Regulation [and Competition] in the Philippine Electricity Industry Maria Fe Villamejor-Mendoza University of the Philippines September 2002

Objectives of the Paper Provide a macro-overview of the state of regulation [and competition] in the Philippine electricity industry [PEI] Present an analysis of the changing configuration of the industry Proffer preliminary inferences and statements on the past, present and future of regulation and competition in the PEI

Paper Outline The Patterns of Economic Regulation in the PEI Nationalization Period [1903-1987] Restructuring/Opening Up Regime [1987-present] The Changing Configuration of the PEI Some Preliminary Inferences and Suggestions

Regulation An all-encompassing public policy term which is a direct result of the society’s concept of the role of government Connotes control, direction and guidance, and influence of actions of business by government to promote public interest and welfare Both restrictive [red light] and facilitative [green light]

The Changing Patterns of Regulation in the PEI From a command-control type of economic regulation to one, which is envisioned to be positive, facilitative and promoting competition for public interest and welfare The century old orientation remains to set power rates and prescribe standards of service provision, using the cost-of service COS) or return on rate base regulatory regime

Economic Regulation Takes the overt barriers to entry and exit, licensing and tariff laws, price and wage controls Covers sectors of the economy such as electricity, gas, etc., which are deemed strategic to development

Command and Control Regulation The exercise of government influence or control by imposing standards backed by criminal sanctions Uses carrots and sticks in reining over the industry

Cost of Service or RORB Regime Establishes a “satisfactory” or “normal” profit or rate of return on the firm’s regulated asset base, after allowing for efficient capital and operating costs 12% RORB allowed in the Philippines

The Regulatory Periods “Nationalization” Period, 1900-1987, from American colonial rule to earlier period of the Aquino administration Characterized by the predominant state involvement in the provision, transmission, and regulation of electricity

The Regulatory Periods Opening Up/Restructuring Period From 1987-present, from the latter part of the Aquino administration to the Arroyo administration [post-Martial Law regimes] Distinguished by efforts of the state to open the PEI for competition and involve the private sector and other stakeholders in the provision and regulation of electricity

The Nationalization Period, 1900-1987 The Opening Up/Restructuring Period, 1987-2001   1900-1941 American Period Japanese Period, 1942-45 “Republican Period”1945-1971 Martial Law Period, 1972-1986 People Power1 Post-Martial Law Period, 1986-Present Municipal Franchise Act of 1903; Corporation Law of 1906 PD 40 of 1972 EO 215 of 1987 Omnibus Investments Code of 1987 Public Service Act of 1913, 1923, 1929, 1931, 1936 NPC Act of 1936 NPC Amendment of 1949, 1971 NEA Act of 1973 The BOT Law of 1991 Environmental Laws of 1977, 1978 DOE Act of 1977, 1978 Oil Industry Commission Act of 1977; BOE Act of 1978 ERB Act of 1987/OEA Reorganization Act of 1987 Electric Power Crisis Act of 1993 DOE Act of 1992 DOE Regulations 94-2000 Anti-Pilferage Act of 1994 Tariff Segregation & Unbundling of 1998 (EO 473) ERB Open Access Transmission 1997; Pricing Policy 1999 EPIRA Act of 2001 1935 Philippine Constitution 1972 Philippine Constitution 1987 Philippine Constitution 1900 (Active Provision, Sale, and Regulation of Electricity by the National Government) 1986 (Opening of the PEI to Competition) 2001  

Nationalization Period Ownership and operation of a vertically integrated state monopoly in power generation and transmission, e.g., the National Power Corporation [NPC]

Nationalization Period Supervising the distribution and supply backbone through the financing and organization of private rural electric cooperatives [RECs] through the National Electrification Administration [NEA]

Nationalization Period The policy determination and planning of the energy sector by the Department of Energy [DOE] The economic price setting by the NPC until 1993

Nationalization Period The economic regulation [price setting and prescription of service standards] of public service electricity utilities by the Public Service Commission [PSC], the Oil Industry Commission [OIC], the Board of Energy [BOE], and the Energy Regulatory Board [ERB] from 1923, 1977, 1987, respectively

Nationalization Period Public Service/Electric Utilities Organizations for public service Private, sometimes public organizations with public character Provide essential public services such as electricity, gas, transportation, telephone, water, under legally established monopoly conditions

Nationalization Period Grant of franchises to electric power utilities by the PSC, NEA, local government units and the Philippine Congress Franchise is the privilege extended to a “person” to operate an electric system for service to the public at retail, within a designated geographical area

Nationalization Period The arbitration of constitutional questions, particularly of the nationalistic provisions of the Constitution by, and with recourse to judicial appeal from the Judiciary

