The policy pendulum swung from one extreme to the next for the energy sector within this whole year – with more high points for the power industry; while patchy implementation of policies had been observed in the oil sector.

The divestment threshold cast at 70 percent for the generation assets of state-run National Power Corporation (NPC) had been accomplished, and the Power Sector Assets and Liabilities Management Corporation (PSALM) is also getting headway with the privatization of power supply contracts via the appointment of independent power producer administrators or IPPAs.

Even the controversy-laden Manila Electric Company (Meralco) was ‘virtually quiet’ all-year round. In fact, those anticipating a “showdown” at the giant utility firm’s stockholders meeting in May were stymied at realization that the “media-ignited exchange of blows among equity holders” just turned up to be “flickers” when the groups of the Lopezes, Metro Pacific Investments Corporation (MPIC) of businessman Manuel Pangilinan and San Miguel Corporation (SMC) finally sat in one table – really a whopping credit to them for rationally keeping their “issues” behind closed doors.

Moving on to the deregulation of the power sector, prospects are high that milestones will be achieved next year as far as opening the industry to competition is concerned – via the introduction of open access or the regime that will bestow that long-desired “power of choice” to the consumers (initially to those having peak demand of 1 megawatt). Well finally, after nine long years of the Electric Power Industry Reform Act’s (EPIRA) implementation.

“PSALM is targeting meeting the 70 percent threshold in IPPA privatization before the first half of 2010. We are very confident we will meet the target,” have been the reassuring words given by PSALM acting vice president for asset management and electricity trading Conrad S. Tolentino.

Energy Secretary Angelo T. Reyes similarly indicated NPC’s privatization in the trifecta of accomplishments the energy sector had logged during the year – in addition to investment inflows in upstream oil and gas which may well claim success because of the recent entry of multinational giants ExxonMobil and BHP Billiton; as well as on renewable energy (RE) projects resulting from the passage of the RE Act.

Policy infirmities

Conversely, the downstream oil industry had continually been enmeshed with policy tweaks – from the Supreme Court ruling booting out the “Big 3” (Petron Corporation, Pilipinas Shell Petroleum Corporation and Chevron Philippines Inc.) from their depot sites in Pandacan and up to the near year-end fracas due to the Malacanang-imposed Executive Order 839 which indirectly brought back the industry to a “regulated state” as market forces got distorted when pump prices were frozen at October 15, 2009 levels for three weeks.

Such policy infirmity ignited industry outrage that many of the principals of the multinational oil firms (among them French firm Total SA, Liquigaz which is the local affiliate of Dutch firm SHV Holdings S.V. and even Thai firm PTT) called for a review of their operations and investments in the Philippines. Pilipinas Shell, local subsidiary of The Hague-headquartered Royal Dutch Shell plc, went one step further by tugging Malacanang into a court battle when it petitioned for temporary restraining order and prayed for injunctive and declaratory relief on the EO’s constitutionality. After causing all that degree of exasperation, the Palace eventually blinked on its policy pronouncement, prompting it to lift the price freeze via EO 845.

Perilous journey in NPC’s privatization

If PSALM can finally breathe a sigh of relief on the first component of its privatization mandate; that does not mean that it had gone through seamless process in selling the NPC’s generating assets. In fact, the divestment program practically trailed perilous journey, hence, it took about eight years to meet the prescribed 70 percent asset divestiture threshold.

While refusing to acknowledge that PSALM encountered rough patches, Mr. Tolentino offered this explanation: “while PSALM has been in existence for some eight years now, the power privatization process itself is relatively new to all concerned, including the relevant regulatory and oversight bodies. Everyone involved is learning something new everyday and coping accordingly.”

In due course, PSALM was reportedly confronted with problems which it found complicated to resolve at first – including lack of documentation and titling of assets, resistance from NPC, getting approvals from lenders and faulty contracts, among others.

From the investors’ viewpoint, PSALM really fumbled in its initial handling of the assets’ privatization, but they are considerate enough in giving the privatization company a passing grade (an overall rating of 7 out of a perfect score of 10) for finally hitting the mark on such mandate.

