Governance Issues and Prospects in the Philippine Energy Sector

by Alan S. Cajes


Note: This article was written as an output for the Energy and Clean Air Project funded by USAID. The paper reflects the opinion of the writer.


The report of the Philippine Governance Initiative in 2006 came up with an overall assessment that states:


“The Philippine Team has found that electricity governance in the Philippines needs much improvement, in all areas of governance: transparency and access to information, participation of all stakeholders especially the weaker stakeholders, accountability and mechanisms for redress, and in building the capacity of both institutions of government and civil society.”[1]


This overall assessment is substantiated in a report that identified five main lessons. These lessons are:


1. Achieving good governance in the electricity sector starts with the policy process;
2. Effective regulation needs to put in place the right rules, but this is not enough;
3. Transparent, accountable, competent agencies of government are needed in order to have good governance in the electricity sector;
4. The government and its creditor/donor agencies must disclose the role played by the latter, and
5. Equally if not more important is the participation of weaker stakeholders[2].


In 2008, a technical working group composed of representatives from the Energy Family, identified issues that are related to governance. These are presented below.


PRIVATIZATION

• Manualization of Privatization Guidelines

COMPETITION

• Timely disclosure of market information among WESM participants
• Strict enforcement of WESM Rules e.g., imposition of penalties to minimize breaches and promote a culture of compliance and discipline among WESM stakeholders
• Undertake Performance Audit of WESM including PEM Committees including development of Performance Standards for the Market Operator
• Review PEM Board Composition and Governance Structure
• Continuous review and updates WESM Rules and manuals
• Facilitate Transition to Independent Market Operator
• Ensure effective and efficient performance of all service providers by developing standards of performance
• Implement the IPPA Program

SUPPLY SECURITY

• EPIRA Amendment on cross ownership
• Institutionalize proper disclosure of information

TOTAL ELECTRIFICATION

• Develop Capacity Building Program for ECs to implement off-grid electrification e.g., solar, mini-grid operations
• Clarify the roles of DOE, NPC-SPUG, NEA and other players in the implementation of rural and missionary electrification
• NPC to develop and adopt a Manual on Preparation of its Missionary Electrification Program including its best practices
• Revisit NPC-SPUG Roles in existing areas and those areas with New Private Power Providers (NPPs)
• DOE to issue a Circular on the Preparation of Missionary Electrification Development Plan (MEDP) incorporating the policies and programs to be adopted
• Establish a One-Stop Shop for PSP Program including Monitoring and Coordination
• Create a Core Group, within the EPIMB, to prepare and develop the MEDP
• Develop Capacity Building Program for DOE, NEA and NPC on planning and implementing PSP Program and MEDP
• DOE and ERC to reconcile the UC-ME and the MEDP
• ERC to institutionalize MEDP evaluation and UC-ME determination

According to the 13th EPIRA Implementation Status report (Period Covering May to October 2008), one of the preconditions to open access and retail competition -- seventy percent privatization of the generating assets of NPC in Luzon and Visayas -- is nearly completed. The Energy Family has also assessed the Wholesale Electricity Spot Market (WESM) Rules, particularly on the governance and operational aspects of the electricity market operation as envisioned in the EPIRA. The other updates during this period are as follows:


1. Privatization of 14 NPC generating assets with an equivalent of 69 percent level of privatization[3];
2. PSALM will continue sell the NPC’s decommissioned power plants and other non-operating assets[4];
3. Power generation business of SPUG will be offered to private sector, known as the New Private Power Providers (NPPs)[5];
4. NPC’s debt was reduced by 18% from $7.01 billion at the end of 2007 to $5.7 billion as of end of 3rd quarter of 2008. The loan prepayments helped reduce the country’s debt burden, improved PSALM/NPC’s liability profile, and diminished its exposure to foreign currency risks[6];
5. PSALM will ensure timely filing for Universal Charge[7] to cover stranded debts and/or stranded contract costs;
6. Creation of a Technical Working Group composed of the DOE, Department of Budget and Management (DBM), National Economic Development Authority (NEDA) and DOF. Among others, the TWG looked into the possibility of implementing certain initiatives which could help in lowering electricity rates[8];
7. The WESM commercial operation in Luzon is still under the supervision of the Department of Energy (DOE), which heads the Autonomous Group Market Operator (AGMO)[9];
8. Demand-side participation in Luzon is sluggish although three (3) additional electric cooperatives (ECs) have registered as direct participants[10];
9. The Market Surveillance Committee (MSC), an independent body tasked to monitor the performance of the market, has made several recommendations to the PEM Board[11];
10. The Rules Change Committee (RCC) has approved some proposals, including amendments to the WESM Rules and Manual on Pricing Error and Price Substitution due to Network Congestion, proposed changes to the PEM Audit Manual, and proposed changes to the PEM Board Structure;
11. The DOE is now in the process of reviewing and improving the market rules currently implemented in the Luzon spot market to ensure that the declaration of commercial operation in the Visayas will result to real competition and eventually lower electricity prices;
12. Gross generation from power plants using imported fuels like coal and oil reduced to 6.77 percent and 13.72 percent respectively. With the high utilization of indigenous resources for power, self-sufficiency in first semester of 2008 increased to 67.99 percent compared to 64.34 percent than it was in first semester of 2007, and
13. In support of the Government’s efforts to alleviate poverty, the DOE launched a massive and focused action to increase and accelerate access to electricity services by the country’s unenergized communities[12].


In brief, the legal, regulatory and institutional frameworks for reform in the energy sector have been largely put in place. Around the middle of 2006, the wholesale electricity spot market became operational. The transmission and distribution tariffs are being regulated. What need to be fulfilled are the objectives of making the sector financially viable and privatizing the assets of NPC.


