TAKEOVER OF ELECTRIC COOPERATIVES – DOE NEEDS TO ESTABLISH RULES…QUICKLY. (Part 2)

David Celestra Tan, MSK
19 July 2019

Part 2

There are many unclear issues that any takeover by the private sector of an electric coop would be messy. It behooves the Department of Energy to establish clear rules soonest before target areas are thrown into chaos. Some profound aspects that need clarity are the following:

1. Due process – In taking away or not renewing franchises, there has to be due process. The legislative Franchising Committee does not appear to provide for a due process for denying renewals of incumbent franchise holders much less for cancelling an existing franchise and giving it to someone else. The acrimonious state of the PECO takeover of its assets could have been less so had there been true due process in the franchise denial.

2. Valuation and Definition of Distribution Assets
As we have seen, it is not enough to rely on the power of eminent domain to force the take over. At the same time, the right of the former public utility franchise holder to hold on and value its distribution assets may not be absolute because the consequent rates to the consumers will need to be considered especially when the government is effecting a change of franchise holder. It needs to assure the consumers that it is to their better interest and that includes the rates will be better. Only Distribution lines and substations should be part of eminent domain. Expensive real estate and buildings accumulated over the years should not be part of the rate base. Allow the new franchise holder to lease from the owner to avoid disruption of operations while he is looking and setting up his own buildings and base of operations within say five (5) years. Instead of just handing out franchises, the LFC might want to include these provisions in the franchise.

3. Standards of DU Failure – When does an incumbent franchise holder deserve not to be renewed? And when does an EC’s franchise deserve to be cancelled? The term “ailing” is not clear and if we go by the definition of RA 10531, it means an EC is bankrupt and not able to operate. It is not enough for the area Congressmen, Governor, and Mayors to declare that an EC is ailing. (we have a long running joke. Before you can privatize and rehabilitate a coop, you must destroy it first!).

4. Other Policy issues on the takeover of an electric coop?

a) Who makes the decision on whether the coops franchise should be defended? The Coop Board or its member-owners? If you are an owner and your business franchise is being taken away which will marginalize your business value, would you not have a right to fight for it?

b) Who makes a decision on whether the coops assets should be sold? Should it not be the member-owners?

c) If your coop management has been taken over by the NEA, can the member-owners not demand that NEA rehabilitate the coop as required by law under RA 10531? What are your options if NEA is not doing enough to address the problems of the EC under its management?

d) What happens if your EC Board is not doing enough to protect the coop franchise and assets, can the member-owners call for an emergency stockholders meeting and elect a new Board? What are the rules if the EC is registered with the CDA? Would you not remove your Board if they are not protecting the interest of the stockholders?

e) Should the DOE not establish guaranteed service level improvements as a condition for the entry of the private sector? What happens if they fail? Can they also be replaced?

f) Will the consumers in these islands still be entitled to missionary subsidies? How much time is the new private franchise holder allowed to reduce his true cost of generation and the phase out of the government subsidy?

g) What will happen to the IPP’s who have long term contracts with the EC’s? Will their power supply agreements be rescinded or renegotiated by the new franchise holder?

h) Assuming the member-owners are willing to sell, Who determines what is the fair value of their shares and the distribution assets?

i) How about the employees of the EC’s? Will they get fair retirement packages?

j) Will the DU service compliance standards to their franchises obligations be the same for the off-grid and on-grid Distribution Utilities? Will our legislators hold Meralco to the same franchise compliance standards? And will they dare to even suggest a grab of Meralco’s franchise?

DOE and NEA as White Knights

Actually at this stage only the Department of Energy appear to be trying to do something to rehabilitate Paleco through a Task Force created by Secretary Alfonso G. Cusi and had recently issued orders for Paleco, NEA, and NPC to correct the problems that have been identified. Will the provincial and City officials impede the rehabilitation? (The DOE we understand had created similar task forces also for Mindoro and Masbate)

NEA under RA 10531 is mandated to step in when there are management problems of electric coops and service is deteriorating. They then are legally obligated to rehabilitate the EC like Paleco. With the DOE Task Force showing the way for Paleco problem corrections, will NEA, and NPC whose outdated transmission facilities on the 400km long island is part of the brownout problem, step up to really solve the problems on the ground? Or will they be tacit parts of the political campaign to make poor Paleco look terrible to justify its disenfranchisement?

Meanwhile, the DOE needs to see the writing on the wall that the big conglomerates, who can fund lobby campaigns to take over EC franchises of plum areas, will continue to launch hostile takeovers of EC’s and clear rules are needed quickly, and leadership provided, to assure the service to the public does not deteriorate. Maybe all it will take it to tighten and update the rules under the IMC program. (and delete that MC option for Christ’s sake!). Will it not be a wonderful EC world if we also find a solution to the unspoken “politically ailing” coops? Just kidding.

The Epira Law under Section 37 specifically mandates the DOE to supervise the restructuring of the power sector. And the takeover of the franchise areas of Electric Coops is a major tectonic power sector restructuring affecting millions of marginalized consumers.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

TAKEOVER OF ELECTRIC COOPERATIVES – DOE NEEDS TO ESTABLISH RULES…QUICKLY. (Part 1)

David Celestra Tan, MSK
19 July 2019

Part 1

The acquisition of the electric distribution franchises seems to have become the new frontier of the big conglomerates for insane profit growth after they have all conquered power generation, water, telephone, condo building, roads and highways, and soon airports. We are sure it has not been escaping their corporate growth strategists the 25% annual return on equity of Meralco that the ERC’s PBR rules are allowing. That acquiring the franchise for the Distribution monopoly is also the ticket to the generation monopoly.

