UyFrances Irene GSAPPUP 2016 Thesis
UyFrances Irene GSAPPUP 2016 Thesis
UyFrances Irene GSAPPUP 2016 Thesis
Energy
Pricing
in
the
Philippines
and
its
Effect
on
Economic
Growth
A
Thesis
Presented
to
the
Faculty
of
the
Graduate
School
of
Architecture,
Planning
&
Preservation
COLUMBIA
UNIVERSITY
In
Partial
Fulfillment
of
the
Requirements
for
the
Degree
Master
of
Science
in
Urban
Planning
by
Frances
Irene
Uy
March
2016
Table
of
Contents
I. Introduction…………………………………………………………………………………...3
IV. Analysis……….……….……….……….……….……….……….……….……….………....13
d. Pricing Mechanisms……….……….……….……….……….……….……….…...39
V. Findings……….……….……….……….……….……….……….……….……….…………42
VIII. Conclusion……….……….……….……….……….……….……….……….……….……..46
1
Abstract
This
study
explores
why
energy
prices
in
the
Philippines
are
high.
A
comparison
of
the components of energy cost among selected cities in Asia reveals that Manila has
the third highest generation cost, highest grid cost and the third highest value added
tax imposed on energy. An examination of a residential bill in Manila further reveals
residential electric bill comprises of miscellaneous charges that represent subsidies
incentivize development of renewable energy and the cost of debt incurred by the
government in the past. The history of the energy industry in the Philippines reveals
that loose implementation policies especially at the local level, external economic
factors such as currency depreciation and increase in interest rates and oil prices,
influences led to the massive debt incurred by the government. Due to the
government’s fiscal constraints, the industry was privatized. Pricing is regulated by
the Energy Regulatory Commission but oligopolies and conflicts of interest in the
industry, as well as the current pricing mechanisms suppress demand and impede
the reduction of energy prices. Absence of public participation leaves the general
2
I. Introduction
compared to its Asian neighbors. An overall comparison among selected cities in
Asia shows that Manila has the second highest overall residential electricity
tariff next to Tokyo.1 If not for the 2011 Great East Japan Earthquake of
Manila’s energy prices might even be the highest in Asia.2 Furthermore, Manila
has the third highest generation cost and the highest grid cost in Asia based on
combined with a 12% Value Added Tax make energy prices in the Philippines
Several Asian cities, with the exception of Tokyo, Singapore, Hong Kong
and Manila, embed subsidies in its electricity pricing which results in energy
prices that are not reflective of its true cost. A Filipino economist I interviewed
with expertise on the energy industry of the Philippines explains that Asian
countries like Malaysia, Indonesia, Vietnam and China are able to subsidize
electricity because they export natural resources like gas, coal, hydro and oil to
1
The Lantau Group. (2013). Global Benchmark Study of Residential Electricity Tariffs. Retrieved from
https://www.ema.gov.sg/cmsmedia/Electricity/Consumers/Residential/Global_Benchmarking_Study_of_R
esidential_Electricity_Tariffs_%202013.pdf
2
World Nuclear Association. (2016). Fukushima Accident. Retrieved from http://www.world-
nuclear.org/information-library/safety-and-security/safety-of-plants/fukushima-accident.aspx.
3
The Lantau Group. (2013). Global Benchmark Study of Residential Electricity Tariffs. Retrieved from
https://www.ema.gov.sg/cmsmedia/Electricity/Consumers/Residential/Global_Benchmarking_Study_of_R
esidential_Electricity_Tariffs_%202013.pdf
4
Ibid.
5
20160108-‐‑CV
3
In
the
absence
of
energy
subsidies,
Manila’s
energy
prices
are
significantly higher than its Asian neighbors. While Manila’s high energy prices
subsidies will not be effective as this strategy has been found to exacerbate the
fiscal burden of the government and does not address the long-‐‑term affordability
of energy as proven in other Southeast Asian countries. To illustrate this, Taipei’s
Taipower incurred a loss of NT$1.62bn (US $55.8m) in 2012 and South Korea’s
KEPCO incurred a loss of KWR 2,473bn (US $2.3bn) in 2011.6 Coxhead wrote in
Asia Pathways that “energy subsidies are a hidden tax on economic development”
subsidies.7
reforms in the industry are necessary and urgent. Population growth in the
access to reliable energy services.8 Addressing the underserved demand will not
only promote economic growth; reforms in the energy industry will positively
6
The Lantau Group. (2013). Global Benchmark Study of Residential Electricity Tariffs. Retrieved from
https://www.ema.gov.sg/cmsmedia/Electricity/Consumers/Residential/Global_Benchmarking_Study_of_R
esidential_Electricity_Tariffs_%202013.pdf
7
Coxhead, I. (2014, August 27). Southeast Asia’s energy subsidies are a tax on development. Retrieved
from http://www.asiapathways-adbi.org/2014/08/southeast-asias-energy-subsidies-are-a-tax-on-
devedevelopment/
8
International Energy Agency. (2015). Southeast Asia Energy Outlook 2015. Retrieved from
https://www.iea.org/publications/freepublications/publication/WEO2015_SouthEastAsia.pdf
9
International Energy Agency. (2015). Southeast Asia Energy Outlook 2015. Retrieved from
https://www.iea.org/publications/freepublications/publication/WEO2015_SouthEastAsia.pdf
4
The
Philippines
is
abundant
in
natural
resources
and
has
a
diverse
mix
of
energy sources. Some of Luzon’s resources include a 1,200MW natural-‐‑gas fired
Ilijan power plant, a 1,000MW Sual coal-‐‑fired power plant, a 345MW San Roque
largely powered by geothermal and hydroelectric power plants and have huge
hours.13
energy consumption in correlation with its economic growth. However, the same
energy supply and prices has profound effects on the economic growth of the
country. High energy prices are reflected in the costs of doing business in the
Philippines which make it difficult to attract new investments in the country. In
the 2nd European Union -‐‑ Philippines Meeting on Energy, a Philippine Chamber
10
KPMG Global Energy Institute. (2014). Growth and Opportunities in the Philippine Electric Power
Sector (2013-2014 Edition). Retrieved from
https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/energy-report-
philippines.pdf
11
Ibid.
