The Philippine Online Chronicles

This is today.  The lights are twinkling, but not in delight. On and off they go, and we stand, scratching our heads, bewildered in blackest day.

Is this for real?

Peter Wallace wrote, “Daddy, daddy, it’s dark in here,” and cited that as of January 29, 2010, Luzon had the requisite 1,837 MW electricity with gross reserves at 415 MW.  For Visayas it should be 340 MW (with gross reserve of 35 MW) and for Mindanao, 369 MW (gross reserve of -17 MW).

Dean de la Paz on the other hand wrote in Dim and Dimmer on Business Mirror that the shortages in Luzon and Visayas are a myth!  He added that Mindanao’s deficiency is “artificial and temporary,” the result of what he calls “myopia and incompetence,” and that the idea of emergency powers is “ludicrous.”

Opening the page to the Department of Energy, power stats reveal that for the entirety of the Philippines, as of 2008, electricity from hydroelectric power plants accounted for 61,386 MWh.  The largest source of electricity in the Philippines as of that year was Natural Gas, which generate for the country 19,575,855 MWh.  The next would be coal, at 15,748,784 MWh, and then Geothermal at 10,722,780 MWh.

Again, is this for real?

Are the conspiracy theorists right? That this is some dark plan preparing us for a black day in May?  Does Occam’s Razor hold true in this case?  Is this the government’s and an industry’s failure? How then does this relate to our coming presidential election?

Everyone is jittery.

Nobody likes talk about “emergency powers.”  Does this situation warrant the President evoking section 71 of the Energy Power Industry Reform Act?

These are after all, uncertain times. To understand, should we put ourselves in the proper context?

A brief background

This was yesterday. The Philippine Energy Sector, specifically the National Power Corporation, started during the Commonwealth years with Commonwealth Act 120.  That law nationalized hydroelectric power in the Philippines.

By 1972, Presidential Decree 40 aiming for total electrification in the country centralized all power generation and transmission facilities in the Philippines.  This included the ownership of all power generation facilities, thus the transfer of all Meralco generating units to the National Power Corporation.  The sale was concluded in 1978 and signed by Finance Minister Cesar Virata (representing the Philippine Government) and Cesar Zalamea, Chairman of Meralco.

In 1988, a new wave of nationalization occurred with the NPC takeover of generation facilities of electrical cooperatives.

Political uncertainties like the seven coup attempts of the Aquino years exasperated twenty years of dictatorship.

By 1991, Build Operate and Transfer (BOT) schemes were implemented by the NPC to encourage the private sector to invest in energy.  It was also the same year that the NPC installed additional power generators to cover deficiencies.

One salient and important piece of information is the focus towards total electrification of the Philippines. It means that the Philippine Government has always aimed to integrate the country into one power grid.

The EPIRA Law of 2001

The “Energy Power Industry Reform Act of 2001” (EPIRA) was enacted into law.   This law does several things:

1. It aims for the total electrification of the Philippines while it protects consumer rights and the environment.

2. It attempts to funnel private capital into the energy sector.

3. It seeks the deregulation and the privatization of National Power Corporation (NPC).

4. It creates the National Transmission Company (TRANSCO), which is made up of the transmission facility assets of NPC.

5. It provides for regulatory conditions.

What does this law want?  It wants to privatize the National Power Corporation.  This law wants the government to leave the power industry and let market forces play.

In 2002, Peter Wallace wrote “Explaining the Power Problem.”  In that report he said three important things at the time:

First, Wallace blamed the Aquino Administration’s choices coupled with several coup attempts against that government which created a situation in the Philippines for the country to be unable to build power plants or to activate a nuclear plant.  That situation, he said, led to Ramos negotiating from a position of weakness with Independent Power Producers.[i] Second, the Asian Financial Crisis led to weaker energy demand during Estrada’s time, and third, the collapse of the peso led to the doubling of loans due.[ii] At that point in time, Mr. Wallace reported that that was why there was 45% excess power supply.[iii]

Recently, Ricardo Saludo, deputy spokesperson of the Palace, made a comment blaming the Energy Power Industry Reform Act for the lack of new power plants. The Daily Mirror quoted Saludo as saying that one "constraint" of the EPIRA law was that it "barred" them from "bringing in new power plants.”

It appears no one quite understands the law or they have chosen to interpret the law differently.  Based on Mr. Saludo’s remarks, the law is being blamed for government’s inability to purchase power.

It isn’t government’s business to buy power.  The market is being privatized.  The National Power Corporation is being sold off.  Why should the government be involved in the purchase of power?

The law clearly states that we are in a deregulated market and that it is most important that the National Power Corporation be privatized. In other words, the private sector must now provide for the necessary infrastructure. They must buy power.  It is no longer the government’s job.

Nick Nichols, an energy sector consultant, posted a month ago in his blog:

“The power plant developers won’t come if the buyers of power don’t ask them!  And under our EPIRA industry restructuring, it’s the private distribution utilities and electric cooperatives that have to procure the power.  They have to solicit.  Every one of them knows they are running out of supply as Napocor Transition Supply Contracts approach the end of their lives.” (Emphasis is mine).

“There are no rules,” Nichols wrote. There are no guidelines from either the Department of Energy or the Energy Regulation Commission, ergo, the distribution utilities are not actively looking for proposals.

From Nichols’ point of view, the situation can be blamed on the energy distributors’ taking their sweet time procuring their contracts and it doesn’t help that there is no existing guidelines from the DOE and the ERC on acquiring supply contracts.

In June 2009, Wallace wrote “How to Avoid the Power Crisis” in which he noted five points:

1. Naturally, build more plants
2. Create a more invest-friendly environment
3. Leave prices to market forces
4. Stop attacking/harassing Independent Power Producers
5. Invest in renewable resources.