Drivers of Energy Reform


The EPIRA[13] is designed to achieve the following objectives:


1. Create and enable legal and regulatory environment to support competitive markets in electricity;
2. Restore the financial viability of NPC in the period prior to privatization;
3. Unbundle and corporitize NPC’s operations to facilitate the introduction of competitive markets in electricity;
4. Establish the open access transmission system needed to support competitive markets in electricity;
5. Establish the open-access distribution system needed to support competitive markets in electricity;
6. Improve the operational efficiency of the distribution subsector to enable it to actively participate in competitive markets;
7. Promote energy efficiency and demand-side management to supplement efficiency gains from competitive markets;
8. Mitigate the social impact of the transition to competitive markets, and
9. Ensure environmentally sustainable power generation.
10. These measures are expected to accomplish the following:
11. Promote competition in power generation and distribution[14];
12. Enhance the inflow of private capital;
13. Broaden the ownership base of power generation, transmission, and distributions;
14. Minimize the government’s financial and risk exposure;
15. Ensure quality, reliability, security, and affordability of power supply;
16. Rationalize electricity prices, and make them competitive and affordable; and
17. Where warranted, provide transparent subsidies to nonviable operations[15].


The long-term development vision of the government focuses on achievement of steady growth in per capita incomes, elimination of poverty and social and economic inequities, and protection of the environment and natural resources.


Ultimate Outcomes of the Energy Sector


A few years after the reform process has started, the energy sector technical working group has identified the key problem facing the sector. This is the need to ensure supply security and competitive rates to fuel economic growth. The underlying theme is summed up in this equation: No Brownout = No Shortage = Sustained Economic Growth. There are three (3) underlying problems to the key problem, namely, energy insecurity, uncompetitive rates, and areas that have no access to modern energy services.


Taking off from the direction set by the technical working group, this part of the paper makes a distinction between the ultimate outcomes and the ultimate objectives of the country’s energy system, including the EPIRA reform process that is still being implemented. The purpose of this exercise is to guide the different stakeholders in appreciating the direction of the reform process.


In doing this, it should be borne in mind that the energy system in the country (from generation to consumption of electricity) is just a means to an end. It is not the end. Although there are performance issues in the energy sector, these issues are what the people or stakeholders care about. Now, there are features of the energy system that may cause poor performance (like high overhead cost of distribution utilities or DUs). Fixing these features, however, is a means to better outcomes; hence, not an end in itself.


The proposed outcomes of the energy sector are productivity, customer satisfaction, and financial risk protection. Productivity is linked to improvement in economic performance. It is based on the assumption that access to electricity will result in economic development. In fact, studies have shown that a certain increase in capacity will lead to an increase in the performance of economic indicators, such as gross domestic product (GDP). Productivity encompasses the underlying theme identified by the technical working group: No Brownout = No Shortage = Sustained Economic Growth[16].


Customer satisfaction basically means that the customers are willing to pay the electricity tariff because it is affordable and competitive, and that they are satisfied with electricity generation, distribution, and transmission. This is the ultimate outcome why there is a need to ensure quality, reliability, security, and affordability of power supply. To fully appreciate the importance of customer satisfaction, it is instructive to recall the key issues prior to EPIRA.


The issues are surplus capacity and high operating cost associated with IPPs contracted by NPC, high debt-service burden of NPC, transmission bottlenecks, high power losses, absence of economies of scale, inefficient operations, and high distribution overheads among the many fragmented and small RECs. This translates to high cost of electricity. According to DOE Secretary Angelo R. Reyes:


“Concomitant and integral to our quest for securing our energy future, we are working with solutions to protect the developing Philippine economy from the volatility of fossil fuel prices through a more diversified and stable energy mix in power generation that will result to sustainable and reasonably-priced electricity rates. We are, however, confronted with the challenge that, on the average, about 60% of energy sources utilized in the power generation mix come from fossil fuels primarily oil, coal and natural gas. Moreover, the Philippines still has one of the highest power rates in Asia[17].”


Financial risk protection essentially means that the financial and risk exposure of the public sector is minimized. With competition in place, the private sector is expected to make investments in the sector. The inflow of private capital would therefore make power generation, transmission, and distributions open to investors who consider their investment as commercially viable. This way, government funds can be used for other purpose, market risk shifts from the public to the private sector, government’s financial and risk exposure is minimized, and the heavy financial burden of power sector development from the public sector is transferred to the private sector. The government, therefore, benefits from the power sector restructuring[18].


Intermediate Outcomes of the Energy Sector


There are intermediate outcomes expected from the energy sector. The intermediate outcomes are neither the problems in the sector nor the causes of the problems. They are intermediate between the ultimate outcomes and causes of the problems. The intermediate outcomes of the energy sector are related to efficiency, equity, access, and quality. In other words, the intermediate outcomes translate to energy security (access and quality), competitive rates (efficiency), and total electrification (access and equity)[19].


To achieve the energy outcomes and pursue the intermediate outcomes, the governance or policy control knobs that are available are financing, payment, organization, regulation, and persuasion or behavioural change. Financing refers to the way energy programs and projects are funded. Financing can be done by private sector players who use their own fund to implement energy programs and projects. They can also pool funds from various sources and use these funds to finance their operations. Payment refers to the manner by which payment for energy services is done. In particular, the use of lifeline rates falls under the payment control knob. The subsidies given to certain types of consumers also fall in this category. Organization refers to the capacity of individuals and institutions to perform their respective roles effectively. Training interventions and other types of capacity building, such as technical assistance and coaching, fall under the organization control knob. Regulation refers to the role that the Energy Regulatory Commission is performing in the energy sector. Finally, persuasion or behavioural change is related to information, education and communication activities that are designed to make the target audience demonstrate a certain type of behaviour. Advocacy programs related to energy conservation fall under the persuasion control knob.


