The document summarizes the history of electricity issues and reforms in the Philippines. It discusses the power crisis in the 1990s that stemmed from insufficient generating capacity. This prompted President Ramos to issue licenses to Independent Power Producers (IPPs) to build new plants. The IPPs solved the short-term crisis but their contracts proved costly. This led to the 2001 Electric Power Industry Reform Act that restructured the industry, privatized generation assets, and established an independent regulator. The document reviews key elements and impacts of the reforms, including the purchased power adjustment mechanism and issues raised around IPPs and distribution utility rates.

1. Economics of Electric Energy
IPPs, the PPA, and the Electric Power
Industry Reform Act
Patrick Cesar T. Ballesteros
Economics for Managers
ATENEO-REGIS MBA PROGRAM

2. What Happened?
҉In 1990, the Philippines was confronted with a crisis of
insufficient electrical generating capacity.
҉Metro Manila and the 33 provinces in Luzon power grid
experienced brownouts of up to 4 hours a day.
҉The root of the problem was the decision by Marcos regime
to build a 620 megawatt nuclear-power plant on the Bataan
Peninsula.
҉The Aquino government decided not to use the facility
mainly because it was located in a seismic fault.
҉As a result, a badly needed expansion of generating
capacity in Luzon, which accounted for 75% of national
electric consumption, did not come on line.

3. Cont..
҉ The then president Fidel V. Ramos acted upon the
situation and addresses the congress through his state of
the nation address to enact a law that would create an
energy department that would plan and manage the
Philippines’ energy demands.
҉ The congress responded by not only creating the
Department of Energy but also giving FVR emergency
powers to resolve the energy crisis.
҉ President Ramos eventually issued licenses to
Independent Power Producers (IPP) to construct power
plants in 24 months. He also issued supply contracts that
guaranteed the government would buy whatever power
the IPPs produced under the contract in U.S. dollars to
entice investments in power plants.
҉ This solved the power crisis and created a stable supply of
electricity in a growing & developing economy of the
Philippines.

4. Cont..
҉In 1997, the Asian Financial Crisis affected the
Philippines and other countries in Southeast
Asia.
҉This has led to closing of some companies which
created a surplus in electricity.
҉Also because of the crisis, Philippine Peso
devaluated rapidly leaving a great concern for
the contracts of IPPs.

5. Independent Power Producers
҉ An entity which is not a public
utility, which owns facilities that
generate electric power for sale to
utilities and end users.
҉ The National Power Corporation or NPC
secured the accreditation of more than
40 Independent Power Producers or
IPP contracts.
҉ The 1994 World Bank study notes that
the average price of some 13 projects it
analysed was 6.52 U.S.
cents/kWh, which the World Bank
conceded was quite high compared to
the 6.37 U.S. cent/kWh bulk energy
tariff of the NPC at that time.

6. Cont..
҉ IPPs were largely petroleum based, with lower installation costs
but higher fuel costs.
҉ Not only did the government throw out its energy mix program
of relying more on indigenous energy sources, the consumers
were subjected to high fuel price risks in imported petroleum
that consumers assumed through fuel adjustment clauses for
tariffs in the IPP contracts.
҉ There is likewise an exchange risk in pegging the wholesale
tariff to the dollar.
҉ The government and the consumers also assumed the market
risk through generous take or pay guarantees.
҉ In addition to the initial high cost of the IPPs, the Asian Crisis
also dramatically upset all the economic growth of the country
and foreign exchange assumptions of the IPPs.
҉ This meant much higher fuel costs and oversupply of electricity
capacity.
҉ investors are fully covered by the fuel cost adjustment
mechanism and take or pay guarantees for which end users are
now paying a heavy price.

7. Purchased Power Adjustments
Purchased power adjustment or PPA
represents the increase in the cost of power
purchased from the National Power
Corporation (NPC) and other suppliers or IPPs.
The PPA is a cost adjustment mechanism
approved by Energy Regulatory Commission
(ERC) to reflect changes in the cost of power
bought from NPC and IPPs.

8. Currency Exchange Rate Adjustment
Currency exchange rate adjustment or CERA is
another type of cost adjustment mechanism
approved by ERC. This aims to recover the
change in foreign denominated operating
costs and principal debts repayment due to
exchange rate movements.

9. Impact of PPA & CERA
҉ PPA and CERA are additional monthly costs being shoulder
over and above the daily consumption of electricity and
expenses to meet the needs of every member of the
family such as food and clothing, education, health and
transportation expenses, water and shelter.
҉ Everyone was affected by the imposition of PPA & CERA
҉ Generally electricity rates in the Philippines, with PPA
included, are higher compared to neighbouring nation.
҉ This makes investments in the Philippines hard to
materialize.

10. Supreme Court Intervention
The Supreme Court of the Philippines ruled to
compel distribution utilities like MERALCO to
refund its customers billions of Pesos
perceived to be PPA payments of its
consumers and to abide by the Court’s
decision with respect to payment of taxes
which formed part of the Company’s operating
expenses.