Due to the absence of clear rules of entry and engagement, it is going to be a wild wild west. Rules of takeover have actually not been necessary although there have been attempts at take overs of electric cooperatives in the past. Until recently, the takeovers by the private sector were mostly welcome and/or necessary. Like those of troubled Pelco by Meralco, Aleco by San Miguel. Others were patient and civil – years of attempts by Aboitiz on Daneco, Meralco on Batelec I and II in Batangas. Aboitiz attempts at gaining a foothold in Ceneco in Bacolod, the 2nd largest electric coop in the country.  Meralco, as if they don’t already lord over 73% of Luzon, had announced its desire to expand its franchise area to neighboring provinces of Pampanga, Tarlac, Batangas, Mindoro, and rest of Laguna.

There has been no shortage of Governors and Congressmen willing to sell their electric coops to those willing to make a deal. Still the overtures remained subtle and civil….until recently.

Wake Up Call

The wake up call that maybe clear rules are necessary is the recent bold and succeeding attempt of MORE of the Razon Group to takeover private DU Panay Electric Company (PECO) that serves metro Iloilo. And after having whet their appetite, MORE is now going after the franchise for the main island of Palawan, one of the world’s most beautiful islands and hence a prestigious service area. Things however can get ugly unless rules of entry and engagement are established quickly by the government.

The Paleco electric cooperative in Puerto Princesa is under siege. Brownouts had reportedly gotten worse despite the NEA takeover. Government officials seem bent on making the coop look “ailing”. The City Government, a known ally of the Governor who is an open supporter of the disenfranchisement of Paleco,  had sued it and seeking the resignation of all the board of directors. Service will deteriorate and soon the world’s most beautiful island would also be one of its darkest….and hottest in the daytime without aircon!

The Epira Law of 2001 had tasked the Department of Energy to supervise the restructuring of the power sector. It is incumbent upon the DOE that ground rules for the entry of the private sector into the electric coops and/or the takeover of their franchises can be made in an orderly manner or in a way that serves the public interest.  After all, electric service is an essential public utility and every care should be taken by the government that they don’t fall into chaos…all in the name of a franchise takeover.

Existing Rules for Entry of the Private Sector into Troubled EC’s

Actually there are already rules for the entry of the private sector into really troubled electric coops that need private investment – This has been the Investment Management Contracts or IMC that was promulgated by the DOE with funding from the World Bank way back in 2004 a couple of years after the EPIRA law was passed in 2001.

This wonderful IMC program for an organized entry of the private investment and management sector to rehabilitate financially ailing electric coops however did not prove appealing to even troubled coops after they saw an “MC” agreement that took over Zambales Electric without an investment and collected fat fees for “management”. That deal stigmatized the IMC program. (We understand the Management Contract or MC option in the rules where there could be a management takeover without making an investment was surreptitiously inserted by a consultant and the DOE did not catch it)

One recent successful entry of a private investor under the IMC rules was the takeover of Zamboanga Electric Coop by Crown Investment Holdings and Desco in 2018. Zamcelco had been suffering from 22% systems losses and was P1.2 billion in debt. Crown-Desco pumped in P2.5 billion with P1.2 billion paying for debts and the balance of 1.3 billion for rehab and working capital. The new managers are working on reducing the systems loss down to the regulatory limit of 13% and have reportedly discovered that its power supplier WMPC has been charging it 50mw of capacity fees when its peak demand had been only half or 25mw. Now Zamcelco is seeking a P441 million refund.  Aboitiz apparently lost out in the bidding for the IMC and the Meralco group backed out early.

The Dangerous Trend Towards the Franchise Grab

It appears the IMC route is too inconvenient, too slow, or too unsure to some players. They have elected to go the “franchise grab” scheme through friendly members of the Legislative Franchising Committee.  Except they are trying to grab DU franchises that are not yet up for grabs.  One such case is More Reedbank application for the franchise for Palawan service area when the incumbent PALECO’s franchise is still valid for nine (9) more years.  And Paleco, while having solvable problems, is far from being ailing or bankrupt as defined in the applicable law which is RA 10531. The franchise application of More Reedbank is sponsored by two congressmen of Palawan.

Another case is the franchise application by a supposed farmworkers cooperative “GamboaHermanos” to provide electric service for the whole island of Negros. (Can you believe it!) Amazingly, the franchise application was approved in one reading according to the papers by the Legislative Franchising Committee.

People point at MOREs apparent success in taking over the franchise of PECO in Iloilo City by lobbying in the Legislative Franchising Committee and winning a Franchise from Congress. PECO’s case is different. First its Franchise was actually expiring, and the LFC can argue that it was just exercising its right to grant a franchise. Second difference is PECO is a private distribution utility and the rules for required rehabilitation under NEA Law 10531 do not apply.

 

Happy SONA!

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

Yellow and Red Power Alert, Things to Ponder, The Outdated and Onerous Genco Contracts, and Permanent Solutions (Part 2)

Part 2 of 2

 

4. The Onerous Guaranteed Payments for Downtimes in the PSA in Main Grid

These power plants will predictably blame technical reasons for the outages. These are however the “effects” and not the “root causes”.

It might surprise many people but the solution to these Power Plant shutdowns are not technical but contractual and financial.To explain, the PSA’s in place now and new ones being signed are still the old 1990’s era, BOT type contracts where the IPP is guaranteed his full capacity fees and fixed costs even if his power plant is down for maintenance and not available to deliver power.

These are in the form of maintenance downtime provisions in the PSA where the IPP is excused from delivering power.  Typically 45 to 60 days per year for coal plants. There is nothing wrong with legally excusing them from delivering power when their power plant have technical problems or need to be shutdown for preventive maintenance.

What is wrong is continuing to pay them full capacity fees and fixed costs during the shutdown period. And these payments are passed on to the consumers as part of AGRA, the new name of the old reviled Purchased Power Adjustment (PPA). 