The application of the control knobs will greatly vary from one issue or problem to another. It is recommended that one control knob is used with the other relevant control knobs. For instance, energy audits of commercial and industrial establishments can be regulated through legislation. However, regulation alone could not achieve the desired result, which is to make energy conservation a way of life. Persuasion is equally important. In fact, the policy direction is to develop a market-driven energy conservation program instead of enacting a law that will enforce compliance with energy conservation requirements. In addition to persuasion, the organization control knob is important. In other words, the capability and capacity to conduct energy audits and implement energy conservation measures should be available.


POLICY RECOMMENDATIONS


Energy security


Energy security is usually defined in terms of reliable and affordable access to energy supplies. Reliable energy supply does not automatically lead to energy security if the cost of accessing electricity is prohibitive. Similarly, affordable electricity rates could not lead to energy security if the supply is unreliable or not available when needed.


It is useful to distinguish energy security from energy independence. Energy security does not necessarily mean that the sources of energy are within the territorial jurisdiction of a country. One country can establish energy supply contracts with another country and can still attain reliable and affordable electricity. Energy independence would require one country to meet its energy requirements from sources within its own territory.


It is therefore possible for local government units, especially the island provinces and municipalities, to have energy independence. Energy independence, however, is not desirable as a goal in itself. In the case of the Philippines, it is nor feasible to pursue energy independence at this time or in the near future.


Energy security in the country is directly affected by two factors: one, the generating capacity of NPC is no longer capable to ensure national power supply security, and two, low additional generation capacities by the private sector.


In the Philippines, a large number of existing energy production capacities will have to happen in the short, medium, and long-terms. Such infrastructure will require investors who will be facing challenges posed by a liberalized market, environmental constraints, and the governance structure, systems and processes in the country down to the local level. Given the performance of the country in energy structural reform program, the incentives to invest in new capacities offer few incentives, particularly in terms of rates of return and risks when compared with other investment areas.


Policy Directions


In the short term, maintaining a reserve stock is important for energy security. What the country needs, however, is proper macroeconomic policy framework that will address the need for comprehensive plans to minimize energy supply risks. The policy framework should consider the following recommendations:


• Tie up the concern for energy security with reduction in energy consumption by aggressively pursuing efficient energy use. Among others, the emphasis on demand side management (DSM) should be given sufficient attention. There is a need for government to establish the DSM system, including the mechanism to monitor compliance with the DSM framework, and take appropriate remedial action where necessary. The government also needs to formulate incentives for DSM and source funding for DSM programs. Demand side management becomes important because it will lower the total cost of investment required.


• Apply or use appropriate principles and techniques in designing communities, especially urban planning. Energy supply and demand analysis should be brought down to the local level and should be considered in the preparation of comprehensive land use plans, among others.


• Pursue active energy conservation program, time-of-the-day pricing of electricity, and the consequent shifting of power demand by consumers and reduction in peak demand. This would help prevent new capacity additions[20]. Energy efficiency, therefore, should be seen as an opportunity to maximize the use of existing capacity. It should not be equated with foregoing the development of new capacities.


• Energy efficiency also helps in addressing global warming. It will also lead to significant environmental and economic benefits. Energy efficiency is essential in reducing the growth in fossil fuel demand and lowering energy prices, enhancing energy security, and reducing the emissions of greenhouse gases.


• Although adoption of renewable energy sources for power generation should be given due attention, oil-based power plants will continue to be a major component of the electricity grids, especially in island communities, remote areas, and sparsely populated areas where other options are not feasible.


Competitive Rates


As mentioned above, the affordability of electricity is an element of energy security. But given the importance of electricity tariff as an object of reform in the energy sector, it merits to be considered as a separate intermediate outcome.


The introduction of competitive markets in electricity is expected to improve governance related to supply conditions. With the absence of government monopoly in the supply of electricity, the private sector is encouraged to bring in private capital and invest in commercially viable power generation projects. Through this process, the market risk is transferred to the private sector. And because the market is presumed to be efficient, the competitive market in electricity is expected to exert downward pressure on electricity tariffs[21].
Based on the experience of Singapore, the market has given incentives to companies to reduce costs. In addition to lowering operation costs, the companies are looking for cheaper fuel. Overall, market reforms in Singapore have increased competition among the industry players and have benefited consumers. This experience has enabled the government to adopt the theme that “expensive electricity is no electricity at all”.


The energy reform package of the Philippines does not specifically promise that electricity tariffs will be reduced after completing the process of reform. Nevertheless, there was at least a theoretical underpinning that electricity rates will go down as a result of the reforms given the experiences of other countries. There were even estimates done as regards the effect of market competition to electricity rates[22]. Accordingly, power rates will go down to long-run marginal cost (LRMC) levels. This is attributed to reduction in distribution overheads, among others.


Policy Directions


Given the situation that the expected downward trend in electricity tariffs is yet to materialize, the question now is how to ensure that the power rates become competitive. The following policy directions are intended to help achieve this objective:


