![E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 9
Arabia and Russia (EIA, 2014). The Philippines is expected to continue relying heavily on imported fossil
fuels, with oil imports reaching 30 Mtoe (around 590,000 bbl/d) by 2035 (see Figure 4-7) (APEC, 2013). In
order to reduce dependence on foreign oil, the Philippines invited tenders for eleven oil and gas blocks in
2014 to the Palawan Basin and nearby regions to explore areas that could potentially increase the
economy’s oil production to 39,000 bb/d by 2019 (EIA, 2014).
In 2013, it was estimated that the Philippines consumed approximately 18 million tons of coal, almost half of
which was produced domestically and the rest was imported (EIA, 2014). Most domestic coal is low-grade
and is mined from the Semirara Island in the western Visayas. Low-grade coal imports are mainly imported
from Indonesia, accounting for 96.7 percent of the total coal imports to the Philippines. Coal imports are
currently lower than oil imports; however, coal imports are projected to increase to nearly 25 Mtoe by
2035. The Philippines is currently undergoing efforts to reduce imported coal by 20 percent to reduce
dependence on imported energy sources. Specifically, there has been expanded exploration for new oil and
gas reserves with the aim of increasing domestic reserves by 20 percent. The Philippines has high potential
domestic coal reserves, with total coal resource potential estimated at 2.53 billion tonnes (PDOE, 2016a).
Coal consumption in the Philippines is expected to continue increasing due to increased energy demand
from domestic coal-fired power plants.
Table 4-1 illustrates the Philippines natural gas production and consumption as of September 11, 2015. The
Philippines’ demand for natural gas is mostly met by domestic production, which was 3.9 billion cubic
meters in 2012 (Index Mundi, 2014b). Natural gas consumption was estimated at 2.8 billion cubic meters in
2010 (Index Mundi, 2014b).8 The Philippines is estimated to have 98.5 billion cubic meters of proven natural
gas reserves (Index Mundi, 2014b). The greatest natural gas reserves in the Philippines is the offshore
Malampaya deep-water gas-to-power project (west of Palawan), which is the largest gas producing field and
the main source of natural gas for the Philippines, providing 30 percent of the Philippine’s power needs. In
particular, natural gas from the Malampaya Gas project is used to fuel three natural gas-fired power plants
in Southern Luzon, to generate approximately 2,700 megawatts of electricity (Malampaya, 2016). The
Malampaya Gas to Power Project is the most significant energy investment in the Philippines’ natural gas
industry. This natural gas project opened the door to the Philippines natural gas industry and has allowed
the Philippines to use natural gas while reducing dependence on foreign energy sources. While the
Malampaya project is the largest operating natural gas project, it is essentially the only operational natural
gas project in the Philippines, and is insufficient to meet the energy needs of the economy.
Renewable energy resources make up a significant portion of the Philippines’ energy mix. The Philippines
passed the Renewable Energy Act of 2008 (RE Act) to help increase the use of renewables in the
economy’s energy mix. By 2035, the Philippines hopes that more than 50 percent of the domestic energy
supply will come from renewables, such as hydropower, geothermal, solar, and wind power (APEC, 2013).
In 2010, the Philippines’ installed geothermal generating capacity was 1,966 megawatts (MW), making the
Philippines the second largest geothermal producer in the world, behind the United States (APEC, 2013).
The PDOE estimates that the economy’s total potential untapped geothermal resource is about 2,600 MW
(PDOE, 2016b). At this time, considerable domestic geothermal resources are under development, but
until they are completed, imported fossil fuels will continue to dominate the economy’s energy mix.
Geothermal is expected to provide the biggest contribution of renewable energy in the future.
8 Currently, there is no domestic [residential?] use of natural gas, only for industrial, power, and transport uses.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/85/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-39-320.jpg)
![5 0 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
There are two important aspects of supply efficiency. First, it is necessary to provide the most
beneficial range of services with the resources available—“doing the right thing.” Second, it is
necessary to supply the required services at the least-possible cost—“doing the thing right.” Neither is
simple and neither is well achieved in most developing countries. ...
Doing the thing right is what commercial competition usually ensures, since the threat of bankruptcy is
a powerful stimulant to internal efficiency. The possibility of subsidy weakens that incentive. ....
Exploring measures to reduce subsidy requirements through improved efficiency and reduced costs is
thus the first step to take in formulating a public transport subsidy strategy.
Much of the argument for transport deregulation and privatization derives from a need to reduce
subsidies. Attempts to increase efficiency of operation through the introduction of competitive
pressures within the sector may enable lower prices to be charged without recourse to subsidy. The
implication is that, for any level of cost recovery lower than 100 percent, subsidies should be
specifically targeted at the objectives sought and should be embodied in competitively tendered service
contracts. ... [While rising transit fares can contribute to inflationary pressures,] The general World
Bank position is that subsidy is the wrong tool to deal with inflation; there is nothing special about the
transport sector to vitiate this view.
Funding public transit through tax revenues and liberalization of fossil fuel prices are not
contradictory. Public funding of mass transit is a social good, as transit ridership results in more and
broader societal benefits—other drivers, businesses, and residents as a whole benefit from reduced
congestion, improved air quality, and better mobility promoting economic development. As the World
Bank recommends, liberalizing fares – or at least allowing regulated fare increases – is essential to the
financial viability and adequacy of public transit service. Consequently, careful consideration of proper
fare regulation to meet both financial and social goals is critical.
Depoliticizing and regularizing fare review is also an important goal to rationalize fares. Such a policy
often politically enables fare increases, which in turn allows transit operators to quickly and reliably
recoup costs and maintain service as costs rise, while also investing in high-quality, ecologically friendly
vehicles and maintenance that are often financially out of reach in low-fare environments. Conversely,
tightly-regulated, subsidized fares may also be in the public interest, so long as adequate revenue
streams for public transit are provided and the subsidies do not lead to inefficient and wasteful
consumption of fossil fuel. However, the critical challenge in the Philippines is that the key part of the
mass transit system (jeepneys) is not public, but privatized.
Additionally, liberalization and rationalization of the transit sector can lead to increased efficiency and
improved service. Such opportunities are rife particularly in systems, where the dominant mode of
public transit is “paratransit”, such as jeepneys and tricycles in the Philippines. The World Bank (2002)
describes paratransit as “usually provided by informal operators that are non-corporate.”
Other features of paratransit that are familiar in the Philippine context include:
• Services are usually unscheduled and often, though not always, on demand-responsive routes, filling
gaps in formal transit provision.
• The vehicles operated are typically small, including motorcycles, partly because of the greater ease of
financing and flexibility of operation of the small vehicles, and partly because controls over small
vehicles are lax even in situations where entry to the large-vehicle market is strictly controlled.
• The vehicles used are often old, having been retired from other countries or other uses domestically, so
that the capital investment necessary to enter the business may be small (World Bank, 2002, pg.
101).](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/85/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-70-320.jpg)
![7 8 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
of the funds’ use and the economic efficiency of their sourcing vis-à-vis alternatives (such as subsidy
removal or budgetary funding by government).
Some jurisdictions around the world impose (or allow and/or mandate regulated utilities to impose)
significant surcharges on ratepayers akin to the UC-ME, including in many U.S. states. For example,
New York State has a surcharge for its Renewable Energy Portfolio Standard, the Energy Efficiency
Performance Standard, the Societal Benefits Charge, and the Technology and Market Development
programs. These surcharges totaled $925 million in 2015—all of which were funded by ratepayers, via
surcharges imposed by the New York Public Service Commission on customer bills for electric
service, collected by the utilities, and remitted to NYSERDA, which is the state’s entity that manages
the public and ratepayer-funded energy programs (NYUP, 2014). NYSERDA programs are generally
funded exclusively by ratepayer surcharges and other related taxes and extra-budgetary levies on
energy users (NYSERDA, 2016).
Under a May 8, 2014, Order, the Commission instructed NYSERDA to develop a framework for
funding that establishes a transparent upper limit on contributions from ratepayers, and sets that level
for the 2015-2020 period at levels below those paid by ratepayers in 2015 (NYUP, 2014). This policy
reflects sensitivity to the impact of surcharges (which fund cross-subsidies of low-income energy users
and environmental energy programs) on ratepayers.
Part 2. Determination of Pro-Poor Utility Subsidies and their Targeting
World Bank (2005) deals extensively with the issue of progressive, pro-poor subsidy design. They
elucidate why volumetric-based electricity and water tariffs often prove to be relatively inefficient in
targeting benefits to the poor. They argue based on field studies that the benefits of quantity-targeted
subsidies is quite poor. Consequently, they argue that rather than subsidies for consumption, subsidies
Are There Viable Alternatives to Utility Subsidies? (Excerpts from World Bank, 2005)
At most, connection subsidies can help encourage poor households with access to the network to connect, and
consumption subsidies will make ongoing service more affordable for the poor. But […] connection and
consumption subsidies address only one of the many problems that may explain why poor households
currently do not use utility services. Moreover, they are not the only instruments available for meeting social
policy objectives in the provision of basic infrastructure services. Utility subsidies are, therefore, best seen as a
potential part of a package of policy measures to help ensure access to utility services for the poor.
Alternative measures may not do away with the need for utility subsidies altogether, but they are certainly
complements that may help to contain the magnitude of utility subsidies and to address bottlenecks that
could otherwise undermine their targeting performance.
The need for utility subsidies can be reduced—if not entirely eliminated— by measures that reduce the cost
of providing network services or that improve the ability of poor households to pay for service at a given cost.
Costs can be reduced by improving operating and capital efficiency, raising revenue collection, and revising
technical norms to allow the adoption of lower-cost service delivery systems. Affordability of utility services can
be enhanced through modifications of utility commercial policies, such as more frequent billing or prepayment
of services.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/85/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-98-320.jpg)
![for connections58 and the provision of complementary goods and services could be more effective at
targeting vulnerable poor populations. They note that “the targeting performance of water and
electricity subsidies can improve significantly if alternative targeting methods are used—means testing,
in particular.” The authors also observe that the need for subsidies can be reduced if cost-of-service
can be brought down, and if alternatives to subsidized service provision (i.e., household or off-grid
community energy) are legalized and available.
The authors suggest four questions to address whether utility subsidies make poor instruments of
social policy in an economy:
a) the targeting performance of the subsidies relative to other social policy instruments,
b) the distribution of subsidies relative to the income distribution,
c) the significance of the subsidized material for poor households, and
d) the potential effect of adding or removing consumption subsidies on poverty levels.
Part 3. Tariff Reform
World Bank (2014, Chapter. 9) examined the methodologies for establishing regulated tariffs in
marginal grid zones. They find that avoided-cost, cost-recovery, and fixed domestic tariffs are the
three predominant approaches to tariff setting:
• Uniform domestic tariffs. All citizens in the same tariff categories pay the same tariff for
electricity regardless of where they live in the economy.
• Avoided-cost tariffs. A small-power producer (SPP) is allowed to set tariffs for consumers that are
equal to or below what the consumers would have been paying on other energy purchases (for
example, kerosene, cell-phone charging) that are now replaced by electricity supplied from a mini-grid.
• Cost-reflective tariffs. Tariffs that produce enough revenues to recover the overall capital and
operating costs likely to be incurred by an actual or hypothetical SPP.
World Bank (2014) find unequivocally that tariffs “must be high enough that they will, after a transition
period of several years, recover operating costs and depreciation on all capital (whether supplied by
the operator or others) as well as any debt payments (if any), and provide for reserves to deal with
emergency repairs and replacements.” Consequently, it is incumbent upon the UC-ME to develop a
middle- and long-term strategy for closing the gap between tariffs and production costs.
Based on our understanding, the Philippines does not currently adhere fully to any of these
approaches, instead setting a tariff below domestic rates, below avoided cost, and below cost recovery
for the SPUG areas. Relying on the World Bank’s approach would lead to increasing tariffs in SPUG
areas. Presuming that SPUG area cost of generation exceeds that on the national grid in Luzon and
Visayas, even the lowest-rate option, uniform domestic tariffs, would require raising SPUG area tariffs
(for example, from PhP5-6/kWh to an estimated PhP7-9/kWh to meet domestic levels). Household-
specific subsidies might adopt progressive volumetric-based escalating tariffs and the Lifeline program
of the rest of the economy.
World Bank (2014) further finds that, “Rural household customers can afford cost-reflective tariffs if
the initial connection charge is not too high and can be paid in small monthly payments over time.”
58 World Bank (2005) states that “[g]iven low coverage rates among the poor, even untargeted connection subsidies have
the potential to be quite progressive.”](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/85/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-99-320.jpg)
![8 0 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
This suggests that modest increases in electricity tariffs to the Philippines domestic on-grid standard
tariff would be manageable. World Bank (2014) elaborates the benefits for newly-electrified
households: “Once rural households get over the connection charge hurdle, they can afford to pay
electricity tariffs that will produce monthly expenditures equal to or less than their prior expenditures
on non-grid energy sources (kerosene, candles, batteries). Electricity has the added benefit of
producing better energy services: higher-quality lighting, better access to information, and health
benefits.”
World Bank (2005, Chapter 9) proposes a number of approaches to make electricity use more
affordable and manageable for low-income households in ways that do not require excessive tariff
subsidies. Such strategies include more frequent increments of smaller payments, and prepayment
systems (see text box).
Part 4. Operational Reform to Lower Costs
World Bank (2005, Chapter 9) notes that many water and electricity utilities in developing countries
and transition economies have very high cost levels because of inefficiencies in operations. Great
increases in efficiency are often achievable, and can help close the gap between maximum tariffs and
full cost recovery rates. Some of the inefficiencies that can be addressed include: “underutilization of
existing capacity in […] power plants, poorly designed plants, excessively high losses in distribution
and transmission networks, and overstaffing.” Reducing these inefficiencies lower the average cost of
service for all consumers. Potential reform options include privatization, competition, and regulation.
Innovative Approaches to Tariff Payment to Increase Affordability? (Excerpts World Bank, 2005)
Changing billing and payment methods and options can help low-income households spread the cost of their
utility bills. Most utilities in developing countries bill monthly or bimonthly, and even monthly bills can be
difficult for low-income households to absorb, and it may be desirable to allow more frequent payment. This
process is facilitated by developing a dense network of payment points in collaboration with banks,
supermarkets, post offices, or other local retailers. An alternative approach for peri-urban slums may be to
subcontract billing to a small-scale operator or local community representative who becomes responsible for
collecting and paying the bills for the entire settlement.
Connection charges that frequently take the form of one-time, up-front capital payments can represent a
major financial barrier for low-income households. Moreover, in the case of services such as sanitation and
natural gas, the cost of the in-house upgrades required to make full use of the network service can, in many
cases, exceed the cost of the connection itself. Such costs can be prohibitive for poor households.
Prepayment systems are an alternative method of helping customers manage their spending on utility
services. Those systems allow households to buy a token or a card in advance, which they insert into the
meter at home. The value of the token or card determines how much water or electricity can be used. Once
the value purchased is reached, the system shuts off. The prepayment meters entail a significant investment
on the part of the utility, raising questions as to whether the additional costs should be recovered directly from
the customers who adopt this payment approach. The prepayment approach effectively allows households to
voluntarily disconnect themselves from the service during periods of financial adversity. An alternative
approach is to install devices that physically limit the amount of service that the household obtains. In the
case of electricity, load limiters restrict the number of appliances that can be used simultaneously.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/85/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-100-320.jpg)
![8 4 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Electricity and Water Cross Subsidies: Experience in Colombia (Excerpts from World Bank, 2005)
In theory, the facts (a) that the Colombian tariff structure includes two strata of residential customers who
pay more than cost and (b) that surcharges are also imposed on industrial and residential customers make it
possible to fund the Colombian subsidy model through cross-subsidies. In practice, however, neither water nor
electricity subsidies have been able to break even on cross-subsidies alone. Both the water and electricity
sectors suffer structural losses as a result of the subsidy scheme (equal to 12 percent of sector turnover in
electricity and 20 percent of sector turnover in water), and it is necessary for the [domestic] government to
step in and help cover those losses.
Part of the problem is that it is difficult to achieve the right balance between customers receiving cross-
subsidies and those providing them in each service area […] Upper-strata customers (as well as business and
industrial customers) are overwhelmingly concentrated in larger cities, making the situation especially difficult
for utilities that serve smaller cities and rural areas. […]In this situation, transfers from the central
government are an attractive and practical solution.
This solution is not without its problems, however. First, as of 2003, many water utilities had failed to raise
prices to the levels indicated by the law. This failure was largely because tariffs in this sector had to increase
significantly (more than four times for the lowest stratum, for example) to comply with the legally set targets
for the tariff in each stratum. Given the likely political difficulties of raising tariffs to the appropriate levels,
utilities put off the move as long as possible. During this transition period of gradual tariff increases, the losses
from the subsidy scheme were larger than expected.
Second, the possibility of obtaining external support creates a disincentive for utilities. Not only must they
raise their tariffs to appropriate levels but also they have to worry about finding an appropriate balance of
cross-subsidizers and subsidy recipients. Under the current stratification system, local mayors have the
ability—as well as the political incentive—to reclassify neighborhoods downward from high to low strata. […]
Moving households down a stratum is a roundabout way to avoid increasing tariffs as much as is required by
the law.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/85/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-104-320.jpg)
![9 2 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Sotkiewicz (2004) finds that a rigorous cost of service study is necessary to determine the cost
reflective baseline tariffs from which the cross-subsidies will be determined. Additionally, the choice of
regulatory mechanism and industry structure for the utility(ies) can have an impact upon the relative
ease with which implementation can take place. And finally, this method of cross-subsidy does not
present a solution to the problem of uneconomic bypass of the system by large users.
Case Studies
India
Nag (2010) reviews the situation of captive generation across India. The Indian case is instructive for
the Philippines because of a key similarity: industry and commercial ratepayers are assessed a
substantially higher tariff than residential consumers and farmers, resulting in an effective cross-
subsidy. Among other reasons (such as power unreliability), higher prices for on-grid electricity have
“10 Questions to Ask About Electricity Tariffs” -- WRI and Prayas, Energy Group
(Excerpts from WRI, 2014)
HOW DOES THE TARIFF SUPPORT ENERGY EFFICIENCY, DEMAND-SIDE MANAGEMENT, AND
DEMAND-RESPONSE MEASURES?
Tariff structure can play an important role in capturing savings by promoting energy efficiency, demand-side
management, and demand-response measures, which allow end-use electric customers to reduce their
electricity usage in a given time period or shift that usage to another time period in response to a price signal.
Such tariff designs include time-of-day tariffs, block tariffs, and demand-response tariffs.
To mitigate power shortages, a main concern in China, the government has adopted a variety of tariff design
measures and incentives to promote energy conservation, including time-of day tariffs, seasonal tariffs in areas
where seasonal demand fluctuation is evident, and compensation for users who avoid peak hour
consumption.
Under a time-of-day tariff, electricity consumed during peak hours is charged at a higher rate than electricity
consumed during off-peak hours. This tariff encourages consumers to use electricity prudently during peak
hours. Not only does it encourage overall energy efficiency, but it also leads to better peak load management,
savings from avoided generation of costly peak-load power plants, and defers investments in new power
plants.
Peak-time rebates can incentivize large consumers (such as hotels, office buildings, and industries) to use
methods that reduce their load during peak hours or when the reliability of the grid is at stake. Load-reducing
measures include the adoption of energy efficient appliances and/or thermal energy storage systems and
household appliances, such as water heaters and air-conditioning systems that can be cycled on and off.
Utilities could also levy surcharges on electricity tariffs that support energy efficiency measures. For example,
a utility can collect a charge per kWh and use it exclusively to fund EE projects.
WHAT ARE THE SUBSIDIES IN THE TARIFF?
Several countries use preferential pricing (e.g., selective access to lower-cost resources) or overt subsidies to
assist low-income groups to access electricity. […] Further, many countries cross-subsidize electricity, whereby
one group of consumers pays higher rates for electricity to cover or subsidize lower rates for other consumers.
A tariff determination process that provides a transparent view of subsidies and cross-subsidies is more likely
to be aligned with the public interest. Periodic review and analysis of the outcomes of subsidy allocations can
prompt measures to prevent perverse impacts. While evaluating the implementation of subsidies, groups can
also consider issues of transparency and accountability.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/85/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-112-320.jpg)
![A - 2 A P P E N D I X A
Tuesday, 1 Dec Wednesday, 2 Dec Thursday, 3 Dec Friday, 4 Dec Monday, 7 Dec
1:30-3:00
Meeting with LPG Associations:
-LPG Refillers Association (LPGRA)
-LPG Industry Association, Inc.
(LPGIA)
Meeting with:
- Representative of the
National Renewables Energy Board
-Mr. Gaspar Escobar, NREB
Secretariat
Presentation:
Philippines Energy Plan
-Lana Rose A. Manaligod, PDOE
Planning Bureau
Meeting with:
-Atty. Vigor Mendoza (former delegate of
the transport sector [1-UTAK]) at the
Phils. House of Representatives
-Ms. Rosemarie Gomera, Head, TWG
National Biofuels Board
(unavailable)
Synthesis / Presentation of initial
report/recommendations
3:00-4:00
Focused group discussions.
(APEC & PDOE Team)
Wrap up for the day:
APEC & PDOE team
Wrap up for the day:
APEC & PDOE team](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/85/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-128-320.jpg)
![E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 9
Arabia and Russia (EIA, 2014). The Philippines is expected to continue relying heavily on imported fossil
fuels, with oil imports reaching 30 Mtoe (around 590,000 bbl/d) by 2035 (see Figure 4-7) (APEC, 2013). In
order to reduce dependence on foreign oil, the Philippines invited tenders for eleven oil and gas blocks in
2014 to the Palawan Basin and nearby regions to explore areas that could potentially increase the
economy’s oil production to 39,000 bb/d by 2019 (EIA, 2014).
In 2013, it was estimated that the Philippines consumed approximately 18 million tons of coal, almost half of
which was produced domestically and the rest was imported (EIA, 2014). Most domestic coal is low-grade
and is mined from the Semirara Island in the western Visayas. Low-grade coal imports are mainly imported
from Indonesia, accounting for 96.7 percent of the total coal imports to the Philippines. Coal imports are
currently lower than oil imports; however, coal imports are projected to increase to nearly 25 Mtoe by
2035. The Philippines is currently undergoing efforts to reduce imported coal by 20 percent to reduce
dependence on imported energy sources. Specifically, there has been expanded exploration for new oil and
gas reserves with the aim of increasing domestic reserves by 20 percent. The Philippines has high potential
domestic coal reserves, with total coal resource potential estimated at 2.53 billion tonnes (PDOE, 2016a).
Coal consumption in the Philippines is expected to continue increasing due to increased energy demand
from domestic coal-fired power plants.
Table 4-1 illustrates the Philippines natural gas production and consumption as of September 11, 2015. The
Philippines’ demand for natural gas is mostly met by domestic production, which was 3.9 billion cubic
meters in 2012 (Index Mundi, 2014b). Natural gas consumption was estimated at 2.8 billion cubic meters in
2010 (Index Mundi, 2014b).8 The Philippines is estimated to have 98.5 billion cubic meters of proven natural
gas reserves (Index Mundi, 2014b). The greatest natural gas reserves in the Philippines is the offshore
Malampaya deep-water gas-to-power project (west of Palawan), which is the largest gas producing field and
the main source of natural gas for the Philippines, providing 30 percent of the Philippine’s power needs. In
particular, natural gas from the Malampaya Gas project is used to fuel three natural gas-fired power plants
in Southern Luzon, to generate approximately 2,700 megawatts of electricity (Malampaya, 2016). The
Malampaya Gas to Power Project is the most significant energy investment in the Philippines’ natural gas
industry. This natural gas project opened the door to the Philippines natural gas industry and has allowed
the Philippines to use natural gas while reducing dependence on foreign energy sources. While the
Malampaya project is the largest operating natural gas project, it is essentially the only operational natural
gas project in the Philippines, and is insufficient to meet the energy needs of the economy.
Renewable energy resources make up a significant portion of the Philippines’ energy mix. The Philippines
passed the Renewable Energy Act of 2008 (RE Act) to help increase the use of renewables in the
economy’s energy mix. By 2035, the Philippines hopes that more than 50 percent of the domestic energy
supply will come from renewables, such as hydropower, geothermal, solar, and wind power (APEC, 2013).
In 2010, the Philippines’ installed geothermal generating capacity was 1,966 megawatts (MW), making the
Philippines the second largest geothermal producer in the world, behind the United States (APEC, 2013).
The PDOE estimates that the economy’s total potential untapped geothermal resource is about 2,600 MW
(PDOE, 2016b). At this time, considerable domestic geothermal resources are under development, but
until they are completed, imported fossil fuels will continue to dominate the economy’s energy mix.
Geothermal is expected to provide the biggest contribution of renewable energy in the future.
8 Currently, there is no domestic [residential?] use of natural gas, only for industrial, power, and transport uses.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/75/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-39-2048.jpg)
![5 0 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
There are two important aspects of supply efficiency. First, it is necessary to provide the most
beneficial range of services with the resources available—“doing the right thing.” Second, it is
necessary to supply the required services at the least-possible cost—“doing the thing right.” Neither is
simple and neither is well achieved in most developing countries. ...
Doing the thing right is what commercial competition usually ensures, since the threat of bankruptcy is
a powerful stimulant to internal efficiency. The possibility of subsidy weakens that incentive. ....
Exploring measures to reduce subsidy requirements through improved efficiency and reduced costs is
thus the first step to take in formulating a public transport subsidy strategy.
Much of the argument for transport deregulation and privatization derives from a need to reduce
subsidies. Attempts to increase efficiency of operation through the introduction of competitive
pressures within the sector may enable lower prices to be charged without recourse to subsidy. The
implication is that, for any level of cost recovery lower than 100 percent, subsidies should be
specifically targeted at the objectives sought and should be embodied in competitively tendered service
contracts. ... [While rising transit fares can contribute to inflationary pressures,] The general World
Bank position is that subsidy is the wrong tool to deal with inflation; there is nothing special about the
transport sector to vitiate this view.
Funding public transit through tax revenues and liberalization of fossil fuel prices are not
contradictory. Public funding of mass transit is a social good, as transit ridership results in more and
broader societal benefits—other drivers, businesses, and residents as a whole benefit from reduced
congestion, improved air quality, and better mobility promoting economic development. As the World
Bank recommends, liberalizing fares – or at least allowing regulated fare increases – is essential to the
financial viability and adequacy of public transit service. Consequently, careful consideration of proper
fare regulation to meet both financial and social goals is critical.
Depoliticizing and regularizing fare review is also an important goal to rationalize fares. Such a policy
often politically enables fare increases, which in turn allows transit operators to quickly and reliably
recoup costs and maintain service as costs rise, while also investing in high-quality, ecologically friendly
vehicles and maintenance that are often financially out of reach in low-fare environments. Conversely,
tightly-regulated, subsidized fares may also be in the public interest, so long as adequate revenue
streams for public transit are provided and the subsidies do not lead to inefficient and wasteful
consumption of fossil fuel. However, the critical challenge in the Philippines is that the key part of the
mass transit system (jeepneys) is not public, but privatized.
Additionally, liberalization and rationalization of the transit sector can lead to increased efficiency and
improved service. Such opportunities are rife particularly in systems, where the dominant mode of
public transit is “paratransit”, such as jeepneys and tricycles in the Philippines. The World Bank (2002)
describes paratransit as “usually provided by informal operators that are non-corporate.”
Other features of paratransit that are familiar in the Philippine context include:
• Services are usually unscheduled and often, though not always, on demand-responsive routes, filling
gaps in formal transit provision.
• The vehicles operated are typically small, including motorcycles, partly because of the greater ease of
financing and flexibility of operation of the small vehicles, and partly because controls over small
vehicles are lax even in situations where entry to the large-vehicle market is strictly controlled.
• The vehicles used are often old, having been retired from other countries or other uses domestically, so
that the capital investment necessary to enter the business may be small (World Bank, 2002, pg.
101).](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/75/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-70-2048.jpg)
![7 8 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
of the funds’ use and the economic efficiency of their sourcing vis-à-vis alternatives (such as subsidy
removal or budgetary funding by government).
Some jurisdictions around the world impose (or allow and/or mandate regulated utilities to impose)
significant surcharges on ratepayers akin to the UC-ME, including in many U.S. states. For example,
New York State has a surcharge for its Renewable Energy Portfolio Standard, the Energy Efficiency
Performance Standard, the Societal Benefits Charge, and the Technology and Market Development
programs. These surcharges totaled $925 million in 2015—all of which were funded by ratepayers, via
surcharges imposed by the New York Public Service Commission on customer bills for electric
service, collected by the utilities, and remitted to NYSERDA, which is the state’s entity that manages
the public and ratepayer-funded energy programs (NYUP, 2014). NYSERDA programs are generally
funded exclusively by ratepayer surcharges and other related taxes and extra-budgetary levies on
energy users (NYSERDA, 2016).
Under a May 8, 2014, Order, the Commission instructed NYSERDA to develop a framework for
funding that establishes a transparent upper limit on contributions from ratepayers, and sets that level
for the 2015-2020 period at levels below those paid by ratepayers in 2015 (NYUP, 2014). This policy
reflects sensitivity to the impact of surcharges (which fund cross-subsidies of low-income energy users
and environmental energy programs) on ratepayers.
Part 2. Determination of Pro-Poor Utility Subsidies and their Targeting
World Bank (2005) deals extensively with the issue of progressive, pro-poor subsidy design. They
elucidate why volumetric-based electricity and water tariffs often prove to be relatively inefficient in
targeting benefits to the poor. They argue based on field studies that the benefits of quantity-targeted
subsidies is quite poor. Consequently, they argue that rather than subsidies for consumption, subsidies
Are There Viable Alternatives to Utility Subsidies? (Excerpts from World Bank, 2005)
At most, connection subsidies can help encourage poor households with access to the network to connect, and
consumption subsidies will make ongoing service more affordable for the poor. But […] connection and
consumption subsidies address only one of the many problems that may explain why poor households
currently do not use utility services. Moreover, they are not the only instruments available for meeting social
policy objectives in the provision of basic infrastructure services. Utility subsidies are, therefore, best seen as a
potential part of a package of policy measures to help ensure access to utility services for the poor.
Alternative measures may not do away with the need for utility subsidies altogether, but they are certainly
complements that may help to contain the magnitude of utility subsidies and to address bottlenecks that
could otherwise undermine their targeting performance.
The need for utility subsidies can be reduced—if not entirely eliminated— by measures that reduce the cost
of providing network services or that improve the ability of poor households to pay for service at a given cost.
Costs can be reduced by improving operating and capital efficiency, raising revenue collection, and revising
technical norms to allow the adoption of lower-cost service delivery systems. Affordability of utility services can
be enhanced through modifications of utility commercial policies, such as more frequent billing or prepayment
of services.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/75/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-98-2048.jpg)
![for connections58 and the provision of complementary goods and services could be more effective at
targeting vulnerable poor populations. They note that “the targeting performance of water and
electricity subsidies can improve significantly if alternative targeting methods are used—means testing,
in particular.” The authors also observe that the need for subsidies can be reduced if cost-of-service
can be brought down, and if alternatives to subsidized service provision (i.e., household or off-grid
community energy) are legalized and available.
The authors suggest four questions to address whether utility subsidies make poor instruments of
social policy in an economy:
a) the targeting performance of the subsidies relative to other social policy instruments,
b) the distribution of subsidies relative to the income distribution,
c) the significance of the subsidized material for poor households, and
d) the potential effect of adding or removing consumption subsidies on poverty levels.
Part 3. Tariff Reform
World Bank (2014, Chapter. 9) examined the methodologies for establishing regulated tariffs in
marginal grid zones. They find that avoided-cost, cost-recovery, and fixed domestic tariffs are the
three predominant approaches to tariff setting:
• Uniform domestic tariffs. All citizens in the same tariff categories pay the same tariff for
electricity regardless of where they live in the economy.
• Avoided-cost tariffs. A small-power producer (SPP) is allowed to set tariffs for consumers that are
equal to or below what the consumers would have been paying on other energy purchases (for
example, kerosene, cell-phone charging) that are now replaced by electricity supplied from a mini-grid.
• Cost-reflective tariffs. Tariffs that produce enough revenues to recover the overall capital and
operating costs likely to be incurred by an actual or hypothetical SPP.
World Bank (2014) find unequivocally that tariffs “must be high enough that they will, after a transition
period of several years, recover operating costs and depreciation on all capital (whether supplied by
the operator or others) as well as any debt payments (if any), and provide for reserves to deal with
emergency repairs and replacements.” Consequently, it is incumbent upon the UC-ME to develop a
middle- and long-term strategy for closing the gap between tariffs and production costs.
Based on our understanding, the Philippines does not currently adhere fully to any of these
approaches, instead setting a tariff below domestic rates, below avoided cost, and below cost recovery
for the SPUG areas. Relying on the World Bank’s approach would lead to increasing tariffs in SPUG
areas. Presuming that SPUG area cost of generation exceeds that on the national grid in Luzon and
Visayas, even the lowest-rate option, uniform domestic tariffs, would require raising SPUG area tariffs
(for example, from PhP5-6/kWh to an estimated PhP7-9/kWh to meet domestic levels). Household-
specific subsidies might adopt progressive volumetric-based escalating tariffs and the Lifeline program
of the rest of the economy.
World Bank (2014) further finds that, “Rural household customers can afford cost-reflective tariffs if
the initial connection charge is not too high and can be paid in small monthly payments over time.”
58 World Bank (2005) states that “[g]iven low coverage rates among the poor, even untargeted connection subsidies have
the potential to be quite progressive.”](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/75/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-99-2048.jpg)
![8 0 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
This suggests that modest increases in electricity tariffs to the Philippines domestic on-grid standard
tariff would be manageable. World Bank (2014) elaborates the benefits for newly-electrified
households: “Once rural households get over the connection charge hurdle, they can afford to pay
electricity tariffs that will produce monthly expenditures equal to or less than their prior expenditures
on non-grid energy sources (kerosene, candles, batteries). Electricity has the added benefit of
producing better energy services: higher-quality lighting, better access to information, and health
benefits.”
World Bank (2005, Chapter 9) proposes a number of approaches to make electricity use more
affordable and manageable for low-income households in ways that do not require excessive tariff
subsidies. Such strategies include more frequent increments of smaller payments, and prepayment
systems (see text box).
Part 4. Operational Reform to Lower Costs
World Bank (2005, Chapter 9) notes that many water and electricity utilities in developing countries
and transition economies have very high cost levels because of inefficiencies in operations. Great
increases in efficiency are often achievable, and can help close the gap between maximum tariffs and
full cost recovery rates. Some of the inefficiencies that can be addressed include: “underutilization of
existing capacity in […] power plants, poorly designed plants, excessively high losses in distribution
and transmission networks, and overstaffing.” Reducing these inefficiencies lower the average cost of
service for all consumers. Potential reform options include privatization, competition, and regulation.
Innovative Approaches to Tariff Payment to Increase Affordability? (Excerpts World Bank, 2005)
Changing billing and payment methods and options can help low-income households spread the cost of their
utility bills. Most utilities in developing countries bill monthly or bimonthly, and even monthly bills can be
difficult for low-income households to absorb, and it may be desirable to allow more frequent payment. This
process is facilitated by developing a dense network of payment points in collaboration with banks,
supermarkets, post offices, or other local retailers. An alternative approach for peri-urban slums may be to
subcontract billing to a small-scale operator or local community representative who becomes responsible for
collecting and paying the bills for the entire settlement.
Connection charges that frequently take the form of one-time, up-front capital payments can represent a
major financial barrier for low-income households. Moreover, in the case of services such as sanitation and
natural gas, the cost of the in-house upgrades required to make full use of the network service can, in many
cases, exceed the cost of the connection itself. Such costs can be prohibitive for poor households.
Prepayment systems are an alternative method of helping customers manage their spending on utility
services. Those systems allow households to buy a token or a card in advance, which they insert into the
meter at home. The value of the token or card determines how much water or electricity can be used. Once
the value purchased is reached, the system shuts off. The prepayment meters entail a significant investment
on the part of the utility, raising questions as to whether the additional costs should be recovered directly from
the customers who adopt this payment approach. The prepayment approach effectively allows households to
voluntarily disconnect themselves from the service during periods of financial adversity. An alternative
approach is to install devices that physically limit the amount of service that the household obtains. In the
case of electricity, load limiters restrict the number of appliances that can be used simultaneously.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/75/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-100-2048.jpg)
![8 4 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Electricity and Water Cross Subsidies: Experience in Colombia (Excerpts from World Bank, 2005)
In theory, the facts (a) that the Colombian tariff structure includes two strata of residential customers who
pay more than cost and (b) that surcharges are also imposed on industrial and residential customers make it
possible to fund the Colombian subsidy model through cross-subsidies. In practice, however, neither water nor
electricity subsidies have been able to break even on cross-subsidies alone. Both the water and electricity
sectors suffer structural losses as a result of the subsidy scheme (equal to 12 percent of sector turnover in
electricity and 20 percent of sector turnover in water), and it is necessary for the [domestic] government to
step in and help cover those losses.
Part of the problem is that it is difficult to achieve the right balance between customers receiving cross-
subsidies and those providing them in each service area […] Upper-strata customers (as well as business and
industrial customers) are overwhelmingly concentrated in larger cities, making the situation especially difficult
for utilities that serve smaller cities and rural areas. […]In this situation, transfers from the central
government are an attractive and practical solution.
This solution is not without its problems, however. First, as of 2003, many water utilities had failed to raise
prices to the levels indicated by the law. This failure was largely because tariffs in this sector had to increase
significantly (more than four times for the lowest stratum, for example) to comply with the legally set targets
for the tariff in each stratum. Given the likely political difficulties of raising tariffs to the appropriate levels,
utilities put off the move as long as possible. During this transition period of gradual tariff increases, the losses
from the subsidy scheme were larger than expected.
Second, the possibility of obtaining external support creates a disincentive for utilities. Not only must they
raise their tariffs to appropriate levels but also they have to worry about finding an appropriate balance of
cross-subsidizers and subsidy recipients. Under the current stratification system, local mayors have the
ability—as well as the political incentive—to reclassify neighborhoods downward from high to low strata. […]
Moving households down a stratum is a roundabout way to avoid increasing tariffs as much as is required by
the law.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/75/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-104-2048.jpg)
![9 2 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Sotkiewicz (2004) finds that a rigorous cost of service study is necessary to determine the cost
reflective baseline tariffs from which the cross-subsidies will be determined. Additionally, the choice of
regulatory mechanism and industry structure for the utility(ies) can have an impact upon the relative
ease with which implementation can take place. And finally, this method of cross-subsidy does not
present a solution to the problem of uneconomic bypass of the system by large users.
Case Studies
India
Nag (2010) reviews the situation of captive generation across India. The Indian case is instructive for
the Philippines because of a key similarity: industry and commercial ratepayers are assessed a
substantially higher tariff than residential consumers and farmers, resulting in an effective cross-
subsidy. Among other reasons (such as power unreliability), higher prices for on-grid electricity have
“10 Questions to Ask About Electricity Tariffs” -- WRI and Prayas, Energy Group
(Excerpts from WRI, 2014)
HOW DOES THE TARIFF SUPPORT ENERGY EFFICIENCY, DEMAND-SIDE MANAGEMENT, AND
DEMAND-RESPONSE MEASURES?
Tariff structure can play an important role in capturing savings by promoting energy efficiency, demand-side
management, and demand-response measures, which allow end-use electric customers to reduce their
electricity usage in a given time period or shift that usage to another time period in response to a price signal.
Such tariff designs include time-of-day tariffs, block tariffs, and demand-response tariffs.
To mitigate power shortages, a main concern in China, the government has adopted a variety of tariff design
measures and incentives to promote energy conservation, including time-of day tariffs, seasonal tariffs in areas
where seasonal demand fluctuation is evident, and compensation for users who avoid peak hour
consumption.
Under a time-of-day tariff, electricity consumed during peak hours is charged at a higher rate than electricity
consumed during off-peak hours. This tariff encourages consumers to use electricity prudently during peak
hours. Not only does it encourage overall energy efficiency, but it also leads to better peak load management,
savings from avoided generation of costly peak-load power plants, and defers investments in new power
plants.
Peak-time rebates can incentivize large consumers (such as hotels, office buildings, and industries) to use
methods that reduce their load during peak hours or when the reliability of the grid is at stake. Load-reducing
measures include the adoption of energy efficient appliances and/or thermal energy storage systems and
household appliances, such as water heaters and air-conditioning systems that can be cycled on and off.
Utilities could also levy surcharges on electricity tariffs that support energy efficiency measures. For example,
a utility can collect a charge per kWh and use it exclusively to fund EE projects.
WHAT ARE THE SUBSIDIES IN THE TARIFF?
Several countries use preferential pricing (e.g., selective access to lower-cost resources) or overt subsidies to
assist low-income groups to access electricity. […] Further, many countries cross-subsidize electricity, whereby
one group of consumers pays higher rates for electricity to cover or subsidize lower rates for other consumers.
A tariff determination process that provides a transparent view of subsidies and cross-subsidies is more likely
to be aligned with the public interest. Periodic review and analysis of the outcomes of subsidy allocations can
prompt measures to prevent perverse impacts. While evaluating the implementation of subsidies, groups can
also consider issues of transparency and accountability.](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/75/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-112-2048.jpg)
![A - 2 A P P E N D I X A
Tuesday, 1 Dec Wednesday, 2 Dec Thursday, 3 Dec Friday, 4 Dec Monday, 7 Dec
1:30-3:00
Meeting with LPG Associations:
-LPG Refillers Association (LPGRA)
-LPG Industry Association, Inc.
(LPGIA)
Meeting with:
- Representative of the
National Renewables Energy Board
-Mr. Gaspar Escobar, NREB
Secretariat
Presentation:
Philippines Energy Plan
-Lana Rose A. Manaligod, PDOE
Planning Bureau
Meeting with:
-Atty. Vigor Mendoza (former delegate of
the transport sector [1-UTAK]) at the
Phils. House of Representatives
-Ms. Rosemarie Gomera, Head, TWG
National Biofuels Board
(unavailable)
Synthesis / Presentation of initial
report/recommendations
3:00-4:00
Focused group discussions.
(APEC & PDOE Team)
Wrap up for the day:
APEC & PDOE team
Wrap up for the day:
APEC & PDOE team](https://image.slidesharecdn.com/2078e8d6-d939-4c27-a5c4-0bcb0829c6c8-161116150115/75/APEC-FFSR-Peer-Review-Report-Philippines-July-2016-Final-7-14-16-128-2048.jpg)
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
- 1. July 2016 This publicationwas produced by Nathan Associates Inc. for the US-APEC Technical Assistance to Advance Regional Integration Project. PEER REVIEW ON FOSSIL FUEL SUBSIDY REFORMS IN THE PHILIPPINES Final Report
- 3. PEER REVIEW ONFOSSIL FUEL SUBSIDY REFORMS IN THE PHILIPPINES FINAL REPORT DISCLAIMER This document reflects the recommendations reached by the APEC Fossil Fuels Subsidy Reforms Peer Review Team and does not reflect the opinions of the Team’s respective governments. The contents of the report are the sole responsibility of the author or authors and do not necessarily reflect the views of the U.S. Agency for International Development, the Asia-Pacific Economic Cooperation (APEC) or other governments.
- 5. CONTENTS Executive Summary ix 1.Introduction and FFSR Peer Review Process 16? 2. Energy Subsidies 5 Identification of Subsidies 6 Lessons Learned from Fossil Fuel Subsidy Reform 8 3. Macroeconomics and Sociodemographics 10 Macroeconomic Condition 11 Socioeconomic Indicators 13 4. Energy Landscape of The Philippines 14 Energy Consumption 14 Energy Supply 17 Power Generation 20 Transportation 25 Energy Policy 27 5. Subsidy 1: Oil Price Stabilization Fund (OPSF) 30 History and Context 30 Vision 33 Key Findings 33 Recommendations 34 Observations 34 Lessons Learned and Best Practices 35 6. Subsidy 2: Pantawid Pasada: Public Transport Assistance Program 43 History and Context 43 Vision 46 Key Findings 46 Recommendations 47 Observations 48 Lessons Learned and Best Practices 49 7. Subsidy 3: Excise Tax Exemptions 58 History and Context 58 Vision 60 Key Findings 61 Recommendations 61
- 6. I I CO N T E N T S Lessons Learned and Best Practices 62 8. Subsidy 4: Missionary Electrification for Small Power Utilities Group 69 History and Context 69 Vision 74 Key Findings 74 Recommendations 75 Observations 76 Lessons Learned and Best Practices 76 9. Subsidy 5: Universal Charge Exemption for Self-Generating Facilities 85 History and Context 85 Vision 88 Key Findings 88 Recommendations 88 Lessons Learned and Best Practices 90 10. Conclusion 97 11. References 99 Appendix A. APRP Meetings for IFFSR Mission, December 2015 Appendix B. Summaries of APRP Meetings in Manila, philippines Appendix C. Peer Review Team Members FFSR Team Leader FFSR Team Members FFSR Secretariat Appendix D. APEC FFSR Evaluation Tables
- 7. I N TR O D U C T I O N I I I Illustrations Figures Figure 1-1. Development of IFFSR Peer Review Process in the Philippines 18? Figure 3-1: Philippines Map 10 Figure 3-2. Philippines Annual Percentage Growth Rate of GDP 12 Figure 3-3. GNI per Capita of Philippines, Atlas Method (Current USD) 12 Figure 4-1: Total Final Energy Consumption by Sector 1990-2014 15 Figure 4-2: Total Final Energy Consumption by Fuel Type 1990-2014 15 Figure 4-3: GHG Emissions by Fuel Type from 1990 - 2014 16 Figure 4-4: Energy Demand Outlook by Sector (in MTOE) 16 Figure 4-5: Energy Demand Outlook by Fuel (in MTOE) 17 Figure 4-6: The Philippines Primary Energy Supply 18 Figure 4-7: Philippines Energy Production and Net Imports 18 Figure 4-8: 2014 Philippines Capacity Mix by Grid 21 Figure 4-9: Philippine Power Generation Mix (in gigawatt-hours, GWh) 22 Figure 5-1. Philippines OPSF Balance and other Macroeconomic Indicators 32 Figure 5-2. Philippines Oil Consumption (left) and Energy Productivity (right) 32 Figure 6-1: Indexed Transit Fares and Fuel Prices 44 Tables Table ES-1. Timeline of Peer Review Process x Table ES-2. Key Findings and End Goals for the Three Evaluated Subsidies x Table ES-3. APRP Recommendations for the Five Evaluated Subsidies xii Table ES-4. APRP Observations for the Five Evaluated Subsidies xii Table 2-1: Main Types of Fossil Fuel Subsidies 6 Table 4-1: Natural Gas Production and Consumption as of September 2015 20 Table 4-2: Philippines 2014 Capacity by Plant Type 23 Table 7-1: Prevailing Taxes and Duties on Petroleum Products 59 Table 7-2. Impact of VAT and Offsetting Measures 59 Table 8-1: Existing and Pending Components of the Universal Charge (UC) 70 Table 8-2: ERC-Approved Universal Charges, As of 31 July 2015 71
- 8. CAVEATS The opinions expressedin this report are a consensus view of the APEC Peer Review Panel for the Philippines after discussions with the Philippine Government and review of various source documents. These opinions do not represent any single individual on the Review Panel, or the Philippines’ Government, or any other APEC economy or organization with which a review panel member may be associated. Any errors in the report are solely the responsibility of the members of the Review Panel. ACKNOWLEDGMENTS This report was produced by Nathan Associates Inc, in association with ICF International, for the APEC Energy Working Group. Dr. Ananth Chikkatur (ICF) was the team lead for the Secretariat of the APEC Peer Review Panel (APRP). He was supported by Mr. Andrew Eil (ICF), Ms. Alexandra Jamis (ICF), and Ms. Jeannette Paulino (Nathan Associates). The APRP consisted of Dr. Niall Mateer (Team Leader), Mr. David Buckrell (New Zealand), Mr. Noor Iskandarsyah (Indonesia), and Mr. Toshiyuki Shirai (International Energy Agency, IEA). The APRP thanks all of the departments in the Philippines that devoted significant time and effort in supporting the Panel’s activities in Manila. The Department of Energy, in particular, was very helpful in coordinating the APEC Peer Review activities. We are especially grateful to Ms. Melita Obillo and Ms. Luningning Baltazar, who were the primary contacts in the Government of the Philippines for this Peer Review.
