Lower power rates elude manufacturers

The high cost of power in the Philippines is often blamed for making local products uncompetitive in the global market. And until assets of the National Power Corp. (Napocor) are privatized, exporters believe the promise of lower power costs will not be realized. "Our power rates are the highest in Asia, running close to Japan," said Jose Ibazeta, president of the Power Sector Assets and Liabilities Management Corp. (PSALM).

"People are asking why our rates are high, but actually they are not," he added. "What is happening is that the Philippines is the most transparent nation in terms of power rates, because we do not have subsidies." Countries like Vietnam, China, Thailand and Malaysia, which enjoy lower rates compared to the country, have "hidden subsidies" that the Philippine government, as a policy, does not provide, Ibazeta said.

"The cost of producing energy is the same for everybody, whether it is coal, gas or geothermal. There is no difference. The distribution costs are the same. So the difference in rates must go down somewhere," he said. To bring down the country's electricity costs, the government is banking on the implementation of the Electric Power Industry Reform Act (EPIRA) of 2001 to spur competition in the once state-controlled power sector. Many of the objectives of that law have been accomplished, including the unbundling of power rates, the restructuring of the power sector and the establishment of the Wholesale Electricity Spot Market (WESM).

Still, local rates are high, and what remain to be done is the privatization of government's power assets. PSALM is tasked to carry out the privatization by selling at least 70 percent of state-owned Napocor's generating and contracted capacity. Once these provisions are met, open access can start in the power sector, and will allow consumers, starting with large power users, to choose from whom to source their power supply.

At present, the asset management firm has achieved a 42.8-percent privatization threshold for power plants and would only need to auction off a couple of Napocor's large plants to reach to 70-percent target, Ibazeta said.

The process of privatizing Napocor's contracted independent power producers (IPP) by bidding this out to IPP administrators, who will market the plants' energy output, will only start in August. But already a number of groups have already expressed interest in participating. PSALM aims to complete these tasks within the year. This will ensure that open access begins in 2010.

Besides the promise of lower rates, PSALM's privatization mandate also assures the country's future power supply because the government is prohibited under the Electric Power Industry Reform Act to enter into new power purchase agreements with independent power producers.

The private sector - meaning the independent power producers - must expand their facilities or start new ones. The Department of Energy's Supplemental Power Development Plan 2006 to 2014, released in the last quarter of 2007, foresees that the country's power supply will be critical for the Luzon grid in 2010, the Visayas grid in 2011, and the Mindanao grid in 2009. Unless new plants are expanded or put up altogether by the private sector, then the country would be facing rotating brownouts reminiscent of the ones experienced in the early 1990s.

Meanwhile, questions still remain as to how PSALM will privatize Napocor's contracts with independent power producers, because this is the first time such an endeavor will be carried out anywhere in the world.

Ibazeta said earlier that the agency may come up with a decision on how to go about it within April, as it has already narrowed down its options to two possibilities. One option is to transfer Napocor's fuel procurement functions from the independent power producers to the IPP administrators in order to attract the interest of investors. When PSALM completes its mandated privatization threshold, however, household consumers could be disappointed.

Ibazeta said it is industries - not households or other small consumers of power - that will directly benefit from the lower rates. But household consumers will indirectly benefit from "the multiplier effect" of having more businesses and foreign investor operating in the country providing better jobs and services.

The second option is to retain the status quo.