1. Independent and transparent regulation is needed in setting tariffs and it is imperative to use market-based pricing. This however, requires giving the Energy Regulatory Commission (ERC) fiscal autonomy and independence to minimize political and other interventions. This also requires ERC to practice good governance. Various elements of good governance in the electricity sector contained in the Governance Toolkit of the Electricity Governance can be used as reference in improving performance in this dimension[23].
2. There is a need to re-examine cross-ownership if it leads to uncompetitive practices[24]. This, however, requires sufficient information to ensure that uncompetitive practices are being done. On the part of ERC, there is a need for sufficient powers to detect and prevent such anticompetitive behavior. In addition, sufficient expertise to determine the operating cost of all the installed units should be available or accessible.
3. Establishing competitive electricity markets and adopting market pricing mechanisms that will benefit the consumers are important strategies[25]. In relation to this, there is a need to study the setting up of an independent market operator that can be privately run. In terms of the composition and governance structure of PEMC, there is a need to bring in qualified and independent-minded board members who can make decisions based on the interest of society, in general. There is also a need to ensure that there is sufficient number of participants. This aims to prevent generation companies from forcing up the market-clearing price.
4. Tariff structures should consider strategies like promoting energy conservation, providing penalty for peak-hour and peak-season consumption, as well as discouraging the use of electricity that has poor power and load factors. Accordingly, if the peak demand of power exceeds the installed capacity, the system marginal price during periods when load is being shed is equal to the cost of unserved demand. Therefore, regulation is needed to specify a price cap to prevent excessive profits.
5. Cross-subsidies from one class of consumers or areas to another should be minimized and be made transparent, quantifiable, targeted, and can be phased out in the medium term by designing appropriate social safety nets. An alternative could be government subsidies to households that avail of the lifeline rates[26]. Lifeline rates to consumers who have very low monthly consumption could be an acceptable strategy.
6. One way of reducing the cost of electricity is scrapping the VAT on electricity. It is also possible to scrap the royalties on indigenous energy[27]. Estimates point out that a reduction of PhP0.16/kwh can be done by removing natural gas royalties. The impact, however, of this measure will not be felt immediately. The government uses the royalties to pay for the excess energy being delivered by the Malampaya natural gas operations[28].
7. For DUs to actively participate in a competitive market system, they need to be of sufficient size to attract competition between generators, have the ability to make sound bids in the competitive market, and have the financial resources needed to back up those bids[29]. The economies of scale can be pursued through structural and operational reforms to achieve efficiency[30].


A policy on disconnection for delinquent customers may need to be formulated because the financial viability of buyers is important to reduce the suppliers’ risk of nonpayment.


Training and other forms of capacity building are important for power sector reform and restructuring. The Energy Family and the industry players need management skills, technical knowledge about new technologies, and good governance capacity (including financial management). Therefore, human resource development, within the context of organization development, is an important long-term investment.


Under EPIRA, the NPC assets are sold and large utilities are unbundled in the process. The NPC assets are sold to the private sector, except for those assets that are still covered by contracts and administered by another party. The private sector participates in the privatization efforts but make a bid based on their own assessment of the revenue-earning potential of the assets. There are factors that influence the sale value of the power sector assets. These factors include the following: Investment climate in the country; Level of consumer tariff; Transparency in regulatory procedures; gains that potential investors hope to achieve from other investments; Value assigned to making an early entry into the sector or country; Financial strength of other companies in the industry and of customers, and the instrument of sale".


These factors need to be nurtured properly if competitive power rates are to become a reality in the near future.


Total Electrification


One of the key issues in sustainable development is “energy poverty in the midst of plenty”. This is recognized during the World Summit on Sustainable Development (WSSD), which gave prominence to energy and its relationship to poverty eradication and sustainable development. In this context, the access to energy services becomes an important condition to achieve the poverty alleviation goal of the United Nations, which is to reduce by half the number of people living under US$ 1 a day by 2015. Thus, policies and measures that address energy access must be given the highest priority in national energy sector planning.


Although access to modern energy services is not part of the Millennium Development Goals (MDG), various scholars have pointed out that the MDG target could not be attained without energy access. A large number of people who live below the poverty threshold depend on the use of old biomass-based technologies that pose health risks and even death to the poor. Thus, it is not stretching the imagination too much to assume that the MDG targets can not be achieved without access to modern energy services[31]. Access to modern and reliable energy services remains essential for sustainable human development, economic growth, higher quality of life, and better delivery of education and health services. In other words, access to energy is essential to poverty reduction initiatives.


The electrification program in the country is facing challenges since most of the unenergized barangays are remote, disperse, and difficult to electrify. The program requires more resources, time and efforts. To achieve the goals of the program, it is necessary to integrate rural and missionary electrification efforts through a collaborative effort of the public sector, private sector, civil society organizations, and donor institutions.


The DOE has programs and projects lined up to expand access to electricity services. These programs cover the 1) provision of cost-of-capital subsidies of solar photovoltaic battery charging stations, individual solar home system, micro-hydro systems, and wind turbine energy systems; 2) innovative service delivery to promote sustainability of the projects and ownership by the beneficiaries, and 3) grid connection and off-grid electrification through the ER 1-94 Electrification Fund[32].


The NEA provides technical, financial and institutional assistance to electric cooperatives (ECs) to ensure the provision of the reliable and adequate electric services in their respective franchise areas. NEA’s subsidy program covers barangays and sitio electrification. It has a set of criteria to prioritize the beneficiaries.


The NPC-SPUG provides small-scale power generation and associated power delivery systems in areas that are not connected to the main transmission grid. It is currently serving 75 small islands nationwide. The NPC-SPUG’s implementation is dependent on the availability of the share of Missionary Electrification from the Universal Charge (UC-ME).
Since the DOE provides policy direction and over-all program management as regards electrification program, it is important to consider the following:


1. Come up with a clear policy to expand access to electrification;
2. Formulate an action framework that clearly identifies and determines the roles of key stakeholders, such as the local government units, other government agencies, private sector, civil society organizations, people’s organizations, donor institutions, distribution utilities, and qualified third parties[33];
3. Review and evaluate the previous programs and projects, especially those related to renewable energy system, to identify what went well and what went wrong, as well as use the information in crafting the policy and the program of action;
4. Document good practices in other countries for possible replication in the country and for avoidance of programs and projects that are bound to fail in the long run;
5. Build local and institutional capacity to implement and sustain programs and projects, especially among the local government units and the local distribution utilities;
6. Strengthen the capacity of higher education institutions to provide knowledge and technical support to program and project implementers and partners;
7. Conduct policy fora to discuss the problem of rural electrification, including experts’ and citizens’ conference, and
8. To the extent possible, outsource the implementation of programs and projects to organizations or institutions that have experience, track record, competence, mandate, and capability to run the programs and projects so that the DOE could focus on monitoring and evaluation functions.