Nationalization Period The intermittent “intervention” by the President of the Republic on certain issues and public demands related to the PEI, e.g., the take over of private generating plants during Martial Law

On the Regulation of the PEI Implications of EO 172 or the “Energy Regulatory Board Act of May 8, 1987” On the Regulation of the PEI   Regulator Regulatory Concern Legal Basis   National Power Corporation Rate fixing of all its services, e.g., power generation and transmission; Retained sole responsibility for power generation and transmission RA 6395; PD 40 Public Service Commission Cases contesting NPC Board-determined rates; Retained power to grant certificates of public convenience and necessity to public utilities RA 6395; CA 146 Oil Industry Commission Grant certificates of public convenience & necessity for oil & gas companies; Fix rates of electric utilities except that of NPC and the electric cooperatives RA 6173, PD 1206 National Electrification Administration Grant franchises to electric cooperatives PD 269 Department of Energy /Office of Energy Affairs Overall planning of the energy sector PD 1206; EO 193 Energy Regulatory Board Not material to the PEI: focus was on energy resource regulation EO 172

Nationalization Period Nationalistic Philippine Constitution Protect Filipinos against unfair foreign competition and trade practices Give preference to qualified Filipinos in the granting of rights, privileges, and concessions covering national economy and patrimony

Nationalization Period Nationalistic Philippine Constitution No franchise, certificate, or any form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or corporations at least sixty percent of whose capital is owned by Filipinos

Nationalization Period It is the duty of the State to regulate or prohibit monopolies when the public interest so requires, and prohibit combinations in restraint of trade or unfair competition

Nationalization Period Combinations in Restraint of Trade or Unfair Competition Monopolies, mergers and acquisitions Cartel arrangements Predatory pricing, price manipulation Cross ownership, cross subsidization

Restructuring/ Opening Up Period Philosophy of Reforms De-Marcosification Privatization Deregulation, liberalization Reenginering, reinventing Governance

Restructuring/ Opening Up Period The government was cash-strapped but necessary public services had to be provided The private sector was willing and able to provide public services, which the government used to provide

Restructuring/ Opening Up Period EO 215 Ended the monopoly of the NPC in power generation Opened the sub sector to private sector participation; gave rise to IPPs or independent power producers Retained transmission monopoly of NPC

Restructuring/ Opening Up Period EO 226 [Omnibus Investments Code of 1987] RA 6957 [The BOT Law] and RA 7718 [Revised BOT Law]

Restructuring/ Opening Up Period RA 7638 [The DOE Act of 1992] with power to set prices transferred from C to ERB, a task it was not prepared to do RA 7648 [The Electric Power Crisis Act of 1993]

The NPC IPP Plants, 1986 –1998 Year (with Milestones) Administration   Year (with Milestones) Administration Number of IPP Plants Contracted Total Capacity 1986 Aquino Administration (Mothballing of the PNPPI-Nuclear Power Plant)   Nine (9) 1, 988.73 MW June 30, 1992 Start of Ramos Administration Ten (10) 961.95 MW April 20, 1993 RA 7648 (Electric Power Crisis Act) (Start of 1 year-Effectivity Period) 896.80 MW April 20, 1994 (End of RA 7648) Fourteen (14) 4, 610.25 MW June 30, 1998 End of Ramos Administration (Start of Estrada Administration) Three (3) 766.00 MW Total Forty five (45) 9, 223.73 MW   Source: Department of Energy, 2002

Restructuring/ Opening Up Period ERB Regulation 95-21 [Standard Rules and Regulations for the Operation of Electric Power Services] with provision for open access transmission tariff and tariff for ancillary services [OATTS]

Restructuring/ Opening Up Period EO 473 [Segregation and Unbundling of Electric Power Tariff Components of NPC and Franchised Utilities] ERC Pricing Regulation for RORB

Restructuring/ Opening Up Period RA 9136 [The Electric Power Industry Restructuring Act of 2001] or the Omnibus Electricity Industry Reform Act

RA 9136 or the EPIRA Act of 2001 Features Unbundling of the PEI into four sectors: generation [G], transmission [T], distribution [D], and supply [S] G and S as businesses affected with public interest, shall be competitive and open

RA 9136 or the EPIRA Act of 2001 T and D as natural monopolies and public utilities or common carrier businesses for public service, shall remain as monopolies subject to the regulation of the Energy Regulatory Board [ERC]

RA 9136 or the EPIRA Act of 2001 NPC generation assets will be privatized and sold to the private sector Competition in G and S shall be introduced Open access in T and D Creation of the WESM or wholesale electricity spot market

