Counter-proposals on the Philippine government's proposed measures to mitigate high power costs

In a Cabinet meeting held yesterday at the Malacaňang Palace, Finance Secretary Margarito Teves made the following proposals which aim to mitigate the impact of rising power costs:

• asking the distribution utilities to absorb the value-added tax (VAT) on system losses;
• reviewing the cap on system losses to lessen the burden for consumers;
• requiring the state-owned National Power Corp. (NPC) to offer flat rates of Php4.11 per kilowatt-hour to Manila Electric Co. (MERALCO); and
• ensuring that local government units (LGU) allocate part of their tax share for lifeline subsidies.

On the other hand, the former military general-turned defense chief-turned energy secretary, Angelo Reyes, who is barely less than a year in his post, presented proposals with a broader perspective:

• implementing “open access”, or a regime where end-users can choose their electricity supplier, in the Philippine Economic Zone Authority (PEZA) by mid-July;
• renegotiating existing government contracts with independent power producers (IPP); and
• implementing a nationwide energy conservation plan.

The proposed plans by the two cabinet secretaries are well and good. But, being an industry insider for over three years, I have these following proposals which in my opinion would be more viable and beneficial for the industry players:

First, instead of asking distribution utilities to absorb the VAT on system losses, why not scrap the VAT on system losses since they cannot be categorized as power sales in the true sense of the word. System losses involve electricity lost either from pilferage or technical inefficiencies.

Second, instead of lowering the cap on system losses from the current 9.5% for private distribution utilities and 14% for electric cooperatives to about 7.5% or 8% as proposed by the finance secretary, perhaps it would be better to leave the current 9.5% level and implement the same to electric cooperatives as well.

The current system loss cap was calculated and referenced on the customer node of the National Power Corporation (NPC) when the regulator approved the cap. Now with the operations of the WESM, the reference point of both buyers and sellers in the spot market is the trading node which is about some few kilowatt-hours away from NPC and TRANSCO's reference point for billing. In short, technical system losses have actually increased due to Site Specific Loss Adjustment (SSLA) in the WESM. Therefore, lowering the cap would only put distribution utilities and electric cooperatives who are actively buying from the spot market in an unfair situation vis-a-vis distribution utilities who are sourcing 100% of their power requirements from the NPC.

Maybe, a more viable solution is for the regulator to disallow the 1% cap on administrative system losses, or those electricity consumed by the power distributors themselves that are being passed through to the power rates of consumers. These should be treated as part of operational expenses.

Speaking of WESM, the regulator must consider drafting a general rule on bilateral contract quantity (BCQ) declaration protocol. Such procedures could encourage efficient buying in the WESM and avoid disputes between buyers and sellers. Likewise, allow WESM buyers to directly nominate their BCQs in the market, not through generators or suppliers.

On the proposal of offering MERALCO a flat rate of Php4.11 per kilowatt-hour, the proposal would be fine for as long as the said rate includes deferred accounting adjustments (DAA) on fuel costs and foreign exchange. If the proposed rate is only meant to be the basic charge, then the time-of-use (TOU) rate would still be better since it gives some flexibility for demand-side management.

With regard to allocating some of LGUs' tax shares for lifeline subsidies, well, I support this idea. At least, people will be benefited by the tax they pay to their local government.

The implementation of open access in PEZA as proposed by the energy secretary is long overdue. Currently, a proposed implementation of interim open access in Luzon and Visayas grids is pending before the Energy Regulatory Commission (ERC). This is a good news for bulk-users of electricity since the broader the scope of open access, not just in economic zones, the better since it fosters competition which may lead to cheaper rates. The only worry is that NPC and MERALCO are still the dominant players. Also, an open access at this early point in time might just lead to higher power costs, initially, since generators and power suppliers will surely reflect the high costs of fuel and foreign exchange in their rates.

Meanwhile, the proposed renegotiation of existing IPP contracts is being opposed by the Philippine Independent Power Producers Association (PIPPA), saying it would give a feeling of uncertainty to investors. Thus, I see that this proposal would not move any farther.

Lastly, I find the proposed implementation of a nationwide energy conservation plan as moot and academic. There's no need for it to be proposed for it should be part of the government's annual agenda whether be there an energy crisis or none.