NAPOCOR gets big bites of payments
Sunday, July 30, 2006
BY RENE Q. BAS, Sunday Times Editor
Why is the price of electric power to Philippine consumers among the highest in the world—in Asia the most expensive, next only to Japan?
Many factors cause the price consumers have to pay for electricity to go up.
Presenting consumers with a bill reflecting only the true costs of electricity plus a reasonable profit is not easy, even when the company selling it is rather honest. It becomes harder in a country like the Philippines where a kind of socialist mentality is ever present in the market and its organs. This is also the reason the Philippines always fails to make it on the roll of the most globally competitive countries.
A "socialized tariff structure"—as the free-trade economists’ jargon goes—is unsustainable. It is almost impossible to make it transparent and usually leads to price distortions.
So, when the law says power companies must price their sales according to set variables on which rates are to be based, the result is highly unbalanced investor returns. That is an unpleasant characteristic of investor returns across the country’s power industry: imbalance. (Imbalance is also the primary characteristic of almost everything in our society: incomes among businesses, workers wages, educational and leadership opportunities, distribution of wealth and power, etc.)
The distribution sector
The distribution sector is the part of the industry that is directly in touch with the greater public of corporations, government offices, enterprises, households (meaning families and individual human beings). This sector is where the most maligned companies in the industry belong. The biggest distributor is MERALCO, an institution that has become the whipping boy of everyone who complains about high electricity costs in the country although most of its clients are only in the National Capital Region and environs.
The fact is that MERALCO, and other electricity distributors, have been squeezed, as far as getting financial returns on the investment stockholders have made in their companies. Distributors get less for their investment than companies in the generation and transmission sectors.
Distributors have to ask government agencies to allow them to raise the price they charge customers. Companies selling shoes, ice cream and pan de sal don’t have to. But MERALCO and its ilk have to get the Energy Regulatory Commission’s approval. And when the ERC grants the increase anybody can challenge it in any court which often grants a restraining order.
MERALCO's last tariff increases were in 1994 (1.7 centavos) and 2004 (8.65 centavos). Its 2004 increase, however, is the subject of a court case pending before the Supreme Court. Due to previous court setbacks, MERALCO has provisioned for losses in the event of an adverse decision.
The transmission sector’s TRANSCO, on the other hand, which is government owned, has had a net income during the past three years believe to exceed P30 billion.
The generation sector’s NAPOCOR, also government owned, has been declaring net losses in the past couple of years but it is heavily subsidized by the government. Its loans enjoy a sovereign guarantee from the Republic of the Philippines. Independent power producers have also enjoyed staggering profits.
Some other factors contribute to the high cost of generation. Most familiar to all is the cost of fuel in the world market and the peso’s performance against the US dollar. These affect the cost of generating electricity because oil is used in oil-fired generating stations and the generating companies use trucks and cars, which use gasoline and oil.
The high price of oil also raises TRANSCO's costs of transmitting electricity to MERALCO and other distribution utilities.
Prices and rates, if we are serious about making our country’s economy truly a liberal and free trade one, should be based not on subsidies or on political considerations. Rates must be based on the true cost of providing electric service.
Ideally all costs must be considered as part of the total cost structure in order for rate distortions to be minimized. Rates must in fact provide the proper price signal to consumers. Electricity costs have fixed and variable components, which rates should be able to reflect.
The challenge to make electricity affordable most especially for low-income consumers must be balanced with the real costs of supporting the need to profit from providing electric service.
The price of power, in other words, must also be able to support the economic development of the area it serves including the country in general. Without this delicate balance, rate distortions will prove to be the bane of the electric industry in general.
Industries have long clamored for the real cost of providing electric service to be reflected on the bills they have to pay for electricity.
Industrialist George Yang, owner of McGeorge Food Corp., the local operator of McDonalds, has said that high electricity prices have made the Philippine business market uncompetitive. High wholesale electricity prices drive Philippine electricity retail rates higher than it should be, making it unattractive to end-users.
Industrial rates are further burdened by subsidies to other customer categories. As a result of the distortions in the rate structure some industrial customers resort to what is known as self-generation. Self-generation, however, digs into the companies’ resources. The cost of building a generating facility and the operating expenses necessary to keep the facility going adds up to business expense. It may be attractive in the short term but long-term effects severely affect the bottomline and make them less competitive than they should be.
After all is said and done the point of all contention should be that reflecting the true cost of electricity to consumers must be the ultimate objective. Policymakers, industry players, regulators and the public in general must understand the intricacies in reflecting the true cost of power.
Compared with other Asian countries these graphs show how globally uncompetitive we are in the Philippines:
Below the table shows the charges NAPOCOR charges its customers who are mainly the distributors:
Let’s look at the distribution sector’s costs.
Higher power rates in the last 10 years were due to an increase in generation costs and not in distribution rates. Generating cost, which accounts for as much as 50 percent of the monthly electric bill of consumers, is the cost of power generated by and sold to power distributors like MERALCO by state-owned NAPOCOR and by independent power producers (IPPs).
MERALCO gets only 13 percent of a consumer’s monthly payment which covers the distribution cost.
"We are actually just a collecting agency for government and other entities for charges like the generation charges, taxes and universal charges," said Elpi Cuna Jr., vice president and Corporate Communication head of MERALCO.
"Before customers use electricity, it has to go through three major phases—generation, transmission and distribution. In the generation phase, power is generated in power plants operated by NPC and the IPPs. In the transmission phase, the electricity goes through high-voltage transmission lines of state-owned National Transmission Co. (TRANSCO) so that it can reach the distribution system of MERALCO. MERALCO then delivers the electricity to consumers through its substations and distribution lines where it is stepped down to voltages that consumers can use," Cuna stated.
Cuna also stressed that MERALCO rates cover only distribution. This includes the cost of building, operating and maintaining the distribution system, which brings power from the transmission grids to the end-user.
This means that for every P1 paid to it by a consumer, 87 centavos go to NPC, TRANSCO and other service providers. Only around 13 centavos go to MERALCO for its work and expenses of distributing electricity.
At the current average rate of about P8.1 per kWh, only roughly P1 is paid to the power distributor, with the rest going to government and IPPs.
"We continue to initiate moves to lower generation cost so customers can also enjoy the lower generating cost. If we can buy electricity at cheaper rates from generating companies, then our customers will benefit," Cuna said.
posted by philpower @ 3:25 PM,