Policy Directions


There are a number of technical options that are available to ensure energy access for all. The options include grid extensions, mini grids, and off-grid systems based on renewable energy sources. The maximization of the renewable energy’s contribution into the power requirement of the country will take time, and at best within the range of 40-60 percent. As DOE Secretary Reyes pointed out:


“While we have taken that big step towards clean energy utilization, our calculations estimate that the contribution of renewable energy sources to the country’s power requirement is projected to be between 35% to 55% until the year 2030. This is of course subject to technological developments and cost considerations, specifically in the area of storage technologies. Assuming that the maximum share of 55% from renewable energy sources will be utilized in the power generation mix, the remaining 45% gap will have to be supplied by reliable base load capacity[34].”


The initiative towards total electrification should be implemented in a comprehensive manner so that the target customers can maximize their benefits. One critical issue that needs to be addressed is quality of supply, especially during peak periods.


Although there is no argument against the need to pursue renewable energy, it is important that a comprehensive review and assessment of previous programs and projects is done to determine success factors, gaps, and avoid a repeat of the past failures. Besides, renewable energy projects also have significant negative impacts that need to be prevented, mitigated or controlled.


Among the policy directions that are required to pursue total electrification are the following:


1. In view of the objectives under the MDGs and the WSSD, the national energy policy should satisfy the basic needs of the population who have no access to modern energy services. Therefore, there is a need for a clear policy to address the needs of people who are considered energy poor because they have not benefited well from conventional energy policies. It is critical that energy poverty is recognized as one of the key social determinants of well-being in view of the significant rural-urban inequities in energy supply and consumptions.


2. Ensuring universal access to electricity requires “ambitious” national electrification program as integral elements of national sustainable development frameworks. At the national level, there is a need to launch national programs, projects and initiatives on renewable energy and efficient clean energy technologies to provide energy services to people, especially in off-grid areas.


3. The commercial, industrial, and high consumption residential consumers are subsidizing the poor. If these cross subsidies are removed, the poor will have to pay more for their electricity consumption. Although it is expected that the government will continue to maintain as certain level of subsidy, it is likely that the phasing out of cross subsidies, particularly of the poor, will be carried out slowly over time[35].


4. The removal of the economic subsidies will lead to higher tariffs for these sectors in some areas of Visayas and Mindanao. This, in turn, will lead to lower productivity and unemployment in these sectors. Job loss is expected to create a new class of poor, who are likely to have greater debt problems and psychological problems compared to the established poor. It is important that government provides assistance to the affected population so that they could adjust to the new environment.


Cross-cutting Policy Directions


The process of implementing the EPIRA faces a number of risks. One, the creation of a wholesale power market will largely depend on the ability of the government to ensure an open access policy. Two, there is a need to guard against the possible anticompetitive behavior of the industry players, chiefly the distribution utilities and the newly formed generating companies. Three, there is a significant risk that is related to the human and institutional capacity for dealing with complex issues brought about by the restructuring program.


That is why good and effective governance becomes an important ingredient for a successful energy reform. The absence of good and effective governance can severely impair the implementation of energy reform initiatives. Governance, therefore, need to be given the same level of prominence as technical and economic considerations of reform. Ultimately, the preconditions for full EPIRA implementation are governance concerns that are linked to transparency, accountability, rule of law, etc.


Within the context of good and effective governance, it is imperative that the energy policies of the government must ensure the following:


1. A leveled playing field;
2. A supportive policy and regulatory environment in order to encourage private sector participation;
3. An energy market that considers the total cost to society of its energy choices is created;
4. Enabling conditions to support national systems of innovation and technology transfer like targeted training programs, information access, strengthening scientific and technical educational institutions, technology assessment and demonstration projects, etc.;
5. Strategic, coherent and coordinated framework to support national implementation, and
6. Energy access plans that include actions for national, regional, and local government levels cooperation.
7. Emphasis on accountability, participation, predictability, and transparency—the basic elements of good governance, therefore, need to be given due importance in the same level as complex technical elements of reforms.
8. For instance, the private sector would require transparency and accountability, in addition to the possibility of realizing a reasonable rate of return, to actively participate in the generation subsector. Inefficiencies, such as perceptions of corruption and bureaucratic red tape, will not only discourage potential investors but will also increase the cost of generating and supplying power at the expense of the consumers. Various forms of corruption in the energy sector are a growing concern in good and effective governance.
9. Following the proposal of George Soros and in line with the need for transparency, energy companies could make public disclosures of taxes, royalties and other payments to governments. According to the World Economic Council (WEC), corruption adds to the cost of energy, thereby making it more difficult to bring commercial energy to the poor. WEC enjoins its members to “make ethics a strong component of energy system governance”. In line with this, WEC recommends the following ingredients:
10. Voluntary governmental and corporate energy and/or environmental audits;
11. Transparent contractual relationships;
12. Common safety and environmental rules;
13. Best business practices for company plants, and
14. Respect for energy workers and customer choice.


There is a need to disclose information, including the technical ones, so that the different stakeholders could understand the issue besetting the sector. Disclosure and transparency about the general terms of contracts are keys to protection of the rights of the consumers. They also help promote integrity in the sector.


The good practices that the energy sector should consider to improve corporate governance include the Access Initiative for effective engagement of the stakeholders in decision making, the global reporting initiative for reporting performance, and the formulation of service charters.
In support of good and effective governance, the cross-cutting themes discussed below should be pursued by the energy sector.