These give financial incentives to IPP’s for being down or expressed another way, there is no financial benefit to them to AVOIDing and minimizing downtimes. If these IPP’s are not paid during their downtimes and only paid when they are actually providing a service to the consumers,  their financial dynamics will change, giving them the incentive to make investments in making their power plants reliable.

 Still another way of expressing this guaranteed payments whether down or not, is that electric consumers are being charged for 12 months of service but only getting power from the IPP for 10 months, especially for base-load plants. This is so onerous to the Filipino consumers.

Even for those power plants with “Reserve power contracts” and providing “ancillary services”, they should be paid capacity fees and fixed costs only when they are validated to be on line and available to provide the power if called. Not when they are down.

Downtime allowances in PSA’s should only be an excuse from delivering the service but not for guarantee of continuing capacity payments even if they are not performing a service. We are now in the Build Operate and OWN era, no longer BOT, where at the end of the contract, the power plant is Transferred to the distribution utility.

Ironically these onerous guaranteed payments for downtime allowances are still in the seven (7) midnight Meralco PSA’s signed with subsidiary MeralcoPowerGen. And even in the 460mw expansion of Mauban coal plant with partner EGAT. We suspect that this contract provision is among those trade secrets that Meralco had petition to keep confidential from the public and ERC is agreeing to be hidden from public scrutiny.

These onerous provisions must be prohibited in the Guidelines for procurement being drafted by the DOE, ERC, and NEA for being patently anti-consumer.

Until this is cured, there will always be downtime anomalies because there are financial incentives to being down or no financial benefit to avoiding downtimes.

 (see our Article on Outdated PSA Provisions Need to be Updated, matuwid.org December 6, 2018)

5. The Onerous Guaranteed Payments for Downtimes in the PSA in the Off-Grid

In the Off-Grid areas these guaranteed payments during downtimes similarly cause brownoutsand also the bloating of the missionary subsidies in hundreds of millions. In the Island of Palawan, President Duterte no less complained about the brownouts and the Electric Coop was blamed. It turned out 35% of the brownouts resulted from a power supply contractor whose temporary generators have been unreliable and another 35% resulting from outdated and incompleted transmission lines service of Napocor that have failed to keep up with the demand of the fast growing tourist island.

What is aggravating the brownouts are also contractual in nature. The Electric Coop agreed to pay a power provider for 6mw reserve capacity but it can only be used by the power provider when his regular engines are down for maintenance. The Coop is paying P5 million a month extra or P60 million a year but if the Palawan grid is short of power it cannot call this unit into service because it is only to back-up the contractors own units. So why is the Coop and why is missionary subsidy being paid for 6mw that can only be used by the contractor to meet his 20mw contractual guarantee and cannot be called by the Coop for his own use? And ERC had approved this contract provision.

 On the subject of off-grid areas, the Philippine Grid Code and the Small Grid Code issued by the DMC of ERC, do not provide for maximum size of units to be installed in the island as a % percent of total demand. The maximum size of each generator determines the amount of reserve capacity that the island needs to have. Ideally technical studies and small grid experience show that this should be limited to about 10% of system demand. In a 50mw island, the maximum generator size should be about 5mw. For reserve capacity known as N-1 and N-2 is based on the extra units equivalent to the size of the largest unit.  Hence the larger the disproportionate sized generator, the larger the reserve units that the consumers will pay for.

 In a 50mw island N-1 reserve will be 5mw and n-2 would be only 10mw.

If the largest unit is undefined and allowed to be say 8mw or 15mw coal boiler, the reserve unit will be equivalent to 15mw and not 5mw at higher costs to the consumers.

 6. Long Term Solutions

a. Obviously, guaranteed payments during downtimes must be prohibited from PSA’s. In fairness to consumers,payments must be provided only for delivered service. There must be a disincentive to being down and a financial incentive to make their power plants reliable with minimum downtime.

This is the root cause of the downtimes and Alerts especially those occurring during inopportune times like summer. This can be incorporated in the government guidelines for procurement and made part of the CSP template.

b. Distribution Utilities like Meralco who are the contracting parties to the Power Supply Agreements, must be required to have continuing Generating Capacity Management Coordination and Monitoring. It is their duty to their consumers.

c. The DOE can have a permanent monitoring and coordinating function for the synchronization of maintenance downtime schedules specially avoiding the critical months of summer and Christmas season.

d. The technical terms of the bidding for future supply under CSP must include a prescription on the maximum sizes of the generating units that can be offered. This must be in the Small Grid Code, in the NEA Guidelines, and in the DOE and ERC Guidelines. This is Not only for reasonable size and cost of reserve capacity but also for better systems adjustments for load variations in these off-grid islands.

In many islands, the load variation is only 5% of peak demand. In a 50mw island, the load variation is 2 to 2.5mw.  It is hard and uneconomical for an 8mw reserve engine to fill this in without disrupting the other smaller engines synchronized to the island grid.

Yellow and Red alerts will recur in the country unless we take steps to address their real causes.  Of course Meralco and their cartel members would like us all to believe that the solution is more supply. And that to address our fears of brownouts we must forget about the anomalous terms of their seven (7) midnight contracts and have it approved.

There needs to be a compromise in the national interest. The matter has been allowed to drag on for so long and we are playing into the hands of the involved proponents.

We agree that some resolution are now urgently needed but Meralco needs to also compromise. Their negotiated rates need to be made reasonable and the terms of the PSA cannot be onerous. The ERC needs to see that. Better half of it is converted to LNG. Given the urgency of the power supply, we wonder why the Supreme Court does not see that it is to the national interest to decide on the legality of the ERC extension of the CSP implementation, one way or the other.

