Should Your Electric Coop Franchise be Cancelled And Privatized? Complexities of Taking Over EC’s in Off-Grid Areas? (Part 2)

David Celestra Tan, MSK
22 January 2019

The impending takeover by MORE Electric of the franchise for the distribution of electricity in Iloilo City, to replace its 95 year provider and franchise holder PECO had sent shockwaves through the 122 Electric Cooperatives in the country. And the recent filing of a bill in Congress to grant to MORE Reedbank the franchise for mainland Palawan to take over for Paleco, made top tier Coops wonder if they will be next.

First let us assume that we are a law abiding and Christian people that respects its constitution and the rule and spirit of the law and that we are a society with basic sense of fair play and decency. We will use Paleco only as an example but the complexities and principles apply to all EC’s that can find themselves a target of takeover attempts.  Let us go over the issues.

1. There are big differences in the cases of PECO and PALECO. PECO is a private company whose franchise was expiring and had expired last 19 January 2019. They are also on the main grid and not receiving any missionary subsidy. PALECO is an electric cooperative in the off-grid missionary area AND its franchise is still valid until 2029. As an EC, there are laws (PD 269 and RA 10531) in place clearly defining the process of addressing cases of “ailing” coops during the validity of their franchise, the mandates of NEA as its administrative authority, with clear definition of what is an ailing EC. There is therefore a world of difference in the two situations.

2. PECO has for years been a certified disappointment as a distribution utility and their owners failed to respond to calls for them to improve their services. Their unsatisfactory service was undeniably the fault of its owners and management.

3. In PALECO’s case, its member consumers can rightly complain about the unsolved years of brownouts in the internationally famous tourism island. What outsiders do not know are the real reasons for the brownouts. Of course the easy blame is on PALECO, its Board of Directors and Management. And the recent attacks on Paleco seemed to have come from politicians some of which are explained by the recent filing of HB8829 in the Legislative Franchising Committee to give the distribution franchise to MORE Reedbank.

4. But does PALECO really deserve to be prematurely stripped of its franchise and Palawan be turned over to a new private franchised distribution utility? Before we answer that lets understand first the process at the Legislative Franchising Committee in Congress.

Award of Franchises and or Renewals by the Legislative Franchising Committee

5. Based on our research, Applicants for franchises and or renewals have to submit a list of documents to Congress and the Senate. There is a checklist. You need a sponsor. Basically, it is who you are, the franchise you want, your feasibility study, your financial capability. There is no information required on the previous experience of applicants on the service it is proposing to franchise. Their awardees are subject to the approval of the President.

6. Surprisingly for applicants of franchise renewals we cannot find any clear and transparent rules, criteria, and procedure for determining justifications for renewal or cancellation of franchise. A check on the time it takes to get an award of franchise showed highly variable lengths of time. Some franchise applications are subjected to long process of deliberations and hearings and basically goes through the grinder. Still others with full scale lobby campaigns are fast tracked and granted a franchise in a matter of months with only symbolic hearings.

7. A most important thing is the apparent absence of real due process for denial of a renewal or arbitrary removal of a franchise by the Legislative Franchising Committee.  We would think the incumbent Franchisee has a constitutional right to their day in court. They have after all sacrificed through years of building the distribution systems and serving the community. It is akin to the concept of the “equity of the incumbent”. How about an orderly, democratic, civilized, process of assessing the compliance of the franchise holder to its franchise obligations and its worthiness for a renewal. In case of none-compliance,  a final curing period to show within one year that they can upgrade services and comply with the service requirements of their franchise.  How about giving a final warning for the EC to shape up and meet certain standards with a deadline, fact finding public hearings, an audit by NEA and DOE? Most of all establishing a transparent performance criteria that will serve as the scorecard for franchise holders and renewals.

8. Bottom line is the grants of renewals of franchises are currently subjective, political, and arbitrary. In the case of the siege of Paleco we don’t know if it is only a coincidence that the Chairman of the Congressional Legislative Franchising Committee is from Palawan. We also don’t know if it is also a coincidence that we are facing elections…… and Filipinos know what that means.