Informed Participation of Stakeholders


The energy challenges facing the country require the active and informed participation of all stakeholders. It may require the establishment of energy councils at the national and local levels to allow the development of greater expertise among users with regard to energy conversion and end use, among others. Such energy councils would be a point of diffusion of information to users on important topics like details on energy efficiency measures and energy prices, information on environmental externalities, on renewable energy sources, and information on the impacts of energy investments. The information provided will allow energy users to make informed choices regarding their preferences (technology, housing, type of fuels used, etc.) and help them initiate conventional, new, and renewable energy projects which could trigger more sustainable development.


The energy councils will help the national and local governments to attain energy, environment, and other relevant directives. They could represent energy users and ensure that their rights are respected. They could also serve as the conduit through which users (civil society) can participate in an informed and independent way.


Critical discussions of issues with the participation of the civil society organizations and independent researchers could shed light on the problems we are facing, foster collaboration among the stakeholders, and could result in a synthesis whereby innovative approaches are identified to meet the challenges.


Lack of public involvement from the earliest stages of the reform process has often led to destructive failure and has discouraged potential investors in a restructured energy industry. It is therefore important that policies and programs of action in support of energy reform benefit from constructive and meaningful stakeholders participation.


Technical and economic issues are necessary elements of energy sector reform. In themselves, however, they are not sufficient. Political issues are equally important. Good and effective governance —rule of law, transparency, accountability, etc. — is considered as critical to achieve sustainable energy sector reform[36].


Environmental Sustainability


Environmental sustainability is usually taken to mean that the environmental resources, capacities, and services of ecosystems are not degraded beyond the acceptable limits of the natural environment. At present, the most pressing concern is the impact of climate change to various areas of human life, including energy generation. Climate change could severely affect rainfall patterns, thus posing a significant challenge to water-based energy generation plants. Climate change could also exacerbate the occurrence and impact of natural disasters, thus posing dangers to energy infrastructure from generation to transmission.


It is high time that countries, like the Philippines do not only set goals in relation to promoting environmental sustainability, like reduction of greenhouse gas emissions and use of renewable energy systems, but also consider the impacts of environment-related disasters in energy planning activities at the national and local levels.


DOE Secretary Reyes has verbalized the agency’s commitment to environmental sustainability. He said:


“As a signatory to the UN Framework Convention on Climate Change and the subsequent Kyoto Protocol, we are fully committed to doing our part in addressing global warming even though we are not legally bound to impose a national limitation on emissions. In our efforts to ensure that the use of energy must not damage our environment…[37]”


All energy sector investments, therefore, will have to meet environmental safeguards, including those aspects that are critical in getting social acceptability, such as involuntary resettlement, impoverishment risks, etc.
The environmental and social aspects of the agencies that have critical roles in the energy sector also need to be clarified. For instance, the health, environmental, and social aspects of energy programs and projects require clear rules of engagement among DOE, DENR, DOH, DSWD, and DTI. Although the government has been using the environmental assessment system to look at environment and social issues, it is important that this system is not reduced to a mere fragment of paper that only adds expense to energy project development.


Capacity Building


Capability building to improve institutional capacity is indispensable to effectively promote reforms and good governance. Human resource development is considered as a long-term investment to enhance the effectiveness of the energy sector.


The government needs to develop human and institutional capacity at all levels. The capacity-building interventions should cover areas like policy and strategy development, intra-governmental coordination, regulatory capacity market restructuring, project cycle management, financing and resource mobilization, etc.


Roles of DOE


The DOE will be in a good position to provide good information and create the environment that is conducive for a rational stakeholder to give contributions into:


1. Selection of energy supply and investment in electric generation;
2. Determination of full-cost pricing;
3. Maintenance of the quality of service;
4. Design of energy efficiency measures, and
5. Promotion of renewable energy and other issues of interest to the users and to all citizens.


With DOE serving at the same time as the energy planning agency, it is in a position to strengthen the technical rigor of the energy planning process, formulate clear and coherent policies and action plans at the national, local and utility levels with the full participation of the academe, consumer groups, and civil society organizations, among others.


For inter-agency cooperation and cooperation with UN bodies and the Bretton Woods organizations, there is a need for a joint and coordinated strategic plan of action for energy reform that is in accordance with national plans, priorities and programs. Such a plan should be translated into an operational framework for action that all stakeholders can understand, support, and believe in.


REFERENCES
Asian Development Bank. Energy Policy, ADB Policy Paper, June 2009;
Asian Development Bank. Key Indicators. 2007;
Asian Development Bank. TA 4151-PHI: Promoting Good Governance in the Restructured Power Sector
Asian Development Bank. Report and recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grants to the Republic of the Philippines for the Power Sector Restructuring Program, November 1998
Bureau of Treasury website www.treasury.gov.ph
Department of Energy website www.doe.gov.ph
Department of Finance website www.dof.gov.ph
Governance for Sustainable Development, A foundation of the future, edited by Georgina Ayre and Rosalie Callway.
Hélène Connor, Robert Gould, Rod Janssen, Christophe Rynikiewicz, “New governance imperatives for energy planning in liberalised European markets”
Malaluan, Nepmuceno A., “The Need to Challenge the Private Sector Fundamentalism of the IFIs in Power Sector Program.” Paper presented at the Privatization of Infrastructure Seminar held 5-6 January 2003 in Hyderabad, India as part of the Asian Social Forum.
Modi, V., S. McDade, D. Lallement, and J. Saghir. 2006. Energy Services for the Millennium Development Goals. New York: Emergency Sector Management Assistance Programme, United Nations Development Programme, United Nations Millennium Project, and World Bank
National Statistics Coordination Board www.nscb.gov.ph
Natsuko Toba, Welfare Impacts of Electricity Generation Sector Reform in the Philippines, ERD Working Paper No. 444, June 2003.
Senate of the Philippines Policy Brief, June 2008
Senate Economic Planning Office, Five Pillars of Growth, An Economic and Social Development Framework, 2004.