12
Enerdata. (2014). South-East Asia Energy Data 2014. Retrieved from
https://yearbook.enerdata.asia/#asean-energy-primary-production-data.html
13
Ibid.
5
of
Commerce
survey
was
presented
showing
significant
revenue
loss
per
hour
of
Furthermore, Foreign Direct Investments in the Philippines remain at $1.5bn per
year at the same level it was 25 years ago whereas Thailand, Indonesia and
Malaysia experience a growth between $7bn to $18bn per year in Foreign Direct
of electricity supplies in the Philippines are now the main deterrents to investing
in the country, according to foreign business leaders who see the problem as a
egregiously high. I intend to uncover the underlying reasons behind high energy
energy pricing is determined. To understand energy pricing in the Philippines, I
will also trace the history of the energy industry in the Philippines which is
fundamental in understanding the components of the energy bill and its pricing
mechanisms. Existing studies have concluded that Philippine economy is energy
dependent and that existing energy policies may adversely impact or impede
14
Philippe Reveilhac. (2013, May). Electricity and the cost of doing business in the Philippines. Presented
at the 2nd European Union - Philippines Meeting on Energy. Retrieved from
http://eeas.europa.eu/delegations/philippines/documents/page_content/electricityanddoingbusiness.pdf
15
Enerdata. (2014). Philippines high electricity price is keeping foreign investors away (Executive Brief).
Retrieved from http://www.enerdata.net/enerdatauk/press-and-publication/energy-news-001/philippines-
high-electricity-price-keeping-foreign-investors-away_26287.html
16
Ibid.
6
economic
growth.
Despite
its
abundance
in
natural
resources,
the
problem
of
This study seeks to uncover: Why are energy prices in the Philippines
high? To shed light to this, the following questions need to be investigated: How
is the energy supply chain structured? What pricing scheme is applied at each
stage of the supply chain? How do energy policies affect energy pricing? Has the
electricity?
Energy is a widely discussed topic not only in the US but also among
around energy consumption and its relationship with economic growth. Killian
posited that energy price fluctuations have largely impacted the U.S. economy
since the 1970s.17 At the time, oil price increase was the culprit for drivers of
energy prices. He explored the origins of energy price shocks and its effect on the
U.S. economy and came to conclude that crude oil prices in the U.S. was not a
significant contributing factor to the rise in energy prices. Killian explains that
“in 1990, crude oil prices rose by 83 percent, whereas intermediate energy
prices only rose by 12 percent.”18 Killian further suggests that the importance of
17
Kilian, L. (2008). The Economic Effects of Energy Price Shocks. Journal of Economic Literature, 46(4),
871-909. Retrieved from http://dx.doi.org.ezproxy.cul.columbia.edu/10.1257/jel.46.4.871
18
Kilian, L. (2008). The Economic Effects of Energy Price Shocks. Journal of Economic Literature, 46(4),
871-909. Retrieved from http://dx.doi.org.ezproxy.cul.columbia.edu/10.1257/jel.46.4.871
7
energy
supply
channel
and
its
transmission
remains
open
for
a
debate.19
Killian
also confirms that high energy prices causes a reduction in aggregate demand
for energy.20 Since then, studies surrounding energy and economic growth have
Five years after Killian’s study, oil price change has become the focus of
effects of world oil price change on economic growth and energy demand in the
context of Malaysia. Findings suggest that energy demand and GDP had a
growth, particularly in Southeast Asian countries have become a topic of interest.
Magazzino theorizes that the relationship of the variables fall into one of the
growth hypothesis and feedback hypothesis.22 Magazzino finds that in summary,
the growth hypothesis holds true for ASEAN countries which means that
19
Ibid.
20
Ibid.
21
Mohamed, N. Y. B., & Abdul, N. W. B. (2013). Measuring the effects of world oil price change on
economic growth and energy demand in malaysia: An ARDL bound testing approach. International
Journal of Trade, Economics and Finance, 4(1), 29. Retrieved from
http://dx.doi.org.ezproxy.cul.columbia.edu/10.7763/IJTEF.2013.V4.256
22
Magazzino, C. (2014). A Panel VAR Approach of the Relationship Among Economic Growth, CO2
Emissions, and Energy Use in the ASEAN-6 Countries. International Journal of Energy Economics and
Policy, 4(4), 546-553. Retrieved from
http://ezproxy.cul.columbia.edu/login?url=http://search.proquest.com.ezproxy.cul.columbia.edu/docview/1
619896939?accountid=10226
8
limitations
on
energy
consumption
restricts
economic
growth.23
This
suggests
consumption and economic growth in Southeast Asian countries with more in-‐‑
depth findings in the context of each member country. Findings show that the
Philippines, in particular, support the feedback hypothesis, which means that not
prices and economic growth even in the Philippine context. Existing literature
growth and in the Philippine context, understanding energy pricing is crucial to
understanding the relationship of energy consumption and economic growth is
crucial, it is only a starting point to uncover the underlying reasons why energy
23
Magazzino,C. (2014). A Panel VAR Approach of the Relationship Among Economic Growth, CO2
Emissions, and Energy Use in the ASEAN-6 Countries. International Journal of Energy Economics and
Policy, 4(4), 546-553. Retrieved from
http://ezproxy.cul.columbia.edu/login?url=http://search.proquest.com.ezproxy.cul.columbia.edu/docview/1
619896939?accountid=10226
24
Rezitis, A. N., & Ahammad, S. M. (2015). The relationship between energy consumption and economic
growth in south and southeast asian countries: A panel VAR approach and causality analysis. International
Journal of Energy Economics and Policy, 5(3)
http://ezproxy.cul.columbia.edu/login?url=http://search.proquest.com.ezproxy.cul.columbia.edu/docview/1
701253270?accountid=10226
9
prices
in
the
Philippines
remain
high.