- 9. ACRONYMS AND INITIALS ADBAsia Development Bank APEC Asia-Pacific Economic Cooperation APRP APEC Peer Review Panel ARMM Autonomous Region in Muslim Mindanao ASEAN Association of Southeast Asian Nations Bcf Billion cubic feet CAR Cordillera Administrative Region CNG Compressed natural gas DOTC Department of Transportation and Communications DU Distribution utility EIA United States Energy Information Administration EPIMB Electric Power Industry Management Bureau EPIRA Electric Power Industry Reform Act of 2001 ERB Energy Regulatory Board ERC Energy Regulatory Commission EWG Energy Working Group EO Executive Order FIT Feed-in tariff FFSR Fossil fuel subsidies reform GDP Gross domestic product GHG Greenhouse gas GNI Gross national income GW Gigawatt GWh Gigawatt-hours ICF ICF International IEA International Energy Agency IECC Inter-Agency Energy Contingency Committee IFFSR Inefficient fossil fuel subsidies reform IMF International Monetary Fund ILP Interruptible Load Program IOPRC Independent Oil Price Review Committee IPP Independent Power Producers LPG Liquefied petroleum gas LTFRB Land Transportation Franchising and Regulatory Board LTO Land Transportation Office MEP Missionary Electrification Plan
- 10. V I PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S MEDP Missionary Electrification Development Plan MERALCO Manila Electric Company MMSCF Million standard cubic feet MOPS Mean of Platts Singapore MTOE Million tonnes of oil equivalent MW Megawatt NCR National Capital Region in the Philippines NEA National Electrification Administration NEECP National Energy Efficiency and Conservation Program NGCP National Grid Corporation of the Philippines NPC National Power Corporation NPP New Power Providers NREB National Renewable Energy Board NREP National Renewable Energy Program OECD Organisation for Economic Co-operation and Development OPSF Oil Price Stabilization Fund PDOE Philippine Department of Energy PDOF Philippine Department of Finance PDTI Philippine Department of Trade and Industry PDP Power Development Plan PEP Philippine Energy Plan PNR Philippine National Railways PPCs Pantawid Pasada Cards PPP Purchasing power parity PREE Peer reviews on energy efficiency PSA Philippine Statistics Authority PSALM Power Sector and Asset Liabilities Management Corporation PSP Private Sector Participation program PTA Public Transport Assistance PTAP Public Transport Assistance Program QTP Qualified Third Party program RE Renewable energy RE Act Renewable Energy Act of 2008 RVAT Reformed Valued-Added Tax Law SGF Self-generating facility SPUG Small Power Utilities Group UC Universal Charge UC-ME Universal Charge for missionary electrification UNEP United Nations Environment Programme USAID United States Agency for International Development USD United States dollar
- 11. V I I VATValue-added tax VPR/IFFSR Voluntary Peer Review of Inefficient Fossil Fuel Subsidy Reform WESM Wholesale Electricity Spot Market WTO World Trade Organization WTO SCM World Trade Organization Agreement on Subsidies and Countervailing Measures
- 12. PREFACE Starting in 2009,APEC Leaders have committed “to rationalize and phase out inefficient fossil fuel subsidies that encourage wasteful consumption, while recognizing the importance of providing those in need with essential energy services.” In 2011, APEC Leaders agreed to set up a “voluntary reporting mechanism” that they would review annually to assess APEC’s progress toward this goal. APEC Leaders in 2013 agreed to build APEC economies’ regional capacity for meeting the APEC goal on fossil fuel subsidy reforms, and the APEC Energy Working Group (EWG) developed a methodology and adopted guidelines for conducting voluntary peer reviews of inefficient fossil fuel subsidies. Fossil fuel subsidies incentivize fossil fuel production and consumption and can result in increased energy demand. Inefficient subsidies can lead to fiscal pressure on the government, increase harmful emissions and potentially undermine APEC’s sustainable green growth agenda. APEC Energy Ministers noted in their 2012 Ministerial statement that the reduction of inefficient fossil fuel subsidies “will encourage more energy efficient consumption, leading to a positive impact on international energy prices and energy security, and will make renewable energy and technologies more competitive.” Such inefficient fossil fuel subsidies reform (IFFSR) can free up fiscal resources for cleaner energy options or social reforms and can also reduce local pollution and greenhouse gas emissions. Identifying appropriate reforms and implementing them effectively is challenging despite the benefits for individual economies. An APEC voluntary peer review (VPR) on reform of inefficient fossil fuel subsidies can help APEC economies identify options and help disseminate best practices on reform of inefficient fossil fuel subsidies. The VPR can also improve the quality of voluntary reporting to APEC Leaders. The Philippines is the third of several volunteer member economies to participate in the fossil fuel subsidy reform peer review process. The Philippine Government believes, as do other APEC economies, that any measure that promotes wasteful consumption of fossil fuels is ineffective and should be reformed. The objectives of the peer review are consistent with the domestic 2012-2030 Philippine Energy Plan objectives of (1) ensuring energy security, (2) achieving optimal energy pricing, and (3) developing a sustainable energy system consistent with economic development plans. The VPR for fossil fuel subsidies is led by the APEC EWG. This peer review report is the culmination of the activities conducted under APEC EWG, with support from Nathan Associates and ICF International under the United States Agency for International Development (USAID) U.S.-APEC Technical Assistance to Advance Regional Integration Project. Both Nathan Associates and ICF International served as the secretariat for the APEC Peer Review Panel (APRP). The main report is divided into two parts. The first presents the need for fossil fuel subsidy reform, discusses the background to the APEC VPR process, and provides an overview of the Philippines economy, socio-demographics and the energy landscape. The second part details the history and context of the reviewed subsidies, presents the key findings and recommendations from the APRP, and highlights some lessons learned and best practices for reform. Dr. Phyllis Yoshida Lead Shepherd, APEC EWG
- 13. EXECUTIVE SUMMARY APEC Leadersin 2013 agreed to build regional capacity to assist APEC economies in rationalizing and phasing out inefficient fossil fuel subsidies that encourage wasteful consumption, while recognizing the importance of providing those in need with essential energy services. As part of such capacity building, APEC set up a voluntary peer review (VPR) process to support the progress of APEC economies toward the group’s shared goal of phasing out inefficient fossil fuel subsidies that encourage wasteful consumption. At its November EWG 2013, the EWG endorsed voluntary peer review of inefficient fossil fuel subsidy reform (VPR/IFFSR) guidelines and set up a Secretariat for purposes of the VPR/IFFSR reviews, first applied with the Peru review in 2014 and followed by the New Zealand review in 2015. At the November 2014 APEC Energy Working Group (EWG) meeting in Port Moresby, Papua New Guinea, the Philippines volunteered to undergo the voluntary peer review (VPR/IFFSR). The VPR/IFFSR Secretariat (hereafter “Secretariat”) worked closely with the EWG Lead Shepherd and the EWG Secretariat to provide technical and logistical support for the peer review activities in the Philippines. The economy-level peer review was conducted in December 2015 in Manila, Philippines. A timeline of activities conducted for this peer review is shown in Table ES-0-1. An APEC Peer Review Panel (APRP) was established under guidance from the EWG Lead Shepherd, consisting of volunteers from the APEC and ASEAN economies. The APRP for the Philippines VPR consisted of four experts from Indonesia, Japan, New Zealand, and the United States. In coordination with the Secretariat and the EWG Lead Shepherd, the Philippines selected five policy instruments for evaluation by the APRP: • The Oil Price Stabilization Fund (OPSF), a pricing mechanism for petroleum products designed to protect Filipino consumers from international oil volatility that is no longer active, but still in consideration for re-instatement; • The Pantawid Pasada: Public Transit Assistance Program (PTAP), a limited cash-transfer mechanism for public transport operators in order to limit transit fare increases due to a rise in oil prices; • Excise Tax Exemptions, referring to the current differentiated excise tax regime where several ‘socially-sensitive’ fuels are exempted from excise taxes; • the Universal Charge for Missionary Electrification (UC-ME) to support the Small Power Utilities Group (SPUG), a cross-subsidy program for supporting electricity access and provision in remote areas, with revenue being raised from fees on grid-connected ratepayers; and • Universal Charge Exemption for Self-Generating Facilities, which are currently exempted from UC fees charged to other rate-paying electric utility customers, pending government review. The Philippines used the VPR/IFFSR process to exchange information and obtain policy recommendations for effectively eliminating any identified subsidies to fossil fuels in the long run. The discussions with APRP were intended to explore best practices or alternatives for addressing the objectives that the instruments cited above were meant to address. The key findings and the end goal for each of the instruments are provided in Table ES-0-2 below.
- 14. X P EE R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Table ES-0-1. Timeline of Peer Review Process Table ES-0-2. Key Findings and End Goals for the Five Evaluated Policy Measures Policy Key Findings End Goal Oil Price Stabilization Fund (OPSF) •The OPSF was introduced to provide petroleum products price stability, thereby aiming to achieve macroeconomic stability and protection of the poor from oil price spikes. •This mechanism did not effectively target the poor, but merely stabilized the price of fuels for all citizens, which resulted in a greater benefit to higher income consumers. •In high oil price environments, political resistance kept the fixed price low, resulting in an effective subsidy and a budgetary shortfall as, over time, payouts exceeded saved revenues. •The OPSF has likely caused higher fossil fuel consumption than would otherwise have been the case. •The fund was liquidated in 1998 during the restructuring and liberalization of the oil industry, leading to lasting structural changes in the petroleum market in the Philippines. •There is no desire to reinstate OPSF amongst stakeholders that the APRP met with, especially in the current low oil price environment. •Instead of reinstatement, PDOE has expressed a preference for considering targeted programs for energy security and subsidies to targeted recipients. •De-regulated oil prices which fully reflect the import parity price.. Pantawid Pasada: Public Transit Assistance Program (PTAP) •PTAP was a one-time, targeted subsidy, and the impact of the subsidy was to prevent fare increases on consumers. •PTAP partially subsidized the fuel consumption of identified small-scale public transport groups (excluding buses). •An objective of the Philippine government is to ensure that transit fares do not rise too quickly during times of rising fuel prices. This has been the Activity Month Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016 Mar. 2016 Apr. 2016 APEC EWG Lead Shepherd, Secretariat, and the Philippines’s Department of Energy (PDoE) finalize scope of Peer Review and Planning for the APRP visit to Manila PDoE collects required information and data for submission to Secretariat PDoE and Secretariat coordinate peer review meetings Secretariat produces draft of background paper APRP conducts Peer Review Meetings with technical staff/senior officials from different ministries, and key stakeholders from the power, fuels, and transit sectors APRP draws key conclusions about subsidies and develop recommendations for reforming subsidies Secretariat updates the background material that is included in draft report as “Part 1: Background” section of this report. Secretariat, with APRP input, develops the Draft Report with Key Findings, Recommendations, Observations and Lessons Learned included in chapter 5-10 of this report
- 15. E X EC U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X I Policy Key Findings End Goal •PTAP is not currently active. • Reinstatement of this program is not supported by stakeholders that the APRP met with. •Regulated fares do not provide sufficient price signals to consumers, and also do not provide incentives for jeepney owners to modernize their vehicles. primary motivation for regulated transit fares and subsidies such as the PTAP that contribute to fare dampening. Excise Tax Exemptions •The excise tax exemptions do not constitute subsidies. •Excise tax exemptions are likely to have limited impact on domestic markets because of their proportionately small size relative to the market-determined fuel prices. •However, all other things being equal, excise tax exemptions among different fuels create distortions that are likely to be economically inefficient. •The Philippine Government has marshalled many compelling arguments for supporting the imposition of VAT on petroleum products: (1) reducing fossil fuel imports to improve the current account balance; (2) reducing consumption to improve environmental quality and health; (3) phasing out measures that benefit the rich more than the poor; and (4) increasing government revenue for other valuable social programs. Universal Charge for Missionary Electrification (UC- ME) to support the Small Power Utilities Group (SPUG) •The UC-ME is a cross-subsidy designed to provide affordable electricity access in areas across the Philippines without central grid connection. •Regulated tariffs in SPUG areas do not distinguish between consumer classes. •UC-ME, as currently structured, effectively encourages inefficient fossil fuel consumption. •Current regulatory policy on SPUG power procurement favors incumbent diesel infrastructure. •Ratepayer surcharges, including the UC-ME, have been said to undermine the industrial competitiveness of the Philippines relative to other neighboring countries by pushing up electricity costs in the grid-connected areas to among of the highest in the region. •As SPUG areas are expected to progressively be connected to the grid and become commercially viable, the UC-ME issues may become less relevant. •The purpose of the UC-ME subsidy is to support the reliable and efficient provision of electricity at affordable prices to formerly un-electrified areas. •The government has recognized that the current UC-ME cost and subsidy structure are unsustainable. •The eventual goal of the Philippine Government is to bring the operations in all its existing service areas to commercial viability, and to rationalize the utilization and allocation of the UC-ME subsidy. •The government also seeks to interconnect the SPUG regions with the central grid and to privatize SPUG power generation assets when technically and economically feasible to do so. Universal Charge Exemption for Self- Generating Facilities (SGFs) •UC exemption for SGFs does not constitute a subsidy, since the operators of SGFs still bear the cost for electricity tariff determined in the market. •UC exemption for SGFs could undermine the legal credibility of the imposition of UC itself, which requires that all electricity consumers fund it. •The SGF exemption results in distortions in the respective contributions of different electricity consumer classes to the UC. •SGFs serve an important function in balancing load on the grid by providing peak power capacity, and by providing reliable, uninterrupted power to important industries. •The current legal framework mandates that the UC be collected from SGFs. •Concern on undermining industrial competitiveness in the economy, and operational difficulties in collecting UC from SGFs have resulted in unintended extension of exemption from UC for the SGFs. •Hence, it is envisaged that UC should be collected from SGFs, but in a manner consistent with the promotion of domestic industry and private sector growth.
- 16. X I IP E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Based on the key findings and expected end goals, as defined by the APRP during its deliberations, a set of consensus-driven recommendations was developed. A brief discussion of the five measures and the APRP’s recommendations follows. These ten recommendations are summarized in Table ES-0-3 below. The APRP also made additional observations that are not meant to have the same level of authority as the Recommendations above, and are meant as additional discussion points that the Philippines’ Government may want to consider. See Table ES-0-4. Table ES-0-3. APRP Recommendations for the Five Evaluated Measures Measure Recommendations Oil Price Stabilization Fund (OPSF) R1 – Do not to reinstate the OPSF, regardless of oil price, as it results in wasteful consumption of fossil fuel and fiscal imbalances. Pantawid Pasada: Public Transit Assistance Program (PTAP) R2 – PTAP subsidies should not be reintroduced. Excise Tax Exemptions R3 – Introduce excise taxes on all petroleum products. R4 – Consider developing a strategy on how to effectively use the excise tax proceeds. Universal Charge for Missionary Electrification (UC- ME) to support the Small Power Utilities Group (SPUG) R5 – Further detailed cost-benefit analysis is recommended to evaluate the impacts of the UC-ME as cross- subsidy. R6 – Structure the regulated tariffs closer to the deregulated price. R7 – Expand NPC’s mandate to allow for capital investment in power plant construction and refurbishment to promote efficient power plants in SPUG areas. Universal Charge Exemption for Self- Generating Facilities (SGFs) R8 – A detailed cost-benefit assessment on the UC exemption for SGFs is recommended, as part of the broader cost-benefit analysis of the UC. R9 – If the Universal Charge is maintained, then the SGF exemption should be lifted in order to remove inefficiencies and market distortions. Benefits that SGFs provide should be properly compensated, but should be separated from the SGF universal charge. Some specific options could include: introduce net metering; increase compensation through the ILP; and adjustment payments for grid reliability. R10 – With the removal of the UC exemption for SGFs, a number of complementary measures could be considered to ensure a smooth transition and to address legitimate concerns of businesses and DUs: a step-by- step lifting of the UC exemption to alleviate concerns of industrial and commercial SGF operators; supplementary financial incentives to energy-intensive industries to offset the negative financial burden to industries; and fostering alternative energy/efficient power generators for SGFs to reduce wasteful use of fossil fuels. Table ES-0-4. APRP Observations for the Five Evaluated Policies Policy Observations Oil Price Stabilization Fund (OPSF) O1—A wide range of additional measures can, over time, lower dependence on fuels with volatile prices determined by international markets. O2—Consider price-dampening measures that can protect against economic damage resulting from oil price volatility. Pantawid Pasada: Public Transit Assistance Program (PTAP) O3 – Move towards deregulating jeepney and tricycle fares in a phased manner. O4 – Promote more integrated, intermodal public transit. O5 – Undertake further studies and analysis to underscore the value of deregulating the jeepney/tricycle sector. Excise Tax Exemptions None Universal Charge for Missionary Electrification (UC-ME) to support the Small Power Utilities Group (SPUG) O6 – Implement a comprehensive approach, with more coordination among ministries and local authorities. O7 – Consider reviewing the tendering, contracting, and regulatory approval processes of the current NPP and QTP privatization programs. O8 – Provide better targeted support measures for those in need. Universal Charge Exemption for Self-Generating Facilities (SGFs) None
- 17. E X EC U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X I I I The APRP observed that two of the five reviewed measures, the OPSF and the Pantawid Pasada, are no longer in effect, and that the excise tax exemption for socially-sensitive fuels and the UC exemption for SGFs do not constitute subsidies, leaving only the UC-ME electricity subsidy as an active subsidy. The APRP concluded that neither the OPSF nor the Pantawid Pasada should be reinstated, though observed that numerous measures could be taken by the Philippines Government to address the ongoing underlying concerns of fuel and transit price affordability and stability. The APRP recommended that tax and surcharge exemptions (of excise taxes and the UC-ME charge, respectively) both be removed to prevent unfair or undue preferential treatment vis-à-vis other fuels and electricity consumers, which likely leads to market distortions. However, the Peer Review Panel notes that there are many potential reforms and policy options available to the Philippines government to rationalize fuel taxes and electricity surcharges while preserving and pursuing the government’s social, environmental, and fiscal objectives. These measures are explored extensively in the recommendations, observations, case studies and lessons learned. Oil Price Stabilization Fund (OPSF): The OPSF is no longer active and the APRP has recommended that the OPSF should not be re-instated, regardless of oil prices, as it results in wasteful consumption of fossil fuel and fiscal imbalances—this recommendation is consistent with current Philippine policy. Though not intended to be a subsidy, the OPSF’s price stabilization measures, due to political pressures and bureaucratic design, resulted in a fuel subsidy. Further, the OPSF created a drain on governmental assets and to economic dislocations in times of sudden price adjustments. The APRP concluded that the OPSF is likely to have led to wasteful and inefficient use of fossil fuels, although to what extent the APRP was not sure. Pantawid Pasada: Public Transit Assistance Program (PTAP): The PTAP was a one-time, targeted subsidy active from 2011 to 2013 that benefited jeepney and tricycle drivers. The purpose and impact of the subsidy were to prevent fare increases on consumers through limited fuel price subsidies to transit operators. Because of its limited nature in scale and time, PTAP likely did not constitute a significant subsidy. PTAP is not currently active, and reinstatement of this program is not supported by the APRP. The key issue with public transportation in the Philippines is the regulated fares for privately-operated transport fleet, which do not incentivize private transport owners to modernize their vehicles or for fleets to be efficiently run. The APRP observed that a phased deregulation of jeepney and tricycle fares would likely promote the government objective of fare affordability over the medium to long term. Although much more analysis is needed, the APRP expects that there is likely sufficient competition between jeepney owners and franchises to keep fares affordable for consumers (i.e., there will not be monopolistic or oligopolistic pricing behavior). The APRP also observed that many jeepneys and tricycles are fuel-inefficient and have limited exhaust controls. Together with a liberalized fare regime, more social and environmental incentives and/or regulations for reduced pollution and increased transit and vehicle quality could be considered as well to promote private investment in transit modernization. Excise Tax Exemptions for Socially-Sensitive Fuels: While the APRP considers the exemption of excise taxes for socially sensitive fuels to be economically inefficient, this exemption is not a subsidy. Oil prices in the Philippines have been deregulated since 1998 and closely follow movements in international benchmark oil product prices and exchange rate movements. The APRP recommends that excise taxes should be introduced on all petroleum products. Such an imposition removes distortive preferential tax treatment among similar fuels, and the excise taxes would help in addressing the externalities that result from petroleum fuel consumption. Further study should guide how the Philippines should impose such excise taxes, i.e. by volume, energy content, or pollution intensity (CO2 or other exhaust pollutants), among numerous possible schemes. The Philippines could also develop a strategy on how to effectively use the excise tax proceeds. Tax proceeds could be used for social
- 18. X I VP E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S purposes, including for poor and vulnerable populations currently targeted by the excise tax exemptions. Studies show that targeted social programs are usually more progressive and effective than economy-wide fuel price reductions. Universal Charge for Missionary Electrification (UC-ME): The APRP concluded that the UC-ME leads to wasteful and inefficient use of fossil fuels. The UC-ME, currently structured as a cross-subsidy paid for by grid-connected ratepayers, effectively encourages inefficient fossil fuel consumption due to the fact that most power generators in the SPUG areas are diesel- or fuel oil-powered and that it does not distinguish between consumers. The UC-ME fills the gap between the cost of electricity generation and the regulated electricity tariffs for consumers in SPUG areas (which is below the prevailing tariff in the grid-connected parts of the Philippines). The amount of fossil fuel consumed in the SPUG areas is less than one percent of total fossil fuel consumption for power generation nationwide, meaning that on the scale of the economy, the SPUG electricity subsidy is small. Nevertheless, the UC-ME charges and SPUG subsidies have grown rapidly in recent years and are projected to increase further. The increase in the UC-ME to cover SPUG subsidies not only reflects increasing inefficient subsidies for fossil fuel- powered electricity, but it also threatens the financial viability of the UC-ME and drives up electricity prices for other users. The APRP recommends further a detailed cost-benefit analysis of the UC-ME to evaluate the impacts of the cross-subsidy, which allows for concrete recommendations and alternatives to address financial sustainability and effectiveness of the current Missionary Electrification policy. The APRP recommends that regulated tariffs in the SPUG areas be structured closer to the deregulated (Luzon and Visayas) price, and that NPC’s mandate allow for capital investment in power plant construction and refurbishment to promote efficient power plants in SPUG areas. Further consideration of reforms in the SPUG areas (privatization, cost-plus power procurement, energy efficiency and renewable energy promotion) is encouraged to promote cost-effective and efficient subsidy design and reduction in fossil fuel use. UC-ME Exemption for Self-Generating Facilities (SGFs): The current UC exemption for self-generating facilities (SGFs) does not constitute a subsidy, since the operators of SGFs still pay for the full cost of fuel and bear the cost for electricity tariff determined in the market. The UC exemption for SGFs, however, could undermine the legal credibility of the imposition of UC itself, which requires that all electricity consumers fund it, and the exemption results in distortions in the respective contributions of different electricity consumer classes to the UC. The SGF exemption also may create perverse incentives for industrial and commercial users to disconnect from the grid and, in an extreme scenario, threaten the economic viability of distribution utilities. If the UC is to be maintained, then the APRP recommends that the UC should be imposed on the SGFs in order to remove inefficiencies and market distortions. Where appropriate, SGFs should receive compensatory payments for services they provide to the grid such as grid stability and peak power generation, though these payments should be independent from the UC. There are specific lessons learned and best practices that the Philippines can use in developing its implementation plans for reforms. Many of these can build upon the Philippines’ lengthy and successful history of deregulating and liberalizing energy prices. The report provides some of these best practices and lessons learned, with a focus on those from the Asia-Pacific region and Southeast Asia in particular, but further analysis should be conducted to specifically identify an implementation strategy for the APRP recommendations. The Philippines’ domestic 2012-2030 Philippine Energy Plan, and its objectives of ensuring energy security, achieving optimal energy pricing, and developing a sustainable energy system consistent with the economy’s economic development plans, have laid an excellent foundation and provided the principles for the Philippines’ energy development in the coming 15 years. The task at hand remains to devise specific implementation strategies, developed and executed through these
- 19. E X EC U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X V intergovernmental mechanisms, for the sectors impacted by the subsidy, tax, and pricing policies examined in this peer review. Overall, the APRP developed ten recommendations and made eight observations, as part of this review. The APRP carefully considered the recommendations in order not to be too prescriptive, and the Recommendations represent the compromise position agreed to by all APRP members. The observations are not meant to have the same level of authority as the Recommendations above, and provide additional discussion points that the Philippines’ Government may want to consider. The APRP is confident that there is sufficient capacity within the Philippines to conduct the suggested studies (i.e., on the costs and benefits of the UC-ME and the SGF exemption from it), and consider complementary measures for ensuring a smooth transition with any envisioned changes in policies (e.g., deregulating transit fares or imposing UC on SGFs). The Philippines has been undertaking economic reforms in a progressive fashion for many years, and the APRP recommends a continuation of these reform efforts for the remaining subsidies in place, along with further reviews and analyses of fossil-fuel related policies over time.
- 20. 1 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S 1. INTRODUCTION AND FFSR PEER REVIEW PROCESS The APEC Energy Working Group (EWG) endorsed a Voluntary Peer Review of Inefficient Fossil Fuel Subsidy Reform (VPR/IFFSR) proposal in March 2013, at the EWG45 meeting in Thailand. The proposal aimed to build regional capacity to assist APEC economies in rationalizing and phasing out inefficient fossil fuel subsidies that encourage wasteful consumption, while recognizing the importance of providing those in need with essential energy services (APEC/EWG, 2013a). The proposal put in place an ongoing series of reviews of inefficient fossil fuel subsidies across APEC economies that volunteer to be a part of this review process. The reviews are “peer reviews”— i.e., the reviewers are from peer APEC economies and relevant institutions, with expertise in energy, fossil fuels, finance and economics. Guidelines for the VPR/IFFSR process were approved at the November 2013 EWG46 meeting in Da Nang, Vietnam (APEC/EWG, 2013b). The VPR/IFFSR guidelines (APEC, 2015a) are modeled after the ongoing APEC peer reviews on energy efficiency (PREE). At the November 2014 EWG48 meeting in Port Moresby, Papua New Guinea, the final report from the first VPR/IFFSR peer review in Peru was presented (APEC, 2015b). At this meeting, the Philippines volunteered to undertake the VPR/IFFSR, and planned for its peer review in late 2015. New Zealand also volunteered for its peer review at the EWG48, and its peer review was conducted in March 2015. The final report from New Zealand was submitted and approved by EWG in September 2015 and announced at the APEC Energy Ministerial meeting in Cebu in October 2015 (APEC, 2015c). As in the Peru review process, the VPR/IFFSR Secretariat (hereafter, the Secretariat) coordinated the activities associated with the VPR in the Philippines. The Secretariat worked closely with the EWG Lead Shepherd and the EWG Secretariat to provide technical and logistical support in the Philippines. The EWG Secretariat issued a call for volunteers for the APEC Peer Review Panel (APRP) members. Five volunteers responded to the call, and four volunteers were selected by the EWG Secretariat, with approval from the EWG Lead Shepherd and agreement of the Government of the Philippines. The APRP consisted of Dr. Niall Mateer (U.S.A.), Mr. David Buckrell (New Zealand), Mr. Noor Iskandarsyah (Indonesia), and Mr. Toshiyuki Shirai (International Energy Agency, IEA). Dr. Niall Mateer was designated as the APRP Team Leader. The biographies of the APRP members and the Secretariat are in Appendix C. In October 2015, the Secretariat also began its interactions with the Philippine Department of Energy (PDOE), to begin planning for the APRP to conduct the peer review in early December 2015. The PDOE was designated as the primary point of contact for the Secretariat. The PDOE and the EWG Secretariat confirmed the dates (December 1-7) for the Peer Review visit to Manila, Philippines. The PDOE had initially suggested a list of ten policies for review by the APRP, but in coordination with the Secretariat, the PDOE selected five different policy instruments for evaluation by the APRP: • a pricing mechanism for petroleum products designed to protect Filipino consumers from international oil volatility (Oil Price Stabilization Fund) that is no longer active, but still in consideration for re- instatement;
- 21. I N TR O D U C T I O N A N D F F S R P E E R R E V I E W P R O C E S S I N T R O D U C T I O N A N D F F S R P E E R R E V I E W P R O C E S S 1 7 • a limited cash-transfer mechanism for public transport operators in order to limit transit fare increases due to a rise in oil prices; • a differentiated excise tax regime, where ‘socially-sensitive’ fuels are exempted from excise taxes; • a cross-subsidy program (Universal Charge) for supporting missionary electrification, with revenue being raised from fees on grid-connected ratepayers; and • an exemption for the self-generating facilities from the Universal Charge fees. The selection of the policy instruments by the PDOE was based on their perceived importance. The Secretariat and the APRP (during the meetings) noted that some of the selected policies were not subsidies. Nonetheless, given that there is no universally accepted definition of subsidies and the APEC FFSR guidelines provides sufficient flexibility for volunteer economies to select the policies for review, the APRP was requested to review the selected policies. The APRP assessed the effectiveness and efficiency of the selected policies based on their intended goals and success. Furthermore, a review of the selected policy instruments would be consistent with the Philippines Energy Plan (PDOE, 2012a). The five selected policy instruments vary in effectiveness in achieving their stated goals or objectives, and two of them were no longer in use. The Philippines used the VPR/IFFSR process to exchange information and obtain policy recommendations for effectively eliminating subsidies to fossil fuels in the long run. The discussions with APRP were intended to explore best practices or alternatives for addressing the objectives that instruments were meant to address. These objectives are consistent with those of the APEC VPR/IFFSR process. Figure 1-1 shows the overall approach and process undertaken by the Secretariat and PDOE for the APEC VPR/IFFSR in the Philippines. This process is different to that undertaken in Peru and New Zealand, primarily because the preparation time for the peer review visit was short. As part of the preparation for the APRP visit, the Secretariat also worked with APRP members to finalize their travel logistics, as well as coordinated with the PDOE on the schedule of Peer Review meetings in Manila. The final schedule and the list of participants for the visit are in Appendix A, and meeting summaries are in Appendix B. The APRP and the Secretariat met in Manila with the Government of the Philippines on Monday, November 30, beginning four days of meetings with various government departments and agencies, and other stakeholders. At the end of the visit, the APRP communicated to the Secretary and Undersecretary of Energy the findings and initial recommendations. The APRP has carefully considered the recommendations in order not to be too prescriptive, and the recommendations presented in this report represent the compromise position to which all APRP members agreed. The recommendations, as well as the lessons learned and best practices, provide inputs to the Philippines as it develops reform options for the policy instruments put forward for review. Following the peer review meetings in Manila, the Secretariat worked closely with the APRP members and finalized the draft report for review by the APRP members, EWG Secretariat, EWG Lead Shepherd, and the Philippines Government. Comments by these reviewers are incorporated into this final report.
- 22. 1 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 1-1. Development of IFFSR Peer Review Process in the Philippines
- 23. PART 1: BACKGROUND Part1 of the report contains background information for the APEC peer review of the fossil fuel policy instruments selected by the Philippines. The three sections below are focused on: a) a summary of the need for fossil fuel subsidy reforms in general; b) an overview of the macroeconomics and socio- demographics of the Philippines; and c) a brief overview of the energy landscape in the Philippines. The Government of the Philippines contributed to the information on the Philippine economic and energy context, with additional research undertaken by the Secretariat.
- 25. 2. ENERGY SUBSIDIES Energysubsidies, particularly in low- or middle-income economies, are often assumed to protect consumers from sharp increases in energy and other commodity prices (UNEP, 2008; IMF, 2013). Energy subsidies can be placed on both energy production and energy consumption. The provision of stable, low cost sources of domestic energy is often considered a desirable outcome to enable economic development and growth. However, protection of consumers and producers from energy and commodity price fluctuations comes with a price, as the economy has to compensate for the subsidies in some other way. Government expenditures for inefficient energy subsidies can worsen fiscal imbalances, and divert funds from high priority public spending and private investment. Subsidies can also lead to inefficient allocation of resources, and they often lead to overconsumption of energy. Such a situation can drive imbalances in trade for net energy importers, reduce incentives for the adoption of renewable energy and energy efficiency, and accelerate the depletion of natural resources. Finally, the ‘benefits’ of energy subsidies are often not targeted to lower income consumers; instead, most often the benefits are captured by higher income consumers. The subsidies can also lead to perverse incentives. These distributional effects actually extend to future generations in the form of reduced availability of key inputs for future growth and increased damages from greenhouse gas emissions (GHG). Despite the negative aspects of energy subsidies, they are often difficult to reform due to political resistance from those stakeholders who are receiving the most benefit (IMF, 2013; Clements, et al., 2014). Reform efforts may also lack political and public support, reflecting lack of trust in a government’s ability to reallocate expenditures to programs that support broader initiatives to support vulnerable or low-income population groups. Inflationary concerns and competitiveness issues can also dominate the governmental decision process. In many economies undergoing reform, there is often resistance from state-owned or state–operated enterprises, as they are concerned about the effect on their operations in a more competitive business environment. Energy subsidies can account for a significant fraction of global GDP and government revenue in both developed and developing economies, although estimates vary significantly depending on which definition of ‘subsidy’ is used, and there is no globally accepted definition yet. The International Energy Agency (IEA) measures subsidies using a price-gap approach, which involves a comparison between end- user prices paid by consumers and reference prices that correspond to the full cost of supply, or the annual averaged cost of generating electricity adjusted for the costs of transportation and distribution and VAT. The IEA estimates that the global value of subsidies that artificially lower end-user prices for all forms of fossil energy totaled USD493 billion in 2014, of which APEC member countries account for 99 billion (IEA, 2015a). The OECD has a broader concept of ‘support’, which includes any measure that keeps prices for consumers below market levels or for producers above market levels, or that reduces costs for consumers and producers. The OECD definition is broadly in line with the IEA’s definition of an energy subsidy. The OECD estimates that producer and consumer support combined ranged between USD160 billion and USD200 billion per year between 2010 and 2014 for all OECD countries (OECD, 2015). In contrast to the OECD and the IEA, the IMF definition takes a much broader perspective in that it considers ‘post-tax subsidies’, which allow for specific tax subsidies for fossil fuels (i.e. exemption from VAT, excise, or other taxes) even if domestic fossil fuel prices are at or above international market
- 26. 6 P EE R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S rates, thereby giving fossil fuels a relative price advantage on the domestic market. Post-tax subsidies also includes situations where the price paid by consumers is below the supply cost of energy plus an appropriate “Pigouvian” (or “corrective”) tax that reflects the environmental damage associated with energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenues. Tax subsidies come in two forms: a) lower taxes on energy compared to other consumer products and b) non-internalized external costs to society that arise from energy consumption (e.g., environmental and health costs, climate change, and road traffic). Using this approach, the IMF estimates total ’post-tax subsidies’ of USD 5.3 trillion in 2015, based on an assumed carbon cost of USD 35 per metric ton (IMF, 2015a; IMF, 2015b). The IMF definition of subsidy has not been used throughout the APEC VPR/IFFSR process in Peru, New Zealand nor the Philippines. Another definition of subsidy comes from the World Trade Organization (WTO). Under the WTO Agreement on Subsidies and Countervailing Measures (WTO SCM), a subsidy is considered to exist if there is a financial contribution by a government which confers a benefit through one of four transfer mechanisms: 1) the direct transfer of funds or liabilities; 2) revenue foregone or not collected; 3) the provision of below-cost goods or services; and 4) the provision of income or price support. In order to be actionable, a subsidy here defined must cause damage or harm to another WTO member. As such, while tax exemptions may constitute a subsidy under the terms of the WTO SCM, that application is not useful when comparing fossil fuel support amongst different countries. While there is no globally accepted definition of subsidies, the approach taken in the APEC VPR/IFFSR reviews of Peru, New Zealand and the Philippines has been to define a subsidy in the same way as the IEA does. Namely, an energy subsidy is deemed to exist when any Government action directed primarily at the energy sector lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers. As the APEC Leaders commitment refers to “inefficient fossil fuel subsidies that encourage wasteful consumption”, the emphasis throughout the peer reviews has been to focus on policy instruments that lower the price paid by energy consumers. Consistent with the IEA approach, the APEC VPR/IFFSR undertakes its assessment. Differences in tax rates within an economy or between economies may not be helpful for undertaking an evaluation of fossil fuel subsidies in the context of the APEC VPR/IFFSR. IDENTIFICATION OF SUBSIDIES In order to reform subsidies, one must first identify the subsidy and acknowledge it as such. Table 2-1 has an overview of the classes of subsidies that can be used in the energy sector (UNEP, 2008). The identification of a subsidy requires an understanding of how the subsidy arose, the costs of the subsidy, who receives the subsidy, and the impacts of the subsidy on the economic and energy systems. An inventory provides a natural vehicle for this type of analysis (Kojima, and Koplow, 2015). Even if the impacts of a subsidy are not quantified, the process of inventorying government policy interventions has value by itself: a) it helps government officials and citizens understand the overall scale of public spending and policies promoting particular energy pathways, and b) it helps identify potential leverage points for reform. Table 2-1: Main Types of Fossil Fuel Subsidies. Government Intervention Example How the subsidy usually works Lowers cost of production Raises price to producer Lowers price to consumer Direct financial transfer Grants to producers Grants to consumers Low-interest or preferential loans
- 27. E N ER G Y S U B S I D I E S 7 Government Intervention Example How the subsidy usually works Lowers cost of production Raises price to producer Lowers price to consumer Preferential tax treatment Rebates or exemptions on royalties, sales taxes, producer levies and tariffs Tax credit Accelerated depreciation allowances on energy supply equipment Trade restrictions Quotas, technical restrictions, and trade embargoes Energy-related services provided directly by government at less than full cost Direct investment in energy infrastructure Public research and development Liability insurance and facility decommissioning costs Regulation of the energy sector Demand guarantees and mandated deployment rates Price controls Market-access restrictions Source: UNEP, 2008. Two general methods exist for the identification of fossil fuel subsidies (Kojima and Koplow, 2015). However, rather than having to choose one method over the other, the two methods are actually complementary and should be used together. The International Energy Agency (IEA) uses an ‘effects test’ to determine whether a subsidy exists. The ‘effects test’ is applied by determining whether a policy instrument lowers production costs of energy or raises prices received by energy producers or lowers energy prices to the consumer. It is not sufficient to have a ‘price gap’ between consumer prices and a reference price (IEA, 2014).1 Gaps may occur as a result of any number of causes, so it is necessary to identify a specific policy (i.e., a subsidy or tax) to which the gap can be attributed (Kojima and Koplow, 2015). The alternative approach, the OECD inventory approach, focuses on direct budgetary support and tax expenditures that provide a benefit or preference for fossil-fuel production or consumption, either in absolute terms or relative to other activities or products (OECD, 2013).2 The inventory method is a full accounting framework for producer and consumer support estimates and in fact captures price gaps as market transfers to producers or consumers. Whereas, the ‘effects test’ limits identification of subsidies to a single policy measure, the inventory approach can accommodate the interactions of multiple measures. However, as the OECD points out, not all interventions are necessarily subsidies; its inventory seeks to tabulate all interventions, recognizing that further evaluation is often needed to gauge whether a particular intervention results in subsidies to fossil fuels and whether or not the policy measure achieves its aims (Kojima and Koplow, 2015). Although, there is no consensus on the best way to define and value fossil fuel subsidies, the APEC IFFSR/VPR process has typically focused on Government actions directed at the energy sector that lower the price paid by energy consumers with the assessment undertaken on a pre-tax basis. Reform options need to be defined in terms of new policies (pricing or taxation), and, if complementary policies are required, then the timing and the potential political strategy also need to be considered. Therefore, 1 A reference price is defined as costs of supply inclusive of shipping, distribution, and any value added tax. As a result of this approach, estimates of global subsidies will vary with energy prices, price reform, and increased consumption (IEA, 2014). 2 Rather than referring to their inventory of measures as subsidies, the OECD refers to their inventory as a list of support measures for energy production and consumption (OECD, 2013).
- 28. 8 P EE R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S the process of reform is not a simple process, and requires a structured, sequential, formalized approach (APEC/EWG, 2012). Once reform is underway, continuous monitoring is needed to ensure the desired effects are being obtained and that there are no unintended consequences of reform itself. LESSONS LEARNED FROM FOSSIL FUEL SUBSIDY REFORM Over more than a twenty-year period, well over two dozen economies have attempted fossil fuel subsidy reform. These previous fossil fuel subsidy reform attempts can be classified into three categories3 (Clements, et al., 2014; IMF, 2013): • Success: Reform led to permanent and sustained reductions of a subsidy; • Partial Success: Reform achieved a reduction of the subsidy for at least a year, but then the subsidy re-emerged or remained a policy issue; and • Failure: Reforms rolled back soon after the reform (e.g., resistance to price increases or efforts to improve energy sector efficiency pushed back). The history of previous reforms from various economies can help inform future subsidy reforms. Generally, energy subsidy reforms are more likely to succeed when the following components exist (Clements, et al., 2014; IMF, 2013): o A comprehensive reform plan; o A holistic communications strategy, supported by increased transparency; o Appropriately phased energy price increases that are sequenced differently across different energy products; o Targeted mitigating measures to protect the poor; and, o Depoliticization of energy pricing in order to avoid a situation conducive to a recurrence of subsidies in the future. Most successful reforms have been well planned and based on a clear implementation strategy. A comprehensive reform plan requires: 1) establishing clear long-term objectives, 2) assessing the likely impact of reforms, and 3) extensive consultations with stakeholders (Clements, et al., 2014; IMF, 2013). Successful and durable subsidy reforms often require the effort to be embedded within an agenda of broader economic reforms. As part of the development and implementation strategies for subsidy reforms, it is critical to analyze the impacts of the potential reforms on various stakeholders and identify mitigating measures to reduce adverse impacts (which are often temporary). Such impact analyses need to assess the fiscal and macroeconomic economic impacts, along with identifying potential winners and losers (IMF 2013). Finally, stakeholders should be consulted and involved in the development of a subsidy reform strategy. In order to gain political and public support for the reform effort, it is important to have a comprehensive communications strategy, with as much transparency as possible (Clements, et al., 2014). The likelihood of reform success has shown to be three times higher with strong public support and proactive public communications than without (IMF, 2013).4 The benefits of removing subsidies should be couched in terms of the ability to finance other high-priority spending (investments) on 3 Of the 28 economies studied by the IMF, 12 had fully successful reform attempts; one had only partially successful attempts while the remainder failed (The Economist, 2014, 68–70). Fourteen of the economies were receiving money from the fund, and some of these economies were subject to credit downgrades if reform was not undertaken. 4 Economies with good public information campaigns include Indonesia (text messaging), the Philippines (nationwide road- show), and Uganda (selling the media on subsidies as a social program) (The Economist, 2014).
- 29. E N ER G Y S U B S I D I E S 9 education, health, infrastructure, and social protection. Transparency is a key element of any successful communications strategy for subsidy reform. Some of the relevant information that needs to be communicated include: (i) the magnitude of subsidies and how they are funded; (ii) the distribution of subsidy benefits across income groups; (iii) changes in subsidy spending over time; and (iv) the potential environmental and health benefits from subsidy reform (IMF, 2013, pg. 27). The pace and timing of price increases, and the sequencing of the price increases often determines the success of reforms (Clements, et al., 2014). A phased, but consistent, approach to reforms allows sufficient time for households and private enterprises to adjust to the reforms, and for government agencies to build credibility on the reform process and highlight how the subsidy savings can be put to a good use.5 A phased approach also helps reduce the impacts of inflation and allows a government to build other more sustainable social safety nets. Further, sequencing reform for ‘luxury’ products first will shield lower-income groups until later rounds, and further builds public support amongst the lower income population. Sequencing should take into account spill-overs across products and the consequences for environmental goals. Public support for subsidy reforms will build on how well the government implements mitigating efforts to reduce the impacts of energy price increases on the poor (Clements, et al., 2014). Targeted cash transfers (often in the form of vouchers) are often the preferred method of compensation, as such cash transfers not only provide flexibility for recipients, but also remove governments from being directly involved. If cash transfers are not feasible, efforts should be focused on programs that can be expanded quickly such as school meals, public works, reductions in education and health user fees, subsidized mass transit, etc. (IMF, 2013). Subsidy reform will also be more acceptable if it is accompanied by complementary measures that support the reform objective, such as providing alternative sources for cooking (substituting LPG for kerosene) or off-grid electricity access. Finally, initial public reaction to price increases on international energy markets should not be allowed to reverse subsidy reform efforts—i.e., pricing of commodities should be depoliticized (Clements, et al., 2014). Automatic pricing mechanisms can reduce the possibility of subsidy reversal by distancing the government from energy pricing. Consumers need to be confident that domestic price changes are reflecting changes in international markets, which are out of the control of any single government. Further, delegation of such pricing mechanisms to an independent entity ensures that reform can proceed as planned, and smoothing of automatic pricing avoids sharp increases in domestic prices. 5 India is phasing out subsidies slowly and reducing the overall cost of subsidies from 1 percent of GDP in 2013 to less than 0.5 percent in 2016 (The Economist, 2014). At the same time, the net effect on government revenues will be offset by rising food subsidies.
- 30. 3. MACROECONOMICS AND SOCIODEMOGRAPHICS Thissection presents the macroeconomic and the socio-demographic conditions in the Philippines. These elements provide a context for evaluation of the five policy instruments selected by the Philippines, and for the development of recommendations by the peer review panel. The Republic of the Philippines, more commonly known as the Philippines, is an archipelago situated in Southeast Asia that is composed of more than 7,000 islands (see Figure 3-1). The Philippines is broadly divided by three main island groups: Luzon, Visayas, and Mindanao. The Philippines is further subdivided into 17 smaller sub-regions, such as Regions I-XIII, the National Capital Region (NCR), the Cordillera Administrative Region (CAR), and the Autonomous Region in Muslim Mindanao (ARMM). Source: PSA, 2015a. Figure 3-1: Philippines Map
- 31. M A CR O E C O N O M I C S A N D S O C I O D E M O G R A P H I C S 1 1 The Philippines has a tropical maritime climate, with hot and humid weather throughout most of the year. The Philippines experiences three seasons: a hot dry season from March to May, a rainy season from June to November, and a cool dry season from December to February. The Philippine economy is primarily agricultural, with the main crops being rice, corn, coconuts, sugarcane, bananas, and other tropical fruits. Because the Philippines is located in the Circum-Pacific Belt, the archipelago experiences frequent volcanic activity, which has allowed the economy to exploit geothermal energy resources. The Philippines is also located along the typhoon belt, resulting in annual torrential rain and storms from July to October. The Philippines’ tropical climate also means that the economy is one of the richest in the world in terms of biodiversity. MACROECONOMIC CONDITION Economic growth in the Philippines has been above 5 percent on average during the last decade, which is significantly higher than the growth rate in previous decades. The positive economic growth in the Philippines has been driven by a stable macroeconomic framework, high employment rates, reduced dependence on exports, resilient domestic consumption, low inflation, a rapidly expanding business outsourcing industry, and rising remittances of millions of overseas Filipino workers. The Philippine economy is the 40th largest in the world, with the 2014 gross domestic product (GDP) in purchasing power parity (PPP) being USD 690 billion (in current international dollars). The GDP per capita in PPP (in current international dollars) was USD 6,969 (World Bank, 2016a; World Bank, 2016b). The annual GDP growth rate in 2014 was 6.1 percent and has been growing at an average rate of 5.9 percent over the last three years, despite global economic slowdowns and natural disasters in the region, see Figure 3-2 (World Bank, 2016c). In addition, the annual GDP growth rate increased by 6 percent between the third quarter of 2014 and 2015 (PSA, 2015b). The Philippine GDP is expected to be over 300 billion in 2016 and reach USD 500 billion by 2020 (in current prices, IMF, 2015c). In 2015, the services sector accounted for 57.3 percent of the GDP, followed by industry (31.4 percent), and agriculture (11.2 percent) (PSA, 2015c). The gross domestic income (GNI) in the Philippines was USD 3,500 in 2014, see Figure 3-3 (PSA, 2015c). The annual inflation rate in the Philippines experienced a downward trend in 2014, driven by lower prices in housing, utilities, food, and beverages. However, the inflation rate increased unexpectedly to 1.5 percent in December 2015, and was the highest inflation rate since May 2015. The inflation rate is expected to increase to 1.92 percent by the end of the first quarter of 2016 and increase to 3.8 percent by 2020 (Trading Economics, 2016). Export sales in the Philippines generated USD 4.6 billion in 2014, with the primary exports being electronic products, components and devices, transport equipment, wood crafts and furniture, copper products, petroleum products, coconut oil, and fruits (PSA, 2016).
- 32. 1 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 3-2. Philippines Annual Percentage Growth Rate of GDP Source: World Bank, 2016d. Figure 3-3. GNI per Capita of Philippines, Atlas Method (Current USD) Source: World Bank, 2016e. Gross international reserves were at USD 79.5 billion in 2014 and the Philippines’ debt-to-GDP ratio continues to decline to 36.4 percent, as of 2014 (IMF, 2015d). The World Bank has described the Philippines economy as “Characterized by robust economic growth, low and stable inflation, healthy current account surplus, satisfactory international reserves, and a sustainable fiscal position – a combination never before seen in its history – the Philippine economy has outperformed most Association of Southeast Asian Nations (ASEAN) countries in the past few years” (World Bank, 2015). While the economy is a net importer, the Philippines economy has earned investment grade ratings from major credit rating agencies due to its stable macroeconomic fundamentals. The World Bank has stated, “With a solid macroeconomy that has proven to be resilient to some major shocks, the economy can now focus its attention on implementing crucial structural reforms that can sustain inclusive growth, create more and better jobs, and eradicate extreme poverty” (World Bank, 2015). Although primarily agricultural, the Philippines has been transitioning to a more service and manufacturing-based economy. In 2014, the economy’s labor force was at 43 million (the 16th largest labor force in the world). More specifically, the services sector employed 54 percent of the total
- 33. M A CR O E C O N O M I C S A N D S O C I O D E M O G R A P H I C S 1 3 workforce, followed by the agricultural sector (30 percent of the workforce), and the industry sector (16 percent) (World Bank, 2016f; PSA, 2015d). In January 2015, employment rates in the Philippines were estimated at 93.4 percent (PSA, 2015d). The Philippines is considered to be one of the fastest growing economies in the ASEAN region. SOCIOECONOMIC INDICATORS In 2015, the population of the Philippines surpassed 100 million, making it the 12th most populated economy in the world (World Bank, 2016f). Half of the economy’s population lives in Luzon, the largest of the three major island groups and home to Manila, the capital of the Philippines. The Philippines’ population growth rate was estimated at 1.6 percent in 2015, and is expected to average 1.5 percent over the next 20 years, reaching a population of 135.2 million by 2035 (APEC, 2013). Despite the economy’s stable economy, its large population size and growth rates may present challenges to urbanization, poverty reduction, energy usage, and environmental degradation. As of 2013, the life expectancy at birth in the Philippines was 68 years for the total population (World Bank, 2016g). Total fertility rates as of 2015 were estimated at 3.09 children per woman with the mean age of pregnancy at 23.1 years (Index Mundi, 2014a; PSA, 2014). Literacy rates in the Philippines are high with 96.3 percent of the population aged 15 and over able to read and write (PSA, 2014). In 2012, the average annual family income was P235,000 (Philippine pesos, USD 5,564), though the income gap between families in the highest income decile and the lowest income decile continues to remain wide PSA, 2013a). In 2012, families in the highest income decile made an annual income of P715,000 (USD 16,931), while families in the lowest income decile earned an average annual income of P69,000 (USD 1,633), (PSA, 2013a). The poverty gap at domestic poverty lines in the Philippines was last measured as 5.10 percent in 2012 (World Bank, 2016h). As of July 2015, employment rates in the Philippines were 93.5 percent (PSA, 2015d). Although unemployment rates in the Philippines have declined in recent years, with rates as low as 6.4 percent in 2015, progress has been unequal throughout the county. NCR, for example, has the highest unemployment rate in the economy, at 9.3 percent, while the ARMM has the lowest unemployment rate at 3.2 percent, as of 2015 (Philstar, 2015a).