________________________________________
[1] GRIPP, Philippine Electricity Governance Initiative. WRI: June 2006, p. 8
[2] Ibid.
[3] As of December 2008, the privatization level reached 73.3 percent with the successful bidding for Panay-Bohol and Amlan.
[4] The EPIRA mandated PSALM to choose, through public bidding, Independent Power Producers Administrator/s (IPPA/s) who will administer, conserve, and manage the contracted energy output of NPC-IPP contracts. PSALM recommended adopting the Ownership Approach with the use of back to back contract between PSALM and the appointed IPPA. The back to back contract will reflect the applicable provisions of the original Energy Conversion Agreements (ECAs) between the IPP and NPC. The responsibilities, benefits and risks which can be legally and commercially transferred from NPC to the IPPA will be included in an IPPA Agreement between PSALM and the IPPA .
[5] To facilitate the implementation of this policy, the DOE issued Department Circular No. 2004-01-001 on 26 January 2004 which declared open for private sector participation (PSP) all existing SPUG areas and mandated the conduct of and set the procedures for the competitive selection process as required by the rules on privatization of the Commission on Audit. The selection of an NPP is guided by the following considerations: 1) ability to achieve the lowest long-term cost of power and services; 2) environmental compatibility with the local area, AND 3 most advantageous implementation schedule. However, the lengthy bureaucratic process in securing and complying with certain regulatory requirements and approvals from both the national and local governments is inevitably affecting the financing and implementation of a power project. Thus, an NPP is expected to assume a complete take-over of SPUG generation within two to three years.
[6] The prepayment enabled NPC/PSALM to save on interest payments and guarantee fees that can be used to prepay the other loans of NPC to further trim its stranded debts.
[7] The Universal Charge (UC) is a non-bypassable charge, mandated under Section 34 of the EPIRA, to be imposed on all electricity end-users, including self-generation entities, for the following specific purposes: 1) Payments for stranded debts and stranded contract costs; 2) Missionary electrification; 3) Equalization of taxes and royalties applied to indigenous or renewable sources of energy vis-à-vis imported energy fuels; 4) An environmental charge for watershed rehabilitation and management, and 5) A charge to account for all forms of cross-subsidies. The UC is collected from all end-users every month by the National Transmission Corporation (TransCo) and distribution utilities based on the approval made by the Energy Regulatory Commission (ERC) and remitted to PSALM every 15th of the following month.
[8] The initiatives include the following: 1) Review the VAT on systems loss; 2) Review of the systems losses/caps on recoverable systems losses; 3) Review and renegotiation of power supply contracts; 4) Implementation/rationalization of National Wealth Tax for LGUs/Regions; 5) Review and rationalize Lifeline Policies and Subsidies; 6) Implementation of Open Access and Retail Competition within Economic Zones; 7) Review of Wholesale Electricity Spot Market (WESM) Rules; 8) Review of the implementation of the NPC Php4.11/kwh flat rate; 9) Implementation of Time of Use Rates and Demand Side Management (DSM) Program at the distribution level; 10) Review power purchasing practices of distribution utilities; 11) Conduct diagnostics of the status of EPIRA implementation of all relevant stakeholders; 12) Audit the operation of National Power Corporation and TransCo in relation to rates, and 13) Review and validate the operation of Distribution Utilities in coordination with the Energy Regulatory Commission. The provision of lifeline rate subsidy is allowed by Section 73 of the EPIRA. To date, the lifeline subsidy is enjoyed by mostly marginalized residential end-users falling within the lifeline level determined based on consumption while subsidizing class are the non-lifeline residential end-users as well as the industrial and commercial consumers. In the height of clamor for lowering the electricity rates, the expansion and improvement of lifeline coverage was proposed by various consumer groups that even the Bureau of Trade Regulation and Consumer Protection/Department of Trade & Industry (BTRCP-DTI) has moved a petition with the ERC for the approval of the New Lifeline Rate for Marginalized End-Users in Accordance with the provisions of Sections 43(j) and 73 of the EPIRA.
[9] The implementation of the WESM is one of the key features of the EPIRA. Under Section 31, it is a pre-condition for the implementation of open access and retail competition.
[10] These are: 1) Sorsogon I Electric Cooperative, Inc. (SORECO I); 2) Benguet Electric Cooperative (BENECO), and 3) Tarlac I Electric Cooperative, Inc. (TARELCO I). The total eight (8) direct-member customers comprised only around five (5) percent of the prospective 163 customer participants.
[11] These include 1) Review on the Investigation Report of the Enforcement and Compliance Office (ECO); 2) Analysis on the Competitiveness of the Visayas Electricity Market; and 3) Request for investigation on the possible breaches of the WESM Rules (i.e., non-compliance with the must offer rule and the real time dispatch schedules).
[12] Prior to the launching of ABEP, barangay electrification level stood only at 76.9% having a recorded electrified barangays of 32,281 out of 41,980 total barangay coverage. By the end of 30 September 2008, the ER Program had already energized 40,775 barangays or 97.13% electrification level with only 1,205 unenergized barangays nationwide remain.
[13] The key issues prior to the reform include the following: surplus capacity and high operating associate with IPPs contracted by NPC; high debt-service burden of NPC; transmission bottlenecks; high power losses (overall average system loss sustained by all rural electrification cooperatives (RECs) was 18 percent with a high value of 39.2 percent); and absence of economies of scale, inefficient operations, and high distribution overheads (overall average markup of all RECs was 771.1%, with a high value of 283.7 percent) among the large number of fragmented and small RECs. A combination of these difficulties has resulted in Philippine power rates being the second highest in the region.
[14] The government plans that competition will determine generation tariffs, but the tariffs for the wires portion of distribution tariffs, and the transmission wheeling tariffs will continue to be regulated.
[15] Electricity consumers in Luzon are subsidizing consumers in the other grids in a nontransparent manner according to ADB.
