to the lowest in the region as a result of competitive power.
Our appreciation to Meralco for undertaking this study by IEC. While it is evident that they are doing a reasonable job, they are getting flak by acting as collector of other agencies/factors which are facing considerable problems as mentioned earlier.
Since we should all be purveyors of hope for our countrymen, and not whiners or negativists, we should work together with out-of-box initiatives such as those mentioned in this report to give the Filipinos under the leadership of President Aquino the opportunity to take their rightful place at the head of the region.
(The author is chairman of the National Competitiveness Council.)