Issues on the takeover of Paleco’s franchise

 1. Can Paleco really be declared an “ailing” electric cooperative under the purview of the NEA Law RA 10531 that was passed in 2013 under which electric coops can be privatized? And what had been the cause of its problems? 

a. Legally the only mechanism the privatization of an EC like Paleco can be justified is for it to be declared an “ailing” coop by the NEA. NEA has performance standards for the electric coops and has a long standing system of “Rating” the electric coops.

b. Section 7 of RA 10531 provides for the rules for the NEA’s step-in rights in case of failure of the EC’s to meet operational and financial standards. The criteria for an EC to be declared “ailing” is clearly spelled out under Section 20.

c. What can NEA do with “ailing” coops that it took over, presuming? The law is also clear. RA 10531 recognized Section 4 K of PD269 that provides under Section 6 that NEA should “Restructure ailing ECs with the end in view of making them economically and financially viable”.

d. In the case of Paleco and all Electric Coops, there are legal processes and institution in place through NEA to deal with the issue of whether an Electric Coop is ailing and must be taken over and privatized under RA 10531. As mentioned above, the purpose of the takeover is first to rehabilitate into making them economically and financially viable.

e. “ If within a reasonable period, not exceeding one hundred eighty (180) days from its take-over, the NEA determines that such EC is unable to continue its operation in the ordinary course of business, it may initiate structural reforms such as conversion of the ailing EC to either a Stock Cooperative registered with the CDA or a Stock corporation registered with the SEC. “

 f. In this event, NEA may enter into partnership with a qualified private sector investor, under any of the following frameworks: i. Joint Venture; ii. Investment Management Contract; iii. Management Contract; iv. Operations and Maintenance Contract; v. Special Equipment and Materials Lease Agreement; vi. Concession; vii. Merger and Consolidation; and viii. Other variants deemed applicable to the EC. For this purpose, the NEA is hereby constituted as the agent of the concerned EC.

 g. NEA Takeover

The process of determining whether Paleco is “ailing” has not even started. And it should be the first step to determining whether the Legislative Franchising Committee is justified in cancelling the valid franchise. The Paleco Board had reportedly submitted to NEA its choice of a regular GM to replace the retired one. NEA instead appointed a Project Supervisor which means it has “taken over” management of Paleco reportedly due to pressure from lawmakers and threat of Congressional budget denial. (Ahhh the tyranny of budget approvals, that deadly weapon of Congress!)

But there is no indication that there is an ongoing attempt to restructure Paleco for the purpose of making it economically and financially viable as the legal duty of NEA.  In fact based on the criteria established by the IRR of RA 10531, Paleco is not even “ailing” and can continue its operations in the normal course of business”.

h. We realize that the Legislative Franchising Committee in Congress has the power to grant and or renew franchises. However, in the case of Paleco and all Electric Coops with existing Franchises, it is premature for it to accept or consider applications for franchises for areas where there is an existing franchisee without a due process of determining whether there is justification under current rules to cancel the franchise. Doing so would be unduly disruptive of the current order established by its own laws, something legislators should not be doing.

i. If based on complaints the Legislative Franchising Committee wishes to undertake an investigation on whether Paleco has violated its franchise to justify cancellation, it still behooves Congress to defer to the NEA to make the determination of whether it is ailing and is failing to provide satisfactory service. The rules for that are in place.  In addition to this technical determination, it seems also fair to look into why the EC is nonperforming to justify cancellation of franchise.

j. Noisy consumer, media, and politician complaints do not convict an “accused” and similarly should not be enough basis of precipitate cancellation of franchise for the obvious intention of turning it over to an enticing applicant.

2. Let us look closer at the reasons for the unsatisfactory service of Paleco

Three macro reasons that are beyond Paleco’s control:

k. The failure of the national government to release to Palawan its share of the Malampaya funds. Not many people knew about this. In the original agreement Malampaya funds will be used for energy development projects for Palawan. Paleco had submitted its modernization program of approximately P1 billion but the funds were never released and used instead to help bridge the gaps in the national budget we were told. This effectively denied Palawan with a modernized electric distribution and transmission system. And the consequences are the unstable power systems that the government officials are now crucifying Paleco for.