11. Republic Act 9136 Electric Power Industry Reform Act
҉ As the Philippines experience power outages enough to be
regarded as a national crisis, Ramos Administration turned
to private sectors for solutions.
҉ Using the 1987 Executive Order that allowed the private
sector to generate electricity, and by enacting a Build-
Operate-Transfer (BOT) law in infrastructure projects, the
government opened the floodgates for contracts with
private generation companies or Independent Power
Producers (IPP).
҉ After the onslaught of the Asian Financial Crisis, in 2001
Republic Act 9136 or the Electric Power Industry Reform
Act was signed in to law.

12. Section 2 of EPIRA declares the objective of the law
҉ To ensure and accelerate the total electrification of the country;
҉ To ensure the quality, reliability, security and affordability of the
supply of electric power;
҉ To ensure transparent and reasonable prices of electricity in a regime
of free and fair competition and full public accountability to achieve
greater operational and economic efficiency and enhance the
competitiveness of Philippine products in the global market;
҉ To enhance the inflow of private capital and broaden the ownership
base of the power generation, transmission and distribution sectors;
҉ To ensure fair and non-discriminatory treatment of public and private
sector entities in the process of restructuring the electric power
industry;

13. Cont..
҉ To protect the public interest as it is affected by the rates
and services of electric utilities and other providers of
electric power;
҉ To assure socially and environmentally compatible energy
sources and infrastructure;
҉ To promote the utilization of indigenous and new and
renewable energy resources in power generation in order
to reduce dependence on imported energy;
҉ To provide for an orderly and transparent privatization of
the assets and liabilities of the National Power Corporation
(NPC);
҉ To establish a strong and purely independent regulatory
body and system to ensure consumer protection and
enhance the competitive operation of the electricity
market; and
҉ To encourage the efficient use of energy and other
modalities of demand side management.

16. Unbundled
҉NPC’s generation and transmission functions were
unbundled.
҉National Transmission Corporation (TRANSCO) was
created to own and operate the transmission assets
and perform the transmission functions previously
under NPC.
҉A fully privatized corporation which is National Grid
Corporation of the Philippines took over TRANSCO’s
responsibilities.
҉The missionary electrification program is undertaken
by NPC through the Small Power Utilities Group
(SPUG)
҉PSALM Power Sector Assets and Liabilities
Management Corp. was created to liquidate the
assets and liabilities of NPC

18. 5 Types of
Privatization
of the Power
Build-Operate- Divestiture (full
Industry Transfer (BOT) privatization)
contracts through asset sale
Corporatization of
Management
electric
contract
cooperatives
Concession
agreement

19. Problems
in EPIRA
Competition
Policy
Regulatory
Vested Interest
Issues
EPIRA
Institutional Consumer
Intervention Representation
Transparency

20. Status Report on EPIRA Implementation
Prepared by the Department of Energy, the most
recent is on it’s 18th edition covered the month of
November 2010 to April 2011. It serves as a
summary update of particular developments in
pursuit of the Government to restructure and
privatize the power sector.

21. Privatization
҉The 18th status report stated that the activities
in the privatization of NPC/PSALM generating
assets and IPP contracts were deferred with the
new administration’s call for a review of the
Privatization Plan and the need to address the
seasonal supply interruptions.
҉Also stated in the status report are the
developments on PSALM’s continuing activity
for the completion of the remaining
legal, financial and technical requirements for
the smooth turn-over of the privatized power
plants and IPP contracts as follows:

22. Privatization of Generating Assets

23. Transfer of NPC-IPP to IPPA

24. PSALM/NPC Effective and Basic Generation Charges

25. Distribution Utility Rates

26. Distribution Utility Rates

27. Distribution Utility Rates

28. Distribution Utility Rates
MERALCO

29. Lifeline Subsidy Program
kWh Consumption Bracket Lifeline Discount
0 – 20 kWh per month 100%
21 – 50 kWh per month 50%
51 – 70 kWh per month 35%
71 – 100 kWh per month 20%

30. Electrification
Barangay Electrification Status as of 31May 2011
Region Potential Electrified Barangays Unelectrified Barangays Electrification Level (%)
Barangays
CAR 1,176 1,176 0 100.00%
I 3,265 3,265 0 100.00%
II 2,311 2,311 0 100.00%
III 3,102 3,102 0 100.00%
IV-A 4,010 3,983 27 99.33%
IV-B 1,458 1,458 0 100.00%
V 3,469 3,469 0 100.00%
NCR 1,695 1,695 0 100.00%
SUB-TOTAL 2,0486 2,0459 27 99.87%
LUZON
VI 4,050 4,050 0 100.00%
VII 3,003 3,003 0 100.00%
VIII 4,389 4,389 0 100.00%
SUB-TOTAL 11,442 11,442 0 100.00%
VISAYAS
IX 1,904 1,904 0 100.00%
X 2,020 2,020 0 100.00%
XI 1,160 1,160 0 100.00%
XII 1,194 1,194 0 100.00%
CARAGA 1,310 1,310 0 100.00%
ARMM 2,459 2,441 18 99.27%
SUB-TOTAL 1,0047 1,0029 18 99.82%
MINDANAO
TOTAL 41,975 41,930 45 99.89%
PHILIPPINES

31. “Our Company’s gain will be the Philippines
as well, borne by MERALCOs intrinsic role as
a major contributor to nation building”
Manuel M. Lopez
MERALCO Chairman
The End