Energy
consumption
is
capped
by
energy
prices and unlocking economic potential in the country requires addressing the
identifies key events in the industry’s history that explain egregious electricity
rates in the Philippines. Without identifying the reasons why energy prices are
high and tracing the history that led to this phenomenon, there is no way of
reducing energy prices. Economic growth in the country has been consistently
electricity, especially since it is at a level below the supply of electricity, does not
affect energy pricing. However, it is possible that energy prices constrain the
demand for electricity thereby giving a false sense of adequacy in the supply of
electricity. Oplas identifies high electricity prices and low power generation as
25
Enerdata.
(2014). South-East Asia Energy Data 2014. Retrieved from
https://yearbook.enerdata.asia/#asean-energy-primary-production-data.html
10
constraints
for
electricity
consumption,
which
is
crucial
in
an
emerging
economy.26
Energy supply in the Philippines was originally served both by public and
private entities. However in 1972, the industry underwent reforms and the
industry was nationalized giving the National Power Corporation, a public entity,
became insolvent and the industry transformed from being served by public
supply may shed light on why energy prices in the Philippines are high. This
study also explored whether policies adopted include embedded costs and are
lack of access to reliable energy services in different regions in the Philippines.
However, since this research is focused on the pricing scheme of energy supply,
Existing studies show that Manila has one of the most expensive energy
energy prices, this study uncovered the components of an electricity bill from a
26
Bienvenido S. Oplas, Jr. (2015, August 13). The Philippine electricity market: Monopoly and competition.
BusinessWorld. Retrieved from http://www.bworldonline.com/weekender/content.php?id=113411
11
Meralco
electric
bill.
While
the
sample
electric
bill
is
not
representative
of
Manila’s energy consumption and cost distribution, it provides the energy cost
components of an electric bill in the Philippines as of November 2015. The bill is
similar in terms of geographic area and like Manila, its energy prices are
reflective of true costs because it does not provide energy subsidies. Singapore
was used a benchmark because its energy prices are lower than Manila’s and it
reasons why energy prices are high in the Philippines, employing quantitative
analysis alone will prove insufficient. For a substantive and in-‐‑depth research,
interviews with key stakeholders were conducted and policies were reviewed.
quantitative analysis.
Representatives from both the public and the private sector were
supply chain and consequently energy pricing was identified. Initially, this
12
transmission
and
distribution
utilities.
Interviewees
were
contacted
through
cold emails, LinkedIn and the researcher’s network of contacts, especially those
who previously worked and currently work in the industry and the government.
Getting in touch with interviewees and scheduling a meeting was difficult and
because of the sensitivity of the subject matter, interviewees are more likely to
explaining the current energy pricing scheme. Interviewees also highlighted key
documents that regulate pricing mechanisms and define the roles of government
importantly, interviews highlighted that energy pricing is not just determined by
technical and economic forces; political factors are equally important in defining
energy pricing.
IV. Analysis
A Global Benchmark Study of Residential Electricity Tariffs by The Lantau
world. Manila’s generation cost is only third highest in Asia yet Manila has the
13
Figure
1:
World
city
residential
tarrif
and
its
cost
components,
January
2013
Source:
The
Lantau
Group.
(2013).
Global
Benchmark
Study
of
Residential
Electricity
Tariffs.
Oplas extracted the figures from The Lantau Group’s Global Benchmark
costs are lower than Tokyo’s and Singapore’s.27 According to the data extracted
by Oplas, Manila’s energy cost drivers are the grid charges and value added tax.
Figure 2 shows that Manila’s grid charges are priced at 8.2 SGD¢ / kWh
compared to Tokyo’s 6.7 SGD¢ / kWh and Singapore’s 4.8 SGD¢ / kWh.28 Manila’s
value added tax are significantly higher at 12% compared to Tokyo’s 5% and
Singapore’s 7%.
27
BienvenidoS. Oplas, Jr. (2015, August 13). The Philippine electricity market: Monopoly and
competition. BusinessWorld. Retrieved from
http://www.bworldonline.com/weekender/content.php?id=113411
28
Ibid.
14
Figure
2:
Electricity
Prices,
January
2013
Source:
Bienvenido
S.
Oplas,
Jr.
(2015,
August
13).
The
Philippine
electricity
market:
Monopoly
and
competition.
BusinessWorld.
comprise 60% of one’s electricity bill and reduction in generation cost will
substantially decrease electricity tariffs.29 Higher grid charges, on the other hand,
are not surprising. An interviewee from a distribution utility cites Singapore as a
comparison and explains that Singapore only has one distribution utility that
serves the entire country whereas the Philippines has 140 distribution utilities
29 20120108-‐‑CV
15
with
assigned
franchises. 30
The
interviewee
contends
that
having
several
distribution utilities makes the network atomistic and each distribution utility is
unable to achieve economies of scope and economies of scale.31
atomistic nature of the network also affects the reliability of energy supply as it
lines difficult. It is important to note that the Philippines, compared to Singapore,
to the tax imposed on energy; he cites that other countries don’t impose taxes on
energy.32 However, as shown in Figure 2, other countries apply taxes on energy
too albeit at lower rates than Manila. Hong Kong is the only city that does not
Aside from Manila’s grid charges and value added tax, Figure 1 shows
categorized as “other charges”. What comprises the “other charges” component
30
20120114-‐‑LF
31
Ibid.
32
Ibid.
33
Bienvenido
S. Oplas, Jr. (2015, August 13). The Philippine electricity market: Monopoly and
competition. BusinessWorld. Retrieved from
http://www.bworldonline.com/weekender/content.php?id=113411
16
a. Probing
into
Your
Electricity
Bill
Figure 3 shows a sample Meralco Electricity Bill that lists the components
of a residential electricity bill. The rates that apply for each component of the bill
consumers with higher energy consumption. While the sample electric bill is not
November 2015.
17
The
above
residential
electric
bill
from
Manila
Electric
Company
(Meralco)
For this particular bill, generation comprises 45.79% of the total bill. Grid
39.07% of the total bill. Transmission refers to charges paid to the National Grid
Corporation of the Philippines for the cost of delivery from power generators to
hand, are charges recovered by the distribution utility for the cost of delivery of
energy from transmission grids to end users. Lastly, system loss refers to the
cost of energy lost from the delivery of energy through transmission and
distribution lines. Energy is transmitted through copper wires and a percentage
of energy delivered is lost in the process. Meralco explains that “the maximum
level of losses that may be recovered by private distribution utilities was set at
9.5% by the Republic Act No. 7832 which was reduced to 8.5% starting 2010, as
34
Meralco.
