What is power sector restructuring?

Restructuring necessitates changing the overall structure of the electricity industry. It involves mainly the separation of the competitive from the monopolistic components of the industry such as generation versus transmission, distribution versus supply of electricity. Transmission and distribution are considered natural monopolies; while generation and supply are highly competitive business ventures.

Restructuring also involves the unbundling of electricity tariffs (or breaking down the cost components of power rates to ensure transparency) to distinguish the efficient utilities from the inefficient ones. It therefore equips the regulatory system with the necessary tools to protect the rights of the customer and, in the case of a fully competitive market, provides customers the information they need to make the best choice among power suppliers.

The ultimate goal of restructuring is efficiency and the provision of reliable and competitively priced electricity, while giving customers a full range of choices.

What is the existing electricity industry structure?

The Philippine power industry is divided into three major sectors: generation, transmission and distribution.

Under the present power industry structure, NPC generates its own electricity and buys electricity from IPPs.

Generation used to be a monopoly of the NPC until the issuance of Executive Order No. 215, which opened the generation sector to private investors. At present, a number of IPPs generate and sell electricity to NPC and other customers.

NPC transmits electricity to distributors and large industrial customers via high-voltage wires. NPC is also responsible for constructing the transmission grid highway interconnecting the main islands nationwide.

Distribution of electricity at its usable voltage to end-consumer is performed by investor-owned electric utilities, notably the Manila Electric Company (Meralco), a few local government-owned utilities and numerous electric cooperatives which sell to households as well as commercial and industrial enterprises located within their franchise areas at retail rates regulated by the Energy Regulatory Board (ERB).

The Department of Energy (DOE) sets policy directions for the energy industry, while the National Electrification Administration (NEA) provides financial and technical assistance to electric cooperatives.

What are the legal basis for the existing industry structure?

• Presidential Decree No. 40 issued on November 7, 1972, gave NPC a monopoly on power generation and transmission. The decree authorized NPC to "own and operate as a single integrated system all generating facilities supplying electric power to the entire area embraced by any grid set up by NPC."

• Presidential Decree No. 269 issued on August 6, 1973, created the NEA and prescribed its power and activities. This directive also declared the national policy objective of the government of total electrification on an area coverage basis through the organization, promotion and development of electric cooperatives. PD 269 prescribed the terms and conditions for the operation of electric cooperatives.

• Executive Order 215 issued on July 10, 1987 allowed private investors to participate in power generation through Cogeneration, Build-Operate-Transfer (BOT), and Build-Operate-Own (BOO) schemes. This directive bolstered the national policy of encouraging active private sector involvement in major economic activities of the country, recognizing that this sector can be a partner in nation-building.

Why are existing power rates quite high?

• At the wholesale level, NPC has huge foreign exchange exposure (debt and IPP obligations), while government as stockholder has not infused funds for its operations.

• New entrants in generation sector are not investing/paying for other services which should have been provided by them like reserve capacity, ancillary services, etc. This raises NPC's costs and makes its tariffs uncompetitive (leading to potentially stranded costs).

• At the retail level, some distributors are inefficient and take advantage of the existing flaws inherent in the system and inadequate rules which breed inefficiency and monopolistic abuse.

Why do we need to restructure our power sector?

There are a number of pressing reasons for the restructuring of the power sector. Among these are:

• Our country's end-consumer power rates are among the highest in the region
• Lack of real competition in the generation business
• Uncertainty of funding sources for long-term investment requirements
• A highly fragmented distribution sector
• Absence of consumer choice
• Lack of incentives to drive industry stakeholders to operate more efficiently

These problems have been building up over the decades. It is time we finally address them.

We need to lower power rates to make electricity more affordable to small users and to help industries become more competitive overseas to generate more jobs.

We need to complete the government's rural electrification program principally through the use of environment-friendly new and renewable energy (NRE) sources.

We need to attract more industry players who can take on the responsibility of investing for the future.

Why do we need to privatize National Power Corporation (Napocor)?

The privatization of the National Power Corporation is an important component of the electricity industry reforms program as it accounts for about 90% of the electricity generated in the country today: 56% comes from its generating power plants and the balance from so-called Independent power Producers or IPPs with which it has power purchase agreements (PPAs.)

It is the privatization of NPC therefore, which will allow real competition to develop, starting from the generation side.