Why should the electric consumers be always on the losing end?  We pay when they are down, we suffer when there is a power shortage, and we still pay for the consequent spikes in the WESM prices. When will we have a savior?

 

A Blessed Holy Week and Happy Easter to Everyone!

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org

For private Comments send to david.mskorg@yahoo.com.ph
Public comments submit below.

DOE SEC CUSI AND THE EC ASSN PHILRECA

David Celestra Tan, MSK
20 March 2019

We cannot help but notice the continuing tug of war between Department of Energy Secretary Alfonso G.Cusi and the leaders of the Philippine Electric Cooperative Association or Philreca over the chronic non-performance of many electric coops and what should be the long term solution.

Philreca’s membership and officials apparently got riled by a letter written by Secretary Cusi last January 9 to House Speaker Gloria Macapagal Arroyo endorsing the cancellation of the distribution utility franchises of 17 seriously distressed electric coops. Philreca reacted like a threatened lion.

While most EC’s listed were inarguably ailing and needed serious revamps, like Daneco, Aleco, Zamcelco,  and others, there were others that were curiously thrown in the list that though problematic with bad management and complicated political interference are nonetheless still not ailing and not even close to being distressed as defined by RA 10531, like Masbate,  Oriental Mindoro, and Mainland Palawan.

It is not clear how Secretary Cusi came to writing such a bold letter prematurely, and who did the staff work for such an important step by the Department of Energy. He may have been thrown into frustration with President Duterte himself calling out the bad performance and brownouts in Puerto Princesa and Masbate. Or he may be taking a page from President Duterte’s “shock and awe” style to get people’s attention and shape up?

Prematurity realized and recommendation reassessed

Nonetheless, within a few days Secretary Cusi evidently realized the prematurity of the letter and withdrew the recommendation for updating of data and reassessment as announced by DOE Undersecretary Wimpy Fuentebella.

It was equally a bold move for the Secretary to correct his own course once he realized the action was too early. Courage and humility are virtues of good leaders and statesmen. It is good to see them slow down when going too fast, changing direction when off-course, and going full speed towards a destination. Focus should always be on doing the right thing. No one of us should be too big to correct our mistaken directions.In these the Secretary seem to have handled it well.

Secretary Cusi took a step further and appear to have extended the right hand of peace and dialogue to the electric coops, assuring them that the performance reviews and fact finding efforts are to get to the deep-seated problems of the electric coops, that the assessments will be objective, and the Philreca leaders and members are invited to participate in the search for long term solutions. According to the DOE press statement, the EC’s were assured of due process.

Philreca’s Curious reaction

Philreca curiously seems would have none of it despite the hand of peace and dialogue clearly extended by the Secretary. They fired off a memo in defiance asking the EC’s to submit their performance reports only to the NEA….and let the DOE get it from them. A regretful and unnecessary disrespect. They apparently are treating Secretary Cusi’s letter as an irreversible shot across their bow,  a line in the sand over which they are willing to do battle. Seems perplexing and pointless.

As many observers did, we feel Philreca’s saber rattling and muscle flexing is surprising and looked like they are more interested in picking a fight against a magnified enemy a posture that some people could ascribe only to a desire to raise their profile before the coming elections where Philreca is running as a party list for Congress.

In an unfortunate “let us show you who you are messing with” gambit, Philreca saw it appropriate to wage a signature campaign to petition the removal of Secretary Cusi. Maybe Philreca is not realizing, but these uncooperative moves are starting to make them look like they don’t want to be looked into and giving the impression that they have things to hide.

Still others say the Philreca has some “hugot” in the way they are reacting to Secretary Cusi, who EC’s felt are not supportive of them when he refused to endorse some big funding for rural electrification.

Some EC’s are suspicious of a hidden game plan to “sell” the Coops with the emergence of parties who are close to Speaker GMA to be aggressive applicants to take over DU franchises after their apparent successful takeover of the Panay Electric Company in Iloilo.

Focus must be on the EC problems and how to solve them for the long term

Philreca as a national association of electric cooperatives we would think is very familiar with the long running problems not only of the 17 electric coops but for most coops in the country and should welcome this opportunity to look into their deep causes and prospects for a resolution.

Philreca does not exist for its own reason but, as the national association of electric cooperatives, should exist for their members and the pursuit of their good as electric utilities.  It should have been flexing its muscle for many years to strengthen the electric cooperatives, to address their regulatory, political, institutional, and financial problems. The kind of problems that Secretary Cusi seems trying to address now.

In many ways, the openness of the government to consider “private sector takeover” as an option is due to the failure of the EC’s to correct themselves.  They have been relying too much on NEA, looking for someone else to blame instead of looking within.

The EC’s have this wonderful culture of “cooperativism” or “bayanihan” in coming to each other’s aid whenever anyone is damaged by natural calamities. That kind of “cooperativism” should have worked wonderfully in seeking solutions for failing electric cooperatives who may have political, governance, or financial calamities, and should have been harnessed by Philreca in creating long term solutions for their members.

Secretary Cusi’s  EC initiative may have started with an initial wrong turn but is now in the right course.  In this issue, Philreca should put higher priority for the best interest of their members and not for the sake of the association as a political party.  Pasensya na mga pare ko, an uncooperative stance seems out of character for a sector that is founded on cooperation.

The EC’s should welcome this opportunity for a deep review of their problems and to participate in coming up with long term solutions. After all when was the last time this was actually done either by a DOE Secretary or Administrator of NEA or even by a Presidential Asst for Rural Electrification? We will have to go back to the time of the venerable General Pedro Dumol, the father of the electric cooperative system.

Let us hope that the parties (Secretary Cusi and Philreca) will find a mutually acceptable time and venue for a constructive dialogue. That starts with giving each other a chance and the benefit of the doubt.

