Five evils of cross-ownership in power industry

by Neal Cruz, republished from Philippine Daily Inquirer website, September 05, 2007 

President Gloria Macapagal-Arroyo has endorsed the amendment of the Electric Power Industry Reform Act (Epira), which, contrary to its original intent of reducing power rates, has instead led to higher rates, the second highest in Asia, next only to those in Japan, a rich and highly developed country with a standard of living many times higher than ours. The Epira was copied from the California model of deregulating and privatizing the monopolistic power industry by creating competition in every sub-sector. Competition will force the players to reduce costs and be more efficient to be able to sell more electricity.

It is difficult for laymen to understand the workings of the power industry. For their benefit, therefore, here is a simplified explanation of the power sector and the Epira and its flaws:

Electricity flows from the generating plant through the transmission lines to the distribution lines of the distribution utility, like Manila Electric Co. (Meralco). The distributor connects the users’ residences, factories and business establishments to the power sources, installs meters and does monthly readings, sells the electricity and collects the monthly bills.

The Epira that was passed in June 2001 divided the industry into four sectors: generation, transmission, distribution and supply. Transmission and distribution, however, are considered natural monopolies in providing the lines through which power flows and will continue to be regulated sectors under the supervision of the Energy Regulatory Commission (ERC). The ERC’s job is to make sure that the rates of these two monopolies will always be reasonable and fair.

Accordingly, Section 36 mandated the unbundling of rates and functions of these four sectors.

The National Power Corp. (Napocor) was split into two: generation and transmission. The distribution side was also split. Each one was required to submit its own rates for the review and approval of the ERC.

For the whole thing to work for the benefit of the consumers, there has to be enough players in the generation and supply sectors that will compete with one another in serving the customers.

Section 23 states the whole purpose of the Epira: A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market. But this obligation is nullified by the evil of cross-ownership.

What is cross-ownership? It is the case of a company in one sector, say distribution, owning a sister company in another sector, say generation. There is a conflict of interest here. A distributor cannot supply electricity at the least cost if it has to buy power from a sister company selling its electricity at a high rate.

The framers of Epira knew the harmful effects of cross-ownership and prohibited it in the original version. Unfortunately, lobbying by vested interests won over patriotic integrity so that Section 45 which was supposed to ban cross-ownership was watered down, banning cross-ownership only in the transmission sector and other sectors but not cross-ownership between the distribution and generation sectors. Thus, the Lopez family, which owns Meralco, the country’s largest distributor, was allowed to own and operate generation facilities. Epira’s purpose is to make distributors like Meralco buy power from competing power generators to get the least cost. But with the loophole in the ban on cross-ownership, Meralco is now allowed to enter into negotiated bilateral contracts with sister generating companies. This loophole has led to five evils, the end result of which is still high power rates.

Evil No. 1: These bilateral contracts totaling 2,300 megawatts so far were sweetheart deals. They all have guaranteed minimum take-or-pay provisions that were the real cause of the skyrocketing Purchased Power Adjustments (PPA). Meralco contracted power at P5.20 per kilowatt-hour with its sister companies when power can be bought from Napocor and its IPPs (Independent Power Producers) at P3.97 per kWh. This would not have happened if Meralco the distributor was doing business with an unrelated generator at arm’s length. They would have held competitive biddings from generators so that they could supply power at the least cost to their captive customers.

Evil No. 2: Since Meralco represents 72 percent of the country’s power requirements, it has become a monopoly with full rights to choose who gets to supply their power requirements. The Lopezes of Meralco have then become the controller of the country’s new generation sector once Napocor is privatized as the Epira envisions. There will be no real competition as intended by the law and therefore no reduction in generation rates. Also, the future development of the generation sector on which the country depends for its future needs, will be totally dependent on the whims and caprices of one group.

Evil No. 3: There will be few bidders for the Napocor power plants because only the Lopez-anointed investors can come into the sector. The government will lose hundreds of billions of pesos in lost value-recovery from the Napocor assets. Nobody will buy the generators if it cannot sell the generated power to distributors like Meralco.

Remember, there were two failed biddings for the 600-megawatt Calaca power plant of Napocor. And Masinloc was going to be sold only for $524 million to a Malaysian group with the Lopez-owned First Gen Corp. offering only $384 million. In more recent biddings, Napocor’s Masinloc plant was sold for a whopping $930 million, even higher than the Lopez offer of $570 million.

(To be continued)

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1 Comment

  1. Pingback: The evils of cross-ownership in power industry (2) | Philippine Power Insights

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