“Despite the challenges PSALM is facing, significant progress is being made. I would even say that the pace of privatization has accelerated over the last 1.5 years,” Aboitiz Power Corp senior vice president for generation Luis Miguel Aboitiz said.

Considerably, AP was among the most aggressive participants in the NPC’s privatization program – if judged fundamentally on the number of assets it acquired. The company, with partner Norwegian firm SN Power, is the buyer of the Magat and Ambuklao-Binga hydro plants; and its subsequent acquisitions include the Tiwi and Makiling-Banahaw geothermal plants; power barges in Mindanao and as IPPA for the Pagbilao coal-fired plant. The other companies with NPC assets’ acquisition, based on transferred facilities, are US firm AES Corporation; local firms First Gen Corporation and Energy Development Corporation of the Lopez group; San Miguel Corporation, DMCI Holdings Inc. and SPC Power Corporation.

The latest winners in the IPPA bidding for the San Roque, Bakun and Benguet hydro plants, were Amlan Holdings and Strategic Power Development Corporation, also of San Miguel Corp.

The year 2009 was correspondingly notable because it was in January that the 25-year concession deal for the privatized National Transmission Corporation (TransCo) was finally turned over to the consortium of the National Grid Corporation of the Philippines (listing State Grid of China, Calaca High Power and Monte Oro Grid Resources Corporation as equity holders). The group made an offer of $3.95 billion to win the concession of operating and maintaining the country’s transmission network over the prescribed period.

The big challenge ahead: competition and lower rates

Yet as it was on edict, the privatization of assets is just the starting point and there are more challenges that must be addressed head on so that the well-calculated reforms planned for the industry will finally have its benefits trickle down to the end-consumers.

According to Philippine Independent Power Producers Association Inc. (PIPPA) president Ernesto B. Pantangco, “reforms in the industry in accordance with EPIRA provisions have been progressing fairly well”, as he noted the privatization successes, the Energy Regulatory Commission’s approval of the interim open access (renamed Power Supply Option Program) and the government’s drive at providing solution to the power supply deficit dilemma of the Visayas grid.

Industry stakeholders albeit acknowledged that the government cannot rest still on these milestones, emphasizing that the challenges ahead are more pressing and seemingly difficult to resolve.

The Filipino consumers, in particular, will remain impatient seeing power tariffs go up (instead of down) and will endlessly blame deregulation until they experience innovation in products and services as well as freedom of competition to pull down their electric bills.

Unfortunately, the overwhelming thrust of a free market is not there yet – the initial steps in industry deregulation is still dealing with birth pains that ropes in fixing some distortions especially in electric rates and many more reforms are needed to be concretized – both in the regulatory and policy formulation fronts.

“The power industry players have always been consistent in the declaration that cheaper electricity rates will only occur when competition on a level playing field and open access have been achieved,” Mr. Pantangco said, emphasizing that such was the very reason why the industry players have continually supported the government’s privatization program.

Mr. Aboitiz offers a more pragmatic explanation on how achieving lower electric bills shall be viewed, being a pivotal outcome of the industry’s deregulation. He said “the concept of low electric rates is simplistic and can be misleading” and that the real effect is not easy to explain.

“Lower does not mean lower than before. What it meant is that a private, competitive generation sector will be more efficient and cost less than a regulated, government-operated provider,” he averred, further opining that in government hands, “the true cost of inefficient generation was not reflected in consumers’ bills.”

PSALM’s Mr. Tolentino concurred that “the reality is we’re still under a regime of regulated pricing which does not reflect the true cost of generating power. At the same time, we are seeing the entry of private entities in the generation sector which are making their power plants increasingly efficient.”

With regulatory underpinnings on the offer of time-of-use (TOU) rates, Mr. Aboitiz noted that consumers can initially work on cutting down their electric bills through demand-side management (DSM) initiatives, and this is seen more relevant when such innovative policy finally reaches household levels.

“Lower electric rates will benefit the more efficient consumers, but hurt the less efficient ones…those who consume more at night or consume power evenly 24 hours per day will benefit from the lowest generation rates,” he said, adding that before policy reforms were instituted, all consumers were treated equally “so the efficient ones were subsidizing the inefficient ones.”

(To be continued)