The problems of electric coops are deep-seated and will actually require honest acceptance. How do we insulate it from politicalization? how do we develop competent and honest managers? How do we elect qualified directors? How do we stop corruption? how do we improve our regulatory environment and compliance? How do we collect from the LGU’s who treat their monthly electric bills as a discretionary fund?

It is also a good time to revisit the EC’s role in national development. How do we reconcile the need for cost efficiency as a utility and the high cost of missionary services?  Should they be required to operate efficiently and cost competitively as public service providers? How about separate rules and rates for their missionary responsibilities?

This website had written about the role of the various government institutions in the weakening and failures of the electric coops. And to be honest, we can right the EC’s if we right the way the government institutions deal with them.  When government officials talk about privatizing electric coops, they are actually abdicating their obligations as government officials to perform their own roles for the well being of Electric Coops. It is akin to the AFP proposing to privatize the PNP force because they cannot do their job as law enforcers.

While we are on the subject of dialogue, let us include all the Electric Cooperatives groupings that have sprouted to address their common goals. Let it be a solution of national consensus. Let us hope NEA Administrator Edgar Masongsong weighs in on this momentous occasion and be an agent of unity and dialogue.

We wish Secretary Cusi, Philreca and its leadership, and all the other electric cooperatives and their associations well in this opportune undertaking. Your members are counting on you.

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

 

 

The Dance Around the Truth and Reality of the Governments Role in EC Failures

David Celestra Tan, MSK
11 February 2019

We can only solve a problem if we identify, recognize and willing to face them and get to their root causes. In this posting MSK will try to help resolve the issue by bringing up the role of government agencies and offices as institutions in the deterioration of problematic electric coops, something people are not willing to talk about officially. This is not to blame specific individuals but to provide insights for all of those who are in positions to do something to address the institutional problems.

Batobatosalangit.

1. To have stronger Coops, we need a stronger NEA

NEA is first in line mainly because they are first in line in the administration, guidance, and arbitration of Electric Coop problems. In addition to PD 269 they have been mandated by the Epira Law of 2001 under Section 58 to undertake programs to strengthen the Electric Coops in the face of deregulation and privatization. Further, The Epira Law in one stroke strengthened the Coops financially by condoning all their debts. Can you imagine how rich you will be overnight if your home loan, car loan, and business loans disappear?

In 2013 the New NEA Law was passed as RA 10531 that strengthened NEA further in dealing with and rehabilitating ailing electric coops. 10531 provided NEA with a clear path towards the whole range of remedial measures starting with taking over management by putting in Project Supervisors. And all the way towards privatization under conditions spelled out under Section 20 of the 10531 IRR.

In other words all the tools and mandates have been provided for NEA to be stronger as an institution. Epira Law of 2001 even authorized it to increase its capitalization to P25 billion to enable to help Coops in the face of deregulation. So when we say we need a stronger NEA, we mean stronger Administration and implementation of its mandates.

All the management and operational problems of Coops can be addressed in manageable time if NEA acts firmly and effectively. What gets in their way are the other government institutions specially the local politicians, the CDA, and the Local judges. Of course that is not to say that NEA itself is not playing politics and favoritism.

Coop General Managers now have a lot more complex responsibilities and need more skill sets not only in technical management but also in finance, regulatory, power supply procurement, people management and even politics. We wish that in its mandate under Section 58, NEA would have a more proactive system of developing General Managers like an ” NEA Academy”. They should also allow the appointment of Asst. GM’s as we understand they are disapproving. EC’s must be infused with capabilities to operate more as utilities and not just as a Coop.

Nonetheless, as a government agency whose budget is subject to the inquisition and approval of Congress, NEA had to play ball with Congressmen on their concerns with their local cooperative.Then they become part of the problem instead of the solution.

2. The Cooperatives Development Authority or CDA

General Managers and Board of Directors and sometimes with the support of their local elected officials would use a threat of registration with the Cooperative Development Authority or CDA if they wish to keep control of the Coop and cannot get their way with NEA. The extreme case is Daneco where there is now a Daneco-NEA and a Daneco-CDA each operating parts of Daneco. Batelec II and Paleco are other cases.

For a while those who registered with the CDA for the official purpose of availing of tax exemption privileges of Cooperatives, actually got away from the administrative supervision of NEA and abused their independence. The financial tailspin of several coops can be attributed to this lack of supervision. And NEA initially reacted and ostracized these CDA registered EC’s (about 15 of them) and refused them financial assistance without assurance of management oversight.

One of the achievements of the DOE Secretary Almendras was the passing of the new NEA Law under Republic Act 10531 that reiterated NEA’s administrative supervision of all EC’s, including those registered with the CDA, which did not have the organization to provide administration and guidance for electric cooperatives to function and behave properly. Theoretically it clear the air between NEA and CDA.

The CDA as a government agency is also susceptible to political pressure and many times will issue Cooperative registration to a 2nd group even if there it is clearly an adversarial move against a NEA registered cooperative. CDA had contributed to the disruption of restructuring efforts at a problem Coop.

We wish NEA and CDA will coordinate better in registering Coops, and not allow for it to be used as a way to grab control of the Coop just because they disagree with NEA.

3. Napocor’s contributions to the brownouts and/ or high cost of missionary subsidies

A realistic look into the causes of brownouts would show that Napocor, which retained the provision of transmission services, is as much the cause of recurring brownouts as the local cooperatives management of its distribution system. Napocor is known to be slow and unsuited to create new solutions to generation and transmission services. And it is not entirely their fault. As a government agency, they are subject to strict procurement rules and to them “it is better to be legal than to be right” resulting to less than optimum equipment and service decisions. That is to avoid anti-graft cases specially their senior officers who are close to retirement. What kind of bold solutions can be expected from them?