- 34. 4. ENERGY LANDSCAPEOF THE PHILIPPINES This section provides an overview of energy use in the Philippines, including energy consumption and intensity, primary energy supply, power generation, the transportation sector, and energy policy framework. ENERGY CONSUMPTION Compared to its neighboring APEC member economies, the Philippines has a relatively low energy consumption per capita. Figure 4-1 illustrates total energy consumption in the Philippines from 1990 to 2014, which grew from 18.6 Mtoe (million tonnes of oil equivalent) to 28 Mtoe (PDOE, 2015a). In 1990, the residential sector consumed the greatest share of energy (47.6 percent), followed by the transportation sector (25.2 percent), and the industry sector (22.1 percent) (PDOE, 2015a). Over the past decade, however, energy consumption from the transportation sector has since increased and now requires the greatest share of energy (32.7 percent in 2014). This is likely a result of increased and sustained reliance on petroleum fuels such as gasoline and diesel for transit. According to Figure 4-2, on a fuel basis, oil has consistently maintained its share of total energy consumption, increasing from 42.2 percent in 1990 to 44.5 percent in 2014 (PDOE, 2015a). Today, oil continues to be widely used in the transportation sector. Biomass use, by comparison, has declined as a share of total energy consumption from 45 percent in 1990 to 26 percent in 2014. Total energy consumption has increased since 1990 to 28 Mtoe in 2014, with the transportation sector requiring the largest share of energy (15 Mtoe). The least energy intensive sectors are the agriculture, forestry, and fisheries sectors. Total energy consumption in the Philippines is expected to increase to almost 40 Mtoe by 2030, with oil continuing to dominate as the main fuel (see Figure 4-5) (PDOE, 2015a). Because domestic production of energy will not be enough to sustain the economy’s growing energy needs, the Philippines will need to continue relying on energy imports.
- 35. E N ER G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 5 Figure 4-1: Total Final Energy Consumption by Sector 1990-2014 Source: PDOE, 2015a Figure 4-2: Total Final Energy Consumption by Fuel Type 1990-2014 Source: PDOE, 2015a Figure 4-3 illustrates total greenhouse gas (GHG) emissions from the major energy sources in the Philippines. In 2014, total GHG emissions reached 89.5 million tonnes of carbon dioxide-equivalent (MTCO2e). GHG emissions have increased at a rate of 3.8 percent annually since 1990 (PDOE, 2015a).6 6 GHG emissions include carbon dioxide (CO2), methane (CH4), and nitrous oxides (N2O).
- 36. 1 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S The transportation sector accounted for 37 percent of total GHG emissions in 1990 but had fallen to 29 percent by 2014 due to greater use of coal in the power sector. GHG emissions from electricity production increased from 28 percent in 1990 to 48 percent in 2014, most likely due to increased coal use for electricity production. Figure 4-3: GHG Emissions by Fuel Type from 1990 - 2014 Source: PDOE, 2015a. Figure 4-4 illustrates projected total energy demand in the Philippines by sector, and Figure 4-5 illustrates projected total energy demand in the Philippines by fuel. Figure 4-4: Energy Demand Outlook by Sector (in MTOE) Source: PDOE, 2015a.
- 37. E N ER G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 7 Figure 4-5: Energy Demand Outlook by Fuel (in MTOE) Source: PDOE, 2015a. Since 1990, the energy intensity of the Philippines has decreased by almost 60%.7 This improvement to the economy’s energy intensity is likely due to developments in energy conservation measures, use of energy- efficient technologies, changes to the energy mix, increases in world crude oil prices from 1999 to 2011, and lower energy demand due to the Asian and global financial crises in 2008-2009 (APEC, 2012a). A decreasing energy intensity per GDP is a positive indicator for a healthy economy (APEC, 2012a). ENERGY SUPPLY An economy’s primary energy mix reflects the available energy resources (including those that are domestically produced and foreign-sourced), and the socio-economic and environmental conditions within an economy (PDOE, 2015a). As shown in Figure 4-6, the majority of the Philippines’ total primary energy supply is derived from oil, accounting for one-third of the economy’s energy supply due to high use in the transportation sector. From 1990 to 2014, the Philippines’ primary energy supply increased from 26.7 Mtoe to 47.5 Mtoe. In 1990, the major share of total primary energy supply came from oil (40 percent) and coal (3 percent), with geothermal supplying 18 percent and other renewable energy resources providing 32 percent (PDOE, 2015a). By 2014, use of coal and natural gas increased significantly relative to 1990, such that they accounted for 28 percent of total, with oil (31 percent), geothermal (19 percent), and other renewable energy (17 percent) accounting for the rest (PDOE, 2015a). Currently, hydropower only supplies a small percentage of the total primary energy supply in the Philippines. Oil is predicted to continue leading the primary energy supply until 2025, when coal will surpass oil as the primary energy supply source as a result of high usage for electricity generation (see Figure 4-7). The economy’s total primary energy supply is projected to grow at an annual rate of 3 percent over the next 25 years. 7 Energy intensity is the ratio of total primary energy demand per dollar of GDP (PPP) (PDOE, 2012a).7
- 38. 1 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 4-6: The Philippines Primary Energy Supply Source: PDOE, 2015a. The Philippines has a unique energy portfolio. The economy has modest domestic fossil fuel resources, producing small volumes of oil, natural gas, and coal. However, due to its geography, the Philippines has a high capacity for domestically producing renewable energy from geothermal and hydropower. Figure 4-7: Philippines Energy Production and Net Imports Source: APEC, 2013 With regard to fossil fuel production, in 2013, the Philippines’ total crude oil production was 26,000 barrels per day (bbl/d) with total oil consumption at 299,000 bbl/d (EIA, 2014). Most of the Philippines’ domestic crude oil comes from four oilfields: the Nido, Matinloc, North Matinloc, and Galoc fields, located offshore in the Palawan Basin, on the northwest coast of Palawan. Currently, Petron Corporation operates the largest oil refinery in the Philippines, the 180,000 bbl/d Bataan refinery, supplying almost 40 percent of the economy’s oil product needs (EIA, 2014). Because of its modest fossil fuel production, the Philippines is a net energy importer, and relies heavily on imported fossil fuels. Most of the Philippines’ crude oil is imported to meet the economy’s petroleum demand. In 2013, it was estimated that the Philippines imported about 270,000 bbl/d of crude oil and petroleum products, 35 percent of which came from Saudi
- 39. E N ER G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 9 Arabia and Russia (EIA, 2014). The Philippines is expected to continue relying heavily on imported fossil fuels, with oil imports reaching 30 Mtoe (around 590,000 bbl/d) by 2035 (see Figure 4-7) (APEC, 2013). In order to reduce dependence on foreign oil, the Philippines invited tenders for eleven oil and gas blocks in 2014 to the Palawan Basin and nearby regions to explore areas that could potentially increase the economy’s oil production to 39,000 bb/d by 2019 (EIA, 2014). In 2013, it was estimated that the Philippines consumed approximately 18 million tons of coal, almost half of which was produced domestically and the rest was imported (EIA, 2014). Most domestic coal is low-grade and is mined from the Semirara Island in the western Visayas. Low-grade coal imports are mainly imported from Indonesia, accounting for 96.7 percent of the total coal imports to the Philippines. Coal imports are currently lower than oil imports; however, coal imports are projected to increase to nearly 25 Mtoe by 2035. The Philippines is currently undergoing efforts to reduce imported coal by 20 percent to reduce dependence on imported energy sources. Specifically, there has been expanded exploration for new oil and gas reserves with the aim of increasing domestic reserves by 20 percent. The Philippines has high potential domestic coal reserves, with total coal resource potential estimated at 2.53 billion tonnes (PDOE, 2016a). Coal consumption in the Philippines is expected to continue increasing due to increased energy demand from domestic coal-fired power plants. Table 4-1 illustrates the Philippines natural gas production and consumption as of September 11, 2015. The Philippines’ demand for natural gas is mostly met by domestic production, which was 3.9 billion cubic meters in 2012 (Index Mundi, 2014b). Natural gas consumption was estimated at 2.8 billion cubic meters in 2010 (Index Mundi, 2014b).8 The Philippines is estimated to have 98.5 billion cubic meters of proven natural gas reserves (Index Mundi, 2014b). The greatest natural gas reserves in the Philippines is the offshore Malampaya deep-water gas-to-power project (west of Palawan), which is the largest gas producing field and the main source of natural gas for the Philippines, providing 30 percent of the Philippine’s power needs. In particular, natural gas from the Malampaya Gas project is used to fuel three natural gas-fired power plants in Southern Luzon, to generate approximately 2,700 megawatts of electricity (Malampaya, 2016). The Malampaya Gas to Power Project is the most significant energy investment in the Philippines’ natural gas industry. This natural gas project opened the door to the Philippines natural gas industry and has allowed the Philippines to use natural gas while reducing dependence on foreign energy sources. While the Malampaya project is the largest operating natural gas project, it is essentially the only operational natural gas project in the Philippines, and is insufficient to meet the energy needs of the economy. Renewable energy resources make up a significant portion of the Philippines’ energy mix. The Philippines passed the Renewable Energy Act of 2008 (RE Act) to help increase the use of renewables in the economy’s energy mix. By 2035, the Philippines hopes that more than 50 percent of the domestic energy supply will come from renewables, such as hydropower, geothermal, solar, and wind power (APEC, 2013). In 2010, the Philippines’ installed geothermal generating capacity was 1,966 megawatts (MW), making the Philippines the second largest geothermal producer in the world, behind the United States (APEC, 2013). The PDOE estimates that the economy’s total potential untapped geothermal resource is about 2,600 MW (PDOE, 2016b). At this time, considerable domestic geothermal resources are under development, but until they are completed, imported fossil fuels will continue to dominate the economy’s energy mix. Geothermal is expected to provide the biggest contribution of renewable energy in the future. 8 Currently, there is no domestic [residential?] use of natural gas, only for industrial, power, and transport uses.
- 40. 2 0 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Table 4-1: Natural Gas Production and Consumption as of September 2015 Year Production (MMSCF) Consumption (MMSCF) Power Industrial Transport Total 1994 195 195 0 0 195 1995 188 188 0 0 188 1996 318 318 0 0 318 1997 193 193 0 0 193 1998 329 329 0 0 329 1999 253 253 0 0 253 2000 376 376 0 0 376 2001 4,951 359 0 0 359 2002 62,205 58,120 0 0 58,120 2003 94,807 87,423 0 0 87,423 2004 87,557 83,959 0 0 83,959 2005 115,966 110,217 525 0 110,742 2006 108,606 104,229 2,193 0 106,422 2007 130,211 124,103 3,316 0 127,419 2008 137,073 129,044 2,932 15 131,990 2009 138,030 131,433 3,019 18 134,470 2010 130,008 121,943 3,044 15 125,002 2011 140,368 133,732 3,288 47 137,066 2012 134,563 128,391 2,473 51 130,915 2013 123,944 116,973 2,665 35 119,673 2014 130,351 122,305 3,302 4 125,611 2015 122,541 115,788 2,138 0 117,926 TOTAL 1,663,034 1,573,266 28,892 185 1,602,343 Source: PDOE, 2015b. In addition, the economy’s significant water resources give the Philippines further hydropower potential. Current installed hydropower capacity is at 2,518 MW, with the total untapped hydropower potential of the Philippines estimated at 13,097 MW (PDOE, 2016c). However, large upfront costs, long construction periods, and concerns over environmental degradation have caused the government to focus its attention to small hydro projects, which have an estimated untapped potential of 11,223 MW (PDOE, 2016c). POWER GENERATION The Philippines has the second highest electricity costs in Asia and the fourth highest in the world (IBP Inc., 2015). The high cost of electricity in the Philippines can partly be attributed to the high costs of importing fossil fuels. In 2010, the electrification rate at the household level was 68 percent, though the Philippines hopes to achieve 90 percent household electrification by 2017 (APEC, 2013). Because the Philippines is an archipelago, the major power grids are isolated according to major island groups. In Luzon, the majority of
- 41. E N ER G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 1 the electrical capacity comes from coal, while the Visayas rely mostly geothermal with coal following a close second, and almost half of Mindanao’s energy comes from hydropower (Figure 4-8).9 Figure 4-8: 2014 Philippines Capacity Mix by Grid Source: PDOE, 2015a. In 2014, the Philippines’ total power generation was 77.3 Terawatt hours (TWh), up from 26.3 TWh in 1990 (PDOE, 2015a). As part of the Philippine Energy Plan, the Philippine Government forecasts an additional 11.4 gigawatts (GW) of capacity by 2030 (PDOE, 2014). The installed electricity generating capacity is expected to increase to over 58 gigawatts (GW) by 2035 (APEC, 2013). As shown in Figure 4-9, oil accounted for 47 percent of the electricity generation in 1990, but this dynamic has shifted and now coal is the dominant energy source (43 percent) for power generation in the Philippines (PDOE, 2015a). Following coal is natural gas, which accounts for 24 percent of electricity generation. After the entry of natural gas to the primary energy supply in 2001, natural gas has helped displace the use of oil for electricity generation. Geothermal and hydropower contributed 13 and 12 percent, respectively, to the electricity generation in 2014. Oil contributed to 7 percent of the electricity generation in 2014, and other renewable energy sources (such as wind, solar, and biomass) accounted for 0.5 percent in 2014. 9 Note that in the Mindanao region, the term “baseload hydro” refers to the fact that there is a consistent use of hydro for meeting baseload demand in this region. In most other cases, hydropower is used mostly for ancillary services.
- 42. 2 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 4-9: Philippine Power Generation Mix (in gigawatt-hours, GWh) Source: PDOE, 2015a. Electricity generation from coal is projected to continue dominating the power generation mix, accounting for more than half of the economy’s total power generation by 2035. Natural gas is expected to increase by approximately 1.7 percent annually over the next 25 years (APEC, 2013). Table 4-2, illustrates the power generating capacity by plant type in 2014. Dependable capacity10 was 15,633 MW in 2014, roughly a third of which came from coal plants (PDOE, 2015a). 10 The Philippines often defines dependable capacity as the maximum megawatt output a generating plant can reliably produce when required, assuming all units are in service. Capacity is the maximum electric output an electricity generator can produce under specific conditions. Nameplate capacity is determined by the generator's manufacturer and indicates the maximum output of electricity a generator can produce without exceeding design thermal limits.
- 43. E N ER G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 3 Table 4-2: Philippines 2014 Capacity by Plant Type Source: PDOE, 2015a. Following a power crisis during the 1990s, the Philippines decided to restructure and privatize the power sector to provide a consistent and adequate electricity supply and incentives for greater investments in power and transmission infrastructure. During the 1990s, the Philippines experienced high electricity prices, growing demand for electricity, looming power supply shortages, and the need for a costly expansion of the transmission and distribution network. In addition, there was a need for increased transparency in electricity prices. Because the Philippines has had, and continues to have one of the highest electricity prices in Asia, unsatisfied customers sought greater transparency in their electricity costs. The government recognized the need for reforms and greater private sector involvement to address these issues in the power sector. As a result, the government passed the Electric Power Industry Reform Act (EPIRA) of 2001, which mandated a restructure of the Philippine electricity sector, privatization of the state-owned National Power Corporation (NPC), and separation of the different sections of the power sector. According to PDOE, the goals of EPIRA were to “sustain investments in the power sector through greater private sector participants to meet growing electricity demand, enhance transparency in electricity rates and charges, improve efficiencies by widening the ownership base in the power sector, and provide customers with the power of choice” (PDOE, 2015a). Under EPIRA, the government was required to sell its equity stake in the Manila Electric Company (Meralco), which is the economy’s largest electricity distribution company, serving Luzon and the metropolitan Manila area. As a result, the economy’s hydro and coal-fired plants were privatized, achieving 43 percent of the targeted 70 percent privatization of NPC’s assets, creating open access and retail competition. This resulted in roughly USD 2.682 billion of funds for the government and allowed the generation of electric power to be competitive and open in the Philippines. Also outlined in EPIRA, the energy sector is mandated to create a Power Development Plan (PDP), which outlines the power sector’s plans to ensure a reliable and quality electricity supply. EPIRA also led to the development of two new entities: the Power Sector and Asset Liabilities Management Corporation (PSALM) and the National Transmission Corporation (Transco). PSALM took over the role of managing the NPC’s generation assets, liabilities, and contracts with independent power producers. PSALM also manages NPC’s outstanding debt and is in charge of privatizing NPC’s generation and transmission assets. Transco, a subsidiary of PSALM, assumed the electricity transmission assets of NPC and acts as the system operator of the nationwide electrical transmission system and sub-transmission system.
- 44. 2 4 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S EPIRA also established the Energy Regulatory Commission (ERC), which is responsible for regulating the electricity sector and setting the price of electricity. ERC is also responsible for promoting competition within the power sector and encouraging market development and consumer choice. EPIRA also established the Wholesale Electricity Spot Market (WESM), which serves as a venue where electricity is traded like any other commodity. WESM has allowed for a leveling of the playing field for trading electricity among WESM participants and allows third parties to have access to the power system. MISSIONARY ELECTRIFICATION There are over 4 million households in the Philippines that lack access to modern electricity services. The majority of these households are located in remote off-grid areas and small islands far from the developed population centers of the Philippines. Furthermore, most island localities that do have electricity are limited to diesel-powered mini-grids, which provide limited electricity services for a few hours each day, stemming the potential growth of their local economies (Switch Asia, 2014). Electrification (i.e., the extension of grid power to households) is a major priority for the Philippines. The National Electrification Program is the primary mechanism for expanding electrification (with some support from the National Renewable Energy Board, NREB, and the Small Power Utilities Group, (SPUG), and is funded centrally via budgetary allocations to the National Electrification Administration (NEA). In launching a pair of rural electrification programs in October 2011, President Benigno Aquino III set a target of 100 percent electrification of sitios (smallest administrative units in the Philippines) by early 2016 and 90 percent household electrification by 2017 (PDOE, 2012a). There are 32,400 sitios nationwide. According to the programs, ‘electrification’ constitutes the extension of a power line to a house, and the electrification of a sitio is declared when more than ten households in the sitio have received electricity. As of late 2015, the Philippines had electrified 98 percent of sitios and about 85 percent of households, with over 11 million households connected to electricity (NEA, 2015). In addition, the Sitio Electrification Program, which aims to increase electrification rates in sitios, rural territorial enclaves, attained 98 percent electrification as of December 2015, equivalent to 101,922 sitios (NEA, 2015). To increase electrification to areas not connected to the main transmission grid (missionary areas), EPIRA increased the missionary electrification role of SPUG. Under Section 70 of EPIRA, NPC was allowed to “remain as a National Government-owned and controlled corporation to perform the missionary electrification function through the SPUG and shall be responsible for providing power generation and its associated power delivery systems in areas that are not connected to the transmission system” (PDOE, 2016d, page 19). EPIRA also tasked NPC through SPUG to develop and implement the Missionary Electrification Development Plan to provide adequate electricity to missionary or off-grid areas. Distribution is primarily handled by rural electricity cooperatives, and NEA, a government corporation, is responsible for rural electrification, i.e. grid extension, new grid construction, and distributed off-grid energy access. NEA’s primary mandate is administration of the National Electrification Program, including support for the electricity cooperatives to provide rural electricity access (NEA, 2016). Missionary electrification funding is derived from sales revenue generated in missionary areas and from the Universal Charge for missionary electrification (UC-ME) collected from all electricity customers. The EPIRA
- 45. E N ER G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 5 legislation mandates the UC-ME Charge to fund the generation and transmission of grid electricity to remote and unviable areas, as well as areas not connected to the main transmission system.11 Rapid electrification nationwide, coupled with rapid economic growth driving power demand is leading to an increase in the size and scope of the SPUG regions as more households and villages become electrified. Sustainability of missionary electrification and the need to address budgetary constraints have necessitated the need for private sector participation in missionary electrification via the Private Sector Participation (PSP) program and the Qualified Third Party (QTP) program. The PSP started in 2004 to encourage the entry of the private sector (known as New Power Providers or NPPs) in power generation. NPPs invest in power generation in NPC-SPUG areas. In 2005, the Qualified Third Party (QTP) program was launched to support cost-effective, reliable alternative power providers for small-scale communities in remote and unviable areas.12 The QTP provides power generation and distribution services to missionary areas that are considered unviable by NPC-SPUG. The aim is to gradually replace SPUG activities in off-grid areas through these private players. TRANSPORTATION The Philippines’ transportation sector plays a vital role in connecting the population and economic centers across the islands. The Philippines has developed 897 km of railways, 1,300 public and private ports, and 215 public and private airports (ADB, 2012). Road transport, however, is by far the most dominant transportation subsector, accounting for 98 percent of passenger traffic and 58 percent of cargo traffic (ADB, 2012). The Philippine road infrastructure spans approximately 216,000 km and is categorized by economy-wide highways, provincial roads, city and municipal roads, and barangay (suburban) roads. Most of the highways and expressways in the Philippines are located on the island of Luzon, including the Pan-Philippine Highway, which connects the islands of Luzon, Samar, Leyte, and Mindanao. However a large part of the road network remains unpaved or in poor condition and intermodal integration is generally weak (ADB, 2012). Poor governance of the transport sector also hinders efficient operation and development of this sector. About 15 percent of the economy’s roads are roads that are under the jurisdiction of the Department of Public Works and Highways. The remaining 85 percent of roadways are considered local roads and are under the jurisdiction of various local government units. As of 2011, 79 percent of federal roadways and only 18 percent of local roadways were paved with asphalt or concrete (ADB, 2012). The number of paved roadways has slowly increased from 71 percent in 2011, but this number is well below the economy’s original target of 95 percent paved roads by 2010 (ADB, 2012). In addition, only 45 percent of federal roadways were considered to be in good or fair condition in 2011; a decrease from 2001 when it was 47 percent (ADB, 2012). Annual spending on road infrastructure continues to remain at around 0.6 percent of 11 According to EPIRA, Section 70, the “… NPC shall remain as a National Government-owned and –controlled corporation to perform the missionary electrification function through the Small Power Utilities Group and shall be responsible for providing power generation and its associated power delivery systems in areas that are not connected to the transmission system; 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.” 12 The QTP program was created by EPIRA to mandate (where viable) and encourage private sector provision of power generation in commercially unviable SPUG areas. A small number of projects, mostly smaller than 2,000 households, have been commissioned to date. (Source: EPIMB presentation, December 2, 2015, slides 52-60.) The Energy Regulatory Commission (ERC) in May 2006 promulgated rules and regulations surrounding such contracting. “Rules for the Regulation of Qualified Third Parties Performing Missionary Electrification in Areas Declared Unviable by the Department of Energy.” (ERC, 2006).
- 46. 2 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S the GDP, which is much lower compared to other economies in Southeast Asia. The Philippines lags behind almost all of its regional neighbors in terms of road system quality, due to inadequate maintenance from insufficient funding and inadequate institutional capacity of those agencies responsible for road maintenance. As an archipelago, inter-island travel via watercraft is an important subsector of the Philippines’ transportation sector. Inter-island water transport has helped to link the economy’s major island groups, reduce travel times between islands, and improved the economies of smaller islands along major nautical routes. The busiest seaports and terminals are Batangas, Cagayan de Oro, Cebu, Davao, Liman, and Manila. In 2003, the Philippines created the Strong Republic Nautical Highway, which established 12 major nautical routes linking 17 cities for freight and passenger movement by water transport. The Philippines is experiencing rapid urbanization. As of 2015, 44 percent of the total population lives in urban areas and this number is expected to rise to 77 percent by 2030 (World Bank, 2016i; ADB, 2012). The Philippines has 120 cities, with 16 cities located in Metro Manila – the only metropolitan area in the economy. There are other large urban areas in the economy, such as Davao, Cebu, and Iloilo, but they all lack formal metropolitan organization. Transport within urban areas is dominated by road-based vehicles, such as jeepneys (public utility vehicles), taxis, tricycles, and pedicabs. The most common form of public transit in the Philippines is jeepneys, originally made from refurbished American military jeeps that were left in the Philippines after the Second World War. In 2013, there were over 7 million motor vehicles registered in the Philippines, with jeepneys alone making up 23 percent of the total vehicle population (PSA, 2013b). The number of motor vehicles in use has been increasing rapidly, with an average annual growth rate of 6 percent during the past decade. In Metro Manila, the most common form of transit is road. Buses are another major form of transportation in Metro Manila, though not as common in other urban areas. Traffic volume and congestion in Metro Manila tends to be extremely high, making the movement of people, goods, and services to be challenging, leading to an estimated economic loss equivalent to 4.6 percent of the GDP (ADB, 2012). Motor vehicles emit pollutants, such as particulate matter, nitrogen oxides, sulfur dioxide, carbon monoxide, and carbon dioxide. In particular, the jeepneys are responsible for a large share of air pollutant emissions since they often use surplus or reconditioned/overhauled second-hand diesel engines, which emit more air pollutants than newer vehicles with newer engines. Road-based public transit in Metro Manila and other urban areas is provided entirely by the private sector. There are an estimated 433 bus companies serving 805 routes in Metro Manila, and jeepneys service 785 routes in Metro Manila, with many jeepney operators owning only one service vehicle (ADB, 2012). Urban areas outside Metro Manila experience less traffic congestion; however, with the economy’s high rate of urbanization and vehicle adoption, traffic congestion in other urban areas is expected to rise. Metro Manila is currently the only urban area in the Philippines with a mass transit rail service, which is also the first metro system in Southeast Asia.13 Metro Manila has three mass transit lines, LRT-1 and LRT-2, operated by the Light Rail Transit Authority, and MRT-3, which is operated by the Metro Rapid Transit Corporation. Metro Manila’s light rail system is heavily subsidized, causing transit fees to be relatively inexpensive and allowing the light rail system to serve over 1 million passengers daily (DOTC, 2012). The 13 Department of Transportation and Communications. Railway Operations. http://www.lrta.gov.ph/index.php/2014-05-21-01-05- 51/2014-05-22-02-12-18/2014-05-22-02-16-08
- 47. E N ER G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 7 Philippines also has an inter-regional railway service, provided by the Philippine National Railways (PNR), to connect Metro Manila with the rest of Luzon. Currently, only two of the inter-regional railways lines are operational, the Main Line South (which connects Metro Manila to Legaspi City, Albay Province) and the Commuter Line (which runs north to south through the central business district of Metro Manila). Though there was a high demand for the construction of the Commuter Line, it did not meet commuter demands because of low service frequency and unreliable service schedule, causing a continued decline in passenger traffic from 22,000 passengers per day during its peak in 1977 to 7,500 passengers per day in 2007 (DOTC, 2013). PNR also operated a Main North Line from Manila to San Fernando, La Union, but this line closed in 1981. “With rapid urbanization expected to continue in the Philippines, urban transport infrastructure will be put under increasing pressure, thereby posing a major risk of further deterioration in the mobility of urban populations. The planning and development of new public transport terminals that integrate different modes of public transport would help to mitigate many of the problems currently associated with urban transport, thereby reducing the costs of urban mobility and improving the economic productivity and competitiveness of urban areas” (ADB, 2012). The Philippines plan to improve interconnection between the various islands in order to increase economic opportunities, reduce transportation costs, and increase access to social services. The government’s priority infrastructure projects include: completing the nautical highway system, creating projects to improve transit infrastructure development, reducing traffic congestion in Metropolitan Manila, increasing access to tourist sites, and improving under-developed regions and roadways (APEC, 2013). ENERGY POLICY A key priority for Philippine energy policy has been to increase access of greater populations to reliable energy services and fuel, as well as improve local productivity and aid countryside development. The Philippine Energy Plan (PEP) is a long-term plan launched by the PDOE in 2012 with energy targets through to 2030 aimed at diversifying the economy’s energy mix, promoting a low-carbon future, increasing energy access to all, and enhancing the economy’s energy independence. One of the main goals of the PEP is to increase domestic production of energy by 2030, since fossil fuels currently dominate the energy mix and about 75 percent of the fossil fuel demand is met by imports (REEEP, 2014). The PEP also requires the development of regional energy plans, to assist regional development of energy. Another goal of the PEP is to expand energy access, through the PEP’s Rural Electrification Program, which aims to expand access to electricity to countryside and off-the-grid areas of the economy. This program plans to accomplish rural electrification through the use of decentralized energy systems, like battery charging stations, individual home solar power systems, micro-hydrogen systems, and small wind energy systems. The Program set a plan to attain 100 percent barangay (village or district) electrification by 2008 and 90 percent household electrification by 2017. The PEP also focuses on increasing the use of domestic renewable energy projects, such as wind, solar, small hydro, and geothermal energy. The policy objectives set by the PEP are supported by specific quantifiable goals to be achieved by 2030. In addition, the National Renewable Energy Program (NREP) was developed by PDOE with the goal of tripling the Philippine’s renewable energy capacity by 2030. The NREP was launched in 2011 to support the implementation of the RE Act of 2008, which was passed to encourage investing and generation of renewable energy through the use of several fiscal and non-fiscal incentive mechanisms to achieve greater energy independence. Among the fiscal incentives are an income tax holiday, a reduced corporate tax rate of 10 percent for new and existing renewable energy developers, tax and duty-free importation, zero percent value-added tax (VAT) rate, and payment of transmission charges. Some of the non-fiscal
- 48. 2 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S mechanisms include a feed-in tariff, net metering, renewable portfolio standards (RPSs), and a Renewable Energy Market. The Philippines currently has a feed-in tariff program that allows for qualified renewable energy developers to get a fixed rate per kilowatt-hour (kWh) of their exported electricity to the distribution or transmission network.14 In addition, net-metering rules are already in place, while the RPS and renewable energy markets are still being studied. The Philippines is considering establishing the use of alternative fuels in the transportation sector as a priority. The Philippines 2006 Biofuels Law is another major policy enacted to decrease the dependency of foreign imported oil. This law mandates the inclusion of biofuel blends in vehicle fuel in order to reduce the Philippines’ dependence on imported fossil fuels, protect the economy from rising oil prices, and reduce emissions from conventional fuels. The Biofuels Law is targeting 10 percent biodiesel blending in diesel fuel and 10 percent bioethanol blends in gasoline by 2020 (PDOE, 2015a). The government is also working on deploying other alternative fuels, such as compressed natural gas, liquefied petroleum gas (LPG) and electric vehicles, with plans to expand alternative fueling infrastructure and offer incentives for the use of alternative fuel vehicles. In face of oil shock back in 1970’s, the Philippines government introduced the regulated price for oil products and established the Oil Price Stabilization Fund (OPSF) to minimize price fluctuation by collecting levies from oil companies when oil price is low or paying subsidies to oil companies when oil price is high. However, after experiencing a large deficit in the fund caused by the international oil price hikes, the government initiated the deregulation of downstream oil industry and liberalized the price-setting of oil products. In 1998, the Government passed the Downstream Oil Industry Deregulation Act to deregulate and liberate the downstream oil industry to ensure a competitive market and guarantee fair oil prices and the OPSF was abolished. Assessments of the Downstream Oil Industry Deregulation Act have found that it has helped to level the market playing field and encourage more competition in the oil market, lowering prices and stabilizing the electricity supply (PhilStar, 2013). As another means of protecting the economy from high oil prices, the National Energy Efficiency and Conservation Program (NEECP) was developed to increase the use of sustainable energy use in homes, businesses, and the transportation sector. 14 http://www.doe.gov.ph/news-events/news/press-releases/2930-strong-support-for-philippine-renewable-energy-industry
- 49. PART 2: APRPKEY FINDINGS AND RECOMMENDATIONS Part 2 of the report summarizes the background, key findings and consensus APRP recommendations for each of the five subsidies selected by the Philippines for review. These findings and recommendations are intended to support the Philippines in its ongoing reforms of fossil fuel subsidies. After careful consideration, APRP developed recommendations that are not too prescriptive, and the recommendations represent a compromise position to which all APRP members agreed. For each subsidy, some lessons learned and best practices from other economies are also provided as possible ideas for the Philippines to consider. The recommendations, as well as the lessons learned and best practices, should be further analyzed by the Philippines to develop specific and strategic reform options. Finally, this part of the report ends with a brief conclusion discussing the way forward for the Philippines.
- 50. 3 0 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S 5. SUBSIDY 1: OIL PRICE STABILIZATION FUND (OPSF) The Oil Price Stabilization Fund (OPSF) is no longer in effect in the Philippines. While it was active, the fund allowed the government to peg the domestic crude oil and petroleum fuel prices to a level that was fixed by the government. When global crude oil prices fell below this fixed level, oil companies paid a surcharge into the OPSF account; and when prices were above the level, oil companies received payouts from the OPSF to effectively keep the domestic retail price fixed. When oil prices were high, political resistance did not allow the government to increase the fixed price levels, and the fixed prices were kept low— resulting in an effective subsidy. The OPSF resulted in government budgetary shortfalls as, over time, payouts exceeded revenues into the fund. The fund was liquidated during the restructuring and liberalization of the oil industry in the Philippines; however, the OPSF continues to be an option weighed by policy makers in the Philippines to smooth out petroleum product price volatility on the domestic market. HISTORY AND CONTEXT15 The OPSF was established as a special buffer fund in order to stabilize the domestic prices of petroleum products in the Philippines, following the issuance of Presidential Decree 1956 on 15 October 1984 by President Marcos (Official Gazette of the Republic of the Philippines, 1984). This decree also imposed a value-added tax (VAT) on manufactured oils and revised their specific taxes. The OPSF was created with the purpose of minimizing the then frequent price changes brought about by two factors: (a) the increasing exchange rate of the Philippine Peso against the U.S. Dollar; and (b) the increasing market prices of imported petroleum products into the Philippines. The OPSF fixed domestic prices of a number of petroleum products: regular and premium gasoline, kerosene, liquefied petroleum gas (LPG), and diesel fuel. (The OPSF did not apply to natural gas.) At the time the OPSF was authorized in 1986 by President Corazon Aquino and implemented in 1987, the fund was designed only to act as a stabilization mechanism, with the assumption that over time it would not create a net negative impact on the government budget. The OPSF was a government trust fund managed by the Ministry of Energy. Its revenue came from surcharges paid by oil companies when prevailing crude oil prices were lower than the fixed prices. In times of price spikes and increasing oil prices, the Ministry of Energy was authorized to pay out from the OPSF to fossil fuel companies in order to keep the domestic prices of oil and petroleum products stable. The OPSF absorbed the difference between the fixed selling price and the cost incurred by oil companies in importing crude oil and other petroleum products. Thus, movements in the world oil prices and foreign exchange rates were not directly reflected in domestic prices. Based on international oil prices and foreign exchange movements, the Energy Regulatory Board (ERB) established the prevailing domestic fuel prices every two months. The ERB would order the average 15 Unless noted otherwise, all materials in this section are based on a Memo on the OPSF provided by the Department of Energy to the APRP on October 5, 2015, and in subsequent written correspondence on October 14, October 23, and November 12.
- 51. adjustment (increase/decrease) inthe oil companies’ existing cost recovery/contribution to the OPSF on the different petroleum products. During each subsequent two-month period, if international prices rose, oil companies could claim cost differentials from the OPSF from the fund through a reimbursement certificate subject to PDOE review of the companies’ demonstrated costs (receipts), and subsequent ERB approval. As the market price rose above the wholesale posted price, compensatory adjustments paid to oil companies were absorbed by the OPSF, while the existing wholesale and pump/retail prices of petroleum products were not affected (in periods when no change to pump prices was mandated). While there was a specific formula established to determine the fixed prices, the ERB also took political considerations into account, particularly in times of sharp and sustained oil price spikes.16 In particular, in the late 1980s and early 1990s during the first Persian Gulf War, a “strong political clamor” contributed to ERB maintaining low fixed domestic prices in the face of international oil shocks, despite the OPSF’s sustained deficit.17 However, despite its intentions to be a “zero-balance” fund, the OPSF ran into large deficits beginning in 1989, particularly when oil prices spiked with the Iraqi invasion of Kuwait and the subsequent first Persian Gulf War (Lamberte, Mario B., and J. Yap, 1991). Due to political pressures, target domestic oil prices were kept low for a long enough period in 1990 that the OPSF deficit reached P16.6 billion in November 1990 (roughly USD 700 million at the time). In order to address the oil companies’ cash flow problem, the government reset the domestic oil price substantially higher, leading to a drastic increase in oil prices in December 1990 (premium gasoline rose from P8.87/liter to P15.95/liter and diesel from P6.24/liter to P9.35/liter). The high prices were a shock to the populace, and several government officials were threatened following the decision. The OPSF deficit subsequently narrowed, reaching just P49 million in August 1991, and the fund balance reached its highest surplus of about P8.3 billion in June 1992. After another dip into negative balances in 1993, the Fund rebounded and remained positive until April 1995, after which it fell back into the red. See Figure 5-1. Overall, the OPSF regularly ran large deficits and became a major drain on government resources (IMF, 2013). The government provided an equivalent of 0.2 percent of GDP or 0.8 percent of central government expenditures in subsidies to the OPSF from 1990 to 1997.18 In 1989 and 1990, the OPSF alone, caused government budgetary deficits of 0.9 percent and 0.7 percent respectively (Lamberte, Mario B., and J. Yap, 1991). 16 Department of Energy memo, October 5, 2015. 17 “To address public demands for greater transparency in the pricing of fuel, in early 2012 the PDOE organized a multi-sectoral independent review committee (Independent Oil Price Review Committee - IOPRC). The IOPRC was composed of one representative each from the following sectors: academia; business community; consumers; economists, accountants, and public transport” (PDOE, 2012b). 18 Philippines Department of Finance. Petroleum subsidies in the Philippines. https://www.iisd.org/gsi/sites/default/files/ffs_gsibali_sess3_beltran.pdf.
- 52. 3 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 5-1. Philippines OPSF Balance and other Macroeconomic Indicators Source: IMF, 2015c. Recognizing the impact of the OPSF, a deregulation law, R.A. 8479 entitled “Downstream Oil Industry Deregulation Act of 1998”, provided for the mechanisms to settle the OPSF balance, and close the fund (Arellano Law Foundation, 1998; PDOE). Prior to this deregulation, the General Appropriations Act in 1996 provided a special provision allocating P10 billion in 1996 to partly offset out the OPSF deficit. An appropriation of P1 billion (USD 40 million) was allotted as a buffer during the partial deregulation of domestic prices that year. The Downstream Oil Deregulation Law of 1998 eliminated the OPSF. Figure 5-2. Philippines Oil Consumption (left) and Energy Productivity (right) Source: Oil consumption data (Index Mundi, 2013); GDP per unit of energy data (World Bank, 2016h). Although the evidence is circumstantial, there was a striking rise in oil consumption during the years of OPSF operation from 1987 to 1998 that was absent before and after that interval (see Figure 5-2) (Index Mundi, 2016). This high rate of consumption growth persists even when normalized for GDP growth. Oil consumption growth matched or exceeded GDP growth from 1990 to 2000 (see right graph of Figure 5-2); however, after the 1998 reforms, GDP per energy use rose over time (i.e., energy intensity of GDP declined), indicating greater efficiency beginning in 2000 (World Bank, 2016j). Structural and macroeconomic factors notwithstanding, there is evidence that the OPSF contributed to these dynamics. It is very likely that the OPSF contributed to wasteful consumption of fossil fuels in the Philippines.
- 53. Attempts to re-establishthe OPSF have been floated by various groups during subsequent oil price increases; however, the present Administration is against the proposal as it would require substantial government funds to support oil companies if oil prices were to rise from the current (December 2015) low prices. Furthermore, the petroleum industry, having long since adjusted to deregulated prices, is advocating for maintaining the current deregulated system, as it is more efficient and effective than re-imposing the OPSF. VISION The motivations behind the creation of the OPSF – namely, energy price stability for macroeconomic security and protection of the poor from price spikes – remain key issues for the Philippines energy sector. However, in order to address these issues, the Philippine Government, led by the Department of Energy, has expressed a preference for targeted programs to increase energy security and for provision of targeted support to a limited number of recipients, during times of oil price spikes. The Philippines has already introduced such targeted programs (some of which are discussed below). In general, there are no major political or economic drivers for re-instituting the OPSF in the Philippines. KEY FINDINGS The OPSF was introduced to provide petroleum products price stability, thereby aiming to achieve macroeconomic security and protection of the poor from oil price spikes. This Fund was introduced in 1984 but formally implemented in 1987. It was intended to be a stabilization measure rather than a subsidy. This mechanism did not effectively target the poor, but merely stabilized the price of fuels for all citizens. Hence, the lower fixed price for petroleum products benefited the richer population more than those who are poor, as the rich tend to consume more fossil fuels than the poor. One government source found that in the Philippines, the OPSF provided greater benefits to the highest income groups and middle class with cars and air conditioning (92.8 percent) compared with the lowest income group (7.2 percent).19 In high oil price environments, political resistance kept the fixed price low, resulting in an effective subsidy and a budgetary shortfall as, over time, payouts exceeded saved revenues. The Fund acted as a subsidy for extended periods of time. Income to the Fund from oil companies was insufficient to sustain a zero balance, and the government was forced to inject funds at levels so significant that they impacted the fiscal stability of the government. The OPSF has likely caused higher fossil fuel consumption than would otherwise be the case. Given that, on balance, the OPSF kept domestic petroleum product prices lower than international benchmarks (as evidenced by the repeated government cash infusions necessary to maintain the solvency of the fund), the OPSF-supported price suppression in the Philippines was tantamount to a fossil fuel subsidy for all consumers. Domestic macroeconomic data on oil consumption and GDP per unit of energy consumed provide some circumstantial evidence that, during the tenure of the OPSF, oil consumption was higher than would have been the case without the OPSF (see Figure 5-2). Therefore, the OPSF would have discouraged conservation and improvements in efficiency during the time when it was active, as the full impact of international oil price increases and 19 Beltran presentation (undated).
- 54. 3 4 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S volatility were not passed on to the consumer. Thus, when it was active, the OPSF encouraged wasteful and inefficient use of petroleum products. The fund was liquidated in 1998 during the restructuring and liberalization of the oil industry, leading to lasting structural changes in the petroleum market in the Philippines. By 1998 the need for government infusion of funds became untenable, and the Fund was closed. The need for a fixed price petroleum was deemed undesirable, and the market was deregulated. There is no desire to reinstate OPSF amongst stakeholders that the APRP met with, especially in the current low oil price environment. The deregulation of the petroleum market occurred more than 15 years ago, and a liberalized market has now been firmly established, with no major groups advocating aggressively for the OPSF’s reintroduction. Only the LPG community sought stabilization measures to incentivize LPG use in vehicles as a means of making these LPG-fueled vehicles competitive with petrol and diesel vehicles. However, these LPG advocates did not specifically call for the reintroduction of the OPSF. Instead of reinstatement, PDOE has expressed a preference for considering targeted programs for energy security and subsidies to targeted recipients. A targeted program of disbursements would decrease inefficiencies and target the needy. If the program were to be conditional on high market prices for petroleum, the government would need to determine a price point above which such a program would be introduced, and whether it would be gradual by oil price band levels. RECOMMENDATIONS Recommendation 1. The APRP recommends, consistent with current Philippine policy, not to reinstate the OPSF, regardless of oil price, as it results in wasteful consumption of fossil fuel and fiscal imbalances. Fuel diversification and efficiency improvements can enhance the resiliency of the Philippine economy to oil price volatility over the medium- to long-term. Although the Philippine energy sector is mostly deregulated and market-based, if there are policy concerns about significant price swings, they could be addressed through higher excise taxes, emissions charges, and similar measures. If an urgent, temporary measure is required to provide fiscal relief, targeted cash transfers and other social programs could be used to alleviate financial pressures on the poor in times of high prices (such as occurred in the Philippines in 2007 and 2008). OBSERVATIONS In addition to the recommendations, the APRP has provided some additional observations that the Philippines may want to consider. These observations are not meant to have the same level of authority as the Recommendations above. Observation 1. A wide range of additional measures can, over time, lower dependence on fuels with volatile prices determined by international markets. Given that the Philippines are dependent on internationally-priced petroleum, it (and all other importing economies) will remain vulnerable to oil price swings. However, complementary energy policies can promote the transition to more price-stable and/or lower-cost alternatives. Some of these measures could include, building on current government policies: (1) encouraging partial or full fuel substitution and modal alternatives; and (2) promoting energy conservation and efficiency to reduce petroleum demand through mandates, standards, labelling programs, and other incentives.
- 55. Observation 2. Considerprice-dampening measures that can protect against economic damage resulting from oil price volatility. In the near term, measures could be taken by the government directly or using regulatory or tax policy to spur action by the private sector to equip the economy to manage oil price spikes through price shock dampening. (These would be complementary to the mitigating measures proposed in Recommendation 2.) There are a number of best practices employed throughout the world that would be less costly and distortive than an oil price stabilization fund, and potentially more effective. These include: (1) creating a strategic petroleum reserve, (2) encouraging (through tax or regulatory policy) oil-dependent private firms to engage in fuel price hedging; and/or (3) encouraging or requiring large oil-dependent private firms to stock minimum petroleum fuel inventories. LESSONS LEARNED AND BEST PRACTICES In this section, the APRP provides a brief description of illustrative case studies of how other economies in APEC and other countries have addressed the challenge of petroleum price volatility. Lessons learned and best practices are also presented based on these case studies and other research. The examples below are divided into two groups: cases from ASEAN and APEC economies with similar price stabilization measures to try to reduce volatility from domestic petroleum prices; and analogous oil stabilization funds in other regions of the world. The Philippines has already removed the OPSF, and hence, this section is primarily meant to support the APRP recommendation not to reinstate the OPSF. Following a discussion of the recent analysis of petroleum production pricing by the World Bank and an overview of the 2011 ERIA study (Kojima and Bhattacharya, 2011), the section has several case studies from Thailand, Peru and Brazil. Key lessons learned from World Bank Analysis In 2013, the World Bank released a report on experiences of 65 developing economies on petroleum pricing and related policies (Kojima, 2013), the third in a series of papers authored or co-authored by Masami Kojima. The report argues that while artificially low domestic prices do reduce inflation in the short term, they have serious undesirable consequences: “flourishing black markets, smuggling, fuel adulteration, illegal diversion of subsidy funds, large financial losses suffered by fuel suppliers, deteriorating refining and other infrastructure, and acute fuel shortages causing economy-wide damage” (Kojima, 2013, pg.2). The World Bank case studies and analysis underscore a number of common characteristics that emerge from policy attempts to stabilize petroleum product prices in the Asia-Pacific region and around the world: • First, stabilization policies that keep domestic prices below market prices almost always cause fiscal harm during times of oil price spikes or sustained high prices, including fiscal deficits; oil company losses; sudden price shocks for consumers as prices have to be recalibrated; or some combination of all three. • Second, stabilization of petroleum prices is targeted to the groups most vulnerable to price spikes (e.g., fuel-intensive industry, price-regulated businesses, and low-income consumers of non-substitutable fuels). • Third, stabilization funds resulted in increasing involvement of the government in the domestic market and significant bureaucracy to manage the funds. They often lead to fuel shortages and black market activity.
