Regulation and Competition in the Philippine Electricity Industry

1
Regulation and Competition in the Philippine
Electricity Industry

• Maria Fe Villamejor-Mendoza
• University of the Philippines
• September 2002

2
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

3
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

4
Regulation

• An all-encompassing public policy term which is a
  direct result of the societys 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

5
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

6
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

7
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

8
Cost of Service orRORB Regime

• Establishes a satisfactory or normal profit
  or rate of return on the firms regulated asset
  base, after allowing for efficient capital and
  operating costs
• 12 RORB allowed in the Philippines

9
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

10
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

11
 
12
Nationalization Period

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

13
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

14
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

15
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

16
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

17
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

18
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

19
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

20
Implications of EO 172 or the Energy Regulatory
Board Act of May 8, 1987 On the Regulation of
the PEI  
21
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

22
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

23
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

24
Nationalization Period

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

25
Restructuring/Opening Up Period

• Philosophy of Reforms
• De-Marcosification
• Privatization
• Deregulation, liberalization
• Reenginering, reinventing
• Governance

26
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

27
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

28
Restructuring/Opening Up Period

• EO 226 Omnibus Investments Code of 1987
• RA 6957 The BOT Law and RA 7718 Revised BOT
  Law

29
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

30
The NPC IPP Plants, 1986 1998  
  Source Department of Energy, 2002
31
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

32
Restructuring/Opening Up Period

• EO 473 Segregation and Unbundling of Electric
  Power Tariff Components of NPC and Franchised
  Utilities
• ERC Pricing Regulation for RORB

33
Restructuring/Opening Up Period

• RA 9136 The Electric Power Industry
  Restructuring Act of 2001 or the Omnibus
  Electricity Industry Reform Act

34
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

35
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

36
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

37
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

38
RA 9136 or the EPIRA Act of 2001

• Concentration of Ownership Limits
• No companycan 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

39
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

40
The Changing Object of Electricity Regulation

• From nationalized to an industry being
  restructured and pumped prime for competition

41
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

42
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
43
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
44
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
Others, e.g., Residential, Commercial, Industrial
users
Large Industries
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.  
45
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

46
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  
NPC Privatized Generating Companies (GENCOs)
NPC Residual GENCOs/ Small Power Utilities Group
(SPUG) for missionary electrification
Own Genera tion
Independent Power Producers (IPPs)  
Generation
Wholesale Electricity Spot Market
National Transmission Corporation (TRANSCO)
Transmission
Private Distribution Utilities, e.g. Meralco
Rural Electric Cooperatives
Local Government Utilities
Distribution
Supply
Aggregators/Suppliers
End Users
Residential
Commercial
Industrial
Others
47
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

48
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

49
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

50
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