Napocor is observed to have become unmotivated in solving transmission problems and upgrading their substations and transmission lines after their control of dispatching as Systems Operator was removed and transferred to the local EC. This is observed in Palawan where 30% of the brownouts are reportedly due to outdated transmission lines and congested power substations. In Oriental Mindoro, the North South transmission line that was damaged in 2015 and 2016 remain to be unusable after spending hundreds of millions on more than a hundred kilometers of 69kv lines, because a 5 kilometer stretch had a “right of way problem”. Observers feel that had Napocor been inspired enough to look for a solution they could have found an obvious option, saving the residents of seven towns from more than a year of brownouts up to now and the Electric Coop from using temporary generators that do not run steadily and require higher missionary subsidies.

Alarming Rise in Missionary Subsidies

On the subject of Missionary Subsidies,the alarming increase of these subsidies by more than P10 billion in five years from 2015 to 2020 had been noted by the Bayan Muna Party-List. Most of the increase is coming from islands still served by Napocor with rental generators and waiting to be privatized. This could be a case of confusion among the government agencies on which one of them will initiate privatization of power generation. The EC’s themselves seem to have lost interest in holding biddings for their power supply when the DOE under Secretary Cusi steadfastly refused to allow the use of “unsolicited proposals” and “swiss challenge” biddings, a favorite scheme for supply manipulation, as legitimate method of Competitive Selection Process. Meanwhile Napocor is paying an average missionary subsidy of P15 per kwh mostly for rental generators that are not reliable in the first place compared to an average of P5.00 per kwh for those served by private new power providers.

The unreliability of Napocor’s transmission system and their use of rental generators cause frequent power interruptions that many customers blame on the EC because they are the service provider to the customers.

4. The EPIRA Law IRR.

Part of the problem of Napocor is its confused identity. The Epira Law mandated it to be the provider of power delivery services in the off-grid areas. After the sell-off of its assets, the residual Napocor will become mainly a provider of power in the missionary areas. The Epira IRR however mandated it to privatize the power generation in the off-grid areas whenever possible without being clear on where it will privatize and where it should continue for the long term.

That put Napocor in a quandary on whether to privatize or install more efficient permanent power generation facilities. To be safe they ended up only contracting temporary rental generators that have limited operating hours and high fuel costs.

We wish the Department of Energy will initiate the clarification in the IRR that Napocor will privatize power generation in the remaining 7 of the 14 largest islands where Napocors average missionary subsidy is P15 per kwh compared to P5 per kwh for the privatized islands. Napocor should be mandated clearly to be the provider of power generation in the small and unviable areas so that it can install more efficient and permanent long term facilities, of course with safeguards and added requirement to reduce missionary subsidies. The next wave of medium sized islands can also be identified and be reviewed for privatization in say 10 years. Perhaps Senate Energy Committee Chairman Win Gatchalian can help?

5. The Energy Regulatory Commission

The inability of the ERC to handle efficiently the applications of the EC’s for capex and facilities improvements have caused significant delays in the repair and upgrading of power distribution facilities. We wish they can set up a special department and Commissioner who will specialize in Electric Coop matters. They can improve the process of applications and approvals including faster issuance of Provisional Authorities for Capex programs already reviewed and endorsed by NEA.

Many Coops are dying on the vine waiting for ERC. Meanwhile, they are crucified by their member consumers.

6. The Local Politicians

Many Coops would feel that the interference of Philippine style politics as a democratic institution in their affairs must be listed as the first contributor of Coop failures. But no one would dare talk about it for fear of reprisal. No one also seems to take seriously the prohibition in the RA 10531 that EC’s must be“ insulated from local politics.”

Many politicians appear to consider the EC in their area as a government unit that they can meddle with because EC’s structurally look like government units. Their board of directors is elected by its members, it is administered by the government through NEA, whom the Congressmen can pressure through the budget hearings, and it gets government fundings many times. But Coops are private and owned by its members.

We can understand if local politicians express concern over the bad electric services and get involve in solutions. However, it is only a matter of time before they elect their proteges to the Board of Directors and its General Manager, many times using their influence to make election opponents back out.
Actually, it should be noticed that local politicians bother to get involved in having influence in the EC and assuring that its management is in the “right hands”because they have vested interests and in areas where power generation is supposed to be privatized, that include sponsoring power generation contractors.

Worse, these sponsored power generation contractors more often than not are overpriced and not guaranteed to provide reliable service. In several islands the political protection of these non-performing power generators precluded the local Coop from requiring contract performance or contract rescission, resulting to continuing brownouts that are then blamed on the Electric Coop.

In many areas the local government officials are enticed by politically powerful entrepreneurs who view the power generation business as purely a profit making venture and not as a public service. Then the local EC is on its way to Board takeover and eventual ruin.

The provision in RA 10531 that EC’s must be “insulated from local politics”, is reciprocal meaning local politicians should not get involved in EC elections and EC’s similarly should not get involved in local elections. There are also local politicians who claim that it is the EC managers and directors who are seeking their involvement in getting Barangay support.
However it starts, the intrusion of local political influence and meddling leads to Coop mismanagement and bad decisions and eventual ruin.

7. The local justice system

When the NEA decides to replace bad and corrupt management and even directors, many of them go to the local judges and secure TRO’s specially when there is a support from the local politicians. While most of the TRO’s have merit, many Judges issue TRO’s that clearly lacked basis and obviously intended only to impede the NEA.

In one island it took a year before the unfortunate TRO was lifted and reported to have caused further losses in the tens of millions while the undesirable managers were able to keep themselves in control of the Coop.