RA 9136 or the EPIRA Act of 2001 Market Safeguards Cross Ownership Prohibition No generation company, distribution utility or stockholder/officer thereof shall be allowed to hold ownership share in the transmission company or its concessionaire and vice versa

RA 9136 or the EPIRA Act of 2001 Concentration of Ownership Limits No company…can own or control more than 30% of the installed capacity of a grid and/or 25% of the national installed capacity Bilateral Supply Contracts No distribution utility shall be allowed to source from bilateral power supply contracts more than 50% of its total demand from its affiliate in generation

RA 9136 or the EPIRA Act of 2001 Other Features Mandated P0.30/kWh rebates for all residential consumers Condonation and assumption by the national government of all debts of NPC to at most P200B, also of all debts of cooperatives from NEA and other government agencies

The Changing Object of Electricity Regulation From nationalized to an industry being restructured and pumped prime for competition

Changing Configuration of the PEI State and Private Monopoly during the Nationalization Period before the 1980s Initial Opening up of the Sector and The Power Crisis Years The EPIRA of 2001

The Industry Structure During the “Nationalization” Years (Before late 1980s): Vertically Integrated State Monopoly in Generation and Transmission of Electricity     Generation   NPC   Transmission   Distribution   Distributors & Large Customers   Supply “Small” Customers

Structure of the Industry with Initial Reforms to Open Up the Industry (1987-2001)   NPC Independent Power Producers (IPPs) Generation Transmission NPC Distribution Distributors & Large Customers Supply End Users

The Existing Power Industry Structure   Regulation: -ERB regulates the price of electricity from generator to distributor (wholesale rate) and from the latter to the consumers (retail). -The DOE regulates the non-pricing activities. - NEA regulates the financial performance of cooperatives   NPC Power Plants NPC Power Plants Independent Power Producers (30) Generation Transmission NPC 17 Electric Utilities, e.g., MERALCO 119 Electric Cooperatives; 10 LG Utilities Distribution Distribution Large Industries Others, e.g., Residential, Commercial, Industrial users Others, e.g., Residential, Commercial, Industrial users Consumers Source: Adapted from the National Power Corporation, “National Power Corporation Privatization and Restructuring Program.” A Presentation to the Philippine Senate Committee on Energy, August 17, 1998, Department of Energy, “Electricity Industry Reform. A Primer,” 1999, Payumo and Parayno, 1998-1999, and DOE Database, 2001.  

General Characteristics of the PEI before RA 9136 Vertically integrated G and T in NPC Fragmented and inefficient D/S sub-sector with MERALCO getting 80% market share in D High electricity retail rates, second to Japan

The PEI Envisioned in RA 9136   Regulation: The ERC regulates the price of transmitting and distributing electricity (transmission charge and distribution wheeling charge); ensures the compliance of the former with performance standards; also ensures the compliance of all generating companies, TRANSCO, distribution utilities and suppliers, with financial capacity, health and safety, and other standards -The DOE regulates the non-pricing activities; supervises the restructuring of the industry; entrusted to establish and formulate rules on the wholesale spot market NEA regulates the franchising of RECs; strengthens the technical capability and financial viability of RECs The Power Sector Assets and Liabilities Management Corporation (PSALM) manages the privatization of NPC assets and contracts and the TRANSCO The Congressional Power Commission oversees the proper implementation of RA 9136   Generation NPC Privatized Generating Companies (GENCOs) NPC Residual GENCOs/ Small Power Utilities Group (SPUG) for missionary electrification Independent Power Producers (IPPs)   Own Genera tion Wholesale Electricity Spot Market Transmission National Transmission Corporation (TRANSCO) Private Distribution Utilities, e.g. Meralco Rural Electric Cooperatives Local Government Utilities Distribution Supply Aggregators/Suppliers End Users Residential Commercial Industrial Others

Some Statements The PEI has a long tradition of state control in electric power generation, transmission and regulation It has been a ‘closed’ system since the start of the 20th century

Some Statements Efforts to reform, restructure and open up the industry for competition have been only fairly recent, e.g., in the past two decades prior to 2001 Regulation has been mainly economic rate setting of public service utilities

Some Statements With the EPIRA of 2001, innovations were envisioned to be introduced, e.g., WESM and segregation of sub-sectors Provisions to safeguard competition are present but competition will not be automatic or instantaneous

Some Statements But there are hanging issues, e.g. Stranded debts of NPC Renegotiation of IPP contracts Perpetuation of monopoly position of distribution and transmission; cross-ownership in G and D Promotion of public interest in G/S