- 56. 3 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S • Finally, oil price stabilization funds usually have significant macroeconomic and societal costs. Price stabilization funds often lead to market distortions, overconsumption of fuels (with attendant air pollution, health and environmental impacts), and increased hard currency and government fiscal deficits. Hence, although a price stabilization fund may have an intuitive appeal, such funds usually do not work well in practice (see, for example, Bacon and Kojima 2008, chapter 7: “Price Smoothing Schemes”). Invariably price shocks occur, which governments tend to be poorly equipped to respond to quickly and effectively. The World Bank (Kojima, 2009) concludes, “Several lessons emerge from the recent oil price episode. One is to prepare for the unexpected. ... Such price volatility can produce unexpected large losses from hedging and increase the costs of price control. Although diversifying their energy portfolio and taking steps to improve energy efficiency seem less urgent now, governments should continue to pursue measures to equip the economy for future oil price shocks.” Table 5-1 (below, adapted from Table 4 in Kojima 2013) shows the various price-adjustment mechanisms and their advantages and potential problems. This table provides a useful summary of the challenges the Philippines will face if it attempts to control prices rather than allowing them to continue to be freely set by the market. In short, there appears to be no optimal approach to price controls, though generally speaking, the less harmful options are to limit the fuel volume and type controlled and more narrowly target any subsidies to vulnerable population groups. Table 5-1. Types of Different Price Adjustment Mechanisms Mechanism Advantages Potential Problems Steadily increase price at regular time intervals until cost-recovery levels are reached: • By a predetermined monetary amount (Thailand for LPG for vehicles and industry) • By percentage (Mexico) Each price increase is small and predictable Could lose political commitment over time, and invite resentment if world prices are falling. If the increases are regular but small compared to world price increases, subsidies could continue for years (as in Mexico) Deregulate prices for higher-grade fuels (Egypt, Indonesia, Malaysia) End subsidies to the rich, who are the main consumers of higher-grade fuels Fuel switching by users from higher- grade to cheaper fuel, adulteration of higher-grade fuels with subsidized fuels Ration heavily subsidized fuels, charge higher prices outside quota (kerosene and LPG in India, gasoline and diesel in Iran) Limit subsidies Diversion of rationed fuels to black markets or smuggling Set different prices depending on user category (Costa Rica, India, Indonesia, Iran, Malaysia, Nepal, Thailand) Limit subsidies Selling the same product at different prices invites corruption, starting with diversion to consumers who are not entitled to the subsidized fuel (essentially every economy) Shift subsidy from one product to another (kerosene-to-LPG conversion in Indonesia) Subsidy for one product is completely eliminated Could lead to a growing subsidy on the product to which the subsidy is shifted (as in Indonesia) Introduce a temporary stabilization fund (Chile, Peru), temporary tax reduction (diesel in Thailand) Deal with large price shocks while limiting the period of artificially low prices Political pressure to repeatedly extend the phaseout date (Chile, Peru, Thailand), resulting in a growing budgetary outlay Switch to rule-based pricing when world prices are low (China in Jan 2009) No large price increases needed at time of switching When world prices begin to rise, the political will to adhere to rule-based pricing may weaken (as in China); a period of very low prices may not return in the future for governments to follow this approach Adjust when world prices change Stable prices between changes Price changes are large when
- 57. Mechanism Advantages PotentialProblems significantly and subsidies become too costly to bear (Bolivia, Islamic Republic of Iran, Jordan, gasoline in Nigeria) adjustments are finally made, adjustments almost always mean price increases, tendency to delay price increases, lack of predictability, possibility of growing subsidies, politicization of price increases, hoarding in response to rumors of imminent price increases and leading to fuel shortages Adjust when world prices change more than ±X% (Malawi, Togo) Stability within the price band If X is relatively large, potentially large changes when adjustments are made; possibility of losses exceeding savings within the price band Float prices within a price band, smooth changes outside (Chile for small and medium consumers, Peru) Avoid large price changes Can lead to large subsidies unless price bands are frequently adjusted Set different rules depending on world oil price (China) Limit subsidies to times of high world prices Unless price bands are adjusted from time to time, if world prices remain high, subsidies could grow Agree on the total subsidy envelope for the fiscal year and adjust prices, volume, or both accordingly Limit the total subsidy bill. Politically difficult to raise prices when money runs out (Indonesia) Adjust based on world prices averaged over past 3–6 months (no example in this study) Prices change gradually World and domestic prices could be moving in opposite directions, inviting political backlash; could lead to large losses if world prices are rising over time. Adjust regularly based on world prices averaged over 1–4 weeks (Dominican Republic, South Africa) Tracking world prices well World price volatility quickly transmitted Deregulate, subject to anti-trust regulations (Philippines, Turkey) Market based, no subsidies Downstream petroleum sector needs to be competitive or else consumers may be charged high prices; world price volatility immediately transmitted Source: Kojima, 2013. The World Bank has also suggested that specific best practices for the removal of price controls are quite similar to the removal of fossil fuels across the board (Kojima, 2013). These measures include: • Targeted assistance to consumers • Conservation (efficiency and reduced consumption) • Diversification (partial or complete fuel substitution) • Stock management (hedging contracts and/or proactive development of corporate or other fuel stocks) • Strategic petroleum reserve (domestic petroleum stockpile) • Promoting price competition (through market liberalization, competition, and robust provision of pricing information to consumers) Moving from ad hoc pricing to market-based automatic price adjustment mechanisms can be an important step in making the downstream petroleum sector more efficient. The price formulas can be set to apply to any point along the supply chain and to function either as actual prices or price ceilings. Automatic price adjustment has been reasonably robust against modest price changes, and should be given serious consideration in countries with ad-hoc pricing. Periods of relatively low oil prices are particularly suitable for switching to automatic pricing.
- 58. 3 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S As noted above, Kojima (2013) views that direct and targeted cash transfers are a much better way of supporting specific sectors and population groups, rather than more regressive approaches such as a stabilization fund. ERIA Assessment of Removal for Fossil Fuel Subsidies In 2011, the Economic Research Institute for ASEAN and East Asia (ERIA) studied the impact of pricing reform in ASEAN and six other major economies in Asia (Kojima and Bhattacharya, 2011, pg. 191–212). This report discusses how energy price reforms and the deregulation of the domestic energy market are necessary to help the East Asian economies develop a sustainable, efficient, and integrated energy market. The analysis and simulations found that an economy’s total economic growth is strongly linked with high levels of regulation and control of energy commodity pricing. Controls on the price of energy often restrict price pass-through to the consumers, leading to inefficient allocation of resources and overconsumption of fossil fuels at the macroeconomic scale—as demonstrated by the steeply rising petroleum consumption in the Philippines during the OPSF years, as opposed to the higher GDP growth and lower petroleum consumption before and after operation of the OPSF (see earlier discussion). Kojima and Bhattacharya (2011) also show that although subsidies, including fixed prices such as the Philippine OPSF, are aimed to protect the poorest consumer groups, such subsidies lead to significant market distortions, and provide incentives for misuse of cheaper energy sources. Hence, the Kojima and Bhattacharya (2011) study substantiates the APRP recommendation to not to reinstate the OPSF. The ERIA study also found that removing energy subsidies led to improvements in the economy and the environment through reduced oil imports and consumption. The removal of energy subsidies can boost productivity and help reduce market distortions, increasing economic output. Furthermore, the smallest removal or reform to energy price regulation can have positive results. Additionally, fuel shortages are nearly universal when prices are kept low. China, India, Iraq, Nepal, Nigeria, Pakistan, Thailand (for LPG), and the Republic of Yemen are among those countries that have suffered periods of fuel shortage as a result of government control over fuel prices. (Kojima, 2009). Lastly, oil companies often suffer losses as a result of prices being kept artificially low. Countries in the Asia region, such as Thailand and Vietnam, where petroleum suppliers face price controls and payment to cover gaps between the wholesale and retail price are not automatic, have faced losses (Kojima, 2013). Similarly, prior to the liquidation of the Philippine OPSF in 1998 and energy market liberalization, oil companies in the Philippines also faced non-payment of debts from the OPSF when retail prices were fixed below international market rates.20 Oil Stabilization Fund in Thailand A number of authoritative studies have recently been conducted on the Oil Stabilization Fund in Thailand, including one by the Asian Development Bank (ADB, 2015) and one by a Thai academic for that economy’s government (Vikitset, 2013). As with the OPSF in the Philippines, domestic petroleum fuel prices in Thailand are set by the government. Unlike in the Philippines, however, price changes and payouts to oil suppliers in Thailand were not largely regularized and routine; but rather, the 20 APRP consultations with the Philippine Institute of Petroleum and other downstream petroleum companies, December 1 and December 4, 2015.
- 59. extent of thepayments and price adjustments changed over time. The Oil Stabilization Fund is particularly notable for its lack of predefined mandates and the flexibility and mutability of government policies. Most frequently and in recent years, the Oil Fund has been used to stabilize prices and to subsidize gasohol, or the biofuel gasoline-ethanol blends most commonly used in light vehicles in Thailand. In recent years, there have been small subsidies for E20 (20% ethanol) and large subsidies for E85. Like the Philippine OPSF, Thailand’s Oil Fund was designed to be revenue-neutral, but has often become a de facto subsidy, and at times experienced acute fiscal problems due to negative cash flow. Over the life of the fund, which has existed since 1973, government policies to stabilize prices have fluctuated, sometimes dramatically, to tax some fuels, subsidize others, and sometimes deregulate fuel markets entirely. From 1979 to 1990, the Thai government regulated retail prices of all types of petroleum products both imported and domestic. Thailand’s oil fund was historically used to cross- subsidize LPG. The fund was used to subsidize gasoline and diesel in 2004 and 2005, and non- automotive diesel in 2008. The fund stopped subsidizing LPG in December 2007, and has instead been subsidizing ethanol and biodiesel blends since January 2008. After 2007, the oil fund also has had a cross price subsidy feature where the high-octane gasoline 91 consumers are the major contributors to the oil fund and the E85 consumers are the major recipients of the subsidies. Despite sharp price hikes in 2008, the fund balance managed to stay positive because the government did not opt for large-scale price subsidies in 2008 as it had in 2004 and 2005. The government saw how large a deficit the earlier intervention had created and was careful not to rely excessively on price-based policies in 2008 (Kojima, 2009). During the 1990s, the Thai government fairly successfully managed both prices and the Oil Fund fiscal balance. For example, Thailand deregulated many of its fuel prices (retail gasoline, kerosene, diesel and fuel oil) in 1991 at a time of falling global fuel prices. The government also successfully limited subsidies and Oil Fund fiscal troubles by designing targeted non-fuel benefit programs for the poor. Instead of relying on persistent fuel subsidies, the administration of Prime Minister Samak Sundaravej put in place an anti-poverty package to deliver targeted assistance to the poor to reduce the impacts of the 2008 global financial crisis and high oil prices. These measures reduced the need for the government to fix prices for all fuels (and therefore provide subsides) during a period of high oil prices, as had been previously been done in 2003 and 2004–2005. The measures were also more targeted to fuels and services used by the poor, rather than blanket subsidies for gasoline that would be accessed by all income levels. (APEC, 2012b). However, in other periods, any fiscal prudence was undermined by high oil prices and political pressures. At the beginning of the 2000s, prices were frequently fixed for gasoline, diesel, LPG and biofuels, necessitating government transfers to the oil fund when it became depleted. During rising international oil prices in 2004–2005, government transfers of USD 2.2 billion to stabilize the domestic fuel price resulted in a decision to stop providing subsidies on some fuel products. When the economy faced another spike in international oil prices in 2008, the government resisted the temptation to subsidize all fuels. Fuel subsidies cost the Thai government $15.6 billion over the three years from 2011 to 2014, starving government coffers of funds for crucial infrastructure projects (Nasdaq, 2011). It is likely that the combination of subsidized and fixed petroleum fuel prices has led to increased volatility in domestic fuel prices, due both to the absence of a price signal to consumers in times of high prices and the unpredictable, ad hoc policymaking process. According to Vikitset (2013), the oil fund utilization increased the fluctuations in the costs and the retail prices of gasoline and high speed diesel until the emergence of gasohol and biodiesel in 2007.
- 60. 4 0 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Fuel Subsidy in Indonesia A World Bank study (Kojima, 2009) and an IMF compendium of case studies (Clements et al., 2013) reviewed of stabilized fossil prices in Indonesia, examining the impacts of very large effective subsidies. While Indonesia did not have a dedicated oil stabilization fund, it used government funds to stabilize fuel prices, as well as to provide fuel subsidies. Furthermore, although Indonesia has removed its subsidies for diesel and gasoline from January 2015, this is still a useful case study for Philippines to consider. Indonesia has had some of the highest petroleum subsidies in the Asia-Pacific region, though with some reductions in recent years, usually during episodes of political and/or economic crisis. Despite fixed fuel price policies, Indonesia periodically has adjusted prices upwards, in some cases dramatically, as in 1998 and 2003. Indonesia froze the prices of subsidized fuels between October 2005 and May 2008 (Kojima, 2009). The two price increases before and after this period, however, were both large in order to reduce fiscal deficits. As in the Philippines, such episodes created great fiscal and political strain for the government, and undermined the usefulness of the price stabilization policy precisely when it was most needed. In 2008, with international fuel prices at their peak, petroleum product subsidies reached 2.8 percent of GDP. Fuel prices were raised by 29 percent, on average, and were later reduced as international prices started to fall, though remaining above their pre-increase levels. The government announced its objective to remove fossil-fuel subsidies by 2014. But in September 2010, the House of Representatives agreed to raise budget allocations for subsidized fuel consumption in the revised 2010 budget, which was inconsistent with the government‘s objective to reduce energy subsidies. Indonesia may have also missed an opportunity to reduce fuel subsides in 2012 as the proposed increases in fuel prices by the government was significantly reduced by the parliament. Further exacerbating fiscal pressures on the government was the rise in fossil fuel consumption and smuggling due to lowered prices. While island countries have some protection against this due to their remoteness and lack of cross-border roads, it is instructive that Indonesia, an island nation like the Philippines, is not immune to smuggling. Kojima (2009) found, “In Indonesia, the apparent consumption of subsidized gasoline has correlated strongly with the size of the subsidy per liter: data between January 2004 and July 2008 show consumption rising with the gap between domestic and international prices, presumably because of greater out-smuggling and consumers shifting from unsubsidized to subsidized gasoline.” The government successfully implemented a cash transfer program targeting the poor for future price shocks, which worked fairly affectively in lieu of fuel price stabilization on the economy-wide scale. The Indonesian government initiated a large scale cash transfer program in response to higher fuel prices—one of the largest in the world. First implemented in 2005–06 in the wake of a very large fuel price increase, an extensive survey of recipients shows that the program achieved its primary objective of reducing the increase in poverty that followed the rise in fuel prices. The Indonesian government carried out another round of cash transfers in 2008 when fuel prices rose an average of 29 percent, earmarking Rp 14 trillion ($1.5 billion) to finance a cash transfer program for 70 million of the economy’s poor and near-poor (Kojima, 2009). The IMF observes that political efforts in Indonesia to reduce fuel subsidies have been challenged by the lack of a concerted policy push, and accompanying public awareness campaign, on the need to reduce fuel subsidies. Rather, subsidies were successively reduced to alleviate fiscal crises.
- 61. Fuel Subsidy inMalaysia A World Bank review of case studies of energy subsidy reform included Malaysia’s recent fuel subsidy reform efforts (Vagliasindi, 2013). Malaysia had a long-running fossil fuel subsidy regime; however Malaysia has since December 2014 removed the subsidies for gasoline and diesel. When the subsidies were in place, the prices were fixed by the government and at times remained stable even during price spikes in the international oil markets. A key subsidy reform in Malaysia took place in early July 2008, at the peak of the high international oil prices, when, in an effort to cut the subsidy bill, gasoline prices were increased by 40 percent and diesel by 63 percent (IEA, 2009). The government of Malaysia reported in February 2009 that it had spent RM 40.5 billion ($11.1 billion) on fuel price subsidies between 2005 and 2008. In 2008, Malaysia restructured the automatic pricing mechanism to reduce growing subsidies (Vagliasindi, 2013). To offset the increased prices, the Malaysian government offered cash rebates in the form of lower annual road taxes. Other than subsidy reductions and cash rebates, the package included windfall taxation on certain sectors and an expansion of the social safety net (IEA, 2009). With the dramatic drop in oil prices in the second half of 2008, it became easier for Malaysia to further reduce its gasoline subsidies because prices were declining. From August to November 2008, fuel prices were reduced five times. In July 2010, the government reduced subsidies for some key commodities. Low- octane gasoline and diesel prices were increased by some 3 percent, and the price of liquefied petroleum gas went up by about 6 percent. High octane gasoline is no longer subsidized. Although these measures fall short of earlier official proposals, they mark the beginning of the subsidy reform program highlighted in Malaysian Prime Minister Najib’s New Economic Model (IMF, 2010). The government of Malaysia provides additional fuel price subsidies to fishermen, vessels, and transportation operators with fleet cards (Vagliasindi, 2013). Peru Stabilization Fund In 2014-2015, Peru went through the APEC Fossil Fuel Subsidy Reform Peer Review process (APEC 2015b), and the Peru APEC Peer Review Panel for Peru evaluated a Fuel Price Stabilization Fund in Peru, similar to the OPSF in the Philippines. To slow down the transmission of international market prices to Peru’s domestic prices, the Government of Peru created the Fuel Price Stabilization Fund (Fondo para la Estabilización de Precios de los Combustibles Derivados del Petróleo or FEPC) in September 2004. The FEPC was established with five different pieces of legislation and, the FEPC was made permanent at the beginning of 2013. Initially, all types of gasoline, diesel, lubricants, kerosene, and liquefied petroleum gas (LPG) were regulated under the FEPC. Since 2004, the number of covered fuels has been reduced and the program now attempts to target only the most vulnerable members of Peruvian society. The FEPC utilizes a price band scheme to help maintain the price of fuels sold at the wholesale level in the economy at stable levels. The bands are set bimonthly by OSINERGMIN (Supervisory Body of Investment in Energy and Mining). The APRP in Peru concluded that the FEPC has likely caused higher fossil fuel consumption than would otherwise be the case. While domestic prices are set freely, the FEPC has had a demonstrable impact on pricing behavior. It has reduced the full impact of international oil price increases for the consumer, while also creating significant fiscal costs to the Government of Peru; these costs have been now mitigated to an extent based on a series of recent reforms. The exposure of the Government of Peru to future oil price rises has been mitigated with the removal of a number of oil products from
- 62. 4 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S the FEPC. Now the FEPC only applies to diesel for transport use, packaged LPG, and residual petroleum fuels used by isolated electricity generation systems. The APRP recommended that Peru further reform the FEPC because it found that potential benefits of FEPC are poorly targeted. Initially, the scheme covered all fuels and there were no mechanisms used to direct the scheme only to the most marginal sections of the population. The APRPl also found that FEPC has only marginally reduced inflationary pressures. The muted domestic price response to international oil price movements will have resulted in lower inflation levels than would have otherwise been the case. The APRP concluded that the direct costs of the FEPC between 2004 and 2011 to the Government of Peru are likely to far outweigh the marginal benefits the scheme may have provided in mitigating inflation rises and the impact on GDP. The APRP also noted that Peru’s efforts to reform the FEPC have been positive (APEC. 2015b). Brazilian Experience of Stabilization Fund In 2013, the IMF (Clements et al., 2013) reviewed and analyzed Brazil’s oil stabilization fund that was passed in 1980 in order to reduce the volatility of crude oil prices. The government of Brazil subsidized the price of the oil sold to Petrobras’s refineries using the oil stabilization fund. When international crude oil prices were high, the stabilization fund accrued contingent liabilities to Petrobras, but when crude prices were low, these liabilities were expected to be offset. However, over the course of time, the stabilization fund accrued huge deficits. In the mid-1990s, the Brazilian government transferred 0.8 percent of the 1995 GDP to Petrobras to cover for this large accumulation of debt. “Petrobras had to absorb other losses that were never transparently recorded on the budget” (Clements et al., 2013). To address this problem during the 1990s, the Brazilian government used a gradual approach for the removal of subsidies to deal with opposition from interest groups (Clements et al., 2013, pg. 8). The government gradually removed subsidies on energy products, focusing first on those products that were used by politically weak stakeholders (asphalt, lubricants, and gasoline for airplanes). Subsidies that were used by politically strong stakeholders (liquid fuels used in transportation and industry) were removed later. In 2002, all fuel prices, including diesel, were liberalized, and there is no official setting of prices for fuels. This has helped avoid recurrence of subsidies. Some of the key lessons from the Brazilian experience are (Clements et al., 2013, pg. 11): • Removing subsidies gradually may result in less resistance from groups that benefited from the subsidies. It is important to assess political implications and stakeholder strengths. • “Liberalization reforms have more chance to succeed with a popular government.” • The use of stabilization funds and adjusting oil prices is not practical and can lead to negative consequences under unstable macroeconomic conditions. • Liberalization of prices allows for subsidy reform to remain durable, as prices are automatically adjusted to market fluctuations. • “Targeted social programs can reduce opposition to subsidy reform.” For example, Brazil compensated low-income households with a voucher to help offset the increase in LPG prices.
- 63. 6. SUBSIDY 2:PANTAWID PASADA: PUBLIC TRANSPORT ASSISTANCE PROGRAM The Public Transport Assistance Program (PTAP) or “Pantawid Pasada” program aimed to assist the drivers cope with high oil prices. The PTAP partially subsidized the fuel consumption of identified small-scale public transport groups (excluding buses), through two cash transfers that allowed public transport operators/drivers to purchase diesel fuel through a limited-access scheme. PTAP is not currently active, having been closed due to operational difficulties in 2013. HISTORY AND CONTEXT Established under Executive Order (EO) 32 in April 2011, the Public Transport Assistance Program (PTAP) or “Pantawid Pasada” program provided cash transfers to the public transport sector in order to cushion the impact of high fuel prices on the riding public. The PTAP partially subsidized the fuel consumption of identified small-scale public transport groups. The subsidy was administered by providing cash transfers targeted for purchasing diesel fuel to registered public transit operators of ‘jeepneys’ (small, privately-owned buses) and tricycles. The program called for the distribution of special cards to registered transit operators entitling them to buy their required fuel from selected filling stations using the smart cards instead of paying cash until the amount loaded on the cards was exhausted. Small transit operators are significant providers of urban and suburban transportation, and the predominant consumer of diesel fuel nationwide. As private jeepneys, tricycles and motorcycles in 2013 numbered more than 6 million (nearly 80 percent of the vehicles on the road in the Philippines), dwarfing the 31,600 registered buses, jeepneys and tricycles represent a significant and distinct category of transit for the public (PSA, 2013b). Across the Philippines, jeepneys perform roughly 60 million trips daily. 21 As of December 2010, right before the PTAP subsidy commenced, jeepneys outnumbered buses more than eight to one: there were 27,886 total franchised buses and 230,622 registered jeepneys. Buses and jeepneys also serve different purposes, with jeepneys used more for commuting (primarily trips within 3-15 km distance) and buses for longer-distance transportation. In the provinces, jeepneys convey passengers and goods from rural areas to town/city proper and vice versa. Meanwhile, tricycles normally transport passengers within local areas of towns and cities. From 2011 to 2015, the transport sector consumed about 75 percent of the economy’s total demand for diesel. The Pantawid Pasada program arose out of the government’s role in setting transit fares. Though most operators are private, the Land Transportation Franchising and Regulatory Board (LTFRB) has official authority for setting public transit fares. The LTFRB, an office under the Department of Land 21 Discussions with representative from One United Transport Coalition, in-person interview, December 3, 2015.
- 64. 4 4 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Transportation and Communications, regulates the road transport sector, and thus has the power to review and adjust fares, most commonly following the review of adjustment petitions filed before it. Petitions are normally filed by the public transport groups, e.g., jeepneys, buses and taxis. Such petitions are also published so that the general public can file comments. Both bus and jeepney fares are reviewed by the LTFRB at regular intervals, and are raised typically once every one to two years). Fares across the different transport options tend to be similar, but slightly higher for buses; generally, since 1987, the base fare for 4km to 5km has stayed at roughly 20-30 percent of the price of a liter of diesel fuel for jeepneys and buses. 22 Figure 6-1: Indexed Transit Fares and Fuel Prices. Source: DOTC23. In 2011, following the tsunami in Japan, oil prices rose very quickly (see Figure 6-1). In order to be compensated for the rise in oil prices, the public transport operators petitioned the LTFRB to increase fares. Rather than increasing the fares significantly, the newly-established Inter-Agency Energy Contingency Committee (IECC) unanimously recommended to provide assistance to the public transport sector to cushion the impact of high fuel prices and thereby not having to increase transit fares significantly on vulnerable sectors. The IECC recommended the PTAP to adopt targeted relief specifically for jeepneys, representing the large majority of total public transport vehicles. PTAP’s initial funding requirement in 2011 was P450 million (USD 10M). A total amount of P300 million (USD 6.7M) was released to PDOE for the Public Utility Jeepney driver beneficiaries, while the remaining amount of P150 million (USD 3.3M) was released to the Department of Interior and Local Government for the tricycle driver beneficiaries. 22 There are other factors impacting transit fares. Higher-class air-conditioned buses and other ‘luxury’ vehicles are allowed to charge premium fares. Additionally, students, the disabled, and pensioners are issued transit cards entitling them to 20 percent discounts on fares. Department of Transportation and Communication, in-person consultation, December 2, 2015. 23 Provincial Fare Rates History. Land Transportation Franchising and Regulatory Board (LTFRB). http://ltfrb.gov.ph/media/downloadable/fare_rates_Prov.pdf, and Metro Manila Fare Rates History. LTFRB. http://ltfrb.gov.ph/media/downloadable/fare_rates_MM.pdf.
- 65. Unlike jeepneys, buseswere excluded from the PTAP cash subsidy because they were granted a P1.00 fare increase in March 2011. Moreover, bus companies were deemed less in need of fuel price relief because they were a more organized group and consume more fuel than jeepneys and tricycles. Consequently, bus companies were able to negotiate favorable fuel prices from the oil companies through bulk purchase contracts. The distribution of the Pantawid Pasada Cards (PPCs) commenced in May 2011 among legitimate jeepneys and tricycle drivers/operators serving the riding public, initially in the National Capital Region. Each PPC was loaded with P1,050 (USD 23) and reloaded for another P1,200 (USD 26) cash value (for jeepneys) for the purchase of diesel from participating gasoline stations. Under the program, the PPCs were distributed to legitimate franchise holders with valid and updated the Land Transportation Office (LTO) registration and an existing franchise of good standing. The card acted as a debit card that could be used to buy fuel from participating gasoline stations. Most of these designated gas stations also offered a P1.00/liter discount to the public utility jeepneys, voluntarily offered by respective oil companies. Over the next two years PPCs were distributed throughout the economy to qualified drivers of public utility jeepneys and tricycles. In December 2011, the total number of beneficiaries of the Pantawid Pasada Program throughout the economy, comprising of public utility jeepneys and tricycles with valid franchises, reached more than one million with a corresponding monetary benefit of about P235 million (USD 52 million). The vast majority (P206 million) was disseminated in calendar 2011, resulting in the government-funded purchase of more than 3.8 million liters of diesel at an average price of P45.60 per liter. The PTAP fuel subsidies need to be considered in the context of fuel consumption by jeepneys, buses and tricycles. All of them use the same fuel used by other heavier vehicles across the economy. Jeepneys overwhelmingly use diesel fuel, and few have adopted efficient engines or modern exhaust pollution controls. Recently, Jeepney operators’ associations and DOTC have entered into discussions to formulate a jeepney modernization program that include the introduction of more efficient and environment-friendly jeepneys, This includes financing arrangements that can be accessed by the jeepney operators. In recent years, alternative-fuel jeepneys have been introduced, but most are not widespread; these alternate-fuel jeepneys currently represent only 10 percent of all jeepneys in circulation (IEA, 2013). The LTFRB approved the first electric jeepney (eJeepney) for use in 2012; their use has expanded, though high capital costs, limited charging infrastructure, and safety concerns have slowed adoption (CNN Philippines, 2015). According to the Electric Vehicle Association of the Philippines, there are about 500 electric tricycles and 200 e-jeeps sold in the Philippines. Makati City has put up an on-grid charging station for its e-jeepneys. A new model of LPG-fueled jeepney was introduced and profiled in 2012, with the potential for lower emissions while also using less expensive fuel than diesel (Business Inquirer, 2012). The Philippines plans to increase the number of public utility vehicles (primarily jeepneys) running on electricity, compressed natural gas (CNG) and LPG to 30 percent by 2030 (IEA, 2013). There are currently 31 CNG-based buses. The Department of Energy also seeks to dramatically increase the number of e-
- 66. 4 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S tricycles to 130,000 in 2030, as part of a larger program to promote vehicle electrification (PDOE, 2015a). 24 The Government of the Philippines also aims to promote alternative fuels by partially substituting biofuels for imported petroleum. Jeepneys and other transit vehicles use fuel with the same 2 percent coconut-derived biodiesel blend in circulation nationwide. 25 Targets for the share of biodiesel blended in diesel are to increase, reaching 5 percent in 2015, 10 percent in 2020 and 20 percent by 2025. The government also plans for current 10 percent ethanol blend (E10) in gasoline to reach 20 percent by 2020 (PDOE, 2015a; IEA, 2013). The PTAP program ceased in May 2013. The program was marred by delays in card issuance. PDOE notes that the delays were brought about by discrepancies in the list of legitimate franchise holders obtained from the LTFRB and the LTO. One observer opined that the program did not function properly as there were cards given that were never funded, and there were also ineligible drivers that were issued funded cards. With help of LTO, LTFRB came up with a list of 220,000 public transport beneficiaries. But later review of the list only verified 150,000 legitimate recipients. 26 The program is under consideration to be revived in order to limit transit fare increases when fuel prices rise. Should the program be revived, it is proposed that it be handled directly by the Department of Transportation and Communication, not the PDOE. This may also provide an avenue for the two offices of the Department, i.e. the LTFRB and the LTO, to reconcile their lists of legitimate franchise holders. VISION Despite the current (February 2016) low oil prices (in fact, jeepney fares were recently reduced by about 6 percent, or 50 centavos per ride), there exists a concern that prices will rise sharply in the future, leading to considerable potential hardship if no dampening mechanisms are in place to limit transit fare increases (Official Gazette of the Republic of the Philippines, 2016). Therefore, the Philippine Government would like to maintain policy flexibility. KEY FINDINGS PTAP was a one-time, targeted subsidy, and the impact of the subsidy was to prevent fare increases on consumers. The program was active only from 2011 until 2013. The targeted beneficiaries of this program were jeepney and tricycle drivers. The program’s aim was to provide relief from high fuel prices that would delay or obviate the need to raise fares for transit riders. 24 “PHILIPPINE ENERGY PROFILE.” Presentation by Jesus Tamang, Energy Policy & Planning Bureau, Philippines Department of Energy. December 1, 2015. In subsequent discussions, DOTC and PDOE officials suggested that there are not in fact 50,000 etricycles in circulation as claimed by official data. December 1-2, 2015. 25 Melita Obilla, Department of Energy, in-person consultation, December 2, 2015. 26 Philippines Department of Transportation and Communication, in-person consultation, December 2, 2015.
- 67. PTAP partially subsidizedthe fuel consumption of identified small-scale public transport groups (excluding buses). This goverment assistance provided one-time cash transfers (up to P2,250, or USD 49) for drivers to purchase limited quantities of diesel fuel at the selected petrol stations. PTAP is not currently active. It was closed as a result of administrative difficulties in 2013. The performance of this program did not meet its goals. Cards were issued but a number were not funded; there was also misuse of cards by ineligible drivers. Reinstament of this program is not supported by stakeholders. Based on the discussions with relevant stakeholders that the APRP met with in Manila, the program seemed to provide limited benefit for passengers and transport providers. However, the APRP was unable to assess the views of all stakeholders. Regulated fares do not provide sufficient price signals to consumers, and also do not provide incentives for jeepney owners to modernize their vehicles. A broader issue discussed by the APRP during our meetings indicated that rather than the PTAP, the bigger challenge maybe is to address the regulated fares themselves. The process of transit fare regulation suggests that fair and effective transit fares are not reflected in the PTAP approach. By lower fuel prices, the PTAP could have acted as a disincentive for operators to modernize jeepney and tricycle motors and become more fuel efficient and less polluting. Furthermore, while regulated fares change in response to changes in fuel prices, the system functions poorly when fuel prices change quickly because the process of fare increase petition and LTFRB review takes roughly six months 27 , government responses to sharp fuel price increases historically have taken too long to be of short-term value (i.e., prevent near-term monetary losses or even bankruptcy among transit operators). Regulated public transport fares are pretty common around the world. The challenge in the Philippines is that most of the “public transport” is provided by private individuals that are regulated in what they can charge customers. The regulated charges mute incentives on private transport owners to modernize their vehicles. When the public transport is owned and operated by the public sector (e.g., the municipality), the pressure to modernize comes from consumer/electoral demands. In the Philippines context, the challenge is figure out how to best provide these incentives without causing significant social problems. RECOMMENDATIONS Recommendation 2. PTAP subsidies should not be reintroduced. PTAP is recognized as a government assistance program that indirectly encouraged wasteful consumption of fossil fuels. While providing a cushion against fuel price spikes, the PTAP did not provide any incentives on jeepney and tricycle drivers and owners to conserve diesel fuel usage. PTAP also perpetuated the perverse effects of regulated transit fares in shielding both transit providers and riders from fuel price volatility risks, thereby discouraging mitigating measures such as fuel efficiency, alternative fuels, and modal shifts to other forms of transportation. 27 Interview, Vigor Mendoza, December 2, 2015.
- 68. 4 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S OBSERVATIONS As in the previous section, the APRP has provided some additional observations that the Philippine Government may want to consider regarding providing sufficient incentives for improving the Philippine transportation section. As before, these observations are not meant to have the same level of authority as the Recommendations above. Observation 3. Move towards deregulating jeepney and tricycle fares in a phased manner. The PTAP has highlighted perverse outcomes created by regulated fares. In particular, there are limited mechanisms to protect both transport providers and riders in a regulated fare environment, which has limited market signals to encourage improved performance and efficiency throughout the sector that would benefit consumers and producers alike. While regulated public transport fares are common around the world, many of these regulated fares are for publicly-owned transportation systems. The reason why the APRP is suggesting deregulation is simply that jeepneys in the Philippines are owned and operated by private individuals. Our judgement is that there is likely sufficient competition between jeepney owners and franchises to keep fares affordable for consumers (i.e., there will not be monopolistic or oligopolistic pricing behavior). In our limited analysis of the Philippine transportation sector, we believe that the only way to drive efficiency in the vehicle fleet is to: a) provide a price signal to jeepney drivers, and b) regulate minimum standards, such as vehicle emission standards, to remove the oldest and most inefficient jeepneys from the market. Deregulation of transit fares would create the following benefits: • Provide incentives for owners to modernize the vehicles so that they become more efficient, cleaner, and appealing to the passenger, and thus more competitive. • Create, in the long term, lower fares through competition that benefit passengers and thereby reducing economic distortions. We recognize that such a deregulation would require an amendment to existing law and thus would not be easy to achieve. Further, it is also recognized that the benefits would not be realized in the short term, adding to the challenge of implementing such a reform. However, opportunities should be sought to liberalize jeepney and tricycle fares at times of low prices, particularly on routes where prices would be relatively low and competition would drive efficiency, investment, and innovation. Regulated fares could be maintained on specific routes or for specific price-sensitive constituencies. Observation 4. Promote more integrated, intermodal public transit. Public transportation such as jeepneys, tricycles and buses could be integrated with other modes of public transit, both public and private, to create a more streamlined transport system that could benefit the domestic economy. By reducing duplicative transit routes, congestion, air pollution, and transit times, a more integrated transit system in urban areas could yield many economic, social and environmental benefits. Observation 5. Undertake further studies and analysis to underscore the value of deregulating the jeepney/tricycle sector. Such work might include: • Modal integration: Establish pilot projects for transport modal integration in selected areas in and around Metro Manila, and analyze the findings with the potential for implementation in other parts of the economy, as appropriate. • Price bands that increase over time: Explore a structure that would implement fare price reform, and create a range of constrained fare price band increases according to a reasonable schedule that would eventually reflect real market prices.
- 69. • Excise taxesthat are earmarked for modernization: Evaluate whether a reform of excise taxes might be allocated for jeepney and tricycle owners in order to make them more efficient and comfortable. • Fiscal incentives (soft loans, grants, tax holidays, zero import duties, etc.) for modernization: Analyze the economic and societal impacts of whether the goverment should give such targeted incentives to encourage modernization of the transport sector. This assessment should determine whether any such incentives should be one-time, temporary, or longer term. • Higher vehicle emissions standards and enforcement: Assess whether these standards can improve air equality and lower greenhouse gas emissions, in the context of deregulated fares. • Innovations in commercial structure that supports modernization: Allow innovations to encourage and implement a new management system in public transport sector to increase efficiency and comfort. LESSONS LEARNED AND BEST PRACTICES In this section, the APRP provides a conceptual framework for transit benefits, a review of transit fare- setting best practices, and a brief description of illustrative case studies of how other economies in APEC and other countries have addressed issues of subsidized and regulated transit prices, whether through regulation of the price of fuel consumed by the transport sector, or through direct regulation of fares. As discussed above, based on its evaluation of the Pantawid Pasada, the APRP has called for a broader focus on the issue of transit fare regulation – the underlying driver for the Pantawid Pasada program—and mechanisms available to promote competition, modernization, and quality of service while also protecting consumers from fare increases. Unlike most countries grappling with inefficient fossil fuel use in the transport sector, the Philippines has already liberalized its domestic transport fuel prices. In this respect, the Philippines is ahead of many of its peers in the Southeast Asia region. Due to pervasive domestic fuel subsidies in the past, Malaysia and Indonesia have introduced smart card systems similar to the Pandawid Pasada for vehicle owners in order to better control and target the distribution of subsidized fuel. Though the domestic pricing regimes are very different, the notion of narrowly targeting fuel subsidies to specific vehicle operators is similar. Nevertheless, many studies, including those from the World Bank, 28, 29, 30, 31 have concluded that public transit fare-setting reform is a more effective means of achieving the objectives of the Philippines government. The World Bank (2002, Chapter 10) explores how fare liberalization and better management of transit supply (through franchising, centralization, and other tools) are critical to introduce efficiency into the transit sector and to enable subsidy reduction: 28 The World Bank has prepared a number of comprehensive urban transit policy guidebooks. The World Bank, through the multi-donor Public-Private Infrastructure Advisory Facility (PPIAF) it administers, has also prepared a simple guide to regulating bus fares, which also translates to other forms of motorized, roadway public transit (World Bank, 2006). 29 (World Bank, 2002). 30 An independent paper by a World Bank expert examines public transit systems from around the world reviews a number of common challenges, of which fare regulation is one. (Gwillliam, 2000). 31 Gwilliam (2005) review models for franchising public bus routes to help legalize and regulate informal, private transport networks, as with jeepneys in the Philippines. (Gwilliam, 2005).
- 70. 5 0 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S There are two important aspects of supply efficiency. First, it is necessary to provide the most beneficial range of services with the resources available—“doing the right thing.” Second, it is necessary to supply the required services at the least-possible cost—“doing the thing right.” Neither is simple and neither is well achieved in most developing countries. ... Doing the thing right is what commercial competition usually ensures, since the threat of bankruptcy is a powerful stimulant to internal efficiency. The possibility of subsidy weakens that incentive. .... Exploring measures to reduce subsidy requirements through improved efficiency and reduced costs is thus the first step to take in formulating a public transport subsidy strategy. Much of the argument for transport deregulation and privatization derives from a need to reduce subsidies. Attempts to increase efficiency of operation through the introduction of competitive pressures within the sector may enable lower prices to be charged without recourse to subsidy. The implication is that, for any level of cost recovery lower than 100 percent, subsidies should be specifically targeted at the objectives sought and should be embodied in competitively tendered service contracts. ... [While rising transit fares can contribute to inflationary pressures,] The general World Bank position is that subsidy is the wrong tool to deal with inflation; there is nothing special about the transport sector to vitiate this view. Funding public transit through tax revenues and liberalization of fossil fuel prices are not contradictory. Public funding of mass transit is a social good, as transit ridership results in more and broader societal benefits—other drivers, businesses, and residents as a whole benefit from reduced congestion, improved air quality, and better mobility promoting economic development. As the World Bank recommends, liberalizing fares – or at least allowing regulated fare increases – is essential to the financial viability and adequacy of public transit service. Consequently, careful consideration of proper fare regulation to meet both financial and social goals is critical. Depoliticizing and regularizing fare review is also an important goal to rationalize fares. Such a policy often politically enables fare increases, which in turn allows transit operators to quickly and reliably recoup costs and maintain service as costs rise, while also investing in high-quality, ecologically friendly vehicles and maintenance that are often financially out of reach in low-fare environments. Conversely, tightly-regulated, subsidized fares may also be in the public interest, so long as adequate revenue streams for public transit are provided and the subsidies do not lead to inefficient and wasteful consumption of fossil fuel. However, the critical challenge in the Philippines is that the key part of the mass transit system (jeepneys) is not public, but privatized. Additionally, liberalization and rationalization of the transit sector can lead to increased efficiency and improved service. Such opportunities are rife particularly in systems, where the dominant mode of public transit is “paratransit”, such as jeepneys and tricycles in the Philippines. The World Bank (2002) describes paratransit as “usually provided by informal operators that are non-corporate.” Other features of paratransit that are familiar in the Philippine context include: • Services are usually unscheduled and often, though not always, on demand-responsive routes, filling gaps in formal transit provision. • The vehicles operated are typically small, including motorcycles, partly because of the greater ease of financing and flexibility of operation of the small vehicles, and partly because controls over small vehicles are lax even in situations where entry to the large-vehicle market is strictly controlled. • The vehicles used are often old, having been retired from other countries or other uses domestically, so that the capital investment necessary to enter the business may be small (World Bank, 2002, pg. 101).
- 71. Thus, countries andcities departing from an initial condition of paratransit-dominated transportation sectors are particularly valuable for the Philippines, are a focus of this analysis. The section is organized according to particular public transit and transit fare regulatory issues. These are: • Issue #1: Public Transit Fare Control • Issue #2: Enabling Cost Recovery and Investment in Fare-Setting • Issue #3: Public Transit Route Franchising and Public-Private Partnership Modalities • Issue #4: Ensuring Investment and Quality Standards on Privatized and/or Franchised Public Transit Routes The section concludes with a consideration of case studies on fare liberalization, regulated fare determination, and public transit network management in a privatized transit environment. These cases cover Chinese Taipei, Santiago, Chile and Batam, Indonesia. Issue #1: Public Transit Fare Control As noted above, the World Bank encourages eventual deregulation and relaxation of public transit fare controls in order to protect consumers and small-scale transit operators from the exercise of market power by larger monopolistic and oligopolistic transit operators (World Bank, 2006). With regulated fares, frequent periods of below-cost fares can result in operational losses, which can result in poor service, inability to invest (new vehicles and dispatching technology, for example), insolvency, or reduced service on less-profitable routes (that might have served disadvantaged populations). Moreover, a regulatory process that does not routinely review fares and adjust them by political formula (as in Singapore) can lead to delays and unpredictability in fare levels. Such delays and jarring adjustment to fares can be both economically harmful and upsetting both to transit riders and operators, as the process lacks predictability and ample market signals. There are a number of key highlights and lessons learned from the World Bank Urban Bus Toolkit (World Bank, 2006) on fare control and regulations: • Justifying fare control The objective for controlling fares is often stated as the means to create affordable fares, and where an operator has a monopoly, the objective may be to prevent the abuse of monopoly power. If there are many operators on one route, the objective may be to prevent uncompetitive behavior and ensure consistency on different routes. • The high cost of fare control There is considerable disagreement about whether fare control is necessary to protect passengers. While designed to protect passengers’ interests by preventing operators from charging fares which they cannot afford, fare regulation often has the opposite effect— inappropriate control of bus fares has resulted in the demise of bus companies in many parts of the world. In such cases, passengers may ultimately pay more as new service operators often charge higher prices in an underground economy. • Fare control and responding to market demands Ideally fare increases should be authorized at regular intervals, and be based on a formula which links bus fares to an appropriate price index. It is also preferable for fare increases to be relatively frequent, and small, rather than infrequent and large. It is important that operators are able to predict with reasonable accuracy how fare levels will change, so that they may budget accordingly. If operators cannot be confident that they will be able to adjust fares to compensate for changes in the cost of inputs, investing in a bus becomes risky and unattractive to potential investors.
- 72. 5 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S • Flexible fare control It is important that the regulations allow operators a degree of flexibility in their charging policies. For example, an operator might wish to charge different fares at different times of the day to reflect variations in demand, offering cheaper travel to many users, or to introduce a higher quality service in addition to the basic service, at a higher fare level. • Lifting fare control There may be political obstacles in some countries to deregulating bus fares. Nevertheless in most situations the objective should ideally be the eventual lifting of all restrictions over the level of bus fares. Operators are aware that there is a limit to what passengers can afford or are prepared to pay, and in a competitive situation this will prevent them from attempting to impose unreasonably high charges. Those who do will lose business to those charging less. Allowing operators more scope to determine their charges will give them the opportunity to explore different markets, and adjust charges in line with variations in demand. While reducing fare control is generally viewed by the World Bank as good for efficiency, there are also equity considerations that can affect both for and against fare control. The World Bank (2002, Chapter 10) explores some of these considerations to assist policymakers to balance efficiency, cost, transit operator viability, and transit rider and socioeconomic class fairness considerations. Issue #2: Enabling Cost Recovery and Investment in Fare-Setting A number of strategies can be employed to address the problems of cost recovery and lack of investment in the transit sector, even while maintaining a system of private operators. These include: • raising fares and regularizing and making transparent fare review decisions; • instituting minimum standards for vehicles and service to justify fare increases; • making financing, potentially on concessional terms, to transit operators to allow for investment; • transferring the cost of discounted fares (for seniors, students, veterans, the poor, etc.) away from transit operators and on to budgetary expenditures of the relevant government institutions; and • issuing franchises for particular routes to limit the number of operators, mandate service frequency, regularity, and quality, and set route-specific fares as necessary. Even when embracing cost recovery, governments face many challenges with regard to the design of regulated fares. There will be questions about explicit or implicit cross-subsidies, tradeoffs between quality of service and fare level, and whether or not to allow fare and service quality differentiation on the same routes. The answers to these questions are not obvious and often empirical, with input required from particular groups of transit riders and stakeholders (see Gwilliam, 2005). In paratransit environments, the World Bank recommends the following regarding fare reform: (World Bank, 2002, Chapter 7): “General fare controls should be determined as part of a comprehensive city transport financing plan, and their effect on the expected quality and quantity of service carefully considered; Fare reductions or exemptions should be financed on the budget of the relevant line agency responsible for the categories of person affected (health, social sector, education, interior, and so on).” The World Bank (2002) has developed some general recommendations for public transit structure and fare pricing reform: • Pricing principles for public transport modes should be determined within an integrated urban strategy and should reflect the extent to which road infrastructure is adequately charged. • Given the high level of interaction between modes, and the prevalent undercharging of road use, no absolute value should be ascribed to covering all costs from fares, either for public transport as a whole or for individual modes.
- 73. • Transfers betweenroads and public transport services, and between modes of public transport, are potentially consistent with optimal pricing strategies. • In the interests of efficient service supply, transport operators should operate competitively with purely commercial objectives, with financial transfers achieved through contracts between municipal authorities and operators for the supply of services. • Any noncommercial objectives imposed on operators should be compensated directly and transparently, where appropriate by non-transport line agencies in whose interests they are imposed. • In the absence of appropriate contracting or other support mechanisms, the sustainability of public transport service should be paramount and generally have precedence over traditional price regulation arrangements. Issue #3: Public Transit Route Franchising and Public-Private Partnership Modalities Franchising is often the method of choice for urban regions with preexisting privatized and/or large informal “paratransit” operating sectors. Franchising allows for public regulatory control of privatized networks and routes, including fare control, while retaining the private and independent structure of the industry. Franchising also allows the government to more readily mandate quality of service and vehicles, and to encourage consolidation and professionalization of the industry while reducing overcrowding of routes. The case study on Taipei City (see below) illustrates how a centralized regulatory framework and unified ticketing and operating system for a network of independent, private transit operators can be created. In this case, the government issues franchises for routes and regulates fares, and franchisees are subject to performance and quality control reviews. Non-performing or insolvent transit operators may be forced to vacate their franchises and transfer routes to other operators. The World Bank (2002, Chapter 7) further recommends that when regularizing and regulating paratransit systems, “Cities should strive to find ways to mobilize the initiative potential of the informal sector through legalizing associations and through structuring franchising arrangements in order to give the small private sector the opportunity to participate in competitive processes; Cities must ensure that informal operators meet the same environmental, safety, and insurance requirements as formal operators, and that they meet their proper tax obligations; Cities should plan for a dynamic regime that will allow for a transition to a more formal role for the informal sector when appropriate.” Gwilliam (2005) provides a number of recommendations for public transit regulatory reform in developing countries, particularly regarding the development of franchising of transit routes. This list is partially excerpted below. (i) Political commitment to the reform is essential. Without clear political commitment any system is likely to be vulnerable. In particular, the financing of vehicles by private operators will depend critically on the credibility of the franchise contracts which are awarded. (ii) A proper legal foundation is necessary. Poorly drafted regulatory instruments, or out-of-date legislation that is unenforceable (Russia), or which is enforced selectively enables ‘harassment’ of operators by enforcement agencies. (iii) A strong local institutional foundation is required. The franchising function should be controlled by a city or municipal level agency, preferably responsible to a local government jurisdiction at the same level. (iv) Fares control must be consistent with financial viability of franchisees. The fares to be charged, and the payments to be made to franchisees must be clearly set out in the invitations to tender, as should the procedures and formulae for adjusting those amounts. (v) The administrative agency must be expert and trustworthy. (vi) Industry restructuring must be provided for. Providing for consolidation of the industry may be the first step towards development of an effective competitively tendered franchising system. (vii) Sub-contracting should be strictly limited. The holder of the franchise must be able to be held to account for the performance of the franchise as a whole.