In the process, government will also be spared the need to fund hugely capital-intensive power generating plants. It is estimated that of the total investments required by the energy sector within the next 10 years, about half or roughly P380 billion will go to the power sector.

As it is, NPC is already highly leveraged and burdened with short-term loans. Investments in the power sector are definitely much too heavy for the government to bear, given other priority programs such as health, education and agriculture.

What are the options available to the Philippine Government to meet the investment requirements of our power sector?

The Philippine Government has four options to deal with the problem:

• Realign and/or appropriate government funds to the power industry. This move, however, will deprive other sectors like health, education and agriculture of vital funding.

• Increase power rates to raise the amount needed to finance power projects. Increasing power rates however, is inflationary and runs counter to the pro-poor policy of the Estrada administration.

• Incur more loans. This scheme will worsen government exposure to local and international creditors, thereby adversely affecting the country's financial and economic condition.

• Encourage greater participation of private capital by restructuring the industry. Restructuring the industry will translate to more efficient service and lower rates brought about by competition in the power generation and distribution sectors. It will make electricity retail rates more competitive and transparent and give the customer the freedom of choice. Restructuring and privatization will enhance the inflow of fresh capital to implement the power development program. This will transfer infrastructure risk away from the government to the private sector which has better access to private capital.

How will the restructuring of the power sector and the privatization of NPC benefit consumer, industry participants and government?

The proposed industry restructuring and NPC privatization will be beneficial to consumer and all the stakeholders in the sector.

For consumers, restructuring will provide them with the freedom to choose the most efficient and most competitively-priced power firm. In fact, the prices of electricity in countries which have undergone restructuring had gone down by as much as 40 percent.

Restructuring will allow for the separation of the distribution and supply business of the cooperatives. The distribution business will still be regulated while the supply will be deregulated and thus, will be competitive. With the introduction of open access in the distribution sector, end consumer will have a choice as to where to source their electricity.

For the government, it would mean a leaner budget and more streamlined operations. The money that would be spent for the electricity industry without restructuring and privatization can be utilized instead for other vital government services like health, education and agriculture.

For the industry players, there will be diversification of ownership, greater opportunity for technological innovation and maximum public participation in the sector, thereby enhancing security and reliability of electricity supply.

Why should we privatize NPC in a restructured industry?

There is logic in having both restructuring the industry and privatizing NPC. Privatizing NPC alone,

• Will only be a transfer of government to a private monopoly
• Will not result to competition; cannot take full advantage of efficiency
• Will not give consumers a choice

Restructuring alone,

• Does not raise private capital and cash.
• NPC would still be dependent on the government.
• There will still be subsidies, distortions and political interference.
• We still have to deal with government bureaucracy.
• Government entity will be selling to another government entity.

Why is there an urgent need to implement the electricity industry reforms?

• National demand for electricity is expected to increase by 9% annually within the next 10 years.

• Declining competitiveness of the Philippine industries in the world market due to high production costs which include high electricity rates.

• Inability of NPC to service its debts through internal cash generation and the ballooning maturity of its loans by the year 2000.

How will the energy restructuring reduce power rates?

Tariffs can be reduced by genuine competition in generation and retail sale. By segregating the existing bundled electricity tariff into various components, the customers will have the power to choose their electricity suppliers. This has been the experience of every country that has undergone restructuring.

What are the experiences of other countries after they implemented power reforms?

Many developed countries like the United Kingdom, Norway, New Zealand, Australia and some states in the United States, have fully competitive electricity supply industries. Chile and Argentina are examples of developing countries which have undergone successful reforms in the electricity industry. Figure 2 shows a list of the countries which have completed industry reforms and the effects of these reforms on their respective electricity prices.

Bolivia, Peru and Czechoslovakia are currently in the process of restructuring their respective power industry, while Thailand, Singapore and Malaysia are among the Asian countries which are planning to reform their power industries.

Restructuring has become a standard reform path all over the world since technologies, business processes are now easily obtainable and readily transferable under a developing country environment.

What is the assurance that passage of the electricity industry reforms will lead to security and reliability of power supply?

Power supply will be assured since the reforms will transfer the responsibility of investing funds from the government to the private sector, which has a good track record in putting up much-needed funds for power projects.

And because they will be given the power of choice, consumers will definitely prefer the most efficient and reliable electricity providers.