8. The Department of Energy

The Department of Energy for its part is supposed to be the supervising authority over NEA per PD269 and Epira Law Section 58. For many years the DOE tended to keep its hands off how NEA deals with the EC’s specially in resolving turmoils in problem EC’s. Many times NEA needs a directional push and policy support in dealing with EC situations with resolve. For example, in cases where the problem in an island is the slow remedial measures from NPC in fixing transmission services, NEA’s appeal to NPC would have greater impact if the DOE is lending its moral support. After all NPC is supposed to be also under the DOE.

The DOE is known to have willingly or unknowingly participated in political intrusion into the EC in power supply contracting by approving Swiss Challenge CSP’s lobbied for by local politicians even if they know that it is a mechanism for CSP manipulation, and prescriptions for high rates and missionary subsidies.

But then, reforms can be made and the current DOE seems to have awakened to this reality and started the process of looking into deep-seated problems at the Coops that hopefully can lead to long needed solutions.

We heard that DOE Secretary Alfonso G. Cusi will push for an enlightened way to strengthen problem Electric Coops and that is not by take over of the private sector but by the take over by successful and stronger electric cooperatives. Of course, good rules still have to be made to really make it work but this would be a new and logical era for ailing coops rehabilitation.Let us hope he can make it really happen.

Then the government starts becoming part of the solutions instead of the problems.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

POLICY ISSUES THAT THE GOVERNMENT NEEDS TO RESOLVE BEFORE THE PRIVATIZATION OF ELECTRIC COOPS

David Celestra Tan, MSK
February 6, 2019

We are getting ahead of ourselves on the issue of privatizing electric coops. None the least is whether this will be even good for the consumers. Second is whether the takeover by the private sector is actually the solution to what ails them.

1. Do we want to change policy and the law?

In cases where the Electric Coop is ailing and failing to provide the satisfactory service, the official policy of the state is outlined in RA 10531. First to rehabilitate them by NEA and where they can no longer operate to allow the entry of the private sector. So if we want to deviate from this policy, we first must change the law. Pulling their public utility franchise from under their feet without due process as defined in RA 10531 would be a subversion of our own laws and the policy of the state that is enshrined in that law. It would be an abuse of franchising authority by Congress anyway.

Either we amend the RA 10531 or establish a more transparent reevaluation process of cancelling franchises anchored on due process and mindful of disruption of public services whenever we shake the franchise tree.

2. Does the Government have a right to impose privatization to well performing EC’s specially on the grid? What is the Power of the Legislative Franchising Committee?

The irony of the private sector entrepreneurs who are coveting EC franchise areas is that they only want plum areas like Negros, Cebu, Iloilo, Batangas, Bataan, Pampanga, and some in Mindanao. And there is just no reason even for the government and the Legislative Franchising Committee to consider revoking the franchise of these performing Coops.

The main difference between the ability of a private sector operator and an EC in dealing with the brownout problem is not really money but in managing the interference of local government officials who protect their proteges and the contracts of their sponsored power generators and hence hinder the obvious solutions.

The Congressional and Senate Franchising Committees should not even entertain applications for franchises on existing areas because that is borderline immoral. It is like entertaining someone’s marriage proposal to someone who is happily married. Worse, it is like lobbying with the Priest who married the couple?

On that note, Is the Legislative Franchising Committee only blessing the own-will decision of a couple to marry (the owners and the community in compliance with the laws of the state) or do they have the power to unmarry a couple and choose a replacement spouse?

If the Legislative Franchising Committee would like the power to revoke, they at least must put in the proper due process that is consistent with RA 10531. Or at least supersede that law. At least we need clear rules with due process as a civilized and democratic country.

The role of NEA in these on-grid EC’s is to assure proper management, administration, and governance. It is not missionary unless there are unviable areas that as a government program it wants to electrify.

3. Missionary Nature of Electrification in Off-Grid areas.

Maybe we should revisit why the government is providing electric services on missionary basis in these far-flung areas in the first place. Rightly so it is the policy of the state to provide electricity to all its citizens wherever in these 7,107 islands of ours and since most of them are not “commercially viable” for the profit oriented private sector, the government will have to step up to do it. Meralco that makes 25% per year profit on their investment has not even electrified satisfactorily all the remote areas in its territory. Example Verde Island and Talim island in the middle of Laguna Lake and parts of Laguna and Quezon. Can you expect the Aboitiz group to go into Basilan, Sulu, Lanao, Tawi Tawi, and all the small islands?

The Philippine government decided to accelerate the electrification of these islands by launching the U.S. style electric cooperative system, developed and promoted through the NEA (National Electrification Administration) in early 1970’s.

Now we are in 2019 and most Electric Coops are successful (albeit not perfect, just like Meralco). Maybe 10 to 15% have failed or failing. And some 14 off-grid islands have grown in population and economy that they theoretically have sufficient scale to become Commercially viable, meaning they will no longer need missionary subsidy. These larger islands have actually been identified by the DOE as early as 2005 to be commercially viable for the private sector to take over the generation sector where the Government owned Napocor had proven to be ineffective, too slow, and too expensive. (No offense).Their average generation cost was P18 per kwh. The Transmission services remained with Napocor and the distribution operations stayed with the Electric Coop. This was supposed to be the first step towards the graduation of these islands from missionary subsidies (initially in the generation sector).

4. Privatizing Distribution when Privatizing Generation is only halfway done after 14 years

It has been 14 years since 2005, and the privatization of power generation has stalled at 7 islands since 2010 and the rest remained with Napocor. New Power Providers have taken over Palawan, Oriental Mindoro, Masbate, Catanduanes, Siquijor, Bantayan Island, and Tablas Island. And power generation subsidy has come down to an average of less than P5.00 per kwh, mainly for fuel costs.

According to data culled by Bayan Muna from the DOE MEDP 2016 to 2020, the missionary subsidies for these 7 islands amounted to P3.6 billion in 2015 and for those served by Napocor at P3.5 billion. However, from 2016 to 2020 the missionary subsidy for Napocor served islands soars to P14.133 Billion in year 2020. The subsidy for NPP served areas increased only to P4.7 billion by 2020.