[16] In 1990 the Philippines was confronted with a crisis of insufficient electrical generating capacity. Metro Manila and the thirty-three provinces in the Luzon power grid experienced brownouts of up to four hours per day, with the grid averaging a daily deficiency of 262 megawatts. At the root of the problem was the decision by the Marcos regime to build a 620 megawatt nuclear-power plant on the BataanPeninsula. The Aquino government decided not to use the facility because it was located on a seismic fault. As a result, a badly needed expansion of generating capacity in Luzon, which accounted for 75 percent of national electric consumption, did not come on line. The problem was compounded by inadequate planning and bureaucratic delays. There were delays in the building of a facility capable of generating 110 megawatts of geothermal power in Albay Province and a 300 megawatt coal-fired plant in Batangas Province. The short-term solution was to put up a series of gas-turbine plants with a combined rating of 500 megawatts. Only 245 megawatts came on stream between 1987 and 1989. Economists estimated that to achieve a 5.6 percent growth rate in real GNP, the country would need an additional 300 megawatts of generating capacity yearly.
[17] Paper presented by DOE Secretary Angelo T. Reyes in the International Ministerial Conference on Nuclear Energy in the 21st Century, Beijing, China, 20-22 April 2009
[18] Among others, the government is no longer required top provide funds for the expansion of the sector in areas that have a scale of electricity use that is conducive for commercial operations. It no longer assumes demand growth risks because centralized generation planning becomes a secondary tool, and responsibility for determining the right level of generation tariff is transferred to the electricity market.
[19] According to WEC, there are three goals that need to be achieved: 1) energy accessibility; 2) energy availability, and energy acceptability. On the other hand, the long-term goal of ADB’s assistance is to ensure the quality, reliability, security, and affordability of electricity supply in the Philippines.
[20] Increased efficiency of energy use and supply will accordingly yield more service value from each primary energy unit consumed.
[21] Singapore, United Kingdom, and Argentina, for instance, registered downwards trend in electricity tariffs after initiating reforms.
[22] This estimate is based on the assumption that the transition to competitive markets will start in 2000 and will be completed in 2005.
[23] Accordingly, regulatory skills, antitrust and prevention of monopolistic practices, and an appropriate legal and proper corporate governance practices need to be in place to support an effective restructure environment.
[24] An example of an uncompetitive practice is when a distribution company is allowed to buy from allied generators and discriminate against rival generators.
[25] Such markets accordingly need a certain level of sector maturity before they can function effectively. Accordingly, the market would be effective provided the revenue stream available to the generating companies exceeds their variable cost by an amount that is adequate to cover the fixed costs of generation, including reasonable return to the investors. If there is under-recovery, there will be little to encourage new investments in the sector, and if there were over-recovery, the investors in the generating companies would get a high return at the expense of the consumers.
[26] Lifeline rates refer to the subsidized rates given to low-income electricity consumers who cannot afford to pay at full cost as prescribed by the Electric Power Industry Reform Act (EPIRA). Lifeline rates vary depending on the distribution utility and are set by the Energy Regulatory Commission (ERC).
[27] The government collects a 60 percent share of the net proceeds of natural gas development, 60 percent of the net proceeds of geothermal energy development, and 30 percent of the net proceeds from indigenous coal.
[28] Because of the take-or-pay agreement governing the Malampaya operations, the government has to pay the full amount of energy delivered by Malampaya regardless of whether this energy is utilized or not.
[29] In theory, open and equal distribution access, competition and efficiency gains at the generation level will be passed on to the end-use consumer, as consumers will be able to select the generator of their choice through an open competitive market. Under such a system, DUs will carry power through their wire networks and charge wheeling fees for this service.
[30] The government is expected to identify areas for possible structural and operational reform of distribution operations, conduct appropriate workshops and pilot studies, and encourage area-specific models and methodologies for achieving these structural and operational reforms of distribution operations.
[31] The UNDP has stated that none of the Millennium Development Goals (MGDs) can be met without major improvements in the quality and quantity of energy services in developing countries. The UN Millennium Project, an advisory body constituted by then-UN Secretary General Kofi Annan to recommend practical steps toward achieving the MDGs, argued forcefully that “greater quality and quantity of energy services will be required to meet the MDGs”
[32] Under ER 1-94, power generators and/or energy resource developers are mandated to set aside one centavo per kilowatt-hour (P0.01 per kWh) of the total electricity sales as financial benefits to host communities for electrification, development and livelihood, reforestation, watershed management, health and/or environment enhancement.
[33] Section 59 of the EPIRA and Rule 14 of the EPIRA-IRR stated that “the provision of electric service in remote and unviable villages that the franchised utility is unable to service for any reason shall be opened to other qualified third parties.” Thus, once the concerned franchise holder deems that providing electricity to a barangay or barangays is not commercially viable, then an electric service provider other than the adjacent distribution utility may be authorized to provide the electricity services.
[34] Paper presented by DOE Secretary Angelo T. Reyes in the International Ministerial Conference on Nuclear Energy in the 21st Century, Beijing, China, 20-22 April 2009
[35] It appears that the impact of subsidy removal is relatively small due to the small percentage expenditure on electricity (the 1994 Family Income and Expenditures Survey show only 1.6 to 3.0 percent of the expenditures of households with annual income below the poverty threshold go to electricity.
[36] Technical and economic factors are always included in reform because they are inherent to the process; democratic governance is often not considered because reform practitioners think that they can put it off or avoid it.
[37] Paper presented by DOE Secretary Angelo T. Reyes in the International Ministerial Conference on Nuclear Energy in the 21st Century, Beijing, China, 20-22 April 2009