Meralco Bill Components. Retrieved from http://www.meralco.com.ph/consumer-
information/understanding-your-bill/meralco-bill-components.
18
The
remaining
15.15%
of
the
electricity
bill
comprises
the
“other
charges”
Republic Act No. 9136, Chapter II, Section 6 which states that “pursuant to the
objective of lowering electricity rates to end-‐‑users, sales of generated power by
components of the electricity bill including generation cost are still applied a
19
What
exactly
are
residents
paying
for?
The
second
page
of
Meralco’s
as approved by the ERC, residential customers using up to 100 kWh in a given
mechanism for senior citizens provided under Republic Act No. 8884 or the
Expanded Senior Citizens Act of 2010. There are two Senior Citizens Discounts
citizen which consume not more than 100 kWh a month. The second grants a
50% discount on the electricity bills of senior citizen institutions accredited by
the Department of Social Welfare and Development (DSWD). The discounts are
distribution, supply and metering charges amount, net of lifeline discount, and
35
Meralco.
Meralco Bill Components. Retrieved from http://www.meralco.com.ph/consumer-
information/understanding-your-bill/meralco-bill-components.
20
are
funded
through
a
subsidy
to
be
paid
by
customers
that
are
not
availing
of
the
from customers of the different local government units (LGUs -‐‑ cities and
provinces) where local franchise taxes prior to rate unbundling were already
paid by Meralco but not yet recovered from customers. Prior to the unbundling,
there was no recovery mechanism for local franchise tax payments. Billing of
TRAC started last April 2012 in accordance with the ERC approval in its Decision
under ERC Case No. 2011-‐‑045 RC.”37 Mr. Larry Fernandez, Head of Meralco’s
Utility Economics explains that “Under the regulations, the cost of power
includes all of the cost of delivering service which includes the various business
permits, taxes and fees that are imposed by the government including the local
government.”38
The Feed In Tariff charge is a specialized payment system passed on to
consumers to incentivize the development of renewable energy sources.39 After
delaying the implementation of the Feed In Tariff since 2009, the Energy
21
energy
sources
with
fixed
tariff
benefits
as
stipulated
in
ERC
Decision
Case
No.
2011-‐‑006 RM.40
Environmental Fund, NPC Stranded Contract Costs, NPC Stranded Debts and DU
EPIRA, Section 70, “the missionary electrification function shall be funded from
the revenues from sales in missionary areas and from the universal charge to be
collected from all electricity end-‐‑users as determined by the ERC.”
Source:
Philippine
Energy
Plan
2012-‐‑2030
40
International
Energy Agency. (2015). Feed-In Tariff for Electricity Generated from Biomass, Ocean,
Run-of-River Hydropower, Solar and Wind Energy Resources. Retrieved from
http://www.iea.org/policiesandmeasures/pams/philippines/name-43253-en.php.
41
20160106-MV
22
Environmental
Charge
“is
a
universal
charge
that
accrues
to
an
under existing arrangements and, under Section 34(d) of the Republic Act No.
financial obligations of NPC which have not been liquidated by the proceeds
NPC Stranded Contract Cost of NPC or distribution utility is defined under
the EPIRA as “the excess of the contracted cost of electricity under eligible
contracts over the actual selling price of the contracted energy output of such
contracts in the market.” A former officer of the Power Sector Assets and
NPC’s assets to recover its financial losses, explains that in the past, NPC bought
and variable rates through Power Purchase Agreements.43 NPC then sold power
23
ownership
of
plants
as
well
as
the
capacity
to
supply
energy.
Similar
to
NPC’s
mechanism of selling power to Distribution Utilities, PSALM yields earnings or
losses from the sale of contract depending on how much it sells the contract for
Added Tax. Local Franchise Tax “is levied by provinces and cities for businesses
enjoying a franchise, and paid to such local government units, in accordance with
the provisions of Sections 15 and 137 of the Local Government Code. This is a
pass-‐‑through charge for Meralco paid and collected in accordance with ERC
Regulations.”44 However, It is unclear how the Local Franchise Tax differs from
the Tax Recovery Adjustment Charge. GMA News Online attributes energy price
hikes in 2012 to the local franchise tax collected by Meralco under the Tax
Value added tax “is a consumption tax imposed on the sale of electricity
distribution and sale of electricity to the final consumer. It is a form of indirect
sales tax because the total of the VAT collected on each sale transaction in all the
stages mentioned is charged to the final consumer as part of the purchased price
with sellers and utilities acting merely as tax collectors.”46 The Value Added Tax
24
is
applied
to
all
components
of
energy
cost
except
for
a
portion
of
the
suggests that end-‐‑consumers not only pay for the current cost of producing
energy but also shoulder the cost of debt incurred by the government in the past,
component of one’s energy bill, translates to P345 that can be spent on other
basic needs. Where did these miscellaneous costs come from and why do end-‐‑
consumers shoulder these costs that have no direct benefits to them? These
47
Rappler.
(2012).
PH
at
bottom
3
of
‘world’s
wages’.
Retrieved
from
http://www.rappler.com/nation/4612-‐‑philippines-‐‑at-‐‑bottom-‐‑3-‐‑of-‐‑world-‐‑s-‐‑wages.
25
costs
can
be
traced
back
to
the
history
of
the
energy
industry
of
the
Philippines
as well as the policies adopted throughout the restructuring of the industry.