- 74. 5 4 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S (viii)Good monitoring and enforcement is essential. This is necessary both to ensure that the conditions of franchises are being observed by operators and to curb illicit or unlicensed operations which undermine the franchised operators. Even where reform designs are technically convincing the successful implementation of a reform is a delicate process. Getting the combination and phasing of measures precisely right (for example matching restrictions on the informal sector with tangible improvements in the formal network) may be critical. Maintaining the accord between jurisdictions can be very difficult. And timing the reforms to prevent them being curtailed, uncompleted, by the political cycle is very important. Regulatory reform in developing countries is thus as much art as science. Issue #4: Ensuring Investment and Quality Standards on Privatized and/or Franchised Public Transit Routes Government budgetary outlays for capital expenditures and/or debt financing of transit budgets are often a necessity, given that cost-recovery tariffs do not usually allow for financing of infrastructure, modernization, and network or service expansion. However, regularized operating subsidies for transport undermine the market impulses for efficiency established by competition. Often the best approach is to institute competitive procurement processes. Such approaches may be relevant for the Philippines as it considers the widespread adoption of alternative fuel vehicles such as electrics and compressed natural gas (CNG). The World Bank firmly recommends that transit services be run on a commercial, competitive basis, and that social objectives be integrated into the contracting or franchising terms. Subsidies should be earmarked with specific payments and be explicit and transparent, rather than mixed into overall cost or price structure where it will serve as a diluent of the market incentive and price signal. Other considerations also include the cross-cutting impacts of one mode of transportation (e.g. jeepneys) on another (e.g., tricycles and buses, or rail). Because of the intermodal spillover effects of new routes, congestion, and fare adjustments, the World Bank recommends that cost recovery be considered holistically across a transit system rather than narrowly within each mode (World Bank, 2002). For more details of concerns related to public transit finance, please see appendix III. The World Bank (2002) has developed the following recommendations on sustainable financing of both infrastructure and operational costs of public transit: • Given the degree of interaction between modes, urban transport financial resources should be pooled within an urban transport fund administered by the strategic transport authority at the municipal or metropolitan level. • Intergovernmental transfers should normally be made to the fund and should be structured in such a way as to avoid distorting the efficient allocation of resources within the transport sector at the local level. • Private sector financing for transport infrastructure should be raised through competitive tendering of concessions that may be supported by public contributions as long as these have been subject to proper cost-benefit analysis. • When allocating funds to urban transport, the relationship between transport policy and other sector policies, in particular housing, should be borne in mind. Case Studies In this section, we explore lessons learned from case studies of other economies that have addressed high petroleum prices in the transit sector. The Philippine government can use these examples and adapt them in order to address the underlying concerns that the PTAP sought to address. The selected case studies include Taipei City; Santiago; and Batam.
- 75. Taipei City, ChineseTaipei This case study derives from a Power Point review of the Taipei public transit system prepared by an American transit specialist (Reddy, 2012). Taipei city encompasses 106 square miles, 12 districts, and a population of 2.7 million, with 10 million in a tri-county metro area. There is a monopoly operator of Commuter Rail, and regulated system of private buses, with 15 major private operators that have been market-sharing since 1976. Bus ridership is roughly one-third greater than commuter rail ridership. There is an integrated platform for bus operations known as Allied Operations, or “Lianying”. Lianying was established 1976 as a committee of bus companies. It started with 5 operators, doubled a year later, and today has 15 members. Lianying coordinates fare and ticketing; route planning and numbering; customer information; and interlining and revenue sharing. Operators can obtain route authorities with multiple jurisdictions. Operators share revenue when they operate on the same lines or lines intersect for shared networks. They are allowed to branch out of their home markets and to share routes. Lianying operates some integrated system infrastructure for a streamlined rider experience. For example, there is unified bus stop information, a single schedule published, with integration across metro area. However, there is no unified map of services, and some operators in the metro area are not part of Lianying. Of particular interest, there is a coherent fare policy, and open sales of fare cards across the network as well as in stores. Fare cards simplify transfers and allow for storage of points for various bonuses. Metropolitan Taipei regulates routes closely, which is facilitated by clear regimentation. Because routes are marked on bus windows to ensure compliance, there is dedicated fleet by route, driver and vehicle accountability, and customer familiarity with service. Operators are subsidized on a performance basis based on passengers or passenger-miles carried. Many routes are self-sustaining. Bankruptcies and discontinuations are not uncommon, leading to the reassignment of route franchises, potentially with higher fares. Profit-making operators set service levels by route that are subject to regulatory approval by relevant jurisdiction. In the case of poor performance or bankruptcies, routes can be reassigned by the regulator. Some of the lessons learned from this case study are: 1. Jurisdictional issues can be hidden from riders though multi-jurisdictional operators. 2. Multiple operators provide diversified transit labor marketplace. 3. Fare media & customer information should be consistent throughout metro area, not just city. 4. Performance-based subsidies focus efforts on matching supply to demand. 5. Metro-wide planning and operations clearinghouse is beneficial for integration. Santiago, Chile This case, also adapted from Gwilliam (2005), looks at an ambitious program to unify, reform, franchise and regulate a private urban bus network. The purpose of the large-scale consolidation and integration of Santiago’s transit network was to raise the level of professionalism and safety on the roads, and reduce overcrowding of transit routes (particularly at off-peak times) and highly-polluting vehicles. While meticulously planned and sophisticated, this ambitious program has encountered some hiccups. Santiago’s experience – rife with political and operational challenges – shows the importance to carefully consider all stages of the transition, and to weigh the costs and benefits of retaining small scale operators through sub-contracting – and thereby sacrificing some control and quality – but reducing social dislocation and forced consolidation. Greater Santiago has about 5.3 million people, living in 36 municipalities, with no effective functional urban metropolitan government. As a consequence, responsibility for urban transport has been
- 76. 5 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S fragmented among four central government ministries and agencies. It has 387 separate bus routes, offering extensive point to point coverage, and three metro lines, with a fourth under construction. In a city where air pollution – particularly by particulate matter and ozone – is a serious concern, buses are responsible for about a quarter of PM10 and nearly 40% of the ozone precursor NOx. Deregulation of public transport in 1988 resulted in massive over-provision of capacity, increased urban congestion and environmental degradation as old and unsuitable vehicles were introduced into service, and fares were greatly increased as operators responded to declining load factors. This was fairly rapidly addressed in 1992 when the decision was made that all transit services that crossed the center would be subject to competitive tendering. Total capacity would be controlled and the conditions for selection of successful bids would include the quality of the vehicles offered as well as the fare required. Under that system, 77% of bus services – those which cross the central areas of the city - are presently provided under competitively tendered franchises. The rest are provided under conditions of free entry subject only to quality standards. Routes overlap substantially so that many passengers have a choice between competing routes. The franchises are granted on a net cost basis for over 300 individual routes, calling for between 22 and 40 vehicles per route. The criteria for selection of successful bidders is formula based, with fares (flat fares being required) being the most significant component, but quality of vehicle and other factors also being considered. Each franchise is awarded a prime franchisee which may then subcontract them to operating units. At present there are four types of operating units accounting for the 7,700 buses in operation. Single bus owners account for 30% of the fleet; and operators with 2 to 4 buses accounting for a further 36%. 18% of the buses are in fleets of between 5 and 20 vehicles and only 14% in fleets of more than 20. Most of the operators are members of one of the four trade associations which look after the members interests. The drivers typically are paid a fixed minimum salary plus a percentage of the collected revenues. In addition, because of the lack of secure ticketing and revenue recording arrangements, many drivers further supplement their incomes substantially by not turning in the full revenue collected. The combination of the fragmentation of ownership, overlapping franchises, the form of labor contracts and the lack of effective supervision of performance under the franchises has some striking effects on operational behavior. Drivers are induced to race for passengers, and to keep their vehicles on the road for the whole day, even where the license stipulates lower off-peak than peak frequencies. As a consequence there is overprovision of capacity off-peak. In order to overcome these problems a new, non-statutory body, Transantiago, has been created recently to take overall responsibility for urban transport planning in Santiago. Transantiago has developed, and is currently implementing, a plan involving the creation of a network of privately financed segregated busways, a restructuring of routes to establish a trunk and feeder network, with only 15 contracts requiring larger bus operating units. Bus and metro fares will be integrated in a single system facilitating easy and costless transfer. The initial contracts have now been let. The system is planned to be financially self-sufficient. All contracts between Santiago and the trunk system operators (bus and metro) are to be on a gross cost basis. Payment will be per vehicle kilometer. Both fares and contract payments are to be subject to revision according to sub-sector specific cost indicators. Feeder service provision will be bid on an area basis, contracted on the cost per passenger for the provision of minimum standards of service. All will be subject to regular review to deal with inflation. The aims of the reform program in Santiago – first to introduce competition for the market and now to integrate all modes – are exemplary, and much of the preparation was technically sophisticated. But some important lessons can be learned nevertheless to improve such substantial transportation restructurings. • Permitting sub-contracting to very small operators is bound to be difficult to supervise and likely to generate undesirable structures and operating practices. • Inattention to monitoring and enforcement can amplify undesirable outcomes.
- 77. • The creationof an improved image for bus transit is much more difficult to achieve from the relatively high level of network density and service frequency already existing in Santiago. • Rushing a reform for electoral purposes may put a potentially good reform in serious jeopardy. Batam, Indonesia In this section, the lessons learned from the case of using a fuel card (a smart card) to control the consumption of fuel subsidized in Indonesia has relevance for public transport in the Philippines. The City of Batam is a district in the Province of Kepulauan Riau, Indonesia. Located close to Singapore in western Indonesia, Batam’s economy has significantly grown in last two decades. The energy demand has grown rapidly in line with its economic growth. Energy demand has grown quickly in part due to consumption of subsidized fossil fuel, especially diesel. In the late 2000s and early 2010s, international prices rose quickly but domestic oil prices have not yet changed. Because Batam lacked adequate subsidized diesel supply, fuel shortages became endemic, leading to long queues of trucks and buses at fuel stations. In addition, there were the cases that subsidized diesel were misused by industry and plantations in a manner not allowed by regulation. Consequently, in 2014 the Goverment of Batam City implemented a fuel card program to reduce the volume of subsidized diesel. The fuel card has been collaboratively introduced by the Goverment of Batam City with Pertamina (Oil and Gas State Company in Indonesia), Bank Rakyat Indonesia (State Bank Company), the Local Polices, and the Pump Stations Associations. According to the system, every vehicle has to be registered with local police (Surat Tanda Nomor Kendaraan/STNK). Truck drivers are allowed to purchase of subsidized diesel according to a daily quota that replenishes each month. The card can be used in all fuel stations. The fuel card can not be duplicated and it is easy to use and to recharge. With the fuel card, the city government and Pertamina easily control the real consumption of subsidized diesel, and eliminates improper and excessive uses of subsidized diesel fuel. This mechanism also can eliminate the possibility of commuters (especially bus and truck drivers) buying subsidized diesel out of pump stations and disinsentivize misuse. The participation and support of all related stake holders are a key to the success of this program, which has resulted in no cost to the goverment at all due to savings of subsidized diesel. The central goverment and Pertamina are assessing and evaluating this mechanism. There is a possibility that this mechanism may be applied nationwide. The transport sector merits special attention, not only because it is affected significantly by oil prices, but also because public transport fare adjustments tend to be regulated and widely publicized. For mitigating the effects of higher public transport fares, one review of various measures adopted to make passenger transport more affordable to the poor concluded that supply-side subsidies given to operators are neutral or regressive. Demand-side subsidies (discounted fares, vouchers) perform better, but not markedly so, because public transport is not an inferior good and the share of household expenditure on public transport tends to have an inverted U shape with respect to income in many countries.
- 78. 5 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S 7. SUBSIDY 3: EXCISE TAX EXEMPTIONS Since 2005, the Philippine tax system has had a differentiated excise tax among various fossil fuels— i.e., applying the excise tax to some fuels while exempting others. In general, there are two types of taxes on fossil fuels: a value-added tax (VAT) and an excise tax. The VAT on all oil products in the Philippines is 12 percent. While there is an excise tax on gasoline and jet fuel, there are no excise taxes on petroleum products that are considered “socially sensitive”, namely kerosene, diesel, LPG and fuel oil. The VAT is a general revenue gathering measure applied to the sale of almost all goods and services. Excise taxes, on the other hand, are often intended to cover the externalities associated with the consumption of certain goods and services. Excise taxes are also usually applied “upstream”; i.e., at the time of first importation or sale by the manufacturer (though costs are typically passed on to consumers), and, unlike VAT or sales tax, excise taxes are often assessed on the sale volume rather than on the value of the goods. As excise taxes are not levied on the sale of kerosene, diesel, LPG and fuel oil, the social costs resulting from their consumption (externalities) must be funded from other sources, or simply just ignored. While the differentiated application of excise taxes does not constitute a “subsidy”, a tax treatment that is applied uniformly without exemptions is often preferred in order to have a level playing field for all goods. In particular, an excise tax exemption of selected fossil fuels provides perverse incentives because the social costs related to the consumption of exempted fossil fuels are imposed on those who do not always benefit from the fossil fuels subjected to a lower excise rate. Furthermore, there is an opportunity for “leakage”, wherein the benefits of the lower or exempt fossil fuels may not be limited to the intended targets. The APRP was clear that the excise tax exemption did not constitute a subsidy. However, at the request of the Ministry of Finance and with the agreement of PDOE, the APRP was invited to provide comments on the broader issue of the economic efficiency of such exemptions. HISTORY AND CONTEXT Prior to 2005, all petroleum products were exempted from the domestic value-added tax (VAT) of 10 percent but were subject to an excise tax (with the exception of LPG, which had an excise rate of zero). In 2005, with the passage of the Republic Act No. 9337 or the Reformed Value-Added Tax (RVAT) Law, a VAT was introduced on all petroleum products at a rate of 10 percent, which was then subsequently increased to 12 percent in 2006 (Arellano Law Foundation, 2005). In order to alleviate the price shock from the introduction of VAT, the RVAT law simultaneously removed excise taxes from petroleum products that were considered socially sensitive. These socially sensitive fuels included kerosene, which is used for lighting and cooking; diesel, which is used in public transport; fuel oil, which is used for power generation; and LPG, which is generally used for cooking. Only gasoline
- 79. products and aviationfuels sales are imposed an excise tax (see 7-1). In addition, Executive Order 890 further eliminated all tariff duties on petroleum products.32 Table 7-1: Prevailing Taxes and Duties on Petroleum Products. Source: PDOE, 2008. An illustrative calculation by the PDOE in late 2005 shows that the percentage increase in the retail cost of a variety of petroleum products ranged from 0.7 percent to 6.6 percent when considering both the imposition of the VAT and the offsetting reductions to excise taxes and tariff duties (see Table 7-2, “percentage increase” column). In short, the removal of excise taxes on the socially sensitive products achieved its primary purpose of alleviating the price shock on consumers due to the imposition of VAT without exemptions, even though there was still an overall increase in prices. Table 7-2. Impact of VAT and Offsetting Measures.33 Product Pump Price Oct 2005 Roll- back* Mitigating Measures Total reduction in Pre- VAT price New Pump Price 10% VAT Final Pump Price with VAT** Inc- rease % Inc Excise Tariff* a b c d e=(b+c+d) f=a+(e) g=f*0.1 h=f+g j=h-a j=i/a Unleaded 36.05 (0.6) 0 (0.52) (1.12) 34.93 3.49 38.42 2.37 6.6% Regular 34.57 (0.6) (0.45) (0.46) (1.51) 33.06 3.31 36.37 1.8 5.2% Diesel 32.95 (0.6) (1.63) (0.57) (2.8) 30.15 3.02 33.17 0.22 0.7% 32 On 23 December 2009, EOs 850 and 851 were signed implementing Philippine tariff commitments under two regional free trade agreements: under Common Effective Preferential Tariff Scheme for the ASEAN Free Trade Area /ASEAN Trade in Goods Agreement (CEPT/ATIGA) and ASEAN Australia New Zealand Free Trade Agreement, though petroleum product imports from non-ASEAN countries (primarily the Middle East) still faced a 3 percent tariff. On 10 June 2010 President Arroyo signed EO 890 to bring petroleum tariffs for all imports to zero. EO 890 is available here: http://www.gov.ph/2010/06/10/executive-order-no-890/. 33 Calculated on 2005 prices by the Philippines PDOE.
- 80. 6 0 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Kerosene 33.51 (0.6) (0.6) (0.57) (1.77) 31.74 3.17 34.91 1.4 4.2% Bunker 21.98 (0.6) (0.3) (0.35) (1.25) 20.73 2.07 22.8 0.82 3.7% LPG (P/cyl) 464 (11) 0 (10.03) (21.03) 442.97 44 487.27 23.27 5% *Rollback of P0.60/liter on all products; P1.00/kg or P11 kg for LPG **Based on Oct. 1 to 20, 2005 MOPS/Contract Price. Prices may vary based on location, company and other factors. Source: PDOE34 The PDOE has also estimated that around P180.6 billion (roughly USD$4.0 billion) could have been collected from excise and VAT had there been no excise tax exemption since 2005. Of the P180.6 billion, P161.3 billion (USD$3.6 billion) could have come from the excise tax and P19.3 billion (USD$400 million) could have been generated as additional VAT. The amount represents the cumulative total for the entire period from 2005 to 2015, and the estimates include impact from kerosene, diesel and bunker fuel. The downstream oil industry in the Philippines was fully deregulated in 1998 (Arellano Law Foundation, 1998). The landed costs of oil products in the Philippines therefore are not fixed by the Department of Energy, and they are determined by international market prices, with the Mean of Platts35 Singapore (MOPS) being the benchmark reference price. The PDOE also references MOPS for its weekly estimates of petroleum product landed costs as part of its regulatory remit to ensure fair prices (PDOE, 2016e). Domestic costs of supply, oil company margins, excise taxes (where applicable) and VAT are subsequently added to the landed cost of each petroleum product to reach the final retail price.36 VISION The Philippine Government has marshaled many compelling arguments for supporting the imposition of VAT on petroleum products: (1) reducing fossil fuel imports to improve the current account balance; (2) reducing consumption to improve environmental quality and health; (3) phasing out measures that benefit the rich more than the poor37 ; and (4) increasing government revenue for other valuable social programs38. The APRP presumes that similar motivations apply to the excise tax imposition as well, and should be considered in evaluating the efficacy of the excise tax exemptions. The APRP believes that each petroleum product should be treated on an equal footing. This view is consistent with the view stated 34 Frequently Asked Questions on R-VAT on Petroleum. http://www.doe.gov.ph/doe_files/pdf/Researchers_Downloable_Files/Brochures/Frequently_Asked_Questions_on_RVAT_on _Petroleum.pdf. 35 Platts is a publishing and trading house that publishes daily information on oil price and shipping rates across the globe. 36 Understanding Oil Pricing. http://www.doe.gov.ph/doe_files/pdf/Researchers_Downloable_Files/Brochures/Understanding_Oil_Pricing.pdf. 37 According to 2005 Philippine government statistics, the non-poor (high income groups) consume much more petroleum in absolute terms as well as in terms of budget share. Studies show that high income groups spend 2.0 percent of household budgets on petroleum products while low income groups spend only 1.4 percent of their total income to petroleum products. Department of Energy pamphlet, 2005. 38 Frequently Asked Questions on R-VAT on Petroleum.
- 81. by the PDOErepresentatives that the Government of the Philippines does not wish to interfere in fuel markets.39 KEY FINDINGS The excise tax exemptions do not constitute a subsidy. Oil prices in the Philippines have been deregulated since 1998 and closely follow movements in international benchmark oil product prices and exchange rate movements. To this extent, the APRP concludes that the excise tax exemptions are not subsidies. Excise tax exemptions are likely to have limited impact on domestic markets because of their proportionately small size relative to the market-determined fuel prices. The addition of the excise taxes (and consequently their exemption on socially sensitive fuels) amounted to roughly 2 percent to 5 percent of the retail cost. Therefore the impact of exemptions on the price of exempted fuels is quite small. Consequently, the scale of any resultant market distortions is likely to be small. However, all other things being equal, excise tax exemptions among different fuels create distortions that are likely to be economically inefficient. All other things being equal, those petroleum products that do not have an excise tax exemption (such as gasoline) will, at the margin, have a lower demand relative to those petroleum products that are exempt, despite any inherent advantages over exempted fuels they may have. By providing a tax advantage relative to oil products that have an excise rate imposed, excise tax exemptions could potentially encourage more consumption of excise-exempt oil products relative to oil products with an excise rate imposed (albeit only by a small degree). Any increase in consumption of excise-exempt oil products comes at a cost, as the social and environmental costs of excise-exempt oil product consumption must be paid for from other sources. The excise tax exemption is also not well targeted among customer classes. High- end consumers driving diesel-powered SUVs benefit in the same way as passengers on a diesel- powered Jeepney. Based on the 2000 Family Income and Expenditure Survey conducted by the National Statistics Coordination Board, the top 30 percent of income groups consume 65.4 percent of the total petroleum consumption in the economy, while the bottom 30 percent consume only 7.5 percent. RECOMMENDATIONS While noting that tax exemptions do not constitute a subsidy for the purposes of this review, the APRP was invited by the host economy to provide comment on the efficiency of the excise tax regime on oil products. The APRP concludes that imposing excise taxes on some oil products but not on others creates economic distortions. The recommendations below suggest options for the Philippine Government to address the inefficiencies created by the excise rate exemptions. Recommendation 3. Introduce excise taxes on all petroleum products. As noted above, imposition of excise taxes on all petroleum products removes distortive preferential tax regimes among similar fuels. Excise taxes are helpful in addressing the externalities that result from petroleum fuel consumption. However, more work is needed to determine the appropriate excise tax rate for each petroleum product. For example, excise rates could be applied: • at a flat volumetric rate across all petroleum products; or 39 Melita Obillo, Department of Energy, in-person consultation, December 1, 2015.
- 82. 6 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S • on an energy equivalent basis (as is done in New Zealand); or • on some other basis that reflects the relative social costs of each petroleum products. For example: o the public health consequences arising from poor air quality are greater for diesel and fuel oil consumptions than for LPG and gasoline; o the costs of road maintenance and construction are likely to be relatively higher for diesel users (which include heavy freight transport users) compared to gasoline users (which are primarily private cars); and o the carbon intensity (i.e., rate of carbon dioxide emissions from combustion) of the fuel. The imposition of excise taxes could be implemented gradually over time to limit price shocks to consumers, and/or be imposed at a low level initially (as was done in 2005). The current (early 2016) low prevailing oil prices provides a good opportunity to impose excise taxes on the current excise- exempt oil products without drastic increase in overall prices. To address any regressive impacts of removal of the exemptions on the poor and vulnerable sections of society, complementary measures could be considered (see below). Recommendation 4. Consider developing a strategy on how to effectively use the excise tax proceeds. Approaches on how to apply the revenue proceeds from excise taxes vary internationally. In most countries, revenue from excise taxes goes into the consolidated Government fund and is spent on the Government’s priorities of the day. This approach maximizes the flexibility to Government to apply the revenue it considers most appropriate. In New Zealand, all revenue from excise tax on petroleum products is earmarked for the maintenance and construction of the economy’s road network. The Philippines could consider earmarking revenue received from the imposition of excise taxes on petroleum products to a specific purpose. LESSONS LEARNED AND BEST PRACTICES In this section, the APRP reviews brief summaries of case studies of how other economies collect and use petroleum-related taxes. Case studies include India, Japan, New Zealand, Sweden, and Denmark. These cases include entirely or primarily fossil fuel importing countries, and most are developed countries. Philippines can use these examples and adapt them in order to consider changes to the R- VAT and the excise tax exemption regime. There are a few general observations that can be made as well regarding excise tax reform, and the imposition of energy and environmental levies and taxes. • First, all countries are legitimately well-attuned to the needs of domestic industry and of households, particularly in setting the appropriate level of taxation. • Second, successful fossil fuel taxes tend to be (1) non-negligible in size; (2) fairly consistently and transparently applied over time and across fuel types and industries; and (3) used to help address externalities associated with fuel consumption (such as health and environmental impacts, infrastructure needs, or domestic energy security objectives). • Third, there is tremendous variety in the approaches, scope, and scale of such taxes, as well as approaches to exemptions and limits for such taxes. • Lastly, the most effective taxes have few exemptions to avoid diluting the impact of the tax or creating market distortions that give rise to perverse incentives within industries or across fuel types.
- 83. India: Gradual andRising Imposition of a Domestic Coal Tax Over the past few years, India has been removing its fossil-fuel related subsidies, while also increasing taxes on fossil fuels, with a series of progressive increases in per-tonne taxes on coal (as well as lignite and peat) in particular. These resources are channeled into a dedicated fund to finance a broad array of environmental and clean energy initiatives at the discretion of the domestic government. Officially called the Clean Energy Cess, the per-tonne tax on domestically consumed coal was introduced by the United Progressive Alliance government and made effective from 1 July 2010. (Clean Technica, 2016) In 2014, India doubled the Clean Energy Cess from ₹50 ($0.8) to ₹100 ($1.6) per metric tonne of coal (Clean Technica, 2015). In March 2015, India doubled the Clean Energy Cess again, from ₹100 ($1.6) to ₹200 ($3.2) per metric tonne of coal (Clean Technica, 2015). On February 29, 2016, the Indian government proposed doubling the Clean Energy Cess for a third time: the Indian Finance Minister, Arun Jaitley, proposed an increase in the Clean Energy Cess on coal from ₹ 200 (~US$3) to ₹ 400 (~US$6) per tonne. The tax has now been renamed as the Clean Environment Cess, and the fund that collects the revenue has also been renamed from the National Clean Energy Fund to the National Clean Environment Fund (NCEF), reflecting a broadening of the objectives to which the funds will be devoted from renewable energy to other environmental objectives as well. Cess-generated revenue for the NCEF is quite substantial: the annual revenues collected amount to about ₹120 billion; or roughly $2 billion. Over a period of about 5 years of its existence, NCEF has grown to about ₹400 billion ($6.7 billion) (Clean Technica, 2015). As of the end of 2015, the NCEF held close to $2.53 billion of grant funds (Climate Change News, 2016c). A number of justifications have been cited over the years for levying the Clean Environment Cess. The cess was originally conceived as a measure to promote climate change mitigation and a pollution tax to encourage energy diversification and efficiency. The 2015 increase in cess was applied to both coal mined in India and imported coal in order to encourage investments to increase efficiencies of coal- based power plants and processes. (Clean Technica, 2015) The Indian Ministry of Finance suggested in 2015 that in order to bring down carbon emissions drastically and to bring domestic prices on par with international prices, there should be about a 5-fold hike in coal cess to ₹498 ($8) per metric tonne of coal (Clean Technica, 2015).40 Such a price reform could potentially lead to a substantial reduction in India’s annual CO2 emissions, predicted in one study by 214 million tonnes of CO2e (11% of India’s annual emissions) (Clean Technica, 2015). The health costs of coal have also been cited as a reason for levying the cess. Just as the rationale for the cess has evolved, the targeted uses of the funding have as well. The then- named Clean Energy Cess was originally designed in 2010 to be allocated initially in innovation and R&D in the clean energy sector. Its mandate was subsequently expanded to include investments in clean energy (Climate Change News, 2016c). However, the government has subsequently discovered that the tax is raising ample funds for a wide array of potential environmental uses. (Due to projections that India’s domestic coal production and consumption will rise sharply, revenues for the NCEP are expected to rise in tandem.) As such, the domestic government now intends to use the revenue not just for renewable energy projects but also for environmental projects such as wildlife conservation and, very likely, afforestation and river cleaning projects (Clean Technica, 2016). The sensitivity of the coal industry, power producers, and households to the coal cess remains an area of acute concern for the Indian government. India’s Finance Minister Arun Jaitley noted in March 2015 40 In a hypothetical exercise, the Economic Survey notes that the maximum value to which the cess could possibly be increased to, so that coal-based power producers could still break even, is $15 per metric tonne of coal.
- 84. 6 4 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S that “with regard to coal, there’s a need to find a balance between taxing pollution and the price of power.” It is expected that even with the cess, most of the coal power plants will remain profitable, given the current tariff structure (Clean Technica, 2015). The successful implementation of the cess, as well as its use for supporting renewable energy and other clean energy initiatives indicates the willingness of middle-income countries, such as India, to be able to create new excise taxes to at least partially address externalities from fossil fuels. Japan: A Net Importer Japan has a series of environmental levies on fossil fuels that address a range of environmental externalities and infrastructure needs. As in many of the cases examined here, Japan’s excise taxes are significant, and likely linked to the fact that Japan imports nearly all of its fossil fuels. Japan’s high excise taxes primarily aims to encourage efficiency and alternative fuels as a means of import substitution. Some of Japan’s excise taxes are tied to specific harmful impacts, including a motor vehicle tax that sets aside funds for health impacts, and a CO2 tax to address climate change. Exemptions exist for these taxes, but they are limited. As a major fossil fuel importer, Japan has consistently taxed fossil fuels, helping to send a strong policy signal to industry and consumers that drives a highly fuel-efficient economy. Japan has negligible fossil- energy resources and relies almost entirely on imports. Only 6% of the economy’s energy needs are met from indigenous sources in 2014 (Japan, 2016). Japan is the third-largest oil consumer in the world behind the United States and China, the third-largest net importer of crude oil and the largest importer of both LNG and coal (OECD, 2011). Prices, taxes and support mechanisms All fuels and energy services are subject to a general consumption tax (akin to a value-added tax) at a flat rate of 5% (4% federal, and 1% prefectural), as well as excise and other taxes at different rates, according to the fuel (OECD, 2011). Table 7-3. Energy related taxes in Japan 2001 and 2009 Source: OECD, 2010. A petroleum and coal tax is levied on sales of oil products, natural gas and coal in Japan (Table 7.3; these excise tax rates were posted in 2012 and can be found on Japan’s Ministry of the Environment
- 85. website41). Gasoline, dieselfuel, and LPG are subject to additional, specific excise taxes; a local road tax is also levied on gasoline, the revenues from which are used to finance road construction and maintenance. Most revenues go to the general fund, though some are targeted to road and airport construction. Power-sector and fossil fuel taxes also contribute to fossil fuel strategic reserves, energy-savings, power-sector stability, and fuel mix diversification, particularly for nuclear energy. A share of revenues for numerous taxes is earmarked for local governments. The government funds directly the costs of maintaining publicly-owned emergency oil stocks. Revenue from a petroleum and coal tax is used to finance these costs.. In the case of diesel fuel, the consumption tax is applied to the price before a delivery tax is added. Domestic aviation fuel is also taxed to finance airport construction. Electricity sales to households and businesses carry a Power Source Development Tax, which is intended to finance measures to support new sources of power generation, nuclear power research and development and other activities. (OECD, 2011) Since 2012, tax rates for oil, oil products, natural gas, coal and LPG have been increased as a special measure to cope with CO2 emission reduction. The increased tax revenue is used for various measures to reduce CO2 emission. . New Zealand: Dedicated Excise Tax Revenue Fund for Roads New Zealand has a “motor-spirit excise duty” levied on fuel sold for motor vehicles. The APEC VPR/IFFSR for New Zealand explored this excise tax in its report last year (APEC, 2015c), studying in particular exemptions to this tax. The tax is noteworthy because revenues are directed to a specified fund devoted to road damage and improvements directly related to usage by those taxed (i.e., motorists). The tax is also noteworthy because it is volumetric but not specifically environmental in nature. The motor-spirits excise duty is charged on the sale of certain types of fuel to final consumers, including gasoline, LPG, and compressed natural gas (CNG); diesel is not subject to the excise tax but is subject to a distance and weight-based tax referred to as a Road User Charge which is set at a level that approximates the excise tax levied on gasoline users. In 2016, the excise duty constituted NZD 0.59524 per litre on gasoline. The receipts from this fund until 2008 were split between the New Zealand Government’s general fund and the National Land Transport Fund. Following a policy change that took effect in October 2008, all receipts of the excise tax—along with road-user charges, motor- vehicle registration, and licensing fees—are paid into the National Land Transport Fund and used for road construction and maintenance purposes only. A refund of this excise duty (as well as of the General Services Tax, or GST) is allowed for certain classes of approved off-road vehicles and their off-road usage. Examples of eligible uses would include agricultural vehicles and commercial vessels, and marine transport. The refunds typically account for a small share of receipts: roughly 3 to 4% of the revenue collected through the motor-spirits excise duty. One reason for exempting diesel from the duty is that 36% of diesel use in New Zealand is for off-road vehicles and ships, and thus would require a much larger, more cumbersome refund scheme that would be potentially vulnerable to fraudulent claims (APEC, 2015c). The rationale for the targeted allocation of the excise tax is that those that cause the damage to the nation’s roads should be the parties responsible for paying for their repair and maintenance. Under 41 Government of Japan, Ministry of the Environment: Environment-Related Tax System in Japan (http://www.env.go.jp/en/policy/tax/env-tax/20120814a_ertj.pdf).
- 86. 6 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S this logic, it follows that those who do not use motor fuels on roads should not be subject to this excise tax. In fiscal year 2013, the fuel excise duty comprised NZD 1,620 million (USD 1,350 million) of the National Land Transport Fund, or roughly 54% of the fund’s contributions. The remainder was contributed by light road user charges, heavy road user charges, and motor vehicle registration and licensing fees. All vehicles are also subject to an annual licensing fee, which varies depending on whether the vehicle is petrol or diesel. Road user charges are distance based, and can be purchased in multiples of 1,000 kilometers from the NZ Transport Agency and approved road user charges agents. The cost of a license varies, depending on the type of vehicle and its weight. The current cost for a road user charges license for light diesel vehicles (weighing 3.5 metric tons or less) is NZD 62 (USD 51.67) per 1,000 kilometers. European Energy Taxes Like Japan, many other OECD countries, particularly in Western Europe, levy a variety of environmental excise taxes on fossil fuels. While there is a general consistency in the objectives of capturing negative externalities and promoting efficiency in industry, and protecting industries and households from excessive fuel prices, the specifics of the tax regimes (including tax structure, level, fuels affected ,and exceptions) vary widely from economy to economy, even within the EU. In general, European countries impose a range of excise taxes on a range of different fuels, most commonly to internalize the negative human health and environmental impacts of fossil fuel combustion. Excise tax measures are often heavily differentiated by fuel and by industry to reflect domestic political considerations, which often preference domestic industrial competitiveness. Some countries, including Sweden and Denmark, impose separate taxes on fuels based upon individual pollutants, such as nitrogen oxides and carbon dioxide. These taxes are objectively applied across fuels and fairly and transparently help to achieve low-pollution objectives by punishing dirtier fuels and rewarding cleaner fuels. Special tax provisions and exceptions frequently granted to industry tend to create tax code complexity. While these exceptions respond to domestic political pressures and the perceived competitiveness concerns of trade-exposed industries, favorable tax policies can become entrenched over time, resulting in economic inefficiencies, less competitive industry, and weaker incentives for efficiency and conservation in targeted fuel-intensive industries. Speck (2008) examines in detail tax rates on fossil fuels in four EU member states: Denmark, Germany, Sweden, and the United Kingdom. Interestingly, some of these energy and fuel taxes have existed for a century, long predating the EU and its efforts at policy harmonization. Two of these four economy-level tax policy case studies are excerpted below. Denmark The Danish energy/carbon tax regime consists of three individual taxes: the energy tax, the CO2 tax, and the sulfur tax. The energy tax, which is based on the energy content of the fuel, is levied on fossil fuels, oil products, and coal. Natural gas is the exception because the energy content is not taken into account. The carbon dioxide tax was introduced in 1992 at a rate of approximately 13 Euros per ton of CO2. In 2005, the CO2 tax rate was slightly reduced to 12 Euros per ton of CO2. This reduction corresponded with an energy tax increase so that the overall tax burden remained constant. The sulfur tax was introduced in 1996 and is levied on all fossil fuels with a sulfur content exceeding 0.05%
- 87. (based on weight).Since its introduction, the rate has been set at 2.7 Euros per kilogram of sulfur in energy products, or at about 1.3 Euros per kilogram of sulfur dioxide (SO2) emissions. The tax design provides an incentive to consume energy products with low sulfur content or to abate SO2 emissions by using pollution reducing technologies, i.e., scrubbers. Since the 1996 and 1998 tax reforms, the industrial sector has faced a complex system of partial exemptions from the energy and CO2 taxes. Industries are eligible for a full energy tax refund for the energy used for industrial processes, but are required to pay the full energy tax for the energy used for space heating purposes. The CO2 tax has also been applied to industry sparingly and with many exceptions, some of which have become narrower over time. When the CO2 tax was introduced in 1992, industries were completely exempt from any CO2 tax payments. From 1993 to 1995, non-energy intensive industries were subject to a CO2 tax equivalent to fifty percent of the total CO2 tax. Energy-intensive industries were subject to a more generous refund amounting to about ninety percent of the CO2 tax burden. Since 1996, industrial enterprises have been paying CO2 taxes at differentiated rates according to their energy profile and usage. The full CO2 tax rate applies to space heating while differentiation between heavy and light processes has been established to determine the effective tax burden. Companies can further reduce the CO2 tax burden for these processes if they enter into voluntary agreements with the government (Speck, 2008). Electricity consumption is also subject to a two-tiered tax: an energy tax and a CO2 tax. This dual regime has the effect of promoting both energy efficiency (i.e., reduction of all energy use) and low carbon intensity of energy (reduction of fossil fuel-powered energy use). Since 1977, the energy tax has been levied on electricity consumption regardless of where or how electricity is generated (i.e., volumetric charges based upon kWh). However, fossil fuels used for electricity production are exempt from the energy and CO2 taxes (presumably to prevent dual taxation by power producers and end users). Since 1992, a CO2 tax has been levied on electricity consumption in addition to the energy tax. However, the numerous exemptions noted above for industry have had the effect of dampening incentives for conservation, efficiency, and carbon emissions reduction. Denmark has had three significant energy tax reform (ETR) episodes in the 1990s: in 1993, 1995, and 1998. The three ETRs tended to increase energy and CO2 tax rates tended to raise revenues that were used to reduce payroll taxes and provide grants for energy efficiency programs (Speck, 2008). Sweden In addition to having one of the highest carbon taxes in the world (together with Norway), the Swedish energy and carbon taxation regime is very comprehensive and consists of four different types of taxes: individual levies on energy, carbon dioxide, sulfur, and nitrogen oxides. Energy excise taxes have been in place in Sweden for nearly a century. Energy taxes on transport fuels were introduced in 1924 for gasoline and extended to diesel in 1937. In 1957, Sweden introduced an energy tax on fossil fuels limited to petroleum-based fuels and coal. A further revision of the scheme extended the tax to liquefied petroleum gas (LPG) in 1964 and to natural gas in 1985. The energy tax rates increased continuously though to 1990 and were subsequently lowered to offset the increased tax burden caused by the implementation of the CO2 tax. The introduction of a CO2 tax in 1991 marked a major revision in the energy and carbon tax mechanism. CO2 tax rates are set in accordance with the carbon content of the fossil fuel. In 1991, the CO2 tax rate was around 43 Euros per ton of CO2, and increased to around 100 Euros per ton in 2007 and to 106 Euros per ton in 2008.
- 88. 6 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S A sulfur tax, introduced alongside the CO2 tax in 1991, was the third element of Sweden's energy tax system. It is only levied on heavy fuel oil, coal, and peat fuels. Fuels with a sulfur content not exceeding 0.05% in weight are tax exempt. Sulfur tax rates have not been revised since their introduction. Finally, the nitrogen oxide (NOx) charge, Sweden's last addition to its tax regime, came into effect in 1992. The NOx charge was originally levied on nitrogen oxide emissions from combustion plants generating at least 50 gigawatt-hours (GWh) per year, but was extended to include plants generating more than 25 GWh. To prevent the need for constant legislative acts to adjust tax rates, in 1995 energy taxes were indexed and linked to the Consumer Price Index in Sweden. Such CPI linkage is fairly unusual in Europe, but represents an approach endorsed by many economists to prevent price shocks from irregular tax changes, or the gradual erosion of fixed taxes as the real value of excise duties declines due to inflation. Sweden’s carbon tax had a short-lived provision in only providing limited protection and exemptions to industry. By and large, carbon tax exemptions have not been granted to Swedish industry, leading to a significant increase in the overall tax rate, resulting in Swedish industry facing the highest energy and carbon taxes in Europe. However, the total energy and carbon tax burden had a ceiling; the energy and carbon tax bill of a company could not exceed 1.7% of an enterprise’s sales value in 1991 and 1.2% in 1992. However, even these caps were unsatisfactory to industry and led to political pressure to grant sectoral exemptions. A major revision of the energy and carbon taxation regime took place in 1993 when industry, agriculture, forestry, and fishing businesses were granted generous tax exemptions. These sectors were, and still are, completely exempt from paying the energy tax, and also pay a reduced CO2 tax. From 1990 to 1992, industry faced the same tax burden as households. However, since 1993, industry has been exempted from the energy tax pays only a fraction (21% as of 2007) of the general CO2 tax (Speck, 2008). As in Denmark, Sweden has altered and refined its excise tax regimes for industry. The 1993 ETR completely exempted Swedish industry from the electricity tax. Later, in 2004, energy intensive industries had their exemption conditionally removed, but are still eligible to receive a full exemption of the electricity tax if they participate in projects to increase their electrical efficiency. This policy of negotiated tax exemption through efficiency agreements with the government closely mirrors Denmark’s CO2 tax exemption policy. Other features of Sweden’s tax system have parallels in Denmark’s. As in Denmark, Sweden’s energy intensive enterprises (in addition to energy tax rebates) are eligible for a refund scheme if their CO2 tax liability exceeds 0.8% of their sales value, i.e. an effective cap on excise payments. Lastly, like in Denmark, Sweden’s energy consumption-based taxes were enacted as part of a broader fiscal and taxation reform. In Sweden, the introduction of the CO2 tax in 1991 was part of a major fiscal reform process primarily aimed at cutting high income taxes. The reduction in income taxes that year of 4.6% of the GDP was partially offset by revenues equivalent to 1.2% of the GDP generated from the CO2 and SO2 taxes, illustrating that, like the Philippines’ R-VAT law, countries often seek to offset new consumption and excise taxes with offsetting reductions in other taxes.
- 89. 8. SUBSIDY 4:MISSIONARY ELECTRIFICATION FOR SMALL POWER UTILITIES GROUP Subsidies for missionary electrification for the SPUG provide financial support for the operation of remote and small grids for small islands in the Philippines, which are often the most expensive to establish and operate. The revenue for the subsidies is raised through a surcharge (UC-ME) on utility ratepayers. In other words, the missionary electrification subsidy is cross-subsidized by all other electricity consumers in the Philippines. Nearly 95 percent of the generation for the remote grids is based on fuel oil and diesel fuel, and hence, this policy amounts to a substantial petroleum subsidy, albeit a targeted subsidy for regions that have predominately high operating costs, low levels of economic development and grid connectivity, and low per-capita income. The UC-ME subsidy is currently in effect, though reforms and amendments to the subsidies are underway. HISTORY AND CONTEXT The SPUG is a sub-unit of the NPC in the Philippines, and the SPUG is mandated to perform “missionary electrification” which includes generation of electricity and the provision of associated electricity services in far-flung areas where no private entity is willing or able to provide the electricity services at reasonable cost. The SPUG was created as a result of the Republic Act 9136, otherwise known as the “Electric Power Industry Reform Act (EPIRA) of 2001”. Following the passage of EPIRA in 2001, most of the power generation and transmission functions in the Philippines were deregulated and privatized. EPIRA mandated that “Except for the assets of SPUG, the generation assets, real estate, and other disposable assets as well as IPP contracts of NPC shall be privatized,” leaving exclusively remote and uneconomic grids in NPC’s possession (NEDA, 2001). As such, missionary electrification is now the NPC’s primary function. 42 To support its Missionary Electrification efforts to generate power for and operate remote grids, SPUG sources its funds from: (i) revenues from its sales of electricity and other services in SPUG areas; (ii) a UC-ME, a component of the power bill charged to all electricity end-users; and, (iii) other funding sources including appropriations from the government. The primary source of revenue for the missionary electrification is derived from the UC, which is a mandatory charge imposed on all electricity end-users, including the low-consumption households in the Lifeline program and SPUG area customers. The UC is collected from all end-users on a monthly 42 According to the NPC’s charter statement, its primary mission is to “Provide reliable power generation and its associated power delivery systems to ensure total electrification of missionary areas while encouraging private sector participation.” Philippines National Power Corporation website, accessed February 9, 2016. http://www.napocor.gov.ph/images/about_us/NPC_Charter_Statement_and_Strategy_Map.pdf.
- 90. 7 0 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S basis by the Distribution Utilities. The UC is determined and approved by the ERC of the central government. The UC revenues are remitted to the PSALM, which is a government-owned and controlled corporation created by EPIRA in 2001. 43 Table 8-1: Existing and Pending Components of the Universal Charge (UC). Source: Meralco, 2015. The UC includes three components (see Table 8-1): a) Missionary Electrification Charge, which is a universal charge to fund the electrification of remote and unviable areas, as well as areas not connected to the transmission system, as mandated under Section 70 of the EPIRA. b) Environmental Charge, which is a universal charge (pegged at P0.0025 per kWh) that accrues to an environmental fund to be used solely for watershed rehabilitation and management.44 c) Stranded Contract Cost of NPC, under Section 32 of the EPIRA, refers to the excess of the contracted cost of electricity under eligible IPP contracts of NPC over the actual selling price of the contracted energy output of such contracts in the market. There is a pending component of paying for NPC’s debt through the Universal Charge.45 The EPIRA legislation mandates the UC-ME Charge to fund the generation and transmission of grid electricity to remote and unviable areas, as well as areas not connected to the main transmission system. 46 NPC is mandated to develop a Missionary Electrification Plan (MEP) that includes consolidated individual Power Development Plan of each Small Island and Isolated Grid, which is 43 PSALM’s mission is “to privatize the generating plants of NPC and to manage NPC’s liabilities in order to reduce the Universal Charge for stranded debts and stranded contract costs and to lessen its financial obligations” (PSALM, 2016). 44 The environmental fund is managed by the NPC under existing arrangements and, under Section 34(d) of the Republic Act No. 9136, or EPIRA, 45 PSALM filed its application for Universal Charge on NPC Stranded-Debts (UC-SD) on 30 September 2013 covering the period 2011-2012 in the amount of PhP41.5 Billion to be recovered for 12.5 years in the amount of PhP0.0382/kWh. Hearings were conducted on the said application and PSALM is awaiting ERC decision to date. 46 According to EPIRA, Section 70, the “… NPC shall remain as a National Government-owned and –controlled corporation to perform the missionary electrification function through the Small Power Utilities Group and shall be responsible for providing power generation and its associated power delivery systems in areas that are not connected to the transmission system. 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.”
- 91. comprised of theDistribution Development Plans of concerned electric cooperatives and local government-operated utilities and MEP of SPUG (PDOE, 2015c). Table 8-2: ERC-Approved Universal Charges, As of 31 July 2015. Type P per kWh Missionary Electrification Regular 0.0454 True-up 0.0709 True-up Adjustment for CY2010 0.0381 Cash Incentive for Renewable Energy Developers 0.0017 Environmental Charge 0.0025 NPC Stranded Contract Cost 0.1938 Total: 0.3524 Source: PSALM, 2015. On an annual basis, the NPC petitions the ERC for the UC-ME funds obtaining the differential between the cost of operations (fuel cost, payroll, O&M, and depreciation) and the revenue from electricity sales. The ERC determines the electricity tariffs for the SPUG areas and it is subsidized compared to tariffs for the grid-connected areas. Current tariffs for the SPUG areas are about P5-7 per kWh, depending on location, or roughly 35-45 percent less than tariffs in most deregulated on- grid areas as of early 2015 (NPC, 2016). The average tariff in Luzon for 2015 was P8.29 per kWh, and it dropped from P8.5 per kWh in January 2015 to P7.4 per kWh in December 2015, as the oil prices declined over the year. The total UC-ME subsidy for the SPUG areas includes the subsidy for NPC-SPUG operations, QTP and NPP power purchasing, and the potential capital expenditures for rehabilitation of power plants and construction of transmission lines (PDOE, 2012c). The UC-ME program also funds the relatively small feed-in tariff (FIT) cash payout program for producers of renewable energy; this charge is roughly 5 percent the size of the payout for SPUG (PDOE, 2015c). The allocations for the UC-ME are based on the yearly Missionary Electrification Development Plan (MEDP) issued by the Department of Energy. PSALM administers the UC-ME revenues, transferring the amount needed for SPUG operations to the NPC (PSALM, 2015). As of December 2012, NPC operated 529 generating units in the SPUG regions with a total rated capacity of 283 MW. This nationwide operation is composed of 291 land-based diesel power plants, one hydroelectric plant, one hybrid wind-diesel turbine farm and eleven barge-mounted oil-fired power plants. Oil and diesel power 95 percent of the total electricity generation of SPUG areas, with most running on diesel, and a smaller number running on bunker or fuel oil (PDOE, 2015c). The power plants serve 233 islands through 41 electric cooperatives and ten local government-run groups. Just over half of these groups are less than 2 MW in installed capacity, indicating that many of these are operating very small island grids, and operating only for limited hours (fewer than 10 hours per day). 47 Missionary Electrification accounts for roughly 70 percent of payouts of the Universal Charge fund (PDOE, 2015c). SPUG regions will continue to rely on oil-based generators in the future without 47 In-person consultation with EPIMB, December 1 and December 3, 2015.
