PPA cut evades key issue, may trigger bigger crisis
GATHERING DARKNESS: A top-rated public utility analyst warns that we could find ourselves in another power crisis similar to, if not worse than, that one from 1991 to 1993 when we had daily brownouts lasting eight to 12 hours.
The warning comes from Ricardo Barcelona, a Filipino based at The Hague who holds extensive international experience in public utilities. A top rated analyst and adviser in European utilities, his credentials include impressive stints as global head of the power, water, and gas utilities of ABN-AMRO in London, and executive director at UBS Warburg.
The literally dark scenario is the focal point of Barcelona’s study on the Philippine power sector commissioned by the School of Economics of the University of Asia and the Pacific.
Barcelona’s thesis echoes the forewarning of President Gloria Macapagal Arroyo herself when she unveiled the Philippine Energy Plan last January.
“People think that we have an oversupply of power, but this is only true today for the main grid in Luzon,” the President said. “If we don’t act now… and fast, we will have a serious power shortage in the Visayas by 2004-2005, in Mindanao by 2006 and in Luzon by 2008.”
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INVESTMENT DROUGHT: The looming power crisis is traced to investment drought. With investors avoiding the power sector like the plague, the country appears headed back to the “era of candles” that prevailed from 1091 to 1093.
In his paper, Barcelona pinpointed three recent developments in the power sector that, he said, severely eroded investors’ confidence.
He cited these as: (1) Power price reductions achieved through cuts in purchased power adjustment or PPA charges, (2) the Supreme Court ruling against the Manila Electric Co. or Meralco for overcharging consumers, and (3) the persistent clamor to rescind the contracts of independent power producers or IPPs.
Politics, the usual suspect, was blamed for the three confidence-eroding developments.
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SHOT OF COCCAINE: The deferment of the collection of PPA charges, Barcelona said, is tantamount to curing drug addition with a shot of cocaine. “As the immediate relief wears off, the addiction is aggravated,” he noted.
The reduction of the PPA as ordered by the President brought instant tangible respite to consumers, lowering their electric bills in the next billing cycle.
When the instant gratification wears off — as it has worn off — consumers want more cocaine, which the government appears inclined to administer. (In this metaphor, cocaine is government subsidy.)
Barcelona points out that while the suspension in consumers’ full payment of the PPA brought immediate relief, “the action engenders a worrisome dependency on subsidies to buy our way out of a problem.”
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FROM PPA TO TAXES: There would be no problem if government could afford to partly subsidize power consumption. But government cannot afford that, being very much in the red itself as shown by the ballooning budget deficit.
Even if the government had the money to share the costs of power consumption, taxpayers would, in effect, be subsidizing themselves as power consumers. It would no longer be PPA charges but taxes.
Yet, despite its not having the money, government insists on pursuing a politically-dictated populist approach to lowering the cost of electricity through subsidies.
To carry out the President’s order, government had to borrow to pay for the suspended PPA charges. As pointed out, consumers themselves would end up indirectly paying the interest and principal with more taxes.
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LITIGATION ROUTE: Barcelona laments in his paper that “the fortunes of the energy industry are left in the hands of lawyers, accountants and the judiciary.”
A case in point is the Supreme Court’s ruling against Meralco on its including income tax in its operating expense.
The inclusion of income tax as expense was legal and acceptable in the past, but the tribunal’s ruling reversed the long-standing practice. The reversal left Meralco scrambling for relief from the financial dislocation.
While the action was judicial, Barcelona looked at the ruling as yet another manifestation of the politically-charged environment on the power sector under which policies “can swing from one extreme to another.”
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STRUCTURAL FLAWS: Barcelona points out that with Meralco in danger of bankruptcy, it will not take long before its problems threaten not just the viability of the electricity industry, but also the entire economy.
Meralco is the country’s biggest power utility, accounting for more than half of the market. Congress has just approved the consolidation of its scattered area franchises into one mega-franchise.
In Barcelona’s view, the high court, in taking away the predictability and transparent application of the tariff mechanism, highlighted “serious structural flaws” in the power sector’s regulatory framework.
Clear and transparent tariff application could have avoided the unstable situation where energy policies are contested through litigation, vesting the courts with the unaccustomed role of arbiter in power regulatory matters.
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TIGHTER CREDIT LINES: While largely critical of government’s handling of energy issues and controversies, the Barcelona study lauded the state for not heeding calls to revoke IPP contracts. The IPPs provided additional power in the shortest period of time to bail us out of the 1991-1993 energy crisis.
The study pointed out that tinkering with the contractual arrangements with IPPs would — like the suspension of the PPA — be a short-term relief by merely transferring the burden to future consumers and taxpayers.
Barcelona argued that rescinding the power contracts will not produce the outcome that the critics are seeking — the lowering of electricity bills — but will make matters worse.
As a proposed measure against expensive power rates, the annulment of IPP contracts would inevitably turn out to be an expensive proposition as the country would be obligated to pay cash buybacks in billions of dollars, which it cannot afford.
Worse, access to capital markets would further tighten due to investors’ boycott and excessive premiums on Philippine borrowings.
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POPULIST AGENDA: Barcelona prodded government to discard the “populist agenda” of delivering electricity price cuts to the very customers who will pay for the same cuts tomorrow.
“In the final analysis,” he said, “what the government gives in small doses of subsidies, the same government will eventually be forced to take back in much bigger doses of social and economic penalties.”
He expressed hope that the President, having ruled out herself as a candidate in the 2004 elections, will take advantage of her foreswearing politics to depoliticize the approach to energy policy.