1890 was a historical year for the Philippines because it was the year the
country was first introduced to electricity; three electric arc lamps were
installed in Escolta Manila succeeded by the first power station in 1895.48 In
1901, private electric utilities were emerging in major cities and towns
nationwide with Manila Electric Light and Railroad Company (Meralco) serving
the demand in Manila and 57 other municipalities.49 In November 3, 1936, the
government adopted Commonwealth Act 120 for the purpose of creating the
National Power Corporation and prescribing it power to undertake development
the public and private sectors. When Meralco decided to focus its business in the
Manila area in 1953, NPC acquired Meralco’s assets outside of Manila.51 By 1956,
one-‐‑third of the country’s energy was generated by NPC with the remaining two-‐‑
thirds accounted for by 336 private and municipally owned electric utilities,
48
Ma. Rowena M. Cham. The Philippine Power Sector: Issues and Solutions. The Philippine Review of
Economics. Vol. XLIV No. 1 June 2007p. 33-63.
http://pre.econ.upd.edu.ph/index.php/pre/article/view/218/631
49
Ibid.
50
Chan Robles. Commonwealth Act No. 120. Virtual Law Library. Retrieved from
http://www.chanrobles.com/commonwealthacts/commonwealthactno120.html#.Vu91fJMrLVr
51
Ma. Rowena M. Cham. The Philippine Power Sector: Issues and Solutions. The Philippine Review of
Economics. Vol. XLIV No. 1 June 2007p. 33-63.
http://pre.econ.upd.edu.ph/index.php/pre/article/view/218/631
52
Ibid.
26
In
the
early
1950s
when
the
energy
sector
was
just
growing,
only
20
percent of the population, mostly residents of Manila, had access to electricity.53
Due to inadequate transmission systems, it was a challenge to transmit reliable
rural areas by awarding franchises.54 Ten years later, despite efforts in rural
electric cooperatives with the understanding that rural electric cooperatives will
repay the National Electric Administration from the tariffs they collect.56 The
53
Ma. Rowena M. Cham. The Philippine Power Sector: Issues and Solutions. The Philippine Review of
Economics. Vol. XLIV No. 1 June 2007p. 33-63.
http://pre.econ.upd.edu.ph/index.php/pre/article/view/218/631
54
Ibid.
55
Ibid.
56
Ibid.
27
government
support
during
the
1970s
and
1980s.57
With
the
combined
efforts
of
NPC and NEA, electricity was made available to 50 percent of rural areas.58
rate in rural areas, political patronage, unrealistically low tariffs, weak collection
efficiency led to the insolvency of NEA in 1989.59 Moreover, several interviewees
alluded that local politics came into play, which not only made expansion of
networks and power plants difficult but also affected the capacity of rural
politicians have control over rural electric cooperatives and divert tariff
revenues elsewhere rather than use the funds to repay the National
Administration fails to regulate rural electric cooperatives and is loose in policy
implementation.62
attractive for local governments given the benefits the local government units
will be entitled to. Pursuant to Republic Act Nos. 7638 and 9136, communities
57
Ma. Rowena M. Cham. The Philippine Power Sector: Issues and Solutions. The Philippine Review of
Economics. Vol. XLIV No. 1 June 2007p. 33-63.
http://pre.econ.upd.edu.ph/index.php/pre/article/view/218/631
58
Ibid.
59
Ibid.
60
20120106-‐‑JW,
20120112-‐‑IM,
20120115-‐‑CH
61
20120115-‐‑CH
62
Ibid.
28
development
and
livelihood
fund,
and
reforestation,
watershed
management,
Republic Act 9136 and the Local Government Code, host communities are
entitled to subsidies that shall be applied to lower the cost of electricity.64
power plants requires permit approvals from local government.65 The permits
built. The interviewee further reveals that in order to secure permit approvals,
expenses then add up to the project’s cost and since developers need to recover
their investment, this expense is eventually passed on to consumers.
sources of energy will drive electricity prices up.67 An interviewee from a
national government agency argues that the local government fails to realize
that shortage of electricity supply is more costly to the region than the electricity
29
price
increase
brought
about
by
new
sources
of
energy.68
The
interviewee
explains that addressing electricity supply and balancing it with the affordability
of energy requires convincing not only the local government but also the general
public because energy price increases affect the popularity of local politicians.69
Electrification Administration amounting to P18.07 billion worth of loans to the
major islands of the country for the purpose of total electrification of the
country. 71 To put this plan into action, NPC acquired foreign financing,
construction of the 2x600 MW Bataan Nuclear Power Plant.72 The plant was
stations in the world as it was built to withstand an intensity 8 earthquake and is
well protected against tidal waves and tsunamis.73 Despite the International
68
20120112-‐‑IM
69
Ibid.
70
Inquirer.
(2011).
PSALM
assumes
power
cooperatives’
debt
worth
P12B.
Retrieved
from
http://business.inquirer.net/17961/psalm-‐‑assumes-‐‑power-‐‑cooperatives%E2%80%99-‐‑debt-‐‑worth-‐‑
p12b
71
Department
of
Energy.
Presidential
Decree
No.
40.
Retrieved
from
http://www.doe.gov.ph/doe_files/pdf/OCSP/PD_40.pdf
72
Ma. Rowena M. Cham. The Philippine Power Sector: Issues and Solutions. The Philippine Review of
Economics. Vol. XLIV No. 1 June 2007p. 33-63.
http://pre.econ.upd.edu.ph/index.php/pre/article/view/218/631
73
Napocor.
(2014).
Bataan
Nuclear
Power
Plant.
Retrieved
from
http://www.napocor.gov.ph/index.php/bataan-‐‑nuclear-‐‑power-‐‑plant
30
Atomic
Energy
Agency’s
approval
for
the
plant’s
commercial
operations,
the
power plant was not operated because of “safety” concerns. Mauro Marcelo Jr.
manages the decommissioned Bataan Nuclear Power Plant and explains that the
plant was never operated because of the Chernobyl accident in 1986.74 Despite
the irrelevance of the incident to the Bataan Nuclear Power Plant, political
indecision has left the country’s only nuclear plant, which could significantly
and increasing oil prices in the 1970s as well as economic and political crisis in
1983, which prompted the government to declare a moratorium on payment of
position.76 NPC’s weak financial position made rehabilitation and maintenance of
systems difficult and with the absence of new generating plants to augment
existing capacity and serve rapidly growing demand, the country experienced
blackouts and power system failures. To address this, the government revoked
NPC’s exclusive rights to power generation and enjoined the private sector in
74
The
Telegraph.