- 92. 7 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S policy changes. As per NPC’s interpretation of its mandate, it is not allowed to construct new power plants; it must privatize its power generation assets in areas that are commercially viable, rather than upgrade or expand. While UC-ME funds could be used for capital upgrades, NPC has so far had limited funding or authority from the ERC to do so in the commercially-unviable, subsidy-intensive areas it operates itself. 48 Therefore, from NPC’s perspective, it is essentially forced to continue operating increasingly old and inefficient diesel generating facilities in the SPUG regions. The current UC-ME charge that is being collected from end-users on a monthly basis is P0.1561 per kilowatt-hour (0.003 USD per kWh), which includes a charge of P0.0017 per kWh for supporting the incentives for the SPUG region’s renewable energy feed-in tariff (see Table 8-2) (MERALCO, 2015; PDOE, 2015c). A large and increasing subsidy is expected to be allocated to SPUG and other missionary areas to cover the costs for oil-based generating units. The cost of diesel and other petroleum fuels represents the disproportionate share of SPUG expenses. Based on the 2015-2019 Missionary Electrification Plan of the NPC, the UC-ME requirements for NPC plants will increase from P12.39 per kWh (roughly USD 0.26 per kWh) in 2015 to P15.56 per kWh (roughly USD 0.32 per kWh) by 2019.49 The total expenditure is expected to rise from P6.6 billion (USD 140 million) in 2015 to P13.3 billion (USD280 million) in 2019. 50 The ERC reports that operating subsidies can account for up to P25 per kWh (roughly USD 0.53 per kWh) out of a total generation cost of up to P30 per kWh (USD 0.64 per kWh) in the case of some diesel power plants. 51 This subsidy thus equals up to 80 percent of the full cost of power generation. Moreover, the “socially accepted” or “pass-on” retail tariff charged to SPUG area ratepayers equals P5 to P7 per kWh (USD 0.11-0.14 per kWh), or roughly 35-45 percent less than the average 2015 tariff of P8.29 per kWh (USD 0.18 per kWh) in the deregulated on-grid areas in Luzon. 52 Ageing, low-performing generators in the SPUG areas often have low efficiency and high hauling costs for fuel to be transported to remote and mountain areas. 53 These further add to the generation costs in SPUG areas. The cost of fuel already contributes 54 percent of SPUG operational expenses, and is expected to rise to 58 percent, tracking an absolute increase of fuel costs of 40 percent from USD 147M in 2015 to USD 206M in 2019. Total SPUG fuel expenditures is expected to amount to P39.4 billion (roughly USD 800 million) for the period 2016-2019 (PDOE, 2015c). Through the new power provider (NPP) program, some 41 MW of additional capacity are expected to come on-line in the next three years from a mix of sources, some petroleum-based (PDOE, 2015c). The population in the areas supported by UC-ME continues to grow, resulting in higher demand for electricity in the SPUG regions. Consequently, unless there is a reduction of UC-ME support for reducing the tariffs in the SPUG regions (or there is a policy push to adopt other alternative energy sources), the highly subsidized electricity price leads to perverse incentives for SPUG ratepayers resulting in wasteful consumption of fossil fuels, as well as excessive payouts and undue burden on other UC-ME-paying ratepayers. The subsidized tariffs also apply to all consumers, such that those 48 In-person consultation with PDOE and NPC, December 3, 2015. 49 Note that the 2015-2019 plan does not include the recent 2015-2016 drop in oil prices. 50 “Background on Fossil Fuel Subsidies”, PDOE memo to APRP, October 14, 2015. 51 In-person consultation with ERC, December 3, 2015. 52 In-person consultation with ERC, PDOE, and MERALCO, December 3, 2015. 53 In-person consultations with NPC, ERC, and PDOE EPIMB, December 3, 2015.
- 93. who could affordhigher prices (e.g., hotels, other commercial enterprises, and higher-income households) are likely benefiting the most from the subsidies. There is a possibility for graduation of some SPUG regions out of the subsidy program when they are integrated with the central grid. For example, there is a proposal to link the region of Mindoro to Visayas and Leyte via undersea power cables.54 Once grid-connected, Mindoro will no longer be in the SPUG area. The ERC expects Mindoro interconnection costs to be covered by transmission charges on all customers rather than through central government budgetary expenditures. This approach, however, risks burdening existing customers with higher costs. Furthermore, there are no plans to gradually transition Mindoro customers from below-market SPUG tariffs (P6 per kWh) to market rates (P9 per kWh) paid by the average consumers in the grid-connected areas—hence, connection to the grid would result in suddenly higher power prices in Mindoro, which could result in resistance to grid connectivity. 55 Additionally, the current ‘graduation’ approach does not fully consider the economic status of the regions being interconnected. In order to address some of these issues, PDOE is expected to target SPUG subsidized tariffs by household income and customer types—such targeting would help reduce some of the current inefficiencies in the system. The Philippines has established strong incentives for development of renewable energy in SPUG areas. Republic Act 9513 or the Renewable Energy Act of 2008 provides cash incentives for renewable energy (RE) development through feed-in tariffs to RE developers, as well as preferential tax incentives (Arellano Law Foundation, 2008). The cash incentive is generation-based (i.e., at a fixed rate per kilowatt-hour generated) equivalent to an additional fifty percent (50 percent) of the Universal Charge (UC) for power needed to service missionary areas. 56 The additional support is provided through the Universal Charge for Missionary Electrification (UC-ME), i.e. the same fund that supports SPUG. This policy was formally enacted on August 22, 2011 when the ERC promulgated Resolution No. 21, Series of 2011, entitled "A Resolution Adopting the Amended Guidelines for the Setting and Approval of Electricity Generation Rates and Subsidies for Missionary Electrification Areas", and in Resolution No. 7, Series of 2014, concerning the “availment and disbursement of the case incentive (ERC, 2014).” Besides the feed-in-tariff incentive, the National Renewable Energy Board (NREB) provides solar home systems to some rural areas without near-term prospects of SPUG connection. 57 Questions remain as to whether current regulatory structures and incentives are sufficient to encourage private renewable energy power producers to compete in SPUG areas. Challenges for greater renewable energy penetration are related both to the high cost of renewable energy systems and the current contract bidding process. Although the competitive bidding process in SPUG areas, as well as the ERC benchmarks for cost-of-supply, is technology-neutral, there are significant incumbency advantages conferred to existing institutional arrangements and infrastructure. Since fuel costs are paid for by the UC-ME subsidy, there is little incentive for power producers in SPUG areas to consider fuel cost and volatility into account when determining how to bid for power plants in SPUG areas. 54 In-person consultation with PDOE, December 3, 2015. 55 In-person consultations with PDOE, NPC, and ERC, December 3, 2015. 56 “Cash Incentive of Renewable Energy Developers for Missionary Electrification. A renewable energy developer, established after the effectivity of this Act, shall be entitled to a cash generation-based incentive per kilowatt hour rate generated, equivalent to fifty percent of the universal charge for power needed to service missionary areas where it operates the same, to be chargeable against the universal charge for missionary electrification;” Renewable Energy Act of 2008, section 15, sub-section H. 57 In-person consultation with NREB, December 2, 2015.
- 94. 7 4 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S VISION The purpose of the UC-ME subsidy is to support the reliable and efficient provision of electricity at affordable prices to formerly un-electrified areas. The government has recognized that the UC-ME subsidies are growing to address rising power needs in remote, un-electrified and newly-electrified areas, and that the current cost and subsidy structure are unsustainable. The eventual goal of the Philippine Government is to bring the operations in all its existing service areas to commercial viability, and to rationalize the utilization and allocation of the UC-ME subsidy. Such a program will include subsidy reduction for each area through improvement in generation, transmission and distribution efficiency, and a gradual increase in the retail tariff on subsidized grids corresponding to the economic progress of the area. The government also seeks to interconnect the SPUG regions with the central grid and to privatize SPUG power generation assets when technically and economically feasible to do so. KEY FINDINGS The UC-ME is a cross-subsidy designed to provide affordable electricity access in areas across the Philippines without central grid connection. The UC-ME appears to have been successful in achieving its primary purpose of supplying some 280MW of power to the SPUG areas, a number that is rising with new commissions to private-sector power producers. UC-ME, in relying on ratepayer surcharges rather than government appropriations to support rural electrification, has reduced the financial burden on the government and contributed to the government’s improved fiscal position. Regulated tariffs in SPUG areas do not distinguish between consumer classes. Since UC- ME subsidizes all consumers in SPUG areas regardless of their electricity consumption, there is no differentiation of customers on the basis of income or consumption. Therefore, SPUG electricity tariffs can provide the subsidy to rich households, including those with second houses in the region, as well as to wealthy businesses such that the benefits of this subsidy are being captured more by those who can afford non-subsidized prices. UC-ME, as currently structured, effectively encourages inefficient fossil fuel consumption. The collected UC-ME is allocated only to fill the gap between the cost of electricity generation and the regulated electricity tariffs for consumers in SPUG areas (which is below the prevailing tariff in the grid-connected parts of the economy). There is little incentive to power generators in the area to modernize facilities, as their costs are recovered through the UC-ME scheme and electricity tariff is regulated. This leads to inefficient and wasteful use of fossil fuels, and perpetuates inefficient and high- cost production. Although the SPUG-area power production only amounts to less than one percent of total fossil fuel consumption for power generation nationwide, the fuel volumes are substantial at the local and regional scale. Therefore, absent additional measures to promote diversification of power generation away from diesel and fuel oil, the subsidy effectively encourages wasteful consumption of fossil fuels. Current regulatory policy on SPUG power procurement favors incumbent diesel infrastructure. PDOE and ERC rules prohibit pre-selecting power generation in SPUG areas for a given fuel type, and the structure of contracts and bidding allows for full cost recovery, protecting them from fuel price volatility. The structure also does not require efficiency improvements, or other environmental or social mandates to improve service. Rather, the cost-plus nature of these contracts allows for the operation of ageing and inefficient diesel plants, leaving room for the government to restructure the regulatory environment and explore the introduction of alternative fuels.
- 95. Ratepayer surcharges, includingthe UC-ME, have been said to undermine the industrial competitiveness of the Philippines relative to other neighboring countries by pushing up electricity costs in the grid-connected areas to among of the highest in the region. Electricity costs in the Philippines are among the highest in the region, next only to Japan. UC and other taxes constitute more than 10 percent of the average electricity tariff, and UC charges have been increasing over time (UC outlays have increased almost tenfold from 2009 to 2014) (MERALCO, 2015). Therefore, the entire UC program, including the UC-ME, has been a source of concern for energy-intensive industries, as they consider high electricity prices as one of the barriers to investment in the economy. As SPUG areas are expected to progressively be connected to the grid and become commercially viable, the UC-ME issues may become less relevant. According to current energy policy, once electricity supply in a SPUG area becomes commercially viable for power generators or is inter-connected to the domestic grid, the electricity rate in the area is deregulated and UC-ME is not allocated. Ultimately, more and more of these SPUG areas are expected to be connected to the domestic grid to help lower cost and alleviate the need for the subsidy. Nonetheless, with the economy having over 7,000 islands, it seems impracticable and inefficient to expect full grid interconnection across all of the islands. RECOMMENDATIONS Recommendation 5. Further detailed cost-benefit analysis is recommended to evaluate the impacts of the UC-ME as cross-subsidy. Lack of any cost-benefit analysis with detailed and quantitative data has made it difficult to provide concrete recommendations and propose alternatives to address the concern on the financial sustainability and effectiveness of the current Missionary Electrification policy. The study needs to consider how to address all components of the UC, including options for paying off the stranded cost and debt of NPC and environmental protection. It should be noted that direct government funding of Missionary Electrification (a major recipient of UC funds), as the Philippines has done in the past, is subject to political pressure and could place pressures on the government’s fiscal balance, especially in times of oil price spikes. Ultimately, the need for any UC or direct Government funding should be reduced by seeking to reduce and eliminate the price differences between the regulated and non-regulated parts of the market. Where possible, physical integration of the SPUG areas into the main grid is desirable. Recommendation 6. Structure the regulated tariffs closer to the deregulated price. In order to eliminate market distortions and inefficiencies and avoid disproportionally supporting the wealthy, and commercial ratepayers who do not need subsidies, the Philippines could consider a gradual phase-out of the subsidies such that the current regulated SPUG tariffs would become closer to the deregulated prices. By moving closer to the deregulated prices, there will be less wasteful consumption of fossil fuels, as well as incentives for efficiency. These measures could be instituted in the near term in areas that have stronger economies and are more viable for grid integration and/or production of low-cost energy. A ‘graduation’ policy to sunset SPUG subsidies over time in these regions could be introduced. Such measures could be considered in concert with comprehensive tariff reform by the ERC. Recommendation 7. Expand NPC’s mandate to allow for capital investment in power plant construction and refurbishment to promote efficient power plants in SPUG areas. Currently, old, inefficient power plants languish under NPC’s care because it does not have the mandate and budgetary authority to upgrade old plants or build new ones. Even in privatized SPUG areas, cost structure is pegged to NPC’s inefficient baseline, effectively giving contractors risk-free full-
- 96. 7 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S cost recovery, and thereby retarding the adoption of new business models and technologies. If NPC could be allowed to reconsider its mandate and business models to make capital investments, enter into joint ventures with private sector, or operate in commercially viable areas, it could take a holistic approach towards accelerating the commercial adoption of lower-cost, more efficient, and cleaner technologies. Such an approach could allow for NPC to invest now in more efficient power plants to help mitigate increased fossil fuel demand in the medium-term in the SPUG areas, while also achieving other social, economic, and environmental objectives. OBSERVATIONS As in the previous section, the APRP has provided some additional observations that the Philippine Government may want to consider. Observation 6. Implement a comprehensive approach, with more coordination among ministries and local authorities. A comprehensive approach is most likely to yield durable, politically, economically and financially sustainable solutions. UC-ME has variety of aspects to be addressed, such as fiscal, industrial, social, and energy security concerns, necessitating coherent policies better aligned among different ministries and local authorities both in planning and implementation. For example, coordination among the PDOE, Philippine Department of Trade and Industry (PDTI), and Philippine Department of Finance (PDOF) is needed to strike a balance between achieving industrial competitiveness and energy security, without jeopardizing the government’s fiscal balance. It is also noted that a variety of policies, including cash transfer and other social programs, have been conducted at the local level, including in rural SPUG areas, that may potentially interact with UC-ME and be adjusted in concert with future UC-ME reforms. It is also expected that the Philippines will conduct rigid a “plan-do-check-adjust” study for already on- going policies and distill as many lessons as possible to continuously fine-tune the effectiveness of the policies. Observation 7. Consider reviewing the tendering, contracting, and regulatory approval processes of the current NPP and QTP privatization programs. Such a review could be used to consider the potential to create incentives for more renewable energy and/or more efficient fossil fuel power generation. These might include provisions rewarding power providers for efficiency and/or removing ‘cost-plus’ provisions that fully reimburse the cost of diesel fuel. Observation 8. Provide better targeted support measures for those in need. To minimize the possible negative consequences from electricity tariff increases, targeted support for the poor could be considered. Some of the measures for consideration include: (1) free or highly-subsidized electricity for low-income and low-consuming households, akin to the existing Lifeline program in grid- connected areas; (2) subsidized distribution of solar home systems and efficient lights and appliances to lower local grid consumption and power bills; (3) off-setting subsidies in terms of other social goods and services, such as health care, education, tax cuts, etc.; and (4) progressive tariff brackets that protect low-consuming households from high rates, charging large consumers more per kilowatt- hour. LESSONS LEARNED AND BEST PRACTICES In this section, the APRP provides a brief description of illustrative case studies of how other economies in APEC and other countries have provided resources for rural electrification and tariff support for ongoing electricity access in remote areas, and also how they have reformed tariff regimes
- 97. World Bank Cross-SubsidiesAnalysis (Excerpts from Irwin, 1997) Price structures designed to favor one group over another usually will not survive competition. New firms will undercut high-priced services, denying the former monopolist the revenue to fund low-priced services. If the efficiency gains are not enough to offset the price increases for some groups and the government is worried about the political and social costs of rate rebalancing, it has three basic options: • Preserving the old price structure in a way that ensures neutrality among competitors by requiring one firm, such as the former monopolist, to continue offering low prices for some services while obliging the firm’s competitors to contribute their share to the cost of those services. • Funding price subsidies from general tax revenue rather than from transfers within the firm or industry. • Relying on social safety nets rather than price subsidies. Whichever option a government chooses should stand up against the following four tests: • Do subsidies reach the people the government most wants to support? • Are the costs clear and measurable? • Are the administrative costs as low as possible? • Is the revenue raised from the source that entails the least cost to the economy? over time. We expect that these illustrative case studies will help the PDOE consider alternatives to the current approach for supporting missionary electrification. The section begins with a review of World Bank and other leading analysis of subsidies for rural electrification and electricity access, and ratepayer cross-subsidies in particular. Subsequently, a series of case studies reviews the historical rural electrification policies and the evolution of electricity tariffs in Thailand, Vietnam, and Colombia. Key Lessons Learned from World Bank Analysis The review and analysis is divided into four parts that are most relevant to the issue of rural electrification and tariff subsidies: (1) a review of sourcing of funds for rural electrification and ongoing affordable energy access; (2) a review of best practices for determining utility-related subsidies that target low-income households; (3) a review of best practices for rural electricity tariff reform; and (4) operational reform to lower costs, including effective promotion of private sector participation. Part 1. Funding for rural electrification and energy access The obligation of rural electrification and increasing energy access for governments is unassailable, but finding the funding sources for them is often challenging, since the low-income beneficiaries are most often unable to fully support the cost of electricity being provided to them. Cross-subsidies are often employed by regulated utilities around the world to address such social and environmental objectives. Cross-subsidies often rely on small fees on wealthier and high-consumption households; however, there are limits to the economic and political viability of such cross-subsidies. Therefore, capital for rural electrification infrastructure projects are often funded by government budgetary outlays. (Debt or stock issuance may be viable financing avenues as well for utilities to fund investments.) A World Bank review of cross-subsidies (Irwin, 1997) explored the challenges and pitfalls of using ratepayer cross-subsidies to meet social objectives. It notes that the artificially high prices paid by the cross-subsidizing constituencies (such as the payers of the UC-ME, in the case of the Philippines) create opportunities for market disruption when faced with competition – whether by relying on cheaper sources of electricity off the grid, or by leaving the geographic area entirely (a point noted by MERALCO where export-oriented businesses could leave the Philippines). The World Bank analysis of cross-subsidies further notes that such subsidies may be ill-utilized if they absolve the managing authorities of the need to make sound business and governance decisions regarding the cost-efficiency
- 98. 7 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S of the funds’ use and the economic efficiency of their sourcing vis-à-vis alternatives (such as subsidy removal or budgetary funding by government). Some jurisdictions around the world impose (or allow and/or mandate regulated utilities to impose) significant surcharges on ratepayers akin to the UC-ME, including in many U.S. states. For example, New York State has a surcharge for its Renewable Energy Portfolio Standard, the Energy Efficiency Performance Standard, the Societal Benefits Charge, and the Technology and Market Development programs. These surcharges totaled $925 million in 2015—all of which were funded by ratepayers, via surcharges imposed by the New York Public Service Commission on customer bills for electric service, collected by the utilities, and remitted to NYSERDA, which is the state’s entity that manages the public and ratepayer-funded energy programs (NYUP, 2014). NYSERDA programs are generally funded exclusively by ratepayer surcharges and other related taxes and extra-budgetary levies on energy users (NYSERDA, 2016). Under a May 8, 2014, Order, the Commission instructed NYSERDA to develop a framework for funding that establishes a transparent upper limit on contributions from ratepayers, and sets that level for the 2015-2020 period at levels below those paid by ratepayers in 2015 (NYUP, 2014). This policy reflects sensitivity to the impact of surcharges (which fund cross-subsidies of low-income energy users and environmental energy programs) on ratepayers. Part 2. Determination of Pro-Poor Utility Subsidies and their Targeting World Bank (2005) deals extensively with the issue of progressive, pro-poor subsidy design. They elucidate why volumetric-based electricity and water tariffs often prove to be relatively inefficient in targeting benefits to the poor. They argue based on field studies that the benefits of quantity-targeted subsidies is quite poor. Consequently, they argue that rather than subsidies for consumption, subsidies Are There Viable Alternatives to Utility Subsidies? (Excerpts from World Bank, 2005) At most, connection subsidies can help encourage poor households with access to the network to connect, and consumption subsidies will make ongoing service more affordable for the poor. But […] connection and consumption subsidies address only one of the many problems that may explain why poor households currently do not use utility services. Moreover, they are not the only instruments available for meeting social policy objectives in the provision of basic infrastructure services. Utility subsidies are, therefore, best seen as a potential part of a package of policy measures to help ensure access to utility services for the poor. Alternative measures may not do away with the need for utility subsidies altogether, but they are certainly complements that may help to contain the magnitude of utility subsidies and to address bottlenecks that could otherwise undermine their targeting performance. The need for utility subsidies can be reduced—if not entirely eliminated— by measures that reduce the cost of providing network services or that improve the ability of poor households to pay for service at a given cost. Costs can be reduced by improving operating and capital efficiency, raising revenue collection, and revising technical norms to allow the adoption of lower-cost service delivery systems. Affordability of utility services can be enhanced through modifications of utility commercial policies, such as more frequent billing or prepayment of services.
- 99. for connections58 andthe provision of complementary goods and services could be more effective at targeting vulnerable poor populations. They note that “the targeting performance of water and electricity subsidies can improve significantly if alternative targeting methods are used—means testing, in particular.” The authors also observe that the need for subsidies can be reduced if cost-of-service can be brought down, and if alternatives to subsidized service provision (i.e., household or off-grid community energy) are legalized and available. The authors suggest four questions to address whether utility subsidies make poor instruments of social policy in an economy: a) the targeting performance of the subsidies relative to other social policy instruments, b) the distribution of subsidies relative to the income distribution, c) the significance of the subsidized material for poor households, and d) the potential effect of adding or removing consumption subsidies on poverty levels. Part 3. Tariff Reform World Bank (2014, Chapter. 9) examined the methodologies for establishing regulated tariffs in marginal grid zones. They find that avoided-cost, cost-recovery, and fixed domestic tariffs are the three predominant approaches to tariff setting: • Uniform domestic tariffs. All citizens in the same tariff categories pay the same tariff for electricity regardless of where they live in the economy. • Avoided-cost tariffs. A small-power producer (SPP) is allowed to set tariffs for consumers that are equal to or below what the consumers would have been paying on other energy purchases (for example, kerosene, cell-phone charging) that are now replaced by electricity supplied from a mini-grid. • Cost-reflective tariffs. Tariffs that produce enough revenues to recover the overall capital and operating costs likely to be incurred by an actual or hypothetical SPP. World Bank (2014) find unequivocally that tariffs “must be high enough that they will, after a transition period of several years, recover operating costs and depreciation on all capital (whether supplied by the operator or others) as well as any debt payments (if any), and provide for reserves to deal with emergency repairs and replacements.” Consequently, it is incumbent upon the UC-ME to develop a middle- and long-term strategy for closing the gap between tariffs and production costs. Based on our understanding, the Philippines does not currently adhere fully to any of these approaches, instead setting a tariff below domestic rates, below avoided cost, and below cost recovery for the SPUG areas. Relying on the World Bank’s approach would lead to increasing tariffs in SPUG areas. Presuming that SPUG area cost of generation exceeds that on the national grid in Luzon and Visayas, even the lowest-rate option, uniform domestic tariffs, would require raising SPUG area tariffs (for example, from PhP5-6/kWh to an estimated PhP7-9/kWh to meet domestic levels). Household- specific subsidies might adopt progressive volumetric-based escalating tariffs and the Lifeline program of the rest of the economy. World Bank (2014) further finds that, “Rural household customers can afford cost-reflective tariffs if the initial connection charge is not too high and can be paid in small monthly payments over time.” 58 World Bank (2005) states that “[g]iven low coverage rates among the poor, even untargeted connection subsidies have the potential to be quite progressive.”
- 100. 8 0 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S This suggests that modest increases in electricity tariffs to the Philippines domestic on-grid standard tariff would be manageable. World Bank (2014) elaborates the benefits for newly-electrified households: “Once rural households get over the connection charge hurdle, they can afford to pay electricity tariffs that will produce monthly expenditures equal to or less than their prior expenditures on non-grid energy sources (kerosene, candles, batteries). Electricity has the added benefit of producing better energy services: higher-quality lighting, better access to information, and health benefits.” World Bank (2005, Chapter 9) proposes a number of approaches to make electricity use more affordable and manageable for low-income households in ways that do not require excessive tariff subsidies. Such strategies include more frequent increments of smaller payments, and prepayment systems (see text box). Part 4. Operational Reform to Lower Costs World Bank (2005, Chapter 9) notes that many water and electricity utilities in developing countries and transition economies have very high cost levels because of inefficiencies in operations. Great increases in efficiency are often achievable, and can help close the gap between maximum tariffs and full cost recovery rates. Some of the inefficiencies that can be addressed include: “underutilization of existing capacity in […] power plants, poorly designed plants, excessively high losses in distribution and transmission networks, and overstaffing.” Reducing these inefficiencies lower the average cost of service for all consumers. Potential reform options include privatization, competition, and regulation. Innovative Approaches to Tariff Payment to Increase Affordability? (Excerpts World Bank, 2005) Changing billing and payment methods and options can help low-income households spread the cost of their utility bills. Most utilities in developing countries bill monthly or bimonthly, and even monthly bills can be difficult for low-income households to absorb, and it may be desirable to allow more frequent payment. This process is facilitated by developing a dense network of payment points in collaboration with banks, supermarkets, post offices, or other local retailers. An alternative approach for peri-urban slums may be to subcontract billing to a small-scale operator or local community representative who becomes responsible for collecting and paying the bills for the entire settlement. Connection charges that frequently take the form of one-time, up-front capital payments can represent a major financial barrier for low-income households. Moreover, in the case of services such as sanitation and natural gas, the cost of the in-house upgrades required to make full use of the network service can, in many cases, exceed the cost of the connection itself. Such costs can be prohibitive for poor households. Prepayment systems are an alternative method of helping customers manage their spending on utility services. Those systems allow households to buy a token or a card in advance, which they insert into the meter at home. The value of the token or card determines how much water or electricity can be used. Once the value purchased is reached, the system shuts off. The prepayment meters entail a significant investment on the part of the utility, raising questions as to whether the additional costs should be recovered directly from the customers who adopt this payment approach. The prepayment approach effectively allows households to voluntarily disconnect themselves from the service during periods of financial adversity. An alternative approach is to install devices that physically limit the amount of service that the household obtains. In the case of electricity, load limiters restrict the number of appliances that can be used simultaneously.
- 101. Efficient and appropriatepolicies for private sector market participation Regulatory and operating environment for the active participation of private sector power producers is a key determinant to the market viability of grid extension and power provision to the poor. Ensuring market viability for private sector participants is a goal for the Philippines as well, and power generation in SPUG areas is slowly being transferred to private producers. A further question is how the Philippines can better encourage the development of more cost-effective and clean power sources in SPUG areas beyond diesel- and fuel oil-burning generators. While technology-neutral private procurements and UC-ME-funded renewable energy feed-in tariffs exist, more effort is needed to increase the penetration of conventional, commercial renewable energy technologies such as solar and wind. World Bank (2014, Chapter 9), focus on the issues of regulatory structure for small power producers (SPPs), including tariff-setting, regulatory rules, and interconnection protocols, a critical issue to get right for the private sector to be properly incentivized to enter the market, without compromising service quality and reliability or cost-effectiveness. The study considers both the issue of interconnecting small independent power producers to the grid, and of optimal construction of feed-in tariffs (FITs), two issues that are critical for the expansion of renewable energy as well as likely necessary for long-term cost reduction of power generation in the SPUG areas. World Bank (2014) reaches several important conclusions, some of which are discussed below. The World Bank study’s examination of islanded mini-grids sheds light on a crucial distinction that may be important for the Philippines to consider: the impact of regulated tariffs in SPUG areas on the viability of market-based mini-grids promoted by NEA under household electrification. In fact, in SPUG areas where household electrification rates do not yet approach 100% could fall victim to market distortions because subsidized SPUG grid tariffs will invariably be significantly lower than any commercially viable private-sector driven mini-grid tariffs. Consequently, households would seek to migrate away from mini-grids to the central grid, and it is likely that both mini-grid operators and SPUG operators would face incentives not to interconnect, despite the likely system efficiencies and service improvements such connections could provide. To ensure the commercial viability of SPPs that operate isolated mini-grids, the World Bank recommended that regulators should explicitly: • Allow SPPs to charge tariffs above the uniform domestic tariff if it is required to recover efficient operating and capital costs. • Allow SPPs to cross-subsidize among their customers. • Mandate SPPs to take depreciation on equipment financed through grants. • Allow SPPs to enter into power sales contracts with businesses without requiring prior regulatory approval of the contract terms. • Allow SPPs to recover in tariffs the administrative and financing costs incurred to provide on-bill financing to customers for uses such as connection charges, internal wiring, dwelling upgrades, and the purchase of electric-powered appliances and machinery. Furthermore, the World Bank even encourages off-grid areas electrified by islanded mini-grids not face tariff regulations at all (World Bank, 2014). Those who support price deregulation for small, rural providers serving isolated mini- and micro-grids usually present five reasons why price regulation is neither necessary nor desirable: 1) Most successful decentralized rural electrification schemes for isolated mini-grids have involved little or no price regulation.
- 102. 8 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S 2) Substitutes already exist for the electricity that the new mini- or micro-grid operator proposes to supply, and that a new operator knows it will have to offer a better deal to get customers 3) The operators are serving rural electricity markets that should be “contestable.” 4) A economy is likely to benefit if small private operators of mini- and micro-grids are given the chance to experiment with different business models. 5) The regulator will have neither the time nor the resources to regulate many different small electricity providers. There are risks in not having a regulated tariff, in that private operators could take undue advantage of the pricing freedom. However, local consumers can be provided through: • Annual reporting requirement. • Review of operations in response to customer complaints. • Registration rather than licensing. • Review after five years. Case Studies (Thailand, Vietnam, and Colombia) The electricity sector reforms in South and Southeast Asia during the 1990s and early 2000s focused on: unbundling of the generation, transmission, and distribution; change in ownership from public to private sector; and restructuring of electricity tariffs including gradual removal of subsidies. The objective of one study, the GNESD Case Study report for UNEP (2004), was to examine how these reforms have impacted electricity access among the poor. Reforms in Thailand and Vietnam were chosen as the case studies, as these countries represented diverse economic situations and they took different approaches for increasing electricity access. Findings from the Thailand and Bangladesh case studies are examined here. Overall findings from the three case studies on electricity tariffs and household electricity expenditure show that even in rural areas of Asian developing countries, electricity consumption and household expenditure on electricity can grow rapidly in tandem. In other words, even poor rural households value electricity highly enough – and have a low price elasticity of demand – to absorb tariff increases without dramatic impacts on household wellbeing. Rather, electricity use becomes more calculated and efficiency becomes more prized. For example, “The tariff reforms in Thailand partially contributed to the growth of the ratio of electricity expenditures relative to the poor household’s total expenditures. In fact, in 1998, the ratio had been at the highest level (3.4%), greater than the levels of the non-poor”, while in Vietnam, “with the steady increase in electricity tariffs subsequent to the reforms, higher electricity consumption of the poor was observed, but led, however to doubling of the share of electricity expenditure in the total household’s expenditure” (UNEP, 2004). Furthermore, the Colombia case study (World Bank, 2005) finds that when utilities cross-subsidize tariffs for poor or geographically targeted households, utilities face very weak incentives to improve efficiency and economic cost-effectiveness of service, because tariffs are capped and costs are covered – a situation that has many lessons to offer for the Philippines and its management of the UC-ME. Thailand SUNEP (2004) reviewed electricity sector reforms from the early 1970s through 2000. In the early 1970s, only 7% of the poor households in Thailand had access to electricity. With the implementation of the long-term domestic master plan for rural electrification by PEA (Provincial Electricity Authority) in the 1980s, access to electricity by the poor households increased to 74% by 1988, and reached 98% in 2000. Unlike the Accelerated Rural Electrification (ARE) program, the reforms in the 1990s, i.e., EGAT (Electricity Generating Authority of Thailand) Act and tariff restructuring (a series of tariff
- 103. reforms from 1990to 2000 that caused upward pressures on electricity tariffs of both the poor and the non-poor), do not seem to have significantly influenced the electrification level. However, the EGAT Act reform seems to have led to an increase in the overall average electricity consumption level, though the average consumption level for the poor had shown only a marginal increase. The tariff reforms undertaken in the 1990s resulted in a steady increase in tariffs. With the adoption of marginal cost pricing in 2000, tariff subsidies to PEA were reduced for both the poor and the non- poor consumers, with rising electricity tariffs for the poor households. After 1990, although the increase in average electricity consumption per household slowed, the reforms do not seem to have adversely affected the poor households. Viet Nam In Viet Nam, the establishment of a domestic electricity company, EVN (Electricity of Viet Nam), in 1995 and the dedication of an office within EVN to aggressively pursue rural electrification led to the improvement of electrification levels and increase in electrification rates. Prior to EVN reform, the non-poor already had very high electrification levels. Thus, the targeted rural electrification efforts resulted in a significant increase in electrification levels and higher electrification rates for the poor. From less than 50% prior to the reform, electrification levels climbed to 77% in 2001, about five years after the reform. The completion of the 500 kV line, which stretches from the north to the south of the whole of Vietnam in 1994, has been one of the key factors for the increase in electrification levels. The period subsequent to EVN reform saw significant increase in electricity consumption per capita for both the poor and the non-poor. During the 1990s, there were successive increases in electricity tariffs (for the poor as well as the non-poor, though non-poor tariff increases were greater). Yet, the steady increase in tariffs for the non-poor starting 1994 did not dampen the rate of increase in electricity consumption of the non-poor but led, however, to a doubling of the share of electricity expenditure in total household expenditure during the post-reform period. The Viet Nam experience highlights that past institutional reforms initiated by the government targeting rural electrification were able to increase the electrification levels as well as consumption levels of the poor. Also, early reforms focused on moderating tariffs to enable the poor’s access to electricity, while more recent reforms were focused more on increasing economic efficiency and private participation, which resulted in higher tariffs. It is difficult, however, to say whether recent reforms slowed down access of electricity of the poor, as the timing of the reforms was during the time when the majority of the poor household had access to electricity. Colombia As noted above, Colombia’s experience with regulator-mandated cross-subsidy of ratepaying customers in low-income areas has many parallels with the UC-ME SPUG program. The Colombia case study (cited from World Bank, 2005) below demonstrates how difficult it is to engender sound management and rein in costs when tariffs are delinked from cost recovery and subsidies keep rates low.
- 104. 8 4 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Electricity and Water Cross Subsidies: Experience in Colombia (Excerpts from World Bank, 2005) In theory, the facts (a) that the Colombian tariff structure includes two strata of residential customers who pay more than cost and (b) that surcharges are also imposed on industrial and residential customers make it possible to fund the Colombian subsidy model through cross-subsidies. In practice, however, neither water nor electricity subsidies have been able to break even on cross-subsidies alone. Both the water and electricity sectors suffer structural losses as a result of the subsidy scheme (equal to 12 percent of sector turnover in electricity and 20 percent of sector turnover in water), and it is necessary for the [domestic] government to step in and help cover those losses. Part of the problem is that it is difficult to achieve the right balance between customers receiving cross- subsidies and those providing them in each service area […] Upper-strata customers (as well as business and industrial customers) are overwhelmingly concentrated in larger cities, making the situation especially difficult for utilities that serve smaller cities and rural areas. […]In this situation, transfers from the central government are an attractive and practical solution. This solution is not without its problems, however. First, as of 2003, many water utilities had failed to raise prices to the levels indicated by the law. This failure was largely because tariffs in this sector had to increase significantly (more than four times for the lowest stratum, for example) to comply with the legally set targets for the tariff in each stratum. Given the likely political difficulties of raising tariffs to the appropriate levels, utilities put off the move as long as possible. During this transition period of gradual tariff increases, the losses from the subsidy scheme were larger than expected. Second, the possibility of obtaining external support creates a disincentive for utilities. Not only must they raise their tariffs to appropriate levels but also they have to worry about finding an appropriate balance of cross-subsidizers and subsidy recipients. Under the current stratification system, local mayors have the ability—as well as the political incentive—to reclassify neighborhoods downward from high to low strata. […] Moving households down a stratum is a roundabout way to avoid increasing tariffs as much as is required by the law.
- 105. 9. SUBSIDY 5:UNIVERSAL CHARGE EXEMPTION FOR SELF-GENERATING FACILITIES Captive power generation units operated by industry and the commercial sector are not currently levied the Universal Charge (UC) that all other grid-connected electricity ratepayers are required to pay. As with the analysis around excise tax exemptions for socially sensitive oil products, the exemption of self-generating facilities (SGFs), i.e., captive power producers from the UC does not constitute a subsidy. That said, the UC exemption for SGFs creates distortions and perverse incentives. With the current capacity of SGFs at 2,460 MW (as reported at the ERC), roughly equal to 8 percent of domestic power capacity, non-imposition of the UC on SGFs will, all other things being equal, lead to increased electricity demand from the commercial and industrial sectors, the bulk of which is sourced from fossil fuels. This policy instrument is currently in effect, pending the ongoing resolution of the lapse of SGF exemption from the Universal Charge in 2010. HISTORY AND CONTEXT Self-generating facilities (SGFs) refer to ‘captive’ or grid-isolated power plants – either entirely disconnected from the grid or those connected to the grid, but capable of functioning independently – that support large industrial and commercial operations. With its passage in 2001, EPIRA established that all self-generating facilities (SGFs) should be covered by the UC, like all other grid-connected electricity consumers (NEDA, 2001; PDOE, 2015c). The ERC also issued a rule confirming that SGFs are not exempt from the UC.59 The SGFs are mandated to directly remit to the TransCo. However, since no mechanism for applying the UC to SGFs was established, when the UC was implemented in 2003, the ERC issued a four-year exemption to SGFs through 2007. In 2007, following protests by industry upon the exemption’s expiration, the ERC granted another three-year extension through 2010.60 The exemption expired in 2010, but the UC has still not been imposed. This has created uncertainty for the SGFs, the distribution utilities responsible for the UC collection, and the regulatory agencies.61 The UC exemption for SGFs to date has covered126 facilities in total including large-scale power plants as well as smaller-scale diesel generators, whether new, existing or under construction. The 59 Section 2.01 of the Rules Governing the Collection of the Universal Charge. Citation in EPIMB presentation, December 2, 2015. Slide 65. 60 For the first four years of the UC imposition, which commenced in February 2003 through an ERC Order dated 20 December 2002, the EPIRA-IRR provided that all SGFs, whether new, existing or under construction, should not be covered by the imposition. The four-year deferment of UC on SGFs expired in 2007. On 21 June 2007 the PDOE promulgated “Amendments to Section 4 (c) of Rule 3 and Section 7 of Rule 18 of the Implementing Rules and Regulations (IRR) of Republic Act No. 9136 otherwise known as the Electric Power Industry Reform Act (EPIRA)”, extending the deferment of UC on SGFs up to June 2010. 61 In-person consultations with PSALM, ERC and PDOE, December 3, 2015.
- 106. 8 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S UC, originally 4 centavos (hundredths of a peso) per kWh in the early 2000s, is now up to 35 centavos (about 0.75 of a U.S. cent) per kWh, accounting for 3-4 percent of electricity bills, with further increases pending. In 2005, VAT was also imposed on power consumption, leading some in industry to claim that the UC surcharges result in ‘double taxation’.62 Currently, the retail tariff for electricity in the Philippines is on par with most developed economies in the Asia-Pacific region at roughly USD 0.21 per kWh, while many developing economies in Southeast Asia, such as Malaysia and Indonesia, heavily subsidize their electricity tariffs, leading to much lower power prices (MERALCO, 2015). Prevailing high power prices in the Philippines are opposed by industry noting that they risk eroding their competitive advantage. Nevertheless, industries with SGFs benefit from de-facto lower tariffs due to the exemption from the UC surcharge, which is paid by all other on-grid customers, including Lifeline consumers and SPUG area customers. The Philippines has three broad categories of SGFs: - First, backup power only (commercial establishments and office buildings). - Second, partial self-generation. For example, a large factory might use grid power for its offices or auxiliary power needs, and the SGFs for core heavy manufacturing for reliability. - Third, fully self-generating facilities with no grid connection.63 Most SGFs are grid-connected. However, there is no formal electricity market in which SGFs generators compete to have their capacity dispatched; according to PDOE, no SGFs contribute power back to the grid.64 Yet, many SGFs do participate in the Interruptible Load Program (ILP), which was established by the ERC to minimize the impact of the power crisis affecting the region. Under the ILP, SGFs utilize their generation capacity to reduce power demand on the local distribution utility (DU) grids in peak periods, avoiding black outs and price spikes. During peak load periods they switch off their grid connection and transfer entirely to SGF power, thereby reducing demand on the grid. Through the ILP, the DUs compensate SGFs for their fuel costs, plus a margin payment agreed upon between the enterprise and the DU.65 While SGFs contribute value to the grid by reducing peak load and baseload power demand as well as ensuring reliable power to key private sector entities, the UC exemption is considered as an implicit subsidy (or support measure) because it exempts those users with their own power supply from universal charges that are collected to provide social benefits such as grid extension and tariff relief for the poor. The exemption of SGFs from UC imposition was made permanent for those using renewable energy to generate electricity for their own consumption through the passage of RA 9513, the Renewable 62 In-person consultations with MERALCO, December 3, 2015. 63 In-person consultations with PSALM, ERC, PDOE, and Meralco, December 3, 2015. 64 In-person consultations with PDOE and Meralco, December 3, 2015. 65 “The Interruptible Load Program (ILP) is a program developed by the Department of Energy (PDOE) and the Energy Regulatory Commission (ERC) wherein Distribution Utilities (DU) and Participating Customers (PC’s) enter into an agreement for voluntary full or partial de-loading by the PC for a period of time that is mutually agreed between the DU and PC. Companies with stand-by generation capacities who participate in the ILP will be compensated under this program should they use their own generating facilities during instances of power supply deficit. ILP is one of the available instruments to help mitigate the energy supply deficiency in the Philippines until new capacities become available on the grid. The program helps to ease the anticipated power supply deficit to avert the looming power crisis of 3-hour rotating power outage expected to hit Luzon in early 2015.Targeted ILP contributors are electricity consumers with large embedded generation capacities of at least one MW. De-loading compensation paid to ILP participants will be recovered from all customers of the district utility as part of its total cost of power to be included in its monthly computation of generation rate.” Source: Interruptible Load Program (ILP) Primer.” Australia & New Zealand Chamber of Commerce website, accessed February 10, 2016. http://anzcham.com/blog/publications/interruptible-load-program-ilp-primer/.
- 107. Energy Act of2008 (PDOE, 2016f). However, UC imposition on SGFs utilizing non-RE remains pending in the absence of clear procedures and guidelines from the ERC. There are various issues affecting the imposition of UC on SGFs, including: • SGFs, particularly energy-intensive industries, strongly oppose the imposition of the UC. For them, the UC will be an additional burden to their operating costs, thus hampering their growth, and in the worst-case scenario, possibly result in industries shutting down due to higher costs. • DUs in Visayas and Mindanao expressed great apprehension as to the disincentives implementing the UC on SGF-customers who are participating in the ILP would impose. For the SGFs, the UC imposition is perceived to be unfair since they significantly contribute to the alleviation of tight supply-demand balance during certain hours of the day. They are also exposed to higher power costs due to the operational expenses associated with their generation facilities. Consequently, SGFs might decline to participate in the ILP if their participation results in the imposition of UC surcharges. • All collecting entities of the UC (i.e., DUs and the National Grid Corporation of the Philippines (NGCP)), voiced their concern over additional administrative costs that will be incurred in conducting meter readings for each and every power plant owned by the SGF, reconfiguring the IT system that will be used to generate power bills that will be issued to SGFs monthly, and in maintaining the meters that will have to be installed for each generation facility. Currently the majority of SGFs have no meters. Rather, SGF power production is estimated from fuel consumption or from running time of generators. • NGCP and DUs are also concerned with the enforceability of sanctions on SGFs should they fail to comply with UC payment. The collection of the UC from SGFs remains pending subject to the promulgation of clear guidelines on the amount of UC that will be collected, including the basis for such amount, as well as the procedures for collecting the UC. At the same time, the non-imposition of the UC on SGFs provides additional benefit to large industries and other businesses as they install generators on their own for operational reliability, which is a priority for the large majority of industrial and commercial customers. On 9 March 2011, PSALM informed the ERC of the results of the consultations it conducted with stakeholders regarding the imposition of UC on SGFs. During the consultations, the SGFs and collecting entities openly expressed their opposition to the imposition of the UC in light of the issues noted above. PSALM submitted to the ERC its proposed Guidelines and Procedures Governing the Imposition of Universal Charge to Self-Generating Facilities should the ERC pursue the imposition of UC on SGFs. Since 2011, the ERC has delayed a final decision on whether and how the SGFs should pay for the UC. Since that time, the PSALM and PDOE have conducted consultations with SGFs and prepared draft guidelines with the ERC on whether to revisit the legal applicability of the UC to SGFs; at what level to levy it; how to measure the SGFs’ power consumption, on which basis the UC is levied; and how to collect the UC given that some SGFs do not have accounts with distribution utilities. Due to the complexity of the issue and its politically charged nature, these guidelines remain in draft form pending a resolution by PDOE and ERC.66 66 In-person consultations with PSALM, ERC and PDOE, December 3, 2015.
- 108. 8 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S VISION The current legal framework mandates that the UC to be collected from SGFs. Concern on undermining industrial competitiveness in the economy, and operational difficulties in collecting UC from SGFs have resulted in unintended extension of exemption from UC for the SGFs. Either the UC should be imposed on everyone or it should be not be imposed on anyone. Hence, it is envisaged that UC should be collected from SGFs, but in a manner consistent with the promotion of domestic industry and private sector growth. KEY FINDINGS UC exemption for SGFs does not constitute a subsidy, since the operators of SGFs still bear the cost for electricity tariff determined in the market. UC exemption for SGFs does not by itself lower the electricity prices below the international market prices and the operator of SGFs still bear the full cost for generating electricity. Nonetheless, the APRP analyzed the broader aspects of the efficiency of such exemptions. UC exemption for SGFs could undermine the legal credibility of the imposition of UC itself, which requires that all electricity consumers fund it. The continued SGF exemption is due to the administrative and technical impracticalities of imposing UC on SGFs as well as the strong opposition from industries, especially energy-intensive industries. The exemption without the legal basis could undermine the broader legal stability and the credibility of the UC and may create a sense of unfairness to the ratepayers currently paying UC under the legal framework. The SGF exemption results in distortions in the respective contributions of different electricity consumer classes to the UC. Despite their relatively better financial capacity, industries with SGFs have continued to benefit from the exemption, which disproportionally benefits those SGF-operating industrial and commercial consumers through preferential treatment. SGFs serve an important function in balancing load on the grid by providing peak power capacity, and by providing reliable, uninterrupted power to important industries. Frequent blackouts in the past and intense global competition have led industries to set up SGFs in order to maintain (relatively) affordable and reliable electricity supply, and sustain their industrial competitiveness. Distribution utilities value SGFs’ dispatchable power capacity to meet peak load demand. RECOMMENDATIONS As is the case for the Missionary Electrification program, a wide range of policy options could be considered to address the UC exemption for SGFs. The first-order question relates to how to reduce and eventually eliminate the pricing difference between the regulated and non-regulated parts of the market. This will in turn help reduce and eliminate the need for funds to cover the difference in prices. The source of these funds could be the UC-ME or direct government funding. These issues deserve further study, including a rigorous cost-benefit analysis, as noted in the previous chapter. The lack of an assessment with detailed cost-benefit analysis makes it difficult for the APRP to provide specific recommendations. Recommendation 8. A detailed cost-benefit assessment on the UC exemption for SGFs is recommended, as part of the broader cost-benefit analysis of the UC (recommended in the previous section). The costs and benefits related to implementation of UC imposition on SGFs by distribution utilities need to be assessed. Externalities and system benefits of SGF operation should also be considered in such a study. If the cost-benefit assessment suggests that direct government
- 109. funding for UCis preferable as compared with cross-subsidy, then the SGFs exemption is moot. Assuming that the UC is maintained, the status of the SGF exemption should be resolved in a manner that removes inefficiencies and distortions resulting from the current exemption. Recommendation 9. If the Universal Charge is maintained, then the SGF exemption should be lifted in order to remove inefficiencies and market distortions. It is widely recognized that SGFs provide benefits, such as providing reliable power and contributing to load management during peak demand through ILP. These benefits should be properly compensated, but should be separated from the SGF universal charge. Some specific options could include: • Introduce net metering. To address concern from industries, UC costs for SGFs could be partially offset by introducing net metering, which not only enables SGFs to sell the spare power to the grids and alleviate financial burden, but also provides economic incentives for SGFs to be equipped with meters, effectively reducing administrative cost for charging UC on SGFs and thus addressing administrative concern from collecting entities. Out of 2,460 MW SGF capacity listed at the ERC, only 37.5 MW have been confirmed with own metering facilities, while majority have none. For SGFs that are not connected to the grid, supporting policies to encourage grid connection could be provided. • Increase Compensation through the ILP. Preferential tariffs on electricity sales for SGFs participating in the ILP could be considered to reflect their added contribution to grid stability and load management. • Adjustment Payments for Grid Reliability. SGF-operating entities have indicated the need for reliable, uninterrupted power is a motivating factor for SGF operation. DUs and SGF operators, with the help of PSALM and ERC could determine the incremental economic value of SGFs’ more reliable power than that provided by DUs from the grid, and compensate them for it accordingly. Recommendation 10. With the removal of the UC exemption for SGFs, a number of complementary measures could be considered to ensure a smooth transition and to address legitimate concerns of businesses and DUs. Measures to mitigate the difficulties of adjusting to the removal of the UC exemption for SGFs include: a step-by-step lifting of the UC exemption to alleviate concerns of industrial and commercial SGF operators; supplementary financial incentives to energy-intensive industries to offset the negative financial burden to industries; and fostering alternative energy/efficient power generators for SGFs to reduce wasteful use of fossil fuels. • Step-by-step lift of the exemption for SGFs. To alleviate the negative impact on industries’ financials from the lift of the exemption of UC for SGFs a step-by-step lifting of the exemption with clear timeline could be pursued. This step-wise program could include deadlines for developing an implementation plan, installing meters, and (for energy-intensive industries) a gradual ramp-up to full UC imposition, starting with discounted UC rates. • Improve grid reliability and peak load management. The Philippine Government should work with ERC, distribution utilities, PSALM, and large energy consumers in the industry and commercial sectors to create proper incentives and enabling policies for improved grid management and performance, including introduction of smart grid technologies, upgrading of grid infrastructure, and regulatory adjustments. Improved grid reliability will in turn reduce the impetus for SGFs in the future, driving down costs for SGF operators and other ratepayers alike and reducing inefficient fossil fuel use.
