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Thursday, July 31, 2014
- After two decades of aggressively privatising its public services, the Philippines is beginning to realise the cost of mindless market reforms.
Recent months have seen an explosion of public outrage over a proposed increase in electricity prices, which threatens the country’s economic trajectory and is undermining the interest of millions of ordinary consumers, who have long suffered from exorbitant costs of public services.
The Philippines already has among the world’s most expensive electricity rates, which in 2011, some estimates suggest, even surpassed those of post-Fukushima Japan – making electricity prices in the Philippines the most expensive in Asia.
For many economists, this served as a major disincentive against desperately needed inflow of Foreign Direct Investment (FDI). No wonder, despite attaining “investment grade” status from the world’s leading credit rating agencies in 2013, the Philippines is still struggling to attract high-quality investments.
Things came to a head when the Manila Electric Company (Meralco), the country’s leading electricity distributor, announced a further increase in electricity costs in late 2013. Meralco tried to justify the proposed increase – the highest single price hike in the company’s history – on the grounds that it had to undertake emergency purchases in the Wholesale Electricity Spot Market (WESM) to cover for a maintenance shutdown in its principal source of energy, the Malampaya natural gas pipeline.
But once the Energy Regulatory Commission (ERC) approved the proposed price hike, there was an immediate explosion of public outcry, with leading legislators and public intellectuals raising suspicions of oligarchic collusion.
“I find it difficult to believe that at the very time that the Malampaya [pipeline] would go into a month-long hibernation for maintenance, about eight power suppliers to Meralco would [also] go offline unexpectedly, forcing Meralco to go to WESM, which was supplied by power companies that were controlled by the same interests that went offline,” legislator Walden Bello told IPS.
“With Meralco’s sudden demand, the electricity price per kilowatt hour tripled, resulting in these controlling interests making a killing. The only question unresolved for me is to what extent Meralco was involved in the collusion by its power suppliers.”
Given the quasi-monopolistic nature of the Philippine energy market, with overlapping cross-ownership between distributors and producers, critics claimed that Merlaco and other major producers allegedly “staged” an emergency shutdown to justify the purchase of “artificially high” emergency supply in the spot-market.
Given the limited capacity of the ERC, and separate ongoing corruption investigations against ERC chairperson Zenaida Ducut, an increasing number of people raised the possibility of regulatory capture.
Under growing public pressure, the Philippine legislature, the Department of Energy (DOE), and the Department of Justice (DOJ) launched parallel investigations into the matter, while the Supreme Court passed a temporary restraining order on the proposed price hike by Meralco.
Like many other developing countries, the Philippines underwent a series of sweeping market reforms in the 1990s. As far as the electricity sector was concerned, the process of market transition culminated in the passage of the Electric Power Industry Reform Act (EPIRA) in 2001.
It was a landmark piece of legislation, replacing the Rate of Return on Base (RORB) system with a Performance-Based Regulation (PBR) regime. Its advocates promised, among other things, lower power costs, efficient transmission of electricity, and expanded capacity for energy production.
But in reality, a privatised electricity sector meant its domination by influential business families, who transformed the electricity sector into one of the country’s most profitable businesses.
The cost of the bungled privatisation process was borne by the consumers and the economy. The manufacturing sector – relying on affordable and reliable sources of energy, and crucial to the provision of large-scale employment – suffered from increasingly exorbitant power costs, making the Philippines highly reliant on services and domestic consumption as its engines of growth.
The Ibon Foundation, a research and development NGO in the Philippines, says electricity costs rose more than 112 percent in the 2001-2011 period.
Three years into office, President Benigno Aquino III managed to bring about an unprecedented period of political stability and economic revival to the country. But his good governance initiatives ultimately fell short of overhauling the country’s power infrastructure. There was also minimal improvement in the creaking regulatory agencies.
“In not calling Meralco and the power generators to task, the President lost an opportunity to show he understands the plight of consumers that are now suffering power rates that are among the highest in Asia,” Bello told IPS, reflecting the growing demand among leading legislators and the general public for a more decisive intervention by the government.
“The administration will be remembered as being soft on big business if it continues its hands-off attitude in this matter.”
Although President Benigno Aquino initially refused to directly intervene in the matter, he eventually agreed to review the 2001 law, signaling his willingness to introduce crucial reforms in the energy sector.
“We are open [to review]…When it comes to court action or any legal remedy that is available to consumers or to anybody who has the legal standing to do so, they are free to do so,” deputy presidential spokesperson Abigail Valte said.
It seems that a growing number of Filipino citizens have come to realise the consequences of hasty privatisation of public services. As a result, more people are calling for decisive state participation in the economy and empowerment of regulatory agencies to ensure energy security and protection of consumer welfare.