On a per kwh basis, the NPP served areas has an average subsidy of P5.00 per kwh. Unfortunately Napocor served areas still has an average of P14 per kwh in missionary subsidies about the same level before the NPP’s took over those other islands with big improvements in power reliability.

One major reason the privatization on many of these islands has stopped is because the Department of Energy under current Secretary Cusi is disallowing the “swiss challenge” or unsolicited proposal types of Competitive Selection Process (bless his heart) that the EC Board of Directors have been requesting to favor their preferred power generation suppliers, no different than the way Meralco had been fighting so they can pick and choose their power generators. Now the EC’s are tailor-making the terms of the bidding to their preferred suppliers. It happens even for new PSA’s in places currently served by NPP’s.

Is power cost and subsidy reduction, which is passed on to the national consumers as a UC-ME charge, a recognized objective in missionary areas?

5. Who do you buy the assets of the Coop from? And how do you value them?

This is a matter that needs to be cleared before we embark on taking away franchises and taking the path towards privatization if we are to do it with minimum disruption of electric services.
Note that technically the value of the ownership of the member consumers have increased exponentially after the government decided to condone their debts in 2001 as part of the enticement for the Epira Law of 2001. Its probably at least 1,000 times their original membership contributions. Do they get paid via a 50% reduction in their monthly bill for 2,000 months?

Note also that in the end the consumers will also pay for the value of the assets because the new private owner will seek recovery of his buying price from the consumers?

6. In cases where the Coop franchise had to be tendered, should not the government share in the proceeds?
We had mentioned that technically the coop members own the distribution utility and should keep the benefits of selling the utility. But there is an argument to be made for the government to auction franchises and in the case of the EC’s the government continued in investing in nurturing the off-grid communities through subsidies, loans, and management development through the years, and can justifiably ask for a share in the proceeds of privatization.

7. The Disruption by Carpetbaggers and flippers

Let us face it. Theoretically, it is supposed to be to the public interest that the distribution systems and franchise is turned over to the private sector, in case that is necessary, at lower costs so that it will result to lower rates to consumers. However, there will be those opportunists who will promise to take over the public service franchise and provide least cost power then turn around and flip the asset and its valuable franchise. Will there be a deterrent against carpetbaggers and flippers? Well connected enterprising individuals who will just sell controlling interests and management of the distribution system for a fat profit. Of course, who ever bought it at a premium will try to recover that from the consumers, clearly something against the public interest that the government therefore has a duty to safeguard against. Do we put in rules against this or be fatalists and accept this as part of our capitalist system?

8. Do you continue providing missionary subsidy to the privatized island?

Of course we can make it palatable by saying it is the consumers that the government is subsidizing not the private distribution utility. But that is for the birds. We know that part of the missionary subsidy will go to the private owners. So is it legal to subsidize? Note that one of the favorite come-ons by private Franchise applicants is the government will no longer subsidize power costs. Just like Solar Para sa Bayans franchise. (and that remains to be seen.)

9. How about the existing power supply providers with long term contracts beyond the current franchise term of the EC?

Related to missionary subsidy, Will the new private franchise holder not recognize the contracts or shorten them and say they should go after the old EC? He can claim that he cannot afford those contracts since the government is no longer providing the subsidy. These New Power Providers have invested billions in 20 year contracts on the presumption that the Legislative Franchising Committee will not unduly cancel the franchises unless the EC has irreversibly failed financially. Masbate, Lanao, Albay?

These missionary subsidies for the NPP’s are covered by a missionary subsidy agreement with Napocor. Will the government do the right thing and honor the subsidy agreement but with an intensified effort for missionary cost reduction over a transition period?

10. Should the government allow the complete consolidation of the power distribution sector by allowing the two dominant players and their allies to take over and add more electric coops to their already 80% hold on the nationwide distribution market?

If we genuinely care about promoting true competition, anti-monopoly, anti-market domination, and cartelization we will not. Let us all understand that the ongoing consolidation and cartelization of the power generation sector is happening because Meralco has the market power and is exploiting it to the hilt. Will the likes of San Miguel, DMCI, Metrobank, Aboitiz commiserate to become Meralco PowerGen’s minority partner if it were not for the market power of Meralco to dispense with the utilities 5,500mw power requirement? And when the DOE and the ERC finally put in rules on CSP, somehow the regulatory “sea parted” and suddenly Meralco has a 3,551mw contract with their minority partners in tow in seeming conquests.

Do we allow the obliteration of one national pride in public service, no matter how imperfect, that the Philippine government at least has sustained over the years? And after we developed the remote areas we will turnover it to the private sector? Many Coops no longer need government money even if they are not run well. So why allow the private sector to takeover? Will this be good for the consumers?

We believe that the Department of Energy and the Legislature should focus on the 14 large islands and the technically failed EC’s as defined under Section 20 of the IRR for RA 10531.

Let us test the current laws, rules, and organizations in fixing the serious problems of Davao Del Norte, Lanao, Aleco. Let us test whether the current energy family can pay attention and do something about the burgeoning missionary subsidies in many islands.

Let us try to put things in order by creating clearer rules when privatization of an off-grid area becomes necessary. This includes establishing clearer rules at the Legislative Franchising Committee especially in the renewal or cancellation of distribution utility franchises.

We hope also that the standards of performance for retention of DU franchises will be the same for EC’s and the private Utilities like Meralco and VECO.

For now until these are clear, we are getting ahead of ourselves talking about privatizing electric coops. There is just too much at stake. Let us do it right.

Next: The Government and Government Officials role in Weakening EC’s

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

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.