- 110. 9 0 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S • Support introduction of metering equipment to SGFs. To overcome one of the administrative challenges in lifting UC exemptions, the support for metering equipment could be considered, which allows DUs to effectively quantitate the contribution from SGFs to grid stability and thus to adequately and fairly compensate SGFs for their participation in ILP. LESSONS LEARNED AND BEST PRACTICES In this section, the APRP provides a brief description of illustrative case studies of how other economies in APEC and other countries have addressed cross subsidy issues associated with the power sector, with a particular eye for policies that may put the industrial sector at a disadvantage vis- à-vis other ratepayer categories. We expect these illustrative case studies to help the PDOE in considering alternatives to the current approach for supporting missionary electrification, and for assessing the Universal Charge on self-generating facilities in the industrial and commercial sectors. The issue of electricity tariff surcharge exemption in the Philippines appears to be fairly unusual. Rather than imposing surcharges on already market-rate, cost-recoverable tariffs, many developing countries tend to subsidize electricity to their industrial sectors (e.g., Brazil and China). Even many developed countries provide such subsidies or otherwise protect industry from electricity tariff surcharges. Case studies from India and the United States are reviewed here. The section begins with a review of IMF, World Bank, and the World Resource Institute’s recent recommendations for managing electricity sector tariffs and subsidies, including ratepayer cross- subsidies in particular. Subsequently, three case studies are presented – one from India and one from the United States – looking at captive power production (also known as “behind the meter generation”), electricity cross subsidies, and the impacts of tariff policy on industry. Key lessons from General Review of Developing Economy Electricity Sectors The International Monetary Fund (IMF, 2016) has recently released a working paper studying the electricity generation sectors in Nicaragua and Haiti, reviewing reform efforts to improve efficiency and service provision. The IMF underscores the importance of a robust regulatory stance and policy roadmap governing tariffs and grid governance to ensure proper incentives for ratepayers and to promote efficiency and performance of the grid. The IMF notes that although reliable and low-cost electricity provision is critical for economic activity, poor configurations of the electricity sector are relatively common—resulting in “high electricity costs, electricity shortages, expensive self-generation, and large fiscal subsidies arising from unbalanced cross tariff subsidization, fraud and nonpayment.” Better regulatory frameworks (including adequate tariff setting, enforcement of penalties, and appropriate energy dispatching rules)” are necessary for the countries to have lower generation costs, lower theft ratios and government subsidies, and sufficient investment levels. A World Bank study (World Bank, 2010) provides a short section on the key characteristics of various types of energy subsidy regimes, including electricity cross-subsidies. A key finding is that electricity cross-subsidies can be relatively effective, efficient, and financially viable when payers are many and beneficiaries are few. However, in the case of the Philippines UC-ME, as the ratepayer beneficiaries and consumption in missionary electrification areas grow, the burden of the subsidy on other ratepayers becomes substantially more onerous. Furthermore, businesses affected by the cross- subsidy seem to have raised potential competitiveness concerns as a result of the high electricity costs.
- 111. Some of thepositive effects due to cross‐subsidies between high‐ and low‐volume users (or between users who are remote from supply and those closer to supply) include (World Bank, 2010): • Redistribution from those who are economically well‐off to those who are economically less well‐off • Management and administration burdens are relatively low when consumers are all metered, and there is already a system for identifying different classes of users • Can work most effectively when there are sufficient high‐volume users (e.g., businesses) and not too many low‐ volume users Some of the negative effects could include: • Distortions across the board, where neither set of consumers are paying the correct prices • Can adversely impact the business competitiveness if the cross‐subsidy is a major cost element • May not pro‐poor if cross-subsidies are not well targeted to identify economically disadvantaged consumers • Can result in black market situations (especially for petroleum products), without benefitting the poor WRI (2014) has prepared a paper for policymakers on setting and managing electricity tariffs entitled “10 Questions to Ask About Electricity Tariffs,” under the World Resources Institute’s (WRI) Electricity Governance Initiative (EGI), in collaboration with Prayas, Energy Group. This WRI paper recommends a high level of transparency and regular review for all electricity subsidies, particularly cross subsidies. Of particular relevance to the Philippines is that WRI (2014) calls for variable-rate tariff policies and other incentives to send proper market signals to ratepayers for conservation and demand side management at peak times. These types of policies could help distribution utilities in the Philippines better manage peak loads so that the industry does not have to rely on self-generation in the future. The recommended policy approaches in the WRI paper could be used to analyze potential alternatives to a SGF-dependent peak load management strategy. A further option is to devise a regime of payments by distribution utilities to SGFs to compensate them for timely dispatch and other grid systems benefits related to peak demand operation of SGFs. In keeping with WRI (2014), such a policy could be calibrated to send the appropriate price and operating signals to SGF owners in a manner that could be combined and integrated with the imposition of the UC-ME on SGFs. With regard to alternatives to electricity price subsidies, Irwin (1997) notes that governments may choose for direct government funding of rural electrification and low-income household electricity consumption, or that governments may provide support using other social safety nets as an alternative to avoid electricity subsidies altogether.
- 112. 9 2 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Sotkiewicz (2004) finds that a rigorous cost of service study is necessary to determine the cost reflective baseline tariffs from which the cross-subsidies will be determined. Additionally, the choice of regulatory mechanism and industry structure for the utility(ies) can have an impact upon the relative ease with which implementation can take place. And finally, this method of cross-subsidy does not present a solution to the problem of uneconomic bypass of the system by large users. Case Studies India Nag (2010) reviews the situation of captive generation across India. The Indian case is instructive for the Philippines because of a key similarity: industry and commercial ratepayers are assessed a substantially higher tariff than residential consumers and farmers, resulting in an effective cross- subsidy. Among other reasons (such as power unreliability), higher prices for on-grid electricity have “10 Questions to Ask About Electricity Tariffs” -- WRI and Prayas, Energy Group (Excerpts from WRI, 2014) HOW DOES THE TARIFF SUPPORT ENERGY EFFICIENCY, DEMAND-SIDE MANAGEMENT, AND DEMAND-RESPONSE MEASURES? Tariff structure can play an important role in capturing savings by promoting energy efficiency, demand-side management, and demand-response measures, which allow end-use electric customers to reduce their electricity usage in a given time period or shift that usage to another time period in response to a price signal. Such tariff designs include time-of-day tariffs, block tariffs, and demand-response tariffs. To mitigate power shortages, a main concern in China, the government has adopted a variety of tariff design measures and incentives to promote energy conservation, including time-of day tariffs, seasonal tariffs in areas where seasonal demand fluctuation is evident, and compensation for users who avoid peak hour consumption. Under a time-of-day tariff, electricity consumed during peak hours is charged at a higher rate than electricity consumed during off-peak hours. This tariff encourages consumers to use electricity prudently during peak hours. Not only does it encourage overall energy efficiency, but it also leads to better peak load management, savings from avoided generation of costly peak-load power plants, and defers investments in new power plants. Peak-time rebates can incentivize large consumers (such as hotels, office buildings, and industries) to use methods that reduce their load during peak hours or when the reliability of the grid is at stake. Load-reducing measures include the adoption of energy efficient appliances and/or thermal energy storage systems and household appliances, such as water heaters and air-conditioning systems that can be cycled on and off. Utilities could also levy surcharges on electricity tariffs that support energy efficiency measures. For example, a utility can collect a charge per kWh and use it exclusively to fund EE projects. WHAT ARE THE SUBSIDIES IN THE TARIFF? Several countries use preferential pricing (e.g., selective access to lower-cost resources) or overt subsidies to assist low-income groups to access electricity. […] Further, many countries cross-subsidize electricity, whereby one group of consumers pays higher rates for electricity to cover or subsidize lower rates for other consumers. A tariff determination process that provides a transparent view of subsidies and cross-subsidies is more likely to be aligned with the public interest. Periodic review and analysis of the outcomes of subsidy allocations can prompt measures to prevent perverse impacts. While evaluating the implementation of subsidies, groups can also consider issues of transparency and accountability.
- 113. resulted in rapidgrowth of captive power generation (or SGFs) across India, with the attendant benefits and costs. Captive generation allows for industries to by-pass the transmission and distribution system and its attendant losses, and thereby there could be some economic advantages in not using an inefficient system. Captive generation in India can also contribute to improving access to electricity, and can replace more polluting traditional energy use (e.g., replacing wood, dung-cakes, kerosene, etc.). The small-capacity, relatively inefficient captive power plants (CPPs) can also result in rising carbon emissions, particularly as these plants rely mostly on diesel and fuel oil. Also, emissions-control equipment is often not installed in small captive plants and emissions from a large number of widely dispersed, small-capacity plants are difficult to monitor. Despite the rise in capacity of captive power plants in India, the average utilization of these plants has been quite low (the load factor of the captive plants in 2007 was only at 41 per cent), as most of the capacity is used for back-up generation. However, captive generation especially from large industries could be used to provide supply to the grid, if there are sufficient incentives and regulations, as these industries are already connected to the grid. One example is the zero load shedding model in Pune (a city in Maharashtra state of India), an innovative initiative introduced by a partnership between an industry association, distribution utility, and regulatory commission in consultation with local civil society. In order to curb the increasing electricity deficit in the region, the Pune Chapter of the Confederation of Indian Industries (CII) formulated a proposal (popularly known as the ‘Pune Model’) for using the under-utilized captive generation capacity of industrial enterprises in Pune. The proposal was submitted to the Maharashtra (state) Electricity Regulatory Commission (MERC) for its consideration and introduced in June 2006. Pune faced an estimated a shortfall of 90 MW in the worst case scenario, while the top 30 industrial enterprises in Pune had unutilized captive capacity in excess of 100 MW. The idea was that Pune’s industrial enterprises with spare captive generating capacity would generate additional captive power to fully compensate for scheduled load shedding so that equivalent grid power is made available to other consumers. The Pune model was predicated on a number of core features: 1. Users must be willing to pay a premium for reduced or no load shedding and the incremental cost should be borne by the consumers and not by the distribution company or the government; 2. Load shedding mitigation should not disadvantage any social group or sector; 3. Idle captive power capacity must be sufficient to meet the most or all of the unmet demand; 4. The plan should operate within the framework of governing laws and regulations. To get uninterrupted power, consumer groups agreed to bear the incremental cost of generation by CPPs to cover the difference between the variable cost of generation by CPPs and the average High Tension (HT) industrial tariff. The model works through cooperation and coordination among power consumers, owners of CPPs, power distribution utility, and the regulatory commission. MERC also approved a reliability charge to be paid by the consumers for the better reliability of power provided by the above mechanism. The rate and terms of reliability charge for enjoying zero load shedding were acceptable to all stakeholders. The model became operational on June 4, 2006, and led to zero power deficits over a considerable period of time.
- 114. 9 4 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S United States The United States power sector is highly decentralized, and characterized by many utilities, both public and private, usually regulated at the state level, by public utilities commissions that impose their own regulatory regimes. However, there are a number of larger, more consolidated quasi- governmental power management entities. One, the Western Area Power Administration (WAPA) in the Western U.S., has a new, well-developed “behind the meter” generation policy (equivalent to “captive power” in India or “SGFs” in the Philippines). The specific terms are excerpted below. Perhaps most noteworthy are requirements for strict metering; the policy that peak power generation is not deemed a systems benefit that removes fixed charges or offers special additional payments; and a threshold size of 150kW systems for applicability of the policy. Additionally, fully islanded, behind- the-meter generation (i.e., SGFs) is exempt from this policy. WAPA’s service area encompasses a 15-state region of the central and western U.S. where a more than 17,000 circuit-mile transmission system carries electricity from 56 hydropower plants and other conventional generation operated by the Bureau of Reclamation, U.S. Army Corps of Engineers and the International Boundary and Water Commission. Together, these plants have an installed capacity of 10,504 MW. WAPA sells power to preference customers such as Federal and state agencies, cities and towns, rural electric cooperatives, public utility districts, irrigation districts and Native American tribes. They, in turn, provide retail electric service to millions of consumers in the West (WAPA website). WAPA has developed a policy regarding behind the meter (captive) generation pricing and metering that is promulgated among power-generating ratepayers with more than 150kW in capacity (WAPA, 2015).
- 115. Behind the MeterGeneration Tariff Rules in the Western United States – Western Area Power Administration (undated, website) This Business Practice documents Western Area Power Administration’s (Western) policy requirements under Western’s Open Access Transmission Tariff (OATT) for generation located on a customer’s system behind a revenue meter used for network loads which are included in the determination of the coincident peak and load ratio share for Network Integration Transmission Service (NITS). Such generation that is included in the NITS charges under Western’s OATT is hereinafter referred to as “Behind-the-Meter-Generation”. The Federal Energy Regulatory Commission (FERC) has provided general direction for accounting for such generation, to assure equitable distribution of NITS charges. Based upon FERC’s direction, such generation that is on-line during a transmission system peak should not lower the network customer’s bill, because all network customers must collectively pay for a system that would provide for the customer’s entire energy needs in the event the generation is not available. The requirements and treatment of Behind-the-Meter-Generation for NITS charges are as follows: 1. All Behind-the-Meter-Generation shall be metered. 2. The NITS charges under Western’s OATT will be calculated by: a. ADDING the metered value of the Behind-the-Meter-Generation that is on-line and producing real power at the time of transmission system peak usage to the metered network load; OR b. ADDING the total installed capacity of the Behind-the-Meter-Generation to the metered network load in the event that the required generation metering is not available, regardless of the operational status of the generation at the time of the transmission system peak usage. Behind-the-Meter-Generation shall include all generation located on a network customer’s system behind a revenue meter used for network loads, with the following exceptions: 1. Generation sources that have a total installed capacity of less than 150 kW; provided there are not multiple units of a size less than 150 kW at the same substation where the combined capacity is greater than 150 kW. 2. Generation sources that only operate isolated from the transmission system. Such generation only runs when the load is disconnected from the interconnected grid.
- 116. 9 6 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
- 117. 10. CONCLUSION The thirdAPEC IFFSR/VPR in the Philippines was conducted successfully, with the results of the peer review being documented in this report. Being the third VPR conducted to date, the IFFSR process has now become more institutionalized and more effective with established processes that are recognized and trusted by APEC economies. The Philippines selected five different fossil fuel-related policies for review by the APRP. Although there was limited time for developing a background paper, the Secretariat and the PDOE produced a pre- briefing background paper to the APRP before the review. Based on a review of the background material, the APRP concluded that only two of the selected policies, namely the OPSF and the UC-ME, have led to wasteful and inefficient use of fossil fuels. The OPSF is no longer active and the APRP has recommended that the OPSF should not be re-instated, regardless of oil prices, as it results in wasteful consumption of fossil fuel and fiscal imbalances—this recommendation is consistent with current Philippine policy. The UC-ME, currently structured as a cross-subsidy, effectively encourages inefficient fossil fuel consumption due to the fact that much of power generators in the SPUG areas are diesel- based and that it does not distinguish between consumers. The UC-ME fills the gap between the cost of electricity generation and the regulated electricity tariffs for consumers in SPUG areas (which is below the prevailing tariff in the grid-connected parts of the Philippines). However, the amount of fossil fuel consumed in the SPUG areas is less than one percent of total fossil fuel consumption for power generation nationwide. Each of the other three selected policies was different, and none of them directly influenced consumer prices. They were not considered as subsidies resulting in wasteful consumption of fossil fuels. The PTAP was a one-time, targeted subsidy, and the impact of the subsidy was to prevent fare increases on consumers. The program was active only from 2011 until 2013. The targeted beneficiary of this program were jeepney and tricycle drivers. PTAP is not currently active, and reinstatement of this program is not supported by the APRP. The key issue with public transportation in the Philippines is the regulated fares for privately-operated transport fleet, which do not incentivize private transport owners to modernize their vehicles. Although not a formal recommendation, the APRP has observed that it would be best for the Philippines to move towards deregulating jeepney and tricycle fares in a phased manner. Although much more analysis is needed, the APRP expects that there is likely sufficient competition between jeepney owners and franchises to keep fares affordable for consumers (i.e., there will not be monopolistic or oligopolistic pricing behavior). While the APRP considers the exemption of excise taxes for socially sensitive fuels to be economically inefficient, this exemption is not a subsidy. Oil prices in the Philippines have been deregulated since 1998 and closely follow movements in international benchmark oil product prices and exchange rate movements. The APRP recommends that excise taxes should be introduced on all petroleum products, upon further study. Such an imposition removes distortive preferential tax regimes among similar fuels, and the excise taxes would help in addressing the externalities that result from petroleum fuel consumption. The Philippines should also develop a strategy on how to effectively use the excise tax proceeds. Regarding the UC-ME, the APRP recommends further detailed cost-benefit analysis to evaluate the impacts of the cross-subsidy, which allows for concrete recommendations and alternatives to address
- 118. 9 8 PE E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S financial sustainability and effectiveness of the current Missionary Electrification policy. The regulated tariffs in the SPUG areas should be structured closer to the deregulated price, and NPC’s mandate could allow for capital investment in power plant construction and refurbishment to promote efficient power plants in SPUG areas. The current UC exemption for self-generating facilities (SGFs) does not constitute a subsidy, since the operators of SGFs still bear the cost for electricity tariff determined in the market. UC exemption does not by itself lower the electricity prices below the international market prices and the operators of SGFs still bear the full cost for generating electricity. The UC exemption for SGFs, however, could undermine the legal credibility of the imposition of UC itself, which requires that all electricity consumers fund it, and the exemption results in distortions in the respective contributions of different electricity consumer classes to the UC. If the UC is to be maintained, then the APRP recommends that the UC should be imposed on the SGFs in order to remove inefficiencies and market distortions, along with sufficient complementary measures to SGFs. Overall, the APRP developed ten recommendations and made eight observations, as part of this review. The APRP carefully considered the recommendations in order not to be too prescriptive, and the recommendations represent the compromise position agreed to by all APRP members. The observations are not meant to have the same level of authority as the Recommendations above, and there are additional discussion points that the Philippines’ Government may want to consider. The APRP is confident that there is sufficient capacity within the Philippines to conduct the suggested studies, and consider complementary measures for ensuring a smooth transition with any envisioned changes in policies (e.g., deregulating transit fares or imposing UC on SGFs). The Philippines has been undertaking economic reforms in a progressive fashion for many years, and the APRP recommends a continuation of these reform efforts for the remaining subsidies in place, along with further reviews and analyses of fossil-fuel related policies over time.
- 119. 11. REFERENCES ADB (AsiaDevelopment Bank). (2012). Philippines: Transport Sector Assessment, Strategy, and Road Map. http://www.adb.org/sites/default/files/institutional-document/33700/files/philippines-transport- assessment.pdf. ______. (2015). Fossil Fuel Subsidies in Thailand: Trends, Impacts, and Reforms. http://www.adb.org/sites/default/files/publication/175455/fossil-fuel-subsidies-thailand.pdf. Reddy, Alla. (2012). Regulatory Structure and Business Models for Bus Service Delivery in Southeast Asia. Operations Planning, New York City Transit Authority. Presentation. May 7, 2012. http://www.apta.com/mc/bus/previous/2012/presentations/Presentations/Regulatory-Structure- and-Business-Models-for-Bus-Service-Delivery-in-Southeast-Asia.pdf. APEC (Asia-Pacific Economic Cooperation). (2012a). Peer Review on Energy Efficiency in the Philippines. http://aperc.ieej.or.jp/file/2013/7/23/PREE_201211_Philippines.pdf. ______. (2012b). Reforming Fossil‐Fuel Subsidies to Reduce Waste and Limit CO2 Emissions while Protecting the Poor. http://www.iisd.org/gsi/sites/default/files/ffs_apec.pdf. ______. (2013). Energy Supply and Demand Outlook, 5th Edition. http://publications.apec.org/publication- detail.php?pub_id=1389. ______. (2015a). Guidelines on a Voluntary Peer Review for Reform of Fossil Fuel Subsidies that Encourage Wasteful Consumption (VPR/IFFSR). www.ewg.apec.org/documents/FINAL_VPR- IFFSR_Guidelines.pdf. ______. (2015b). Peer Review on Fossil Fuel Subsidy Reforms in Peru: Final Report. mddb.apec.org/Documents/2014/EWG/EWG48/14_ewg48_017.pdf. ______. (2015c). Peer Review on Fossil Fuel Subsidy Reforms in New Zealand: Final Report. http://www.mbie.govt.nz/info-services/sectors-industries/energy/international-relationships/pdf- document-library/peer-review-fossil-fuel-subsidy-reforms-nz.pdf. APEC/EWG (APEC Energy Working Group). (2012). Reforming Fossil-Fuel Subsidies to Reduce Waste and Limit CO2 Emissions while Protecting the Poor. http://www.iisd.org/publications/reforming-fossil- fuel-subsidies-reduce-waste-and-limit-co2-emissions-while-protecting. ______. (2013a). Development of a Voluntary Peer Review of Fossil Fuel Subsidy Reform. http://www.iisd.org/gsi/sites/default/files/g20lib_apec_2013_peerrvwconceptnote.pdf. ______. (2013b). EWG46 Da Nang Vietnam. http://www.ewg.apec.org/documents/EWG46%20Summary%20Record.EWG46.Website.pdf. Arellano Law Foundation. (1996). Republic Act No. 8180. http://www.lawphil.net/statutes/repacts/ra1996/ra_8180_1996.html. ______. (1998). Republic Act No. 8479. http://www.lawphil.net/statutes/repacts/ra1998/ra_8479_1998.html. ______. (2005). Republic Act No. 9337. http://www.lawphil.net/statutes/repacts/ra2005/ra_9337_2005.html. ______. (2008). Republic Act No. 9513. http://www.lawphil.net/statutes/repacts/ra2008/ra_9513_2008.html. Australia & New Zealand Chamber of Commerce (ANZCHAM). (2016). Interruptible Load Program (ILP) Primer. http://anzcham.com/blog/publications/interruptible-load-program-ilp-primer/.
- 120. 1 0 0P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Bacon R., and M. Kojima. (2008). Coping with Oil Price Volatility. World Bank, Energy Sector Management Assistance Program (ESMAP). https://www.esmap.org/sites/esmap.org/files/8142008101202_coping_oil_price.pdf. Business Inquirer. (2012). Ang, Jason K. Finally, a Cleaner Jeepney. 12 September, 2012. http://business.inquirer.net/81636/finally-a-cleaner-jeepney. Clean Technica. (2015). Upadhyay, Anand. India Doubles Coal Tax, Yet Again. 3 March, 2015. http://cleantechnica.com/2015/03/03/india-doubles-coal-tax-yet/. ______. (2016). Mahapatra, Saurabh. India Doubles Tax On Coal Again. 4 March, 2016. http://cleantechnica.com/2016/03/04/india-doubles-tax-coal/. Clements, B., et al. (2013). Case Studies on Energy Subsidy Reform: Lessons and Implications. http://www.greenfiscalpolicy.org/wp-content/uploads/2013/08/Case-Studies-on-Energy-Subsidy- Reform.-Lessons-and-Implications.pdf. Clements, B., et al. (2014). Energy subsidies: How large are they and how can they be reformed? Economics of Energy & Environmental Policy, 3(1): 1–17. Climate Change News. (2016a). King, Ed. India to Double Coal Tax Under 2016-17 Budget. 29 February, 2016. http://www.climatechangenews.com/2016/02/29/india-to-double-coal-tax-under-2016-17- budget/. ______. (2016b). Pashley, Alex. Weekly Wrap: India Praised for Clean Energy Tax on Coal. 4 March, 2016. http://www.climatechangenews.com/2016/03/04/weekly-wrap-india-praised-for-clean-energy- tax-on-coal/ ______. (2016c). Agarwal, Swati. Will Doubling India’s Coal Tax Boost the Clean Energy Sector? 1April, 2016. http://www.climatechangenews.com/2016/04/01/will-doubling-indias-coal-tax-boost-the- clean-energy-sector/. CNN Philippines. (2015). Matsuzawa, Mikas. Senator Wants Probe into eJeepney Safety. CNN Philippines. 18 May, 2015. http://cnnphilippines.com/metro/2015/05/18/Senator-wants-probe-into-e-jeepney- safety.html. DOTC ______.(2012). Project Information Memorandum. http://www.dotc.gov.ph/images/PPP/2012/1.7BContactlessAFCS/Project%20Information%20Mem orandum%20(DP%2012-21-12).pdf. ______. (2013). National Implementation Plan on Environment Improvement in the Transportation Sector Low Pollution-Low Emission. http://www.dotc.gov.ph/images/front/other_matters/nip.pdf. The Economist. (2014). Energy subsidies: Price Squeeze. The Economist. 14 June, 2014. http://www.economist.com/news/finance-and-economics/21604219-popular-and-harmful- energy-subsidies-are-hardbut-not-impossibleto-kill-price. EIA (U.S. Energy Information Administration). (2014). Philippines. http://www.eia.gov/beta/international/analysis.cfm?iso=PHL. Energy Regulatory Commission (ERC). (2006). Resolution No. 22, Series of 2006. http://www.spug.ph/PSP_articles/Res.No.22,S%20of%202006%20QTP.pdf. ______. (2014). Resolution No. 07, Series of 2014. www.erc.gov.ph/Files/Render/issuance/491. Government of Japan, Ministry of the Environment. (2012). Environment-Related Tax System in Japan. http://www.env.go.jp/en/policy/tax/env-tax/20120814a_ertj.pdf. Gwillliam, Kenneth M. (2000). Public Transport in the Developing World: Quo Vadis? http://www.thredbo- conference-series.org/downloads/thredbo6_papers/thredbo6-plenary-Gwilliam.pdf.
- 121. R E FE R E N C E S 1 0 1 ______. (2005). Bus Franchising in Developing Countries: Some Recent World Bank Experience. http://siteresources.worldbank.org/INTURBANTRANSPORT/Resources/bus_franch_gwilliam.p df. IBP Inc (International Business Publications Inc). (2015). Philippines Energy policy, laws and regulations handbook volume 1: strategic information and basic laws. Washington DC: IBP Inc, 2015. pp.35. IEA (International Energy Agency). (2009). World Energy Outlook 2009. Paris: Organisation for Economic Co-operation and Development/IEA. http://www.worldenergyoutlook.org/media/weowebsite/2009/WEO2009.pdf. ______. (2013). Southeast Asia Energy Outlook: World Energy Outlook Special Report. https://www.iea.org/publications/freepublications/publication/SoutheastAsiaEnergyOutlook_WE O2013SpecialReport.pdf. ______. (2014). World Energy Outlook. Paris: International Energy Agency. http://www.worldenergyoutlook.org/publications/weo-2014/. ______. (2015a). Fossil Fuel Subsidy Database. Paris: International Energy Agency. http://www.worldenergyoutlook.org/resources/energysubsidies/fossilfuelsubsidydatabase/ ______. (2015b). Policies & Measures/Japan: Energy Taxes on Fossil Fuels. http://www.iea.org/policiesandmeasures/pams/japan/name-21925-en.php. IMF (International Monetary Fund). (2010). Malaysia: 2010 Article IV Consultation. https://www.imf.org/external/pubs/ft/scr/2010/cr10265.pdf. ______. (2013). Energy Subsidy Reform: Lessons and Implications. http://www.imf.org/external/np/pp/eng/2013/012813.pdf. ______. (International Monetary Fund). (2013). Case Studies on Energy Subsidy Reform: Lessons and Implications. http://www.imf.org/external/np/pp/eng/2013/012813a.pdf. ______. (2015a). How Large Are Global Energy Subsidies? IMF Working Paper. https://www.imf.org/external/pubs/cat/longres.aspx?sk=42940.0. ______. (2015b). “Counting the Cost of Energy Subsidies.” http://www.imf.org/external/pubs/ft/survey/so/2015/NEW070215A.htm. ______. (2015c). World Economic Outlook database, October 2015. ______. (2015d). 2015 Article IV consultation-press release; staff report. http://www.imf.org/external/pubs/ft/scr/2015/cr15246.pdf. ______. (2016). Power It Up: Strengthening the Electricity Sector to Improve Efficiency and Support Economic Activity. https://www.imf.org/external/pubs/ft/wp/2016/wp1685.pdf. Index Mundi. (2013). Philippines Crude Oil Consumption by Year. http://www.indexmundi.com/energy.aspx?country=ph&product=oil&graph=consumption. ______. (2014a). Philippines Demographics Profile 2014. http://www.indexmundi.com/philippines/demographics_profile.html. ______. (2014b). Philippines Energy Profile 2014. http://www.indexmundi.com/philippines/energy_profile.html. ______. (2016). Philippines Crude Oil Consumption by Year. http://www.indexmundi.com/energy.aspx?country=ph&product=oil&graph=consumption.
- 122. 1 0 2P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S International Institute for Sustainable Development (IISD). (2013). Thailand’s Energy Situation and an Overview on Fossil Fuel Subsidies. https://www.iisd.org/gsi/sites/default/files/ffs_bgkworkshop_tdri.pdf. Irwin, Timothy. (1997). Price Structures, Cross-Subsidies, and Competition in Infrastructure.” Public Policy for the Private Sector. World Bank Group. http://regulationbodyofknowledge.org/wp- content/uploads/2013/03/Irwin_Price_Structures_Cross.pdf. Kojima, Masami. (2009). Government Response to Oil Price Volatility: Experience of 49 Developing Countries. http://siteresources.worldbank.org/INTOGMC/Resources/10-govt_response-hyperlinked.pdf. ______. (2013). Petroleum Product Pricing and Complementary Policies: Experience of 65 Developing Countries Since 2009. https://openknowledge.worldbank.org/bitstream/handle/10986/13201/wps6396.pdf?sequence=1 &isAllowed=y. Kojima, S., and A. Bhattacharya. (2011). Pricing Reform and Enhanced Investment in the Energy Sector: a Way Towards East Asian Economic Development, in Kimura, F. and X. Shi (eds.), ‘Deepen Understanding and Move Forward: Energy Market Integration in East Asia.’ ERIA Research Project Report 2010-25, Jakarta: ERIA. pp.191-212. Kojima, M., and D. Koplow. (2015). Fossil Fuel Subsidies: Approaches and Valuation. Policy Research Working Paper 7220, World Bank Group, Energy and Extractives Global Practice Group. http://documents.worldbank.org/curated/en/2015/03/24189732/fossil-fuel-subsidies-approaches- valuation. Laderchi, Caterina R. (2014). Transitional Policies to Assist the Poor While Phasing Out Inefficient Fossil Fuel Subsidies that Encourage Wasteful Consumption. http://www.worldbank.org/content/dam/Worldbank/document/Climate/Transitional-Policies- Assist-Poor-Phasing-Out-Inefficient-Fossil-Fuel-Subsidies.pdf. Lamberte, Mario B., and J. Yap. (1991). The Impact of the Gulf Crisis on the Philippine Economy. Working Paper Series 91-03. Philippine Institute for Development Studies, October 1991. http://dirp3.pids.gov.ph/ris/wp/pidswp9103.pdf. Malampaya. (2016). Power from the Deep. http://malampaya.com/. Manila Electric Company (MERALCO). (2015). The Philippine Electric Distribution Sector. Presentation. December 3, 2015. Martini, Chiara. (2014). Is the Environment a Luxury?: An Inquiry into the Relationship Between Environment and Income. pp. 101-127. Ministry of Economy, Trade and Industry, Japan (METI), (2016). Energy White Paper 2016. http://www.enecho.meti.go.jp/about/whitepaper/2016pdf/ Nag, Tirthankar. (2010). India Infrastructure Report 2010. Chapter 12. Captive Generation in India: The Dilemma of Dualism. IDFC Limited. http://www.idfc.com/pdf/report/Chapter-12.pdf. Nasdaq. (2011). Heffernan, Shayne. Thailand Oil Fund to End. 5 July, 2011. http://www.nasdaq.com/article/thailand-oil-fund-to-end-cm83883. National Economic and Development Authority (NEDA). (2001). Electric Power Industry Reform Act (EPIRA) of 2001. http://www.neda.gov.ph/wp-content/uploads/2013/12/R.A.-9136.pdf. National Power Corporation (NPC). (2016). Small Power Utilities Group: Existing Effective Rates. http://www.napocor.gov.ph/index.php/2013-09-13-01-23-51/spug-rates. NEA (National Electrification Administration). (2015). 2015 Monthly Reports. http://www.nea.gov.ph/publications/status-of-programsproject-implementation. ______. (2016). About Us. http://www.nea.gov.ph/about-us.
- 123. R E FE R E N C E S 1 0 3 New York State Energy Research and Development Authority (NYSERDA). (2016). Funding. http://www.nyserda.ny.gov/About/Funding. New York Utility Project (NYUP). (2014). Electric Bill Surcharge Reform Proposals to Collect and Spend Billions Do Not Address Affordable Service to Low Income Customers. http://utilityproject.org/2014/11/12/electric-bill-surcharge-reform-proposals-to-collect-and- spend-billions-do-not-address-affordable-service-to-low-income-customers/. Organisation for Economic Co-operation and Development (OECD). (2010). OECD Environmental Performance Reviews: Japan 2010. http://www.oecd.org/japan/oecd-environmental-performance- reviews-japan-2010-9789264087873-en.htm. ______. (2011). Japan: Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels. http://www.oecd.org/site/tadffss/jpn.pdf. ______. (2013). Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels. http://www.keepeek.com/Digital-Asset-Management/oecd/environment/inventory-of-estimated- budgetary-support-and-tax-expenditures-for-fossil-fuels-2013_9789264187610-en#page9. ______. (2015). OECD Companion to the Inventory of Support Measures for Fossil Fuels 2015. http://www.oecd.org/environment/oecd-companion-to-the-inventory-of-support-measures-for- fossil-fuels-2015-9789264239616-en.htm. Official Gazette of the Republic of the Philippines. (1984). Presidential Decree No. 1956, s. 1984. 10 October, 1984. http://www.gov.ph/1984/10/10/presidential-decree-no-1956-s-1984/. ______. (2016). Jeepney Fare Reduced. 22 January, 2016. http://www.gov.ph/2016/01/22/jeepney-fares- reduced/. PDOE (Republic of the Philippines Department of Energy). (n.d.-a). Department Circular No. 98-03-004. Rules and Regulations Implementing Republic Act 8479, “Downstream Oil Industry Deregulation Act of 1998.” http://www.doe.gov.ph/doe_files/pdf/Researchers_Downloable_Files/DownloadableFiles/Republic_Act_84 79-IRR.pdf. ______. (2008). Public Consultation on The Philippine Energy Plan 2008-2030. Presentation. 15 August, 2008. http://www.doe.gov.ph/doe_files/pdf/01_Energy_Situationer/2008%20Oil%20Pricing%20in%20th e%20Philippines.pdf. ______. (2012a). 2012-2030 Philippine National Energy Plan: I. Overview and Executive Summary. http://www.doe.gov.ph/doe_files/pdf/01_Energy_Situationer/2012-2030-PEP-Executive- Summary_revised.pdf. ______. (2012b). The Report of the Independent Oil Price Review Committee (2012). http://www.doe.gov.ph/doe_files/pdf/Price_Watch/IOPRC_Report_09-10-2012.pdf. ______. (2012c). 2012-2016 Missionary Electrification Development Plan (2012 MEDP). http://www.spug.ph/2012%20MEDP.pdf. ______. (2014). Department of Energy Power Situation. http://www.doe.gov.ph/doe_files/pdf/01_Energy_Situationer/2014_power_situationer.pdf. ______. (2015a). Philippine Energy Profile. Fossil Fuel Subsidy Peer Review. Presentation. 1 December, 2015. ______. (2015b). Natural gas production/consumption as of February 29, 2016. http://www.doe.gov.ph/downstream-natgas-statistics/natural-gas-statistics. ______. (2015c). Philippines Economy APEC FFSR Peer Review. Presentation, Electric Power Industry Management Bureau (EPIMB), PDOE. December 2, 2015. ______. (2016a). Coal. http://www.doe.gov.ph/fossil-fuels/coal.
- 124. 1 0 4P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S ______. (2016b). Geothermal. http://www.doe.gov.ph/renewable-energy-res/geothermal. ______. (2016c). Hydropower. http://www.doe.gov.ph/renewable-energy-res/hydropower. ______. (2016d). Philippines Economy APEC FFSR Peer Review. Presentation. ______. (2016e). Pricing Formula: So the public would know - oil pricing formula in a deregulated downstream oil industry. http://www.doe.gov.ph/pricing-formula. ______. (2016f). Republic Act No. 9513. http://www.doe.gov.ph/issuances/republic-act/627-ra-9513. PhilStar. (2013). Gamboa, Rey. Does oil deregulation really work? The Philippine Star. 11 January, 2013. http://www.philstar.com/business/2013/01/11/895493/does-oil-deregulation-really-work. ______. (2015a). Bacani, Louis. Unemployment Rate Falls to 6.4%. The Philippine Star. 9 June, 2015. http://www.philstar.com/business/2015/06/09/1463980/unemployment-rate-falls-6.4. Power Sector Assets and Liabilities Management Corporation (PSALM). (2016). About Us. https://psalm.gov.ph/about%20us.asp#man. ______. (2015). Universal Charge (UC) Administration. https://psalm.gov.ph/admi%20uni%20char.asp. PSA (Philippine Statistics Authority). (2001). Family Income and Expenditures: 2000 Final Results. http://www.nscb.gov.ph/fies/fies-2000/default.asp. ______. (2013a). Filipino Families in the Poorest Decile Earn Six Thousand Pesos Monthly on Average in 2012 (Results from the 2012 Family Income and Expenditure Survey). https://psa.gov.ph/content/filipino- families-poorest-decile-earn-six-thousand-pesos-monthly-average-2012-results-2012. ______. (2013b). Transportation: Philippine Yearbook 2013. https://psa.gov.ph/sites/default/files/2013%20PY_Transportation.pdf. ______. (2014). One in Ten Young Filipino Women Age 15 to 19 is Already a Mother or Pregnant with First Child (Final Results From the 2013 National Demographic and Health Survey). http://census.gov.ph/content/one-ten-young-filipino-women-age-15-19-already-mother-or- pregnant-first-child-final-results. ______. (2015a). The Philippines in Figures 2015. https://psa.gov.ph/sites/default/files/2015%20PIF.pdf. ______. (2015b). Philippine Economy Posts 6.0 Percent GDP Growth. http://nap.psa.gov.ph/sna/. ______. (2015c). Gross National Income and Gross Domestic Product. http://www.nscb.gov.ph/sna/2015/1st2015/2015gnpi1.asp. ______. (2015d). Employment Rate Estimated at 93.4 Percent in January 2015. https://psa.gov.ph/content/employment-rate-estimated-934-percent-january-2015. ______. (2016). Merchandise Exports Performance: December 2015. http://www.nscb.gov.ph/sna/2015/1st2015/2015gnpi1.asp. REEEP (Renewable Energy and Energy Efficiency Partnership). (2014). Republic of the Philippines 2014. http://www.reegle.info/policy-and-regulatory-overviews/PH. Reuters. (2011). Thailand May Remove Oil Subsidy as Fund Runs Out. 4 March, 2011. http://www.reuters.com/article/thailand-economy-subsidy-idAFSGE72302F20110304. Speck, Stefan. (2008). The Design of Carbon and Broad-Based Energy Taxes in European Countries. Vermont Journal of Environmental Law, Vol. 10. http://vjel.vermontlaw.edu/files/2013/06/The-Design-of- Carbon-and-Broad-Based-Energy-Taxes.pdf. Sotkiewicz, Paul M. (2004). Cross-Subsidies That Minimize Electricity Consumption Distortions. http://warrington.ufl.edu/centers/purc/purcdocs/papers/0314_Sotkiewicz_Cross- Subsidies_that_Minimize.pdf. Switch Asia. (2014). Integration of Renewable Energies in the Philippine Off-Grid Areas. http://www.switch- asia.eu/news/integration-of-renewable-energies-in-the-philippine-off-grid-areas/.
- 125. R E FE R E N C E S 1 0 5 Trading Economics. (2016). Philippines Inflation Rate Forecast 2016-2020. http://www.tradingeconomics.com/philippines/inflation-cpi/forecast. UNEP (United Nations Environmental Programme). (2004). Institutional Reforms and their Impact in Rural Electrification: South and Southeast Asia. http://www.gnesd.org/- /media/Sites/GNESD/Publication%20pdfs/Energy%20Access%20theme/Technical_report_AIT_ve r_10_May_2004.ashx?la=da. ______. (2008). Reforming Energy Subsidies: Opportunities to Contribute to the Climate Change Agenda. ISBN: 978-92-807-2944-3. http://www.unep.org/pdf/pressreleases/reforming_energy_subsidies.pdf. Vagliasindi, Maria. (2013). Implementing Energy Subsidy Reforms, Evidence from Developing Countries. World Bank. https://openknowledge.worldbank.org/handle/10986/11965. Vikitset, Thiraphong. (2013). The Role of the Oil Fund in Thailand: Past, Present, and Future. http://rc.nida.ac.th/en/attachments/article/144/oil%20fund_final_thiraphong.pdf. Western Area Power Administration (WAPA). (2015). Treatment of Behind the Meter Generation for Transmission System Network Service Customers. https://www.wapa.gov/regions/RM/opsmaint/Documents/western-behind-meter-generation- policy.pdf ______. (2016). About Western. https://www.wapa.gov/About/Pages/About.aspx. World Bank. (2002). Cities on the Move: A World Bank Urban Transport Strategy Review. http://siteresources.worldbank.org/INTURBANTRANSPORT/Resources/cities_on_the_move.p df. ______. Water, Electricity, and the Poor Who Benefits from Utility Subsidies? http://siteresources.worldbank.org/INTWSS/Resources/Figures.pdf. ______. (2006). Fare Control. The Urban Bus Toolkit: Tools and Options for Reforming Urban Bus Systems. http://www.ppiaf.org/sites/ppiaf.org/files/documents/toolkits/UrbanBusToolkit/assets/1/1d/1d2.ht ml. ______. (2010). Subsidies in the Energy Sector: An Overview Background Paper for the World Bank Group Energy Sector Strategy. http://siteresources.worldbank.org/EXTESC/Resources/Subsidy_background_paper.pdf. ______. (2014). From the Bottom Up: How Small Power Producers and Mini-Grids Can Deliver Electrification and Renewable Energy in Africa. https://openknowledge.worldbank.org/bitstream/handle/10986/16571/9781464800931.pdf?seque nce=1&isAllowed=y. ______. (2015). Philippines Overview. http://www.worldbank.org/en/country/philippines/overview. ______. (2016a). GDP, PPP. http://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD ______. (2016b). GDP per capita PPP. http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD ______. (2016c). GDP growth. http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries. ______. (2016d). GDP growth (annual percent). http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries/PH-4E-XN?display=graph. ______. (2016e). GNI per Capita. http://data.worldbank.org/indicator/NY.GNP.PCAP.CD/countries/PH- 4E-XN?display=graph. ______. (2016f). Labor force, total. http://data.worldbank.org/indicator/SL.TLF.TOTL.IN.
- 126. 1 0 6P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S ______. (2016g). Life Expectancy at Birth, total (years). http://data.worldbank.org/indicator/SP.DYN.LE00.IN/countries?order=wbapi_data_value_2013+ wbapi_data_value+wbapi_data_value-last&sort=asc. ______. (2016h). Poverty Gap at National Poverty Lines (%). http://data.worldbank.org/indicator/SI.POV.NAGP/countries. ______. (2016i). Urban Population (% of total). http://data.worldbank.org/indicator/SP.DYN.LE00.IN/countries?order=wbapi_data_value_2013+ wbapi_data_value+wbapi_data_value-last&sort=asc. ______. (2016j). Data: Philippines. http://data.worldbank.org/country/philippines. ______. (2016h). GDP Per Unit of Energy Use (Constant 2011 PPP $ Per kg of Oil Equivalent). http://data.worldbank.org/indicator/EG.GDP.PUSE.KO.PP.KD. World Resources Institute (WRI). (2014). 10 Questions to Ask About Electricity Tariffs. http://www.wri.org/publication/10-questions-electricity-tariffs.