(2014).
Why
has
the
Philippines
nuclear
power
plant
been
dormant
for
30
years?
Retrieved
from
http://www.telegraph.co.uk/finance/newsbysector/energy/11030508/Why-‐‑has-‐‑
this-‐‑Philippines-‐‑nuclear-‐‑power-‐‑plant-‐‑been-‐‑dormant-‐‑for-‐‑30-‐‑years.html
75
Ibid.
76
Ma. Rowena M. Cham. The Philippine Power Sector: Issues and Solutions. The Philippine Review of
Economics. Vol. XLIV No. 1 June 2007p. 33-63.
http://pre.econ.upd.edu.ph/index.php/pre/article/view/218/631
77
Ibid.
31
country
was
addressed
but
NPC’s
financial
position
was
still
weak
because
of
newly built power plants when the 1997 Asian economic crisis significantly
decreased the demand for electricity in the country.79 Because of the nature of
contracts between Independent Power Producers and NPC, IPPs were not
affected by the economic crisis as NPC was obligated to pay IPPs a minimum
contracted volume equivalent to 85 percent plant factor even if IPPs were only
estimated at Php1.09 per kWh; tariff increase shouldered by end consumers was
limited to Php0.40 per kWh with the remaining balance of stranded costs to be
shouldered by NPC.81 The peso further depreciated from P26 to a dollar in 1996
courts in 2004.83 Utlimately, NPC was declared insolvent and the government
recognized the need to involve the private sector in providing the country with
sustainable energy. The Electric Power Industry Reform Act transferred NPC’s
78
Ma. Rowena M. Cham. The Philippine Power Sector: Issues and Solutions. The Philippine Review of
Economics. Vol. XLIV No. 1 June 2007p. 33-63.
http://pre.econ.upd.edu.ph/index.php/pre/article/view/218/631
79
Ibid.
80
Ibid.
81
Ibid.
82
Ibid.
83
Ibid.
32
liabilities
to
the
Power
Sector
Asset
and
Liabilities
Management
Corporation,
which recovers NPC’s financial losses by liquidating its assets and collecting
33
The
industry’s
history
reveals
that
the
Philippines
has
struggled
to
find
a
economic factors such as currency depreciation, increase in interest rates and oil
prices, ineffective demand projections and poor planning of the pipeline as well
industry. While the private sector has been effective in addressing the shortage
of energy supply in the country, the issue of affordability remains an issue.
complex issues of the power sector, the government restructured the industry to
privatization. Under the Electric Power Industry Reform Act, the industry was
In accordance with Republic Act 9136, Section 31, retail competition and
capacity of generating assets in Luzon and Visayas. Except for the power plants
owned by NPC in Mindanao, the generation sector is mostly owned and operated
by the private sector. Section 6 of Republic Act 9136 states that “the prices
84
Ma.
Rowena M. Cham. The Philippine Power Sector: Issues and Solutions. The Philippine Review of
Economics. Vol. XLIV No. 1 June 2007p. 33-63.
http://pre.econ.upd.edu.ph/index.php/pre/article/view/218/631
34
subject
to
regulation
by
the
ERC.”
However,
since
the
ERC
regulates
pricing
of
distribution utilities that source its energy supply from generation companies,
the cost of generation is indirectly regulated by ERC as well. The primary factor
driving generation cost is the mix of energy sources in the Philippines. KPMG’s
reduction in coal prices, this raw material makes energy production cheaper.85
In fact, the Department of Energy is encouraging power producers to build coal
energy mix of the country may prove futile because by the time coal power
plants are ready to operate, coal prices may have changed. The interviewee
further explains that in the long run, renewable energy might be a more
sustainable and affordable source of energy.87 While the fixed cost required to
produce power from renewable sources exceeds that of coal’s, the variable cost
or renewable sources is cheaper than coal’s and the demand will reach a point
where it is cheaper to use renewable sources of energy.
85
20160108-‐‑CV
86
Reuters.
(2015).
Philippines
coal
demand
to
grow
by
up
to
15
mln
T
in
a
year.
Retrieved
from
http://www.reuters.com/article/philippines-‐‑energy-‐‑coal-‐‑idUSL3N1341BP20151110
87
20160108-‐‑CV
35
Figure
6:
Philippines
Installed
Generation
Capacity
by
Fuel
Type
(2011)
Source:
KPMG
The
Energy
Report
Philippines
2013-‐‑2014
While Section 28 of the EPIRA stipulates dispersal of ownership and de-‐‑
intensive. This being the case, only large-‐‑scale corporations with financial
capabilities are able to penetrate the market. KPMG provides a breakdown of the
36
Figure
7:
Energy
Market
Share
Source:
KPMG
The
Energy
Report
Philippines
2013-‐‑2014
37
Figure
8:
Top
Power
Producers
in
the
Philippines
38
While
transmission,
distribution
and
supply
pricing
are
regulated
by
the
oligopolies in the power industry make it possible for these companies to control
pointed out that a high level official of the National Grid Corporation of the
Philippines has vested interests in a generation company indicating that conflicts
d. Pricing Mechanism
One of the mandates of Republic Act 9136, also known as the Electric
prices of electricity in a regime of free and fair competition and full public
achieve this, the National Power Corporation’s functions was segregated and
as well as the other components indicated in the electric bill. The generation
distribution utility contracts its energy supply. A distribution utility can source
its energy supply from the Wholesale Electricity Spot Market, a market that
39
functions
like
a
stock
market,
where
prices
fluctuate
depending
on
the
demand
regulating the spot market, confirms that market irregularities often happen and
that this is because generation companies are able to withhold supply thereby
pushing prices at irregularly high levels.90 The interviewee adds that despite
been taken to address the matter.91 Such a pricing mechanism should not be
the need to produce more energy and policies should prevent opportunistic
price increases.
However, Oplas observes that “electric companies and DUs [distribution utilities]
have bilateral contracts with different gencos [generation companies], and such
wherein both the gencos [generation companies] and DUs [distribution utilities]
90
20160115-‐‑CH
91
Ibid.