In Mr. Wallace’s opinion, this anti-business climate is not helping. From his point of view, there is a hostile business environment in the Philippines.  While he doesn’t say so plainly, he describes the flip-flopping and the general socialist tendency of our republic to be anti-business and against market forces.  In my humble opinion, Wallace isn’t far from the truth as time and time again, government steps in at inappropriate junctures.

This is today

There is this bit of news from Cotabato.  NorthCot would like to be exempted from power interruption because the province is host to a geothermal plant and not subject to a shortfall. The National Grid Corporation declined.

So where does this leave us?  In the first place, the Energy Power Industry Reform Act started in 2001.  That was the year Arroyo was swept into power, and so its success and failure rests solely on Arroyo’s government's ability to make the law work.

What has happened is that the system is somewhat working.  There is a wholesale electric spot market, as the EPIRA law stated.  Transmission and distribution wheeling charges have been unbundled and 57% of Napocor’s assets have been privatized.[iv] But as Nick Nichols pointed out, some aspects needs ironing out.  Distributing utilities and cooperatives are not seeking out new contracts.  Is it because of their fiscal position?  Why is there no reinvestment?

In Rising Growth, Declining Investment: The Puzzle of the Philippines, Bocchi argued that the Philippine economy is a “low-capital stock equilibrium.”[v] What this means is that the domestic private sector makes enough money and is reluctant to invest back. Can this then explain (in spite of the lack of rules) the reluctance of the energy sector to invest back?

Emergency Powers

Setting aside the economics, what we have is the Arroyo Administration dangling the threat of emergency powers as per the provision of EPIRA Law.

The provision of the law is specific:

“SEC. 71. Electric Power Crisis Provision – Upon the determination by the President of the Philippines of an imminent shortage of the supply of electricity, Congress may authorize, through a joint resolution, the establishment of additional generating capacity under such terms and conditions as it may approve.”

It can only be used on the eventuality of imminent shortage of supply.  But isn’t it also the Arroyo’s administration’s fault why power distributors are not too keen on buying more power? Isn’t it also the lack of guidelines that is the heart of the problem?  Isn’t it also the heavy hand and the negative publicity being shoved at the energy industry that is the root cause of the problem?

Arroyo's Fault?

It makes Arroyo’s critics wonder at the timing.  The rotating brownouts highlight the incompetence of Arroyo’s government.  Additional purchases can only mean a midnight deal; how then can we be certain that such a deal will be favorable to the Philippines and not to the pockets of a few people?

This gross negligence is being used to the advantage of Mrs. Arroyo.

The rotating brownouts also create an environment of fear and uncertainty.  Will we have orderly elections?   Our automated elections are electricity driven.  Yes, the machines are powered by battery, but will the network hold? Will the transmission of data hold?  There are already so many unknown factors in play that this additional burden, this sword hanging over people’s heads does no one good.

This “crisis” is also a shot to Arroyo’s critics: “Look at me, I’m still here, waiting for you.  I’m not as irrelevant as you think I am.”

What we are certain about is this:

There is a power crisis going on.  We need more capacity to grow.  An economy in this day and age needs efficient, reliable, and affordable energy.  The power crisis is damaging to businesses.

This power crisis is borne from the Arroyo Administration’s negligence at not establishing rules for power distribution utilities to purchase power.  It is borne because of people’s fears about the environmental consequences of power plants.

Building power plants is not an overnight business.  They take time to build and operate.

The Energy Power Industry Reform Act is working and we need not return to the past where the energy sector is basically a government-owned industry.  That is the false way to go.

What the Philippine Government needs to follow is the existing law.  It must keep the market open and private.  It must firmly establish rules to encourage businesses to invest.  These rules must not flip-flop.  These rules must be market-driven.  It must be able to encourage distribution utilities to purchase power and build capacity.

This is precisely why nine years of Arroyo has been a failure.  It panders to the shallow.  It aims to satisfy filling the bellies and not looking towards the future.  It trades on cynicism and fear.  It breeds entitlement.

There is no need for emergency powers when clearly, rules need to be established first.  Ensuring that there is a clear and level footing is what is needed and this does not require any special act.  Government does not need to buy more power.  It needs to negotiate with distribution utilities and cooperatives to raise capacity.

On the surface, this energy crisis is an example of Arroyo’s negligence and ineptitude.   How Mrs. Arroyo wants to solve the problem is an example of political savvy that makes use of the current situation (which is her doing) to her advantage.  To grant Arroyo emergency powers is indeed ludicrous.  This crisis puts the Filipino and her future right at the center of a political power play that in the first place shouldn’t exist, in an ideal situation of course.

In the end, it isn’t just Arroyo that we need to blame.  It isn’t just the distribution utilities that are slow to act that we should blame.  The bitter pill is this.  The Filipino sees market forces and capitalism as evil.  The Filipino sees technology like clean coal and nuclear energy as evil.  The Filipino is still locked in the notion that centralism is the best way to go.  Post-Election Day, this "power crisis" goes into the next administration's to-do list because how can a nation in the 21st century survive without adequate power?  Yet the more important question is this: Will we remember that when we allow our fears made into light, is there any doubt as to why we are now in a blackest day, and in brightest night?

[i] P. Wallace, Explaining the power problem, http://www.dataphil.com/special/powerproblem.pdf, p. 1.

[ii] ibid.

[iii] ibid.

[iv] P. Wallace, How to avoid another power crisis, http://www.dataphil.com/special/avoidpowercrisis.pdf, p. 5.

[v] A. M. Bocchi, Rising Growth: Declining Investment: The Puzzle of the Philippines, 2008, p. 29.

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