- 127. A P RP M E E T I N G S F O R I F F S R M I S S I O N , D E C E M B E R 2 0 1 5 A - 1 APPENDIX A. APRP MEETINGS FOR IFFSR MISSION, DECEMBER 2015 Table A–1. Final Agenda Tuesday, 1 Dec Wednesday, 2 Dec Thursday, 3 Dec Friday, 4 Dec Monday, 7 Dec 9:00-10:00 Meeting of the APEC and PDOE team re: agenda, logistics, etc. Meeting with government Agencies: -Department of Finance -National Economic Development Authority -Department of Trade and Industry -Department of Transportation and Communication -Department of Labor and Employment Meeting with power industry agencies: -National Power Corporation (NPC) -National Electrification Administration (NEA) -Power Assets and Liabilities Management Corporation (PSLAM) -Energy Regulatory Commission (ERC) -Manila Electric Company (MERALCO) Meeting with oil associations and companies: -Petroleum Institute of the Philippines (PIP) -Independent Philippine Petroleum Company Association (IPPCA) -Petron -Chevron -Shell -Other oil companies Meeting with Industry Group: -Philippine Chamber of Commerce Industry (PCCI) Secretary and Undersecretary of Energy Evaluation/Assessment/ Final Concerns 10:00-10:25 Overview of the Study by Peer Review Team 10:25-10:50 Macro-economic Profile by NEDA 10:50-11:05 Energy Profile by PDOE Planning Bureau 11:05-11:30 Subsidies on Oil (OPSF, PTAP & RVAT/Excise Tax) 11:30-11:55 Subsidies on Power (Missionary Electrification/UC/SPUG & UC Exemption for SGF) 11:55-12:20 Question & Answer 12:20-1:30 L U N C H B R E A K
- 128. A - 2A P P E N D I X A Tuesday, 1 Dec Wednesday, 2 Dec Thursday, 3 Dec Friday, 4 Dec Monday, 7 Dec 1:30-3:00 Meeting with LPG Associations: -LPG Refillers Association (LPGRA) -LPG Industry Association, Inc. (LPGIA) Meeting with: - Representative of the National Renewables Energy Board -Mr. Gaspar Escobar, NREB Secretariat Presentation: Philippines Energy Plan -Lana Rose A. Manaligod, PDOE Planning Bureau Meeting with: -Atty. Vigor Mendoza (former delegate of the transport sector [1-UTAK]) at the Phils. House of Representatives -Ms. Rosemarie Gomera, Head, TWG National Biofuels Board (unavailable) Synthesis / Presentation of initial report/recommendations 3:00-4:00 Focused group discussions. (APEC & PDOE Team) Wrap up for the day: APEC & PDOE team Wrap up for the day: APEC & PDOE team
- 129. A P RP M E E T I N G S F O R I F F S R M I S S I O N , D E C E M B E R 2 0 1 5 A - 3 Table A-2. Participants Meeting Venue Participant Name Position Institution Official Opening Meeting DOE-AVR Melita Obillo OIC - Director PDOE- OIMB Rodela Romero Assistant Director PDOE-OIMB Loreta G. Ayson Undersecretary PDOE Jesus T. Tamang Director IV PDOE - EPPB Carmencita Bariso Director III PDOE - EPPB Hideliza V. Ludovice OIC-Chief PDOE - OICMD William Quinto Supervising SRS PDOE - ECCD Chairmaine Canillas AVP, Corporate Affairs Department Petron Corp. Mia Delos Reyes Government Affairs Petron Corp. Michelle Sanches Senior SRS PDOE-OICMD Aida Y. Parena Senior SRS PDOE-OICMD Arnold de Vera SRS-II PDOE-OICMD Ma. Victoria Capito OIC-Chief PDOE-PFRD Danilo Vivar Supervising SRS PDOE-PFRD Lana Rose Manaligod Supervising SRS PDOE-PFRD Jane Peraldo Senior SRS PDOE-PFRD Luningning Baltazar Chief PDOE-PMDD Emmanuel Talag Supervising SRS PDOE-PPDD Asuncion Cunanan PDOE-PMDD Teddy Reyes Executive Director PIP Lawrence Fernandez Head Utility Economics, MERALCO Julie B. Dulce Utility Economics, MERALCO Letti L. Sapina Utility Economics, MERALCO Ramon Mathay Utility Economics, MERALCO Mercedita Pastrana Executive Director LPGIA Denise Jannah Serrano Economist DOTC Zenaida P. Oquilino PSALM Liza I. Hernandez NEA James B. Panado NEA Mark Brian Nicdao Downstream Commmunication Manager Pilipinas Shell Randy Anastacio Pilipinas Shell Mark Malabanan Pilipinas Shell Valerie Ku Business Development Pilipinas Shell Agerico T. Isorena Division Manager NPC Richard Yao President LPGRA Yumi Paypon 1-Utak
- 130. A - 4 AP P E N D I X A Meeting Venue Participant Name Position Institution Marisa Garcia DOLE Joycelyn Amazona DOLE Meeting with LPG PDOE-AVR Richard Yao President LPGRA Mercedita Pastrana Executive Director LPGIA Melita Obillo OIC - Director PDOE- OIMB Meeting with Government Agencies PDOE-AVR Melita Obillo OIC - Director PDOE- OIMB Rodela Romero Assistant Director PDOE-OIMB Hideliza Ludovice OIC-Chief PDOE-OICMD Aida Parena Senior SRS PDOE-OICMD Michelle Dela Cruz Senior SRS PDOE-OICMD William Quinto Supervising SRS PDOE - ECCD Lilibeth Morales Senior-SRS PDOE-PFRD Rowena Villanueva Senior-SRS PDOE-PD Elsa Agustin Director Fiscal Policy and Planning Office - PDOF Marisa Garcia DOLE Maria Corazon Japson Economist DOTC Arlene Sison NEDA Dexter Pajarillo PDTI -BOI Ado Rejujo Petron Corp. Meeting with National Renewable Energy Board (NREB) PDOE-AVR Gaspar G. Escobar, Jr. Division Chief NREB -Technical Secretariat Presentation of the Phils. Energy Plan Lana Rose A. Manaligod Supervising SRS PDOE-PD Meeting with the Power Industry Groups PNOC Bldg. 5 Conference Room of Sec. Monsada Melita Obillo OIC - Director PDOE-OIMB Rodela Romero Assistant Director PDOE-OIMB Luningning Baltazar Reviewer, APEC VPR in New Zealand PDOE Emmanuel Talag Supervising SRS PDOE Asuncion Cunanan PDOE-EPIMB Hideliza Ludovice OIC - Chief OIC-OICMD Michelle De la Cruz Senior SRS PDOE-OICMD Aida Parena Senior SRS PDOE-OICMD Zenaida Aquino Officer-in-Charge Universal Charge Administration Department, PSALM Lawrence Fernandez Head Utility Economics, MERALCO Jon Cleofas AVP Power Generation Group-MERALCO Atty. William S. Pamintuan First VP MERALCO Ernesto Cabral Retail Supply MERALCO Charis Ramos Regulatory Legal Regulatory Legal Office - MERALCO Letti Sapina Utility Economics, MERALCO
- 131. A P RP M E E T I N G S F O R I F F S R M I S S I O N , D E C E M B E R 2 0 1 5 A - 5 Meeting Venue Participant Name Position Institution Joey Alonzo Energy Management Manager MERALCO Ramon Mathay Utility Economics, MERALCO Rodolfo Evangelista SR. PRDO NEA Alvin Ortega Chief ERC - TRD Ana Maria Bayani ERO II ERC Agerico T. Isorena Division Manager NPC Ma. Rosemarie Alayay CSS-B NPC Joan Castillo Director PDOF - CAG Jaime Rariza PDOF - CAG Meeting with Transport Representative PNOC Bldg. 5 Conference Room of Sec. Monsada Atty. Vigor Mendoza Chairman 1-Utak Melita Obillo OIC - Director PDOE-OIMB Meeting with Oil Companies PDOE-AVR Teddy M. Reyes Executive Director PIP Mia Santos Government Affairs Petron Corp Melita Obillo OIC - Director PDOE- OIMB Recap Meeting PDOE-AVR Jesus T. Tamang Director IV PDOE - EPPB Marrio C. Marasigan OIC Assistant Secretary & Director PDOE - REMB Melita Obillo OIC - Director PDOE-OIMB Carmencita Bariso Director III PDOE - EPPB Luningning Baltazar Chief PDOE-PMDD Emmanuel Talag Supervising SRS PDOE-PPDD Recap of the 5 days meeting OIMB Conference Room, PNOC Bldg. 5, 3rd Floor Hon. Zenaida Y. Monsada Secretary Department of Energy Loreta Ayson Undersecretary Department of Energy Jesus T. Tamang Director IV PDOE - EPPB Carmencita Bariso Director III PDOE - EPPB Rodela Romero Asst. Director PDOE-OIMB Ben Austria Chairman PCCI Rhuby Conel Adhoc Manager PCCI Hideliza Ludovice OIC-Chief PDOE-OICMD William Quinto Supervising SRS PDOE - ECCD
- 133. APPENDIX B. SUMMARIESOF APRP MEETINGS IN MANILA, PHILIPPINES Tuesday, December 1, 2015, 9:30-10:00am Initial Logistics/Technical Meeting The APRP had its first meeting with the main activity liaison, Ms. Melita Obillo, OIC Director at the Oil Industry Management Bureau at the Department of Energy to discuss the logistics and agenda of the weeklong meetings. Tuesday, December 1, 2015, 10:00am - 1:00pm Official Opening Meeting The opening meeting was convened by senior officials from the Department of Energy. In attendance, together with PDOE management and analysts, the APRP, and the Secretariat representatives, were PDOE-affiliated public energy sector institutions, including the National Electrification Administration, the Power Sector Assets and Liability Corporation (PSALM), and the National Power Corporation; other government agencies, including the Departments of Transportation & Communications and Labor & Employment; and numerous private sector representatives from the power and fossil fuel sectors. The meeting began with introductions of the participants and the description of roles of each entity involved in the IFFSR process. The PDOE welcomed the APRP and the Secretariat and noted that the Philippine government looks forward to the outcome of fossil fuel subsidy peer review, building on earlier reviews in the Philippines and New Zealand. The APRP presented the objectives of the FFSR Peer Review Process and their knowledge on the five subsidies under review based upon research prior to the site visit. The APRP Team Leader emphasised that this is voluntary activity and as such the APRP will duly consider the Philippines’ objectives for the Peer Review, as per the APEC guidelines. The Power Market Development Division (PMDD) of the PDOE provided a presentation on the Philippine Power Sector. The presentation covered the restructuring of the electricity sector in the Philippines, the bureau’s vision for reform, and the history of power sector subsidies. The PDOE Undersecretary, Ms. Loreta G. Ayson, led a discussion on the definition of a fossil fuel subsidy. Undersecretary Ayson also articulated key considerations for the APRP regarding the policies selected for review: including (1) the source of energy assistance payments (government and non- government); (2) the purpose of the assistance, particularly regarding development and support of lower income households; (3) identifying the target beneficiaries of the subsidy and whether they are benefiting from them; and (4) the time frame of the assistance program (temporary or permanent). The APRP presented several definitions of subsidies, as articulated by various international organizations and countries. It was noted that no single definition is universally accepted. The APRP and the Philippines delegation agreed that government policies that reduce energy prices below international
- 134. B - 2A P P E N D I X B levels to consumers constitute subsidies. Participants among the APRP and the Philippines government noted that other policies under review designed to lower energy prices for certain consumers, such as ratepayer cross-subsidies and favourable tax treatment, are less clear-cut. Tuesday, December 1, 2015, 2:00 - 4:00pm Meeting with LPG Association The APRP met with the LPG Refiners Association (LPGRA). The LPGRA underscored that LPG, among other alternative fuels, reduces exhaust pollution from jeepneys and tricycles compared to diesel fuel, the more common fuel. It was noted that widespread fuel switching has yet to take place because there are limited incentives and numerous barriers to do so. The discussion between the LPGRA and the APRP also touched on household uses of LPG; purchasing patterns of LPG among poorer households; and policy measures to promote fuel switching, together with their costs and benefits. The APRP also discussed the OPSF with the LPGRA, and discussed the extensive changes taken in the refining sector since the deregulation of the fossil fuel industry that followed the abolition of the OPSF in the late 1990s. Wednesday, December 2, 2015, 9:00 – 1:00pm Meeting with Government Agencies The APRP met with the following Government agencies: • Department of Energy • Department of Finance – Fiscal Policy and Planning Office. Very involved in the Excise Tax Exemption for socially sensitive process. We did not agree with it at the Department of Finance. • Department of Labor and Employment • Department of Transportation and Communication • National Economic Development Authority (NEDA) • Department of Trade and Industry, Department of Trade and Industry Following introductions and a presentation by the APRP on its purpose, each government agency presented their role in implementing each particular policy under review, or how each agency is affected by a particular policy. They also provided their general views on the vision or objectives for addressing the selected policies. • The Department of Finance emphasized the fiscal impacts of preferential tax policies, such as the excise tax exemption for certain fuels, on government receipts. • The Department of Labor and Employment (DOLE) emphasized that its mission is to alleviate the working conditions of the workers. Of the subsidies considered, Pantawid Pasada (PTAP) most concerns the DOLE because most workers use public transport. The DOLE representatives stressed that efficient and affordable public transport can have beneficial impacts for the workforce and the economy.
- 135. M E ET I N G S U M M A R I E S B - 3 • The Department of Transportation and Communication (DOTC) representatives noted the DOTC’s mission is to support the development of public transit and thereby mitigate air pollution. • National Economic Development Authority (NEDA) expressed support for the idea that there should be a study on economic impacts of subsidies. Wednesday, December 2, 2015, 1:30–2:30pm Meeting with National Renewable Energy Board, Department of Energy During this meeting, the APRP had in-depth discussion with the NREB representative on renewable energy, microgrids, geothermal energy, competition of coal, natural gas, and other energy sources, etc. The discussants addressed the subsidy for Missionary Electrification (SPUG). The NREB representative stressed NREB’s interest in supporting renewable energy solutions in areas with limited electricity. Wednesday, December 2, 2015, 2:40-4:30pm PDOE Planning Bureau Presentation The Planning Bureau of the PDOE gave a presentation to the APRP on the energy profile of the Philippines that covered the following topics in her presentation: • Energy Policy and Programs • Final Energy Consumption • Primary Energy Supply • The Downstream Oil Sector • The Power Sector • Energy Programs Affecting Oil and Power The team went over the slides and asked specific questions about the different energy sources, measures affecting these sources, energy efficiency, and the government’s vision. Thursday, December 3, 2015, 9:00 – 1:00pm Meeting with Power Industry Groups Participants included the APRP; the PDOE; the Power Sector Assets and Liability Corporation (PSALM); the Energy Regulatory Commission (ERC); the National Power Corporation (NPC); the National Electrification Administration (NEA); and Meralco, the regional electric utility of Manila. Following introductory remarks, the MERALCO representative gave a detailed presentation about the Philippines power sector, focusing on retail prices for households and businesses, and the structure of the power utility industry. Several of the points he made included: • The Philippines’ power prices are higher compared to neighbouring countries, due largely to lack of subsidies.
- 136. B - 4A P P E N D I X B • The Philippines has an unbundled power sector in which generation, transmission and distribution are separated. • Transmission and distribution are still regulated, while the generation sector is open to competition in Luzon and Visayas. • It is important to understand the context of the Philippines market – not necessarily appropriate to copy policies from developed companies. • There is a constant need for capital investments. Rapidly growing market due to economic and infrastructure growth. • About 45 percent of consumers consume 100 kWh/month or less. • Household electrification is at 81 percent at the domestic level. In MERALCO area – Metro Manila and adjacent provinces the electrification rate is 97 percent. In some areas, electrification level is 52 percent. There is a wide disparity across regions. • The Government of the Philippines uses surcharges on electricity charged to ratepayers to cover investments in power sector infrastructure and to implement cross subsidies. The power sector support policies, including the universal charge (UC) for missionary electrification and the UC exemption for self-generating facilities (SGFs), were discussed at length, including the many policies to support privatization and electrification. Discussion centered on the efficiency and efficacy of these policies, and whether the costs of these programs are justifiable and appropriately placed on ratepayers rather than taxpayers. Thursday, December 3, 2015, 2:00–4:30pm Meeting with Transport Representative The APRP met with 1-Utak (One United Transport Coalition), an advocacy organization for various groups involved in public transportation in the Philippines, including but not limited to jeepney drivers. The discussion focused on issues in the public transport sector, the deregulation of fares, and how the fixed fares and fuel subsidies for jeepney and tricycle operators affect public transport. In particular, the meeting highlighted the way in which fixed, regulated fares obstruct the uptake of new technology, efficiency, and competition in the transport sector. The participants also discussed government efforts, possible solutions, and incentives beyond fare deregulation to promote these aims. Friday, December 4, 2015, 9:00am–11:30am Meeting with Oil Industry Representatives Two representatives of the petroleum industry – the Philippines Institute of Petroleum and Petron – met with the APRP. The PIP and Petron representatives articulated views of the industry on health, safety, product quality, and the environment. Excise taxes and VAT were discussed, as were fuel quality standards such as Euro IV and air quality. Monday, December 7, 2015, 11:00am–12:30pm Meeting with the Philippine Chamber of Commerce and Industry
- 137. M E ET I N G S U M M A R I E S B - 5 The APRP met with representatives of the Philippine Chamber of Commerce and Industry to share preliminary findings and recommendations, which were well received. Monday, December 7, 2015, 11:30am–12:30pm Meetings with Department of Energy The APRP conducted a debrief meeting with various representatives of the Department of Energy, including the Secretary, the Honorable Ms. Zenaida Monsada to report out on activities conducted and to share preliminary findings and recommendations. In particular, the APRP and PDOE discussed the potential for translating the findings into policy recommendations that would be implementable.
- 139. APPENDIX C. PEERREVIEW TEAM MEMBERS FFSR TEAM LEADER • Dr. Niall Mateer FFSR TEAM MEMBERS • Mr. David Buckrell • Mr. Noor Iskandarsyah • Mr. Toshiyuki Shirai FFSR SECRETARIAT • Dr. Ananth Chikkatur • Mr. Andrew Eil • Ms. Alexandra Jamis • Ms. Jeannette Paulino FFSR TEAM LEADER Dr. Niall Mateer Dr. Niall Mateer is Director of CIEE’s Carbon Sequestration Research Program, manages the West Coast Regional Carbon Sequestration Partnership (WESTCARB) contract, awarded by the California Energy Commission (CEC). His roles include financial and programmatic oversight and management of critical partnerships. Until 2000, Dr. Mateer was Director of Research Outreach at the University of California (UC) Office of the President. Dr. Mateer participated in many research initiatives throughout California during the 1990s and oversaw the administration of UC's diverse system-wide research organizations, including the UC Energy Institute, the National Institute for Environmental Change, and CIEE. He also served on the Board of the California Space Technology Alliance, promoting the California space program. In 2000 he was appointed founding Executive Director of the University of California Trust in the United Kingdom (UK), based in his hometown of London, England. He returned to the United States in 2005 to become a consultant on university management and various venture technology projects. Dr. Mateer is an earth scientist by training and has been active in 35 countries as a researcher, as a geoscience project leader for UNESCO, and as editor of an international geological journal. He has written over 100 scientific publications. He was a founder faculty member of geology departments in Texas and in Nigeria. Ph.D. Geology, 1977 (Uppsala University, Sweden) B.S. Geology, 1973 (Durham University, UK)
- 140. D - 2A P P E N D I X D FFSR TEAM MEMBERS Mr. David Buckrell Mr. Buckrell is the Principal Policy Advisor at New Zealand’s Ministry of Business, Innovation and Employment (MBIE). His work focuses on providing analysis and advice on policy settings and market developments in New Zealand’s upstream exploration, natural gas, and downstream petroleum sectors. Mr. Buckrell has provided policy input to New Zealand’s royalty regime concerning petroleum and minerals, MBIE’s Organisation of Economic Co-operation and Development (OECD) draft analysis on fossil fuels in New Zealand, MBIE’s review of tax rules for non-resident offshore rig operators in the petroleum and “specified mineral” sector, the International Energy Agency’s (IEA) Emergency Response Review of Japan, and a review of New Zealand’s Crown Minerals Act. Mr. Buckrell was previously an energy consultant at the Washington-based PFC Energy, where he focused on global midstream, refining and marketing issues, and specialized in the midstream and downstream sectors of the Former Soviet Union. Mr. Noor Iskandarsyah Mr. Iskandarsyah has been working in the Fiscal Policy Office in Ministry of Finance Republic of Indonesia since 1996. In the last five years, Mr. Iskandarsyah has served as the Head of Subsidy Policy Division. His main responsibilities include analyzing, formulating, and proposing subsidy policies in the State Budget. These subsidies include energy subsidy (fuel, LPG, and electrify subsidy) and non-energy subsidy (food, fertilizer, seed etc.). Mr. Iskandarsyah is also responsible for discussing the subsidy budget with related line ministers and other institutions under the Ministry of Finance and the Parliament. Mr. Toshiyuki Shirai Mr. Shirai serves as Senior Energy Analyst in Directorate of Sustainability, Technology and Outlooks in IEA. Previously, he served in various policy planning divisions as deputy-director in Ministry of Economy, Trade and Industry in Japanese government, being responsible for Middle East and Africa affairs, energy policy, manufacturing industry policy, and economic cooperation policy. He also served as head of economic and commercial section in Embassy of Japan in Islamic Republic of Iran. FFSR SECRETARIAT Dr. Ananth Chikkatur Dr. Chikkatur has over twelve years of experience in energy and technology policy analysis, along with a strong background in technical and research expertise. Dr. Chikkatur has worked in a number of energy-related areas, including natural gas, oil, power, carbon capture and storage, and climate change. For USAID and APEC, he developed the voluntary peer review guidelines for fossil fuel subsidy reforms for APEC. He also led Masters in Economics and Finance, 2001 (Institut d’Etudes Politiques de Paris, Paris, France) B.A. Politics, 1998 (Victoria University of Wellington, Wellington, New Zealand) Ph.D. Physics, 2003 (Massachusetts Institute of Technology, USA) B.S. Physics, 1997 (University of Rochester, USA) Master of Business Administration, ,2004 (Georgetown University) Master of Science, 1998 (University of Tokyo) Master of Economy, (University of Indonesia) Master of Public Administration (Flinders University, South Australia)
- 141. P E ER R E V I E W T E A M M E M B E R S D - 3 the team for the VPR/IFFSR in Peru in 2014. Dr. Chikkatur has worked on and managed several projects with the European Commission and U.S. Environmental Protection Agency to develop Carbon Capture and Storage (CCS) related guidance documents and related reports. He has worked with the Global CCS Institute, Asia Pacific Economic Cooperation (APEC) and the Asian Development Bank in organizing workshops across the globe on CCS. He has supported the World Bank’s Independent Evaluation Group to assess their project appraisal process for several coal-fired power projects. Before joining ICF, Dr. Chikkatur worked on energy technology innovation policy issues at Harvard’s Kennedy School of Government where his research focused on policy options to promote advanced coal-power technologies, including CCS, with a particular focus on India. Mr. Andrew Eil Mr. Eil has more than twelve years of experience and provides independent consulting on the topics of clean energy, air quality, transit, finance, and international development. Mr. Eil recently reviewed models of municipal energy-efficient street lighting in India and Canada for the World Bank and completing energy market writing projects for corporate clients on topics that include natural gas markets, state- level energy utility policy, private equity oil & gas sector investment. Previously, Mr. Eil worked as the Coordinator of Climate Change Assistance Programs in the United States Department of State’s Office of Global Change (OES/EGC). He has also served as a consulting analyst for the Climate Change Unit at the International Finance Corporation and World Bank. Mr. Eil holds a Master of Public Affairs in International Development with a certificate in Science, Technology and Environmental Policy from the Woodrow Wilson School at Princeton University, and a Bachelor’s degree in History and Literature (Russia) from Harvard University. He is fluent in Russian and proficient in French, Mandarin Chinese and Spanish. Ms. Alex Jamis Alex Jamis is an Analyst in the Environment and Social Sustainability Division at ICF International. She specializes in alternative fuels, advanced vehicles, and other petroleum reduction strategies in the transportation sector. Her work provides support to the National Renewable Energy Laboratory (NREL) and the U.S. Department of Energy (USDOE). She has also assisted federal agencies, such as the U.S. Environmental Protection Agency (EPA), National Park Service (NPS), and United States Agency for International Development (USAID) in guidance and research related to renewable energy, green power, and sustainable development. Ms. Jamis also helped develop the voluntary peer review guidelines for fossil fuel subsidy reforms for Peru in 2014. Prior to joining ICF, Ms. Jamis worked in communications at the Solar Energy Industries Association (SEIA), where she maintained media relations, assisted with the execution of major report releases, and researched, wrote, and edited articles and other content on a broad range of energy, environment, and policy issues. She is fluent in Spanish. Ms. Jeannette Paulino Jeannette Paulino is a Research Associate for the trade facilitation unit of the International Development Economics practice of Nathan Associates and has more than four years of international development experience. Presently, she manages the operations of a USAID-funded project in Colombia and two World Bank-funded projects in Haiti and Botswana. She participated as a MPA, International Development, 2009 (Princeton University, USA) B.A. History & Literature, 2002 (Harvard University, USA) B.A. Political Science, 2011 (University of Florida, USA) B.S. Environmental Science and Policy, 2012 (University of Maryland, USA)
- 142. D - 4A P P E N D I X D team member of the FFSR Secretariat for Peru in 2014. Ms. Paulino has a diverse background in international development in the areas of trade facilitation, free trade agreements and special economic & industrial zones, trade information portals, export promotion, business enabling environment, small and medium businesses (SMEs), and fossil fuel subsidies. She has a Bachelor’s degree in Political Science with a concentration on international relations and international development and humanitarian assistance from the University of Florida. She is a fluent Spanish speaker.
- 143. APPENDIX D. APECFFSR EVALUATION TABLES Subsidy Title #1: the Oil Price Stabilization Fund (OPSF) Description: The establishment of a special buffer fund, called the Oil Price Stabilization Fund (OPSF), was the earliest attempt to stabilize the domestic prices of oil products in the economy. The OPSF’s purpose was to minimize frequent price changes brought about by two factors: (a) the increasing exchange rate of the peso as against the US dollar; and (b) the increase of the world market prices of imported crude oil. The OPSF, no longer in effect, pegged domestic oil and petroleum fuel prices to a level fixed by the government. When global prices were below this level, oil companies paid a surcharge into the OPSF account; when prices were above the level, oil companies received payouts to effectively keep the domestic retail price fixed. In high oil price environments, political resistance kept the fixed price low, resulting in an effective subsidy and a budgetary shortfall as, over time, payouts exceeded saved revenues. The fund was liquidated during the restructuring and liberalization of the oil industry, but the OPSF is again up for consideration to smooth oil price volatility. Funds of the OPSF initially came from the oil companies when international price of crude goes down while domestic prices were kept stable. On the other hand, when the costs of crude increase and/or there us an upward trend in the foreign exchange, the OPSF was used to reimburse the oil companies their additional costs to maintain the stable domestic prices. Weblink to Legislation/Regulation (page #): http://www2.doe.gov.ph/Laws%20and%20Issuances/Compendium_of_Energy_Laws/Volume%201/P D%201956.pdf; http://www.lawphil.net/executive/execord/eo1986/eo_137_1986.html; http://www.lawphil.net/statutes/repacts/ra1998/ra_8479_1998.html. Subsidy Type: General (producer and consumer) History: One of the earliest attempts to stabilize the domestic price of oil products was the establishment of the OPSF. President Marcos issued PD 1956 on 15 October 1984, imposing an ad valorem tax on certain manufactured oils and other fuels, bunker fuel oil and diesel fuel oil, and revising the specific taxes. The same law also created a special fund, called the Oil Price Stabilization Fund (OPSF) for the purpose of minimizing frequent price changes brought about by two factors: (1) the increasing exchange rate of the peso as against the US dollar, and (2) the increase of the world market prices of imported products. The OPSF was then used to reimburse the oil companies for cost increases on crude oil and imported petroleum products resulting from exchange rate adjustment and/or increase in world market prices of crude oil. The OPSF stabilized prices. However, prices were kept low to the point that OPSF fund deficit reached P16.6 billion on November 1990. To address cash flow problem, oil prices drastically increased on December 1990 (premium gasoline from P8.87/li to P15.95/li and diesel, from P6.24 to P9.35/li), resulting in death threats to ERB officials. The narrowing of the deficit ensued, reaching just P49 million in August 1991, and the fund balance reached its highest surplus of about P8.3 billion in June 1992. On 9 December 1992, R.A. 7639 was approved, which provided for the payment in part of the subscription of the government to the capital stock of the National Power Corp. in the amount of P3
- 144. D - 2A P P E N D I X D billion out of the OPSF. Yet the Fund remained positive until April 1995, after which it went back in red. Rescuing the Fund, in 1996 the General Appropriations Act for the year provided a special provision in the PNOC budget allocating P10 billion to partly wipe-out the deficit. A P1 billion was allotted as buffer during the partial deregulation. Despite the infusion by the government, the OPSF was still P2.5 billion short by the time R.A. 8180 was passed. Recognizing the huge deficit, the second deregulation law, R.A. 8479 provided for the mechanisms for BOC and BIR to settle the OPSF balance. The Downstream Oil Deregulation Law dissolved the Oil Price Stabilization Fund (OPSF) in February 1998. Recipients: Oil refiners Duration: October 1984 – February 1998 Financial Value: Variable. P3.5 billion (roughly USD$105 million) in government contributions to cover the OPSF’s debts Potential Impacts: Dampens oil price shocks to the private sector and consumers, particularly lower- income households. o Affected Government Ministries/Departments: Department of Energy Potentially including: Energy Utilization Management Bureau Energy Policy and Planning Bureau Oil Industry Management Bureau o Energy Regulatory Board (ERB)/Energy Regulatory Commission (ERC) o Department of Finance o DOE-organized Independent Oil Price Review Committee (IOPRC) Affected Stakeholders: Oil industry; private sector (industry and commercial sectors); private individuals and households, particularly low-income Inefficient? If so, why?: May be inefficient if government is unable to keep the fund solvent, leading to net outflows and subsidies for fossil fuel consumption. Protection from market volatility leads to the government’s assumption of market risk, creating an implicit cost reduction for the consuming public. Options for Reforms: N/A Benefits of Reform: N/A Expected Changes Regarding Value and Recipients: N/A Planned Action (if any): Attempts to re-establish the fund have been floated by different groups in the face of oil price increases, but the present Administration is against the proposal as it would require huge amount of government funds to operate. Instead of reestablishing the fund, allocations for energy security and targeted subsidies to the poorest of the poor may have to be considered foremost. Timeframe: Sunsetted, 1998
- 145. P E ER R E V I E W T E A M M E M B E R S D - 3 Current Status: Inactive Subsidy Title #2: Pantawid Pasada – Public Transport Assistance Program (PTAP) Description: Established under Executive Order (EO) 32 in April 2011, the Public Transport Assistance Program (PTAP) or “Pantawid Pasada” program aimed to provide relief to the public transport sector to cushion the impact of high fuel prices on the riding public. The PTAP partially subsidized the fuel consumption of identified small-scale public transport groups (excluding buses), providing cash transfers to purchase diesel fuel through a limited-access scheme made available only to public transit operators. PTAP is not currently active, having been closed due to operational difficulties in 2013. However, it is being considered for reinstatement. Weblink to Legislation/Regulation (page #): http://www.gov.ph/2011/04/01/executive-order- no-32-s-2011/ Subsidy Type: Consumer (public transit providers) History: Established under Executive Order (EO) 32 in April 2011, the Public Transport Assistance Program (PTAP) or “Pantawid Pasada” program aims to provide relief to the public transport sector to cushion the impact of high fuel prices on the riding public. As provided by the EO, the PTAP partially subsidized the fuel consumption of identified small-scale public transport groups. The subsidy was administered by providing cash transfers targeted for purchasing diesel fuel to registered public transit operators of ‘jeepneys’ (small, privately-owned buses) and tricycles. The program called for the distribution of special cards to registered transit operators entitling them to buy their required fuel from selected filling stations using the smart cards instead of paying cash until the amount loaded on the cards is exhausted. Small transit operators are significant providers of public transportation, and the predominant consumer of diesel fuel nationwide. As private jeepneys, tricycles and motorcycles in 2013 numbered more than 6 million (nearly 80% of the vehicles on the road in the Philippines), dwarfing the 31,600 registered buses, 67 jeepneys and tricycles represent a significant and distinct category of public transit. As of December 2010, right before the PTAP subsidy commenced, jeepneys outnumbered buses more than eight to one: there were 27,886 total franchised buses and 230,622 registered jeepneys. Buses and jeepneys also serve different purposes, with jeepneys used more for commuting (primarily trips within 3-15 kilometers distance) and buses for longer-distance transportation. In the provinces, jeepneys convey passengers and goods from rural areas to town/city proper and vice versa. Meanwhile tricycle normally transports passengers within local areas of towns and cities. From 2011 to 2015, the transport sector has consumed about 75% of the economy’s total demand for diesel. The Pantawid Pasada program arose out of the government’s role in setting transit fares. Though most operators are private, the Land Transportation Franchising and Regulatory Board (LTFRB) has official authority for setting public transit fares. The LTFRB, an office under the Department of Land Transportation and Communications, regulates the road transport sector, thus has the power to review and adjust fares/rates, or raise them following the review of petitions filed before it. Petitions are normally filed by the public transport groups, e.g., jeepneys, buses and taxis. Such petitions are also published so that the general public can file comments. Both bus and jeepney fares are reviewed by the LTFRB at regular intervals, and are raised if found to be reasonable. Fares tend to be similar, but slightly higher for buses; generally, since 1987, the base fare for 4km to 5km has stayed roughly 20%-30% of the price of a liter of diesel fuel for both forms of transit. Unlike jeepneys, buses were excluded from the PTAP cash subsidy because they were granted 67 “Transportation: Philippines Yearbook 2013.” https://psa.gov.ph/sites/default/files/2013%20PY_Transportation.pdf.
- 146. D - 4A P P E N D I X D P1.00 fare increase in March 2011. Moreover, bus companies were deemed less in need of fuel price relief because they are a more organized group and consume more fuels than jeepneys and tricycles. Consequently, bus companies are able to negotiate favorable fuel prices with the oil companies through bulk purchase contracts. In the absence of a directed program to suppress fuel price increases, rising oil prices put heavy upward pressure on transit fares, leading to petitions from public transport groups. In 2011, the newly-established Inter-Agency Energy Contingency Committee (IECC) unanimously recommended to provide assistance to the public transport sector to cushion the impact of high fuel prices and the resulting effects on the above-mentioned vulnerable sectors. The IECC recommended Public Transport Assistance Program (PTAP) to adopt targeted relief specifically for jeepneys, representing a large majority of total public transport vehicles. PTAP’s initial funding requirement in 2011 was P450 million ($10 million USD). A total amount of P300 million ($6.7M USD) was released to DOE for the Public Utility Jeepney (PUJ) driver beneficiaries, while the remaining amount of P150 million ($3.3M USD) was released to the Department of Interior and Local Government (DILG) for the tricycle driver beneficiaries. The distribution of the Pantawid Pasada Cards (PPC) commenced in May 2011 among legitimate jeepneys and tricycle drivers/operators serving the riding public, initially in the National Capital Region. Each PPC was loaded with P1,050 ($23 USD) and reloaded for another P1,200 ($26 USD) cash value, (for jeepneys) for the purchase of diesel from participating gasoline stations. Under the program, The Public Transport Assistance (PTA) Cards were distributed to legitimate franchise holders with valid and updated LTO registration and existing franchise of good standing. The card acted as a debit card that could be used to buy fuel from participating gasoline stations. Most of these designated gas stations offered a P1.00/liter discount to the public utility jeepneys (PUJs), voluntarily offered by respective oil companies. This discount came at no cost on the part of the government except that it indirectly led to a reduction in the fuel company’s taxable income and hence income tax payments. Over the next two years PTA cards were distributed throughout the economy to qualified drivers of public utility jeepneys and tricycles. In December 2011, the total number of beneficiaries of the Pantawid Pasada Program throughout the economy, comprising of public utility jeepneys (PUJ) and tricycles with valid franchises, reached more than one million with corresponding monetary benefit of about P235 million ($52 million). The vast majority (P206 million) was disseminated in calendar 2011, resulting in the government-funded purchase of more than 3.8 million liters of diesel at an average price of P53.29 per liter. The program ceased in May 2013. Recipients: Small-scale public transit jeepney operators Duration: 2011 - 2013 Financial Value: P235 million (USD$52 million) over roughly two years Potential Impacts: Partial reimbursement of public transit jeepney operators, defraying costs and allowing the deferral of ridership fare increases. Affected Government Ministries/Departments: - Department of Energy - Department of Transportation and Communications Land Transportation Office (LTO- DOTC) - Land Transportation Franchising and Regulatory Board (LTFRB) Affected Stakeholders: Jeepney drivers; transit riding public; indirect impacts on bus operators, filling station owners, and employers and businesses affected by transit fare prices Inefficient? If so, why?: This subsidy was inefficient insofar as it encouraged excessive reliance on traditional liquid fuels (diesel and gasoline), potentially slowing the transition to cleaner
- 147. P E ER R E V I E W T E A M M E M B E R S D - 5 alternatives (e.g. biofuels, hybrid and electric vehicles, cleaner more efficient buses, etc.). It is unlikely that PTAP encouraged excessive consumption because it was capped per operator at a level well below average monthly consumption, meaning market-based prices were restored at the level of marginal consumption. Options for Reforms: This policy is currently inactive, though it is being considered for reinstatement. Alternatives include reduce fare vouchers for low-income riders and incentives for more efficient and alternative-fuel vehicles to be purchased by jeepney operators, or other fuel- efficient public transit alternatives. Benefits of Reform: Reducing reliance on petroleum-based liquid fuels in the transit sector, decreasing imports and reducing risks to fuel price volatility. Environmental, health and climate benefits of reduced fossil fuel consumption. Expected Changes Regarding Value and Recipients: N/A Planned Action (if any): Reinstatement of PTAP is currently being considered by the Department of Transport and Communications. Timeframe: N/A Current Status: Inactive. Reinstatement of PTAP is currently being considered by the Department of Transportation and Communications.
- 148. D - 6A P P E N D I X D Subsidy Title #3: RVAT Law Excise Tax Exemption for Socially-Sensitive Fuels Weblink to Legislation/Regulation (page #): http://www.lawphil.net/statutes/repacts/ra2005/ra_9337_2005.html Subsidy Type: General (tax credit benefitting producer and consumer) History: Beginning in 1996, all petroleum products had corresponding excise taxes, by virtue of Republic Act 8184, except for LPG which has zero (0). However, the tax structure was modified in 2005 with the implementation of RA No. 9337 or the Reformed Value-Added Tax (RVAT) Law which expanded the coverage of the VAT and lifted the exemption on petroleum products specified in the 1988 Law. However, excise tax was not reinstated on ‘socially sensitive’ fossil fuels used for public transportation and in cooking and heating. Only gasoline products and aviation fuels now have their corresponding excise taxes; all the rest have zero. The RVAT Law includes “mitigating measures” to minimize its impact on consumers, through the reduction of excise taxes on kerosene, LPG, diesel and bunker fuel oil to zero. Effectively, the RVAT law removed the excise taxes on so-called “socially sensitive products”, i.e. kerosene as it is used for lighting and cooking purposes in rural areas; diesel as it is widely used by the public transport; and fuel oil, being used for power generation. LPG remained at zero as it is generally used for cooking. The implementation of RA 9337 was also foreseen to result in an increase in retail oil prices despite the reduction to zero of the excise tax on socially-sensitive products (kerosene, diesel and fuel oil) as earlier noted. Recipients: Oil industry players and consumers Duration: Ongoing, indefinite Financial Value: Forgone tax revenue (uncalculated) Potential Impacts: This tax is designed to shield consumers of socially-sensitive fossil fuels, particularly low-income households, from the impacts of RVAT imposition and high prices more generally. Affected Government Ministries/Departments: • Department of Energy • Department of Finance • Bureau of Customs (BOC) • Bureau of Internal Revenue (BIR) • Department of Trade and Industry (DTI) • Department of Transportation and Communications (DOTC) • National Economic and Development Authority (NEDA)
- 149. P E ER R E V I E W T E A M M E M B E R S D - 7 Affected Stakeholders: Consumers, oil industry players: importers, refiners, distributors and retailers of said fuels Inefficient? If so, why?: The tax subsidy is inefficient because (1) it targets all consumers indiscriminately; (2) it encourages overconsumption, particularly given health and environmental costs of fossil fuel use; (3) it discourages the use and adoption of alternatives; (4) it forfeits government tax revenue that could be more readily targeted to desired program goals. Options for Reforms: Reinstatement of excise taxes, coupled with targeted subsidies (e.g. cash transfers or fuel purchase vouchers) to low-income households who are the intended beneficiaries of socially-sensitive fuel excise tax exemptions; promotion of electrification, home solar systems, and other alternative fuels to provide rural and poor households modern energy services. Benefits of Reform: Removal of market distortions of fossil fuel tax subsidies; encouragement of conservation and efficient consumption; encouragement of alternative energy technologies to fossil fuel subsidies; better targeting of benefits to neediest households. Expected Changes Regarding Value and Recipients: Better targeting of benefits to rural and poor households with cash transfers or vouchers; transfer of tax or fiscal subsidies to other non- fossil energy providers. Planned Action (if any): None Timeframe: N/A Current Status: In force
- 150. D - 8A P P E N D I X D Subsidy Title #4: Missionary Electrification Subsidies for Small Producers Utilities Group (SPUG) Description: This policy, currently in effect, provides a subsidy for remote and small grids – often the most expensive to establish and operate – that is paid for with a surcharge on utility ratepayers throughout the economy (a cross-subsidy). Because 95% of the remote grids’ power demand is met by oil and diesel fuel, this policy amounts to a substantial petroleum subsidy. Weblink to Legislation/Regulation (page #): http://www.neda.gov.ph/wp- content/uploads/2013/12/R.A.-9136.pdf Subsidy Type: Producer (electricity generator & grid operator) History: The Small Power Utilities Group (SPUG) is a sub-unit of the National Power Corporation (NPC) mandated to perform missionary electrification functions such as generation of electricity and the provision of associated electricity services in far-flung areas where no private entity is willing or able to provide the same service at reasonable cost. SPUG was created as a result of the Republic Act 9136, otherwise known as the “Electric Power Industry Reform Act (EPIRA) of 2001”. To support its grid extension efforts, SPUG sources its fund from (i) revenues from its sales of electricity and other services; (ii) a Universal Charge for Missionary Electrification (UC-ME), a component of the power bill charged to all electricity end-users; and, (iii) other funding sources including appropriations from the government. To ensure the sustainability of missionary electrification, the government implemented the Private Sector Participation (PSP) program in 2004, which encouraged the entry of the private sector (known as New Power Providers or NPPs) in power generation, gradually replacing SPUG in off-grid areas. In 2005, the Qualified Third Party (QTP) program was likewise launched to provide alternative power providers in remote and unviable areas. The Universal Charge (UC) is a charge imposed on all electricity end-users as determined, fixed and approved by the Energy Regulatory Commission (ERC) of the central government. It is remitted to the Power Sector Assets and Liabilities Management Corporation (PSALM), a government-owned and controlled corporation created by Republic Act No. 9136. The UC for Missionary Electrification (UC-ME) is one such charge. EPIRA mandates the UC-ME Charge to fund the electrification of remote and unviable areas, as well as areas not connected to the transmission system. As of June 2009, there are 90 island and 8 isolated grids all over the economy that are being served by NPC-SPUG as part of its mandate to implement Missionary Electrification. The allocations for the UC-ME are based on the yearly Missionary Electrification Development Plan issued by the Department of Energy. The UC-ME is a non-by passable charge that is collected from all End-users on a monthly basis by the Distribution Utilities. Currently, the UC-ME being collected to end-users on a monthly basis in the amount of P0.1561 per kilowatt hour (one- third of one cent USD per kWh). This is composed of the (1) regular/previously approved amount of P0.0454/kWh per month; and (2) a UC-ME charge equivalent to P0.709/kWh. An Order dated 10 October 2013 set the UC-ME charge of P0.0017/kWh to be collected starting in January 2014.
- 151. P E ER R E V I E W T E A M M E M B E R S D - 9 A large and increasing subsidy is expected to be allocated to SPUG and other missionary areas largely to cover the costs for oil-based generating units. Based on the Missionary Electrification Plan of the NPC, the UC-ME requirements for NPC plants will increase from P12.392/kWh in 2015 to P15.56 by 2019 amounting to P6.6 billion to P13.3 billion in the same period. The cost of fuel is expected to amount to P39.4 billion (roughly $800 million USD) for the period 2016-2019. Oil and diesel power 95% of the total electricity generation of SPUG areas. The population in the areas supported by UC-ME continues to grow. So long as the UC-ME is not rationalized or there is no coherent policy to adopt other alternative energy source, SPUG regions will continue to rely on oil-based generators. This leads to perverse incentives for SPUG ratepayers to consume wastefully, leading to excessive payouts and undue burdens on other UC-ME-paying ratepayers. Recipients: PSALM and state-supported remote grid operators; indirectly, households benefitting from grid electricity in remote areas and islands Duration: Established in 2001, this policy is still active. SPUG is designed to transition to remote grids to private power grid operators, graduating them from the program. Financial Value: The UC-ME requirements for National Power Corporation (NPC) plants will increase from P12.392/kWh in 2015 to P15.56 by 2019 amounting to P6.6 billion to P13.3 billion in the same period. The cost of fuel is expected to amount to P39.4 billion (roughly $800 million USD) for the period 2016-2019. Oil and diesel power 95% of the total electricity generation of SPUG areas. Potential Impacts: This subsidy is intended to cover the capital cost of grid extension in remote areas and islands, and to defray the cost of electricity provision on these expensive grids benefitting primarily low-income households. Affected Government Ministries/Departments: - Department of Energy - National Power Corporation (NPC) - National Grid Corporation of the Philippines (NGCP) - Energy Regulatory Commission (ERC) - Sector Assets and Liabilities Management Corporation (PSALM) - Department of Social Welfare and Development (DSWD), which implements the National Household Targeting System for Poverty Reduction (NHTS-PR) Affected Stakeholders: Households in affected SPUG areas; other ratepayers; independent power producers and grid operators; businesses in affected SPUG areas; fuel and alternative energy providers Inefficient? If so, why?: This subsidy may be inefficient insofar as it may not be providing electricity and modern energy services to beneficiary households in the most cost-efficient way. SPUG is an implicit energy subsidy because most power on the grid is provided by diesel and
- 152. D - 10 A P P E N D I X D other fossil fuels, encouraging overconsumption and excessive environmental and health costs. Additionally, ratepayer subsidies appear to be indiscriminate regarding income or consumption level, leading to poorly targeted operating and ratepayer subsidies. Options for Reforms: Targeted funds for grid (macro, micro or mini) establishment, but not for fossil fuel operating costs; targeted benefits (cash transfers, vouchers, etc.) for low-income households; incentives for alternative energy generation (biofuels, solar, wind and hydro energy, etc.). Benefits of Reform: Lower reliance on expensive, volatile, and dirty fossil fuels; lower capital expenditures and challenges of grid establishment and maintenance; local energy production leading to job creation and import substitution; health, environmental and climate benefits. Expected Changes Regarding Value and Recipients: Risks of near-term cost increases for grid power, or slower grid extension. However, renewable energy may be cost-effective due to the high expense of grid establishment and operation in remote areas. Businesses and higher- income households would face rising electricity rates, changing incentives for consumption but also potentially creating near-term fiscal pressures. Planned Action (if any): Unclear Timeframe: N/A Current Status: Active
- 153. P E ER R E V I E W T E A M M E M B E R S D - 1 1 Subsidy Title #5: Exemption of Self-generating facilities from the Universal Charge Description: Captive power generation units operated by industry and the commercial sector are not currently levied the Universal Charge (UC), to which all other end consumers of electricity are subjected. While self-generating facilities (SGFs), as such power generation is known, ease demand pressures on the grid, the UC exemption is effectively a ratepayer subsidy. Further, SGFs disproportionately use fossil energy such as diesel and oil generators, making the UC exemption an implicit fossil fuel subsidy. Weblink to Legislation/Regulation (page #): http://www2.doe.gov.ph/Laws%20and%20Issuances/Compendium_of_Energy_Laws/Volume%203/Se c.%206.pdf; www.erc.gov.ph/Files/Render/issuance/6276; Subsidy Type: Producer (self-generating facilities are both producers and consumers) History: Self-generating facilities (SGFs) refer to ‘captive’ or grid-isolated power plants – either entirely islanded from the grid or capable of functioning independently – for large industrial and commercial operations. For the first four years after Universal Charge (UC) imposition, which commenced in February 2003 through an ERC Order dated 20 December 2002, EPIRA established that all self- generating facilities (SGFs), including large-scale power plants as well as smaller-scale diesel generators, whether new, existing or under construction, should not be covered by the UC. While SGFs contribute value to the grid by reducing peak load and base load power demand as well as ensuring reliable power to key private sector entities, the UC exemption is fundamentally a subsidy because it exempts those users with their own power supply from universal charges gathered to provide social benefits such as grid extension and tariff relief for the poor. The exemption of SGFs from UC imposition was made permanent for those using renewable energy to generate electricity for their own consumption through the passage of RA 9513 (An Act Promoting the Development, Utilization and Commercialization of Renewable Energy (RE) Resources and for Other Purposes). For those SGFs utilizing non-renewable energy, the expiration has lapsed with the UC imposition supposed to start by July 2010. However, UC imposition on SGFs utilizing non-RE remains pending in the absence of clear procedures and guidelines from the ERC. Specifically, the need to address concerns of the SGFs as follows: • SGFs, particularly energy-intensive industries, strongly opposed the imposition of the UC. For them, the UC will be an additional burden to their operating costs, thus hampering their growth, and in the worst case scenario, possibly result in plant shutdown. • Distribution utilities (DUs) in Visayas and Mindanao expressed great apprehension as to the difficulties that will be encountered in implementing the UC on SGFs, particularly to SGF-customers participating in the Interruptible Load Program (ILP). The ILP was established by the ERC to minimize the impact of the power crisis affecting the region. • Under the ILP, SGFs utilize their generation capacity to enable reduce power demand on the local DU grids in peak periods, avoiding brownouts and price spikes. For the SGFs, the UC imposition
- 154. D - 12 A P P E N D I X D is perceived to be unfair since they significantly contribute to the alleviation of tight power supply during certain hours of the day. They are also exposed to higher power costs due to running their generation facilities. • All collecting entities of the UC (i.e., DUs and NGCP), voiced their concern over additional administrative costs that will be incurred in conducting meter reading for each generation facility owned by the SGF, reconfiguring the IT system that will be used to generate power bills that will be issued to SGFs monthly, and in maintaining the meters that will have to be installed for each generation facility. The collection of UC from SGFs remains pending subject to the promulgation of clear guidelines on how and the amount of UC that will be collected, including the basis for such amount. This non- imposition continues to encourage large industries and other businesses to install generators (particularly diesel gen sets) to benefit from the avoided UC-cost and operational reliability, a priority for the large majority that are industrial and commercial customers that need reliable power at all times. With the current capacity of SGFs at 1,347 MW, non-imposition of the UC on SGFs is encouraging substantial use of fossil fuel among the commercial and industrial sectors. Recipients: Industrial and commercial producers of electricity for captive, grid-isolated facilities (self- generating facilities) Duration: The UC exemption has been in effect since the imposition of the Universal Charge in 2003. For those SGFs utilizing non-renewable energy, the expiration has lapsed with the UC imposition supposed to start by July 2010. However, UC imposition on SGFs utilizing non-RE remains pending in the absence of clear procedures and guidelines from the ERC. Financial Value: The amount of forgone Universal Charge revenue is unclear given the lack of clear statistics on SGF generation and consumption. Potential Impacts: Impacts of application of the UC to SGFs would be higher tariffs/costs on SGFs, raising costs of business for commerce and industry; increased incentives for efficiency; increased incentives for grid connection (if grid power is valuable); increased revenues from the Universal Charge to be applied to social objectives. Affected Government Ministries/Departments: - Department of Energy - National Power Corporation (NPC) - National Grid Corporation of the Philippines (NGCP) - Energy Regulatory Commission (ERC) - Sector Assets and Liabilities Management Corporation (PSALM) - National Electrification Administration (NEA) - Department of Trade and Industry (DTI) - National Economic and Development Authority (NEDA) Affected Stakeholders: Corporate and industrial entities (self-generating facilities); grid operators; independent power producers; ratepayers paying the Universal Charge; beneficiaries of Universal
- 155. P E ER R E V I E W T E A M M E M B E R S D - 1 3 Charge programs; all consumers affected by grid performance. Inefficient? If so, why?: This subsidy is inefficient because it encourages disinvestment in the grid and starves social programs funded by the Universal Charge of resources. Rather, in encourages industries and businesses to stay off-grid to avoid paying the UC. Further, because most off-grid power is generated from fossil fuels (diesel, etc.), as opposed to lower-carbon power mixes on the grid, this subsidy may be discouraging and slowing the transition to lower use of fossil fuels, forestalling domestic investments in grid improvement, energy efficiency, renewables and biofuels, and the attendant benefits for the environment, air quality, climate, and import substitution. Options for Reforms: Gradual application of the Universal Charge, with some new revenue returned to SGFs to encourage grid interconnection, grid reliability, efficiency and alternative fuels, and to defray cost increases. Benefits of Reform: Lower-carbon power mixes on the grid, this subsidy may be accelerating the transition to lower use of fossil fuels, and domestic investments in grid improvement, energy efficiency, renewables and biofuels, and the attendant benefits for the environment, air quality, climate, and import substitution. Additional resources for UC-funded programs. Expected Changes Regarding Value and Recipients: The costs are listed above in the ‘history’ section. There are challenges with avoiding price shocks related to new UC imposition on SGFs, important economic drivers in the Philippines. Improved grid reliability and peak demand management are critical. Bureaucratic and administrative challenges of UC imposition on SGFs need to be addressed. Planned Action (if any): Under review Timeframe: Under review Current Status: Under review