40
benefit
to
the
disadvantage
of
the
customers.”92
He
also
suspects
that
cross-‐‑
ownership of generation companies and distribution utilities contribute to high
energy prices.93
for tariff increases as a legal document rather than deciding on the petitions
based on its economic impact and its effect on end-‐‑consumers.94 The interviewee
mandate of protecting public interest and cites that for a period of time, certain
generation companies and distribution utilities have doubled their assets while
Interestingly, even the private sector complains of tight financial margins and
aggressive investments in the energy industry does not support this claim. While
also responsible for balancing public and private interests to ensure the
92
Bienvenido S. Oplas, Jr. (2015, August 13). The Philippine electricity market: Monopoly and
competition. BusinessWorld. Retrieved from
http://www.bworldonline.com/weekender/content.php?id=113411
93
Ibid.
94
20160114-‐‑SS
95
Ibid.
96
20120114-‐‑LF
41
Regulatory
Commission
says,
“We
can
never
really
please
everyone.
For
as
long
as everyone is on the same level of unhappiness, we are okay with that.”97
through the Electric Power Industry Reform Act. In addition to the cost of
producing, transmitting and distributing energy as well as debt repayment of the
who may not necessarily need the subsidy.98 Furthermore, in promoting the
Feed-‐‑In Tariff under the Republic Act 9513 was implemented in 2011 and
V. Findings
97
20120112-‐‑IM
98
GMA
News
Online.
(2011).
Senators
want
new
criteria
for
EPIRA
lifeline
users.
Retrieved
from
http://www.gmanetwork.com/news/story/222189/money/senators-‐‑want-‐‑new-‐‑criteria-‐‑for-‐‑epira-‐‑
lifeline-‐‑users.
99
Bienvenido
S.
Oplas,
Jr.
(2015).
Business
World.
Feed-‐‑in
tariff
means
more
expensive
electricity.
Retrieved
from
http://www.bworldonline.com/content.php?section=Opinion&title=feed-‐‑in-‐‑tariff-‐‑
means-‐‑more-‐‑expensive-‐‑electricity&id=118551
42
miscellaneous
charges
can
be
traced
back
to
the
convoluted
history
of
the
between expanding energy access across the nation and providing reliable and
affordable electricity. In the process of expanding energy access in the country,
oil prices, ineffective demand projections and poor pipeline planning, as well as
political influences in the energy industry. At present, end-‐‑consumers shoulder
the cost of energy reduction, transmission and distribution, debt repayments of
maintaining the affordability of energy. With a growing population, the country’s
energy needs will inevitably grow and adopting the Wholesale Electricity Spot
oligopolies in the industry allow for generation companies to have control over
absence of public participation result to end-‐‑consumers carrying the burden of
necessarily need the subsidy and unnecessarily burden consumers who shoulder
43
energy
in
the
country
create
an
imbalance
in
public
and
private
interests
in
favor
of developers.
This study uncovered the underlying reasons why energy prices remain
high in the Philippines by focusing on the history, policies and pricing scheme
surrounding it. The study was limited to the supply side of the supply chain,
generation, transmission and distribution. This study covered the history of the
comprehensive understanding of how current energy prices are affected by the
divided into 7,107 islands; since regulations are applied at a national level, the
scope of this study includes Manila and the rural provinces.
The findings of this research will help inform policy makers on the
underlying reasons behind why energy prices remain high in the Philippines.
Policy makers have learned from the industry’s history that reliance on foreign
financing and oil imports make the industry susceptible to external economic
factors. The energy crisis preceded by the 1997 Asian economic crisis was a
result of ineffective demand projections and poor pipeline planning that ignored
the international scene. At the time, especially since the government relied
44
heavily
on
foreign
financing,
taking
into
account
international
events
that
affect
the country’s energy demand and supply was crucial. The government’s failure
to accurately plan the country’s energy demand and supply led them to enter
into emergency contracts with independent power producers making the cost to
obligations, the industry was privatized. While the privatization of the industry
affordability remains unsolved. The government should not leave energy pricing
to market forces and balance the interests of the private and public sector. The
government should refrain from providing incentives to the private sector at the
expense of the public. In as much as the private sector needs to realize profits to
expand its capacity to produce energy, the public cannot bear these costs
entirely especially since the public pays taxes on energy too.
oligopolies in the industry are stipulated in the Electric Power Industry Reform
Act but implementation and monitoring are loosely defined. To address high
energy prices in the country, implementation and monitoring policies need to be
45
Policymakers
should
also
review
the
pricing
mechanisms
applied
to
energy. The Wholesale Electricity Spot Market should not be applied to basic
commodities such as electricity because it is dependent on demand and supply
sustainability of the industry and should not adopt policies that only achieve
environmental issues and the security of energy supply in the country.
process. This being the case, end-‐‑consumers end up shouldering the cost to
on to the public are unjustified and the affordability of electricity for end-‐‑
VIII. Conclusion
A comparison of the components of energy cost among selected cities in
Asia reveals that Manila has the third highest generation cost, highest grid cost
and the third highest value added tax imposed on energy. An examination of a
residential bill in Manila further reveals an energy cost component unique to the
46
Philippines.
At
least
15
percent
of
a
residential
electric
bill
comprises
of
miscellaneous charges that represent subsidies for the elderly and marginalized
renewable energy and the cost of debt incurred by the government in the past.
Power generation in the Philippines was originally served by both the public and
nationalized the industry in 1972. The history of the energy industry in the
interest rates and oil prices, ineffective demand projections and poor pipeline
planning as well as political influences led to the massive debt incurred by the
Reform Act mandated the Power Sector Asset and Liabilities Management
the need for reforms in the industry but due to the government’s fiscal
who shoulders the cost of subsidizing the elderly and the marginalized end-‐‑
consumers, the cost of repaying the government’s debt, the cost to expand
47
renewable
energy
sources
is
dictated
by
lawmakers
with
little
or
no
public
disadvantage because they have to shoulder the burden of paying for these
miscellaneous costs.