Whether or not Camago Malampaya is part of Palawan Province is only a technicality for the entitlement of the 40% share of Malampaya revenues. There is no debate that it should be used for energy projects and Palawan is deserving of a P1 billion allocation since Palawan is still the launching pad for all activities related to the Malampaya project including the pipelines.

l. The interference of local government officials.

Under Section 11 of the NEA Law IRR,  Governance Structure of ECs.

”In compliance with Section 10 of the Act, it is hereby prescribed the independence of the Board of Directors and Officers of ECs. a) To ensure the long-term business and economic viability of ECs, the management, operations and strategic planning of electric cooperatives shall, as much as practicable, be insulated from local politics.”

Sadly, this law is openly ignored. Local politicians could not restrain themselves and who will stop them?

m. Failure of NEA to Sufficiently Step up to Guide and Assist Electric Coops as mandated by Section 58 of the Epira Law.

NEA did not respond sufficiently to this key mandate intended to insure EC’s thrive under deregulation and privatization as provided for under Section 58. “To strengthen the technical capability and financial viability of rural electric cooperatives”.

Paleco although a CDA could really use some reformation guidance from the NEA but they have not been getting it. Talking to some NEA officials, you get the sense that they are hesitant to aggressively take action for fear they will be reprimanded by provincial and congressional officials who can threaten them during budget hearing days.

n. The Real Causes of Paleco’s brownouts.

Data collated from various sources in Palawan showed that the continuing brownouts in Palawan have been caused only 30% by Paleco’s failure to maintain its lines specially line clearing for which they blame the time it takes to get the permit of the DENR and PCSD to do tree cutting from power lines. 35% is caused by the temporary generators installed by a power generator contractor that could not handle the continuous service needed by Puerto Princesa Grid. 35% is the old and overloaded transmission lines and power substations of the National Power Corp that had not been upgraded to keep up with the fast growing Puerto Princesa City.

How about political interference? Sources in Palawan estimate that of the 30% attributed to Paleco’s failure to operate efficiently, only 1/3 is due to management incapability and 2/3 due to external interference. In the case of the 35% problem of inappropriate equipment by a contractor, Paleco’s inability to take steps is 4/5 due to external interference.

Should Paleco then be fully punished for these failures?

o. Other Issues in Privatizing Paleco and other EC’s.

1. Franchising Power of Congress. Looking at the Wrong Alley, Barking Up the Wrong tree

Let us grant that under the current rules and traditions that the Legislative Franchising Committee has the absolute right to choose a replacement Distribution Utility franchisee to improve services in the public interest. But that is in the case of new or expiring or expired franchises like PECO.

It is an entirely different story when it involves prematurely cancelling a valid franchise, that have years to go, ostensibly due to bad service.

There is due process and there is a law and method in place to deal with underperforming coops as spelled out in RA 10531 and anchored on first rehabilitating them and mindful of constitutional due process.

Pulling the carpet under the feet of Electric coops by taking away their franchise would be a usurpation of current process that is in place and unfairly sabotages their right to rehabilitate and run their affairs. Especially if it is evidently with the intent of putting in an enticing new applicant. It also crosses the line towards legislative overreaching. Is this the equivalent of a coming “coup d’etat”?

Is privatization the right solution for its problems? Who caused the problems anyway?

2. Who owns the EC’s?

The other important issue is Electric Coops are not government institutions. They are owned by the members.

There was a time that all these EC’s owe the government for all the loans for building their systems. But this financial hold on the EC’s went away when the framers of the Epira Law in 2001, decided to outdo its each other and condoned all the debts of the EC’s estimated at P40 billion.  Now while NEA is the designated administrator of the EC’s, it is not the owner of the distribution franchises. It’s role is clearly defined under RA 10531 including what it can do in case of “ailing” coops.

3. Equal Treatment and Standards under the Law

Let us assume that many of its customers complain about the service of Paleco including its Congressmen. And let’s assume that the members of the Legislative Franchising Committee would like to punish Paleco by terminating its franchise and entertaining a new franchisee.

How about the complains about Meralco and their clear violation of their public service franchise? Would these Congressmen also entertain applications to take over the Meralco and VECO franchises on the basis of those complaints? Would they dare threaten to cancel the Meralco franchise?

Our constitution requires equal treatment and standards under the law.

4. What would be Better for Consumer Interest?

Privatization can probably solve the political meddling because private investors would have a different way to mollify local officials. They would also solve the uncertainties and manipulations in the election of the Board because there it will be privately held. Theoretically they will have more money to fund improvements in its distribution systems. They can also change managers anytime they want. It can also be granted that they can improve operations.

But surely the consumers will pay more and unviable sitios will probably not be truly electrified. NEA oversight will not be there to assure proper procurement of materials and equipment. How about the missionary subsidies? Would it be legal for the government to extend missionary subsidies to privatized coops?

According to DOE records and Bayan Muna, the missionary subsidy for Mainland Palawan is P1.09 Billion in 2017, P1.396 Billion in 2018, and P1.186 Billion in 2019. ( we were also surprised that it is that much!) What happens if this is removed?

If consumers pay P10 per kwh in the 6,000mw Meralco area and P11 per kwh in the 400mw Cebu area, what would private investors charge in the 50mw Palawan island? Can ERC help us assure a fair and reasonable rate? No Way with its infamous PBR rate making methodology where we are charged even for investments that were not incurred and the profits of the private DU are no longer regulated. (Many consumers did not know that)

Without missionary subsidies and with PBR, we could be looking at a rate of P15 per kwh In Palawan. And if the rate is controlled, a private investor will probably reduce the quality of service.

5. Parties in Interest

Let us also not forget that there are private investors who have poured in billions in building power generation facilities In Palawan under long term contracts with Paleco. They are parties in interest to the cancellation of the franchise to protect their contractual rights.

The government specially the Legislative Franchising Committee should be circumspect in interfering with existing franchises that it itself granted. There is an established legal process the Congress itself also approved. Democracy works when there is a responsible exercise of power. Let us not weaponize our Franchising process for public services. Let us respect our own laws.

Prematurely taking away Paleco’s franchise is a wrong solution to the wrong problems. And Let us observe due process.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

Apologies: We are sorry for the delay in the posting of this Part 2. I am clumsy with Word and lost half of the article twice as I was saving the file. Just drove me crazy. Kindly bear with me.

Should your Electric Distribution Utility or Electric Coop be Replaced? And What’s The Right and Democratic Way to do it? (Part 1)

David Celestra Tan, MSK
18 January 2019

The failure of the Panay Electric Company (PECO) of Iloilo City to secure a renewal of their franchise that is expiring January 19, 2019 is now in the public’s mind. And raising people’s eyebrows is the ability of a new provider, MORE Electric Power Company of tycoon Enrique Razon to quickly secure a franchise and takeover as the new Distribution Utility for Iloilo City.

The bad and overpriced services of PECO had been in the mind of Iloilo City residents for at least 15 years. It did not help that It bit the bullet when in desperation to quickly get power supply during the crisis years of the 1990’s, it entered into a JV with the Lopez group for a 67mw diesel power plant. That project added about P1.50 per kwh to the PECO rate that gave Iloilo City the highest retail rate in Western Visayas. Subsequently, the Cacho family reportedly declined the Lopez Group proposals to upgrade PECO’s distribution facilities for fear that their ownership will be diluted and Meralco would encroach on its management.

The campaign not to renew PECO’s license started three (3) years ago. Most people only heard about MORE Electric recently. The Franchise of MORE Electric is reportedly just waiting for the signature of President Duterte which presumably is a foregone conclusion. The DOE is just now insuring a smooth transition