Regulatory Commission is the only deciding body that ultimately decides on how
regulations, pricing distortion is inevitable. This, combined with the oligopolistic
nature of the industry, allows the private sector to control supply and influence
energy pricing. It appears that the government incentivizes the private sector by
not addressing the oligopoly in the market, providing subsidies and exempting
them from sharing the losses the government incurred during the energy crisis
preceded by the 1997 Asian economic crisis. Joseph Stiglitz describes this
problem as rent seeking, where the private sector is rewarded much more than
what they are contributing to society and where those rewards are taken from
taking it from others, not by creating value and in so doing, creates inequality
100 Stiglitz, Joseph. The Price of Inequality. New York: W. W. Norton & Company, Inc. 2013. Print.
48
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approach
and
causality
analysis.
International
Journal
of
Energy
Economics
and
Policy,
5(3)
http://ezproxy.cul.columbia.edu/login?url=http://search.proquest.com.ezpr
oxy.cul.columbia.edu/docview/1701253270?accountid=10226
Stiglitz, J. The Price of Inequality. New York: W. W. Norton & Company, Inc. 2013.
Print.
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Retrieved
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http://www.world-‐‑nuclear.org/information-‐‑library/safety-‐‑and-‐‑
security/safety-‐‑of-‐‑plants/fukushima-‐‑accident.aspx.
51
Appendices
Beginning
Script
Hi
Mr.
/
Ms.
[Insert
name],
Thank
you
for
taking
the
time
to
meet
me.
I
am
Irene
Uy,
a
graduate
student
of
Urban
Planning
in
Columbia
conducting
research
for
my
thesis
on
the
relationship
of
energy
and
economic
growth
in
the
Philippines.
I
have
been
reading
about
your
work
as
[insert
position]
in
[insert
organization]
and
I’m
particularly
interested
in
your
experiences
and
insight
on
the
industry.
Consent
I
asked
to
meet
with
you
because
I
wanted
to
interview
you
about
your
opinion
on
the
energy
industry
in
the
Philippines,
particularly
about
(a)
the
supply
chain
(b)
demand
projections
(c)
supply
efficiencies
/
inefficiencies
(c)
energy
pricing
scheme
(d)
policies
and
(e)
privatization
of
the
industry.
I’d
like
to
ask
for
your
consent
to
interview
you
and
to
use
the
materials
for
my
research.
Please
feel
free
to
tell
me
if
you
are
uncomfortable
answering
any
question
I
might
ask
during
the
interview.
You
are
not
obligated
to
answer
anything
you
do
not
want
to
disclose.
Thesis
Topic
&
Significance
Developing
countries
like
China
and
India
experienced
sharp
increases
in
energy
consumption
congruent
with
its
economic
growth.
Despite
the
abundance
of
natural
resources
in
the
Philippines
and
its
growing
population,
energy
consumption,
constrained
by
energy
price,
is
not
growing
at
the
same
rate.
The
National
Economic
Development
Authority
of
the
Philippines
cites
that
high
cost
of
electricity
deters
investments
in
the
region’s
industries
and
consequently
potential
economic
growth
in
the
region.
I
believe
that
understanding
the
issues
of
the
energy
industry
will
contribute
significantly
not
only
to
potentially
improving
the
industry
but
also
to
unlocking
economic
potential
in
the
country.
52
Interview
a. In
your
opinion,
how
does
energy
affect
economic
growth
in
the
Philippines?
b. How
is
energy
priced
in
the
Philippines?
Why
do
you
think
energy
pricing
in
the
Philippines
is
higher
than
its
neighboring
countries?
Do
you
think
it
is
necessary
to
reduce
energy
prices
to
induce
economic
growth?
Do
you
think
the
existing
pricing
scheme
is
an
effective
way
to
price
energy?
What
is
your
opinion
on
the
policies
regulating
the
energy
pricing
scheme?
c. How
can
the
energy
industry
be
improved
to
induce
(rather
than
deter)
economic
growth?
Would
you
say
that
the
problem
in
the
energy
industry
lies
in
the
shortage
of
energy
supply?
If
not,
how
would
you
frame
the
problem
of
the
energy
industry?
d. Do
you
think
energy
consumption
is
constrained
in
the
Philippines?
Why
or
why
not?
Is
this
solely
because
of
high
energy
prices
or
are
there
other
factors
to
be
considered?
What
are
these
factors?
e. In
your
opinion,
does
the
current
supply
of
energy
constrain
demand?
How
is
demand
projected?
Is
it
possible
that
projections
do
not
account
for
underserved
communities?
f. How
is
energy
generated,
transmitted
and
distributed?
Are
there
inefficiencies
in
energy
production?
What
are
they?
Do
you
think
streamlining
inefficiencies
in
energy
production
will
contribute
significantly
to
the
reduction
of
energy
prices?
How
do
you
think
it
can
be
improved?
g. What
existing
policies
affect
/
contribute
to
the
determination
of
energy
pricing?
How
do
you
think
these
policies
affect
energy
pricing
in
the
country?
Do
you
agree
with
the
policies
or
are
there
amendments
you
would
like
to
be
considered?
h. Do
you
think
that
the
privatization
of
the
energy
industry
has
created
a
better
economic
environment
for
the
country?
How
can
the
organizational
structure
of
the
industry
be
improved
to
create
a
balance
between
the
interest
of
private
companies
and
the
general
public?
Ending
Script
Again,
thank
you
so
much
for
taking
the
time
to
meet
me.
I
hope
you
don’t
mind
if
I
get
in
touch
with
you
for
follow
up
in
the
subsequent
months.
I
am
confident
that
my
research
will
progress
significantly
and
I
believe
you
have
more
valuable
insight
that
we
have
not
captured
during
this
interview.
May
I
have
your
contact
information
please?
Would
you
happen
to
know
anyone
else
I
can
get
in
touch
with
who
might
provide
light
on
this
topic?
53
My
email
address
is
[insert]
and
my
phone
number
is
[insert]
if
you
have
any
clarifications
/
if
you
want
to
discuss
this
further.
B. List
of
Interviewees
&
Organizations
54