Nationalize Power Industry!

Posted on June 4, 2014

By Ray L. Junia, Publisher

Something scandalous about the nation’s power industry – it’s in the hands of few oligarchs!

From the Sys to Lopezes, Aboitizes and Consunjis, they are in control of a multi-billion peso industry, virtually placing millions of hapless Filipinos at their mercy.

In recent years, new players emerged with just one driving obsession – rake in billions of pesos in profits like literally squeezing blood from stone.

They include the old-rich Ayalas, banking magnate George Ty and, of course, listed retailer Meralco controlled by Indonesian conglomerate Salim Group through controversial “point man” Manuel V. Pangilinan (aka MVP).
From generation to transmission and distribution of electricity, the oligarchs are just everywhere, placing them in a vantage position to dominate – and dictate – the nation’s economy.

Like A Sore Thumb
Among industry players, Meralco prominently sticks out like a sore thumb, it being the most vilified for raising its power rates to exorbitant levels sans public consultations, in cahoots with an inept Energy Regulatory Commission.

While it cost the Salim Group billions of pesos to buy the Lopezes’ controlling stake in Meralco, their return on equity (ROE) had been awesome, if not mind-boggling.

Based on the firm’s annual reports, Meralco’s (ROE) and profit margin have risen several folds since 2008.
From just five percent in 2008, Meralco’s ROE steadily increased to 10 percent in 2009, 16 percent in 2010 and 25 percent in 2012.

This means that the ROE of Meralco has ballooned five-fold in a span of just five years.
In comparison, Meralco’s 2012 ROE of 25 percent is much higher than the entire power industry’s estimated average of around 15 percent.

From Filipino Pockets

Yet, Meralco has been stingy as far as complying with the government-mandated refund to its customers is concerned.

Apparently, Meralco’s foreign owners want to reinvest elsewhere such as in Singapore and Myanmar the profits they earned from the pockets of ordinary Filipinos.

In Singapore, Meralco acquired last February two brand-new natural-gas-fired 400-megawatt generators valued at US$1.2 billion with earnings from its Philippine operations.

Analysts say that had they been built in the Philippines, Luzon’s 8,000-MW capacity would increase by 10 percent and would have decreased incidence of brownouts and brought down Meralco’s high electricity rates.

Meralco’s defiance is an offshoot of the government’s glaring pro-business, anti-poor policy stance.
Blame, of course, rests squarely on the government’s lack of political will to resist the policy dictates of multi-lateral financial institutions which have a stranglehold on the government’s finances.

Foreign Meddling
For instance, the Electric Power Industry Reform Act (Epira) was passed by Congress in 2001 under threat by the World Bank, the International Monetary Fund and the Asian Development Bank to freeze the bailout funds for the once debt-saddled state-run National Power Corp. (Napocor).

Epira was nursed in its infancy and continue to be protected by its principal author, Sen. Sergio Osmena, who has chaired the Senate committee of energy for the longest time now.

Meant to foster competition in the power industry, Epira turned out to be a toothless law, unable to check its rampant violations by profit-hungry power firms and protect consumer interests.
For more than a decade, Epira failed to check the unabated surge in power rates, one of Asia’s highest, the reason why foreign investors shied away from the Philippines.

Ironically, Epira bred the rise of twin evils of monopoly and oligopoly in the power industry, precisely the key objectives it wanted to eradicate to bring sanity to an industry which has gone berserk with endless rate increases.
Not content with just distribution, some players like the Lopezes and Meralco also ventured into generation and transmission, enabling them to dictate market prices at will. Here the family of the wife of Sen. Osmena and Meralco appears to have violated the law on cross ownership that will allow them to control prices.

Fire Sale
Suspicions of shady deals also surfaced, largely attributed to certain loopholes in the Epira law on which some capitalists exploited to the hilt. In gist, Epira called for the fire sale of state-owned power assets even at grossly undercut prices from their appraised value.

How and why ethnic Chinese taipan Henry Sy ventured into power when his core businesses revolved around retail, his flagship that catapulted him to become one of the world’s richest.

It may be gleaned from how the cash-strapped government resorted to a fire sale just to dispose of its power assets as fast as it could.

From out of the blue, the cash-rich Sy has wrested control of the previously state-owned National Grid Corp. of the (NGCP), the company transmitting power to its franchise areas across the country.

Once Napocor’s money-spinner because of its extensive transmission network, NGCP – formerly called Transmission Corp. (Transco) – was sold to Sy for just US$3.95 billion in early 2000.

The taipan, known for his shrewd sense of business, made a down payment of US$987.5 million and promised to settle the balance of US$2.962 billion or P148 billion within 15 years. Why this was allowed had many guessing the answers but surely raised eyebrows while stirring suspicion of another sweetheart deal.

No Such Efficient Market
But reckoned with its strong balance sheet, the NGCP has been making P15 billion annually, hence its income in 15 years would work to P225 billion. That translates to P77 billion profits for Sy.

Amid the power industry’s bleak outlook, calls are mounting to repeal or amend the Epira law by nationalizing or de-privatizing the highly cartelized power industry.

By and large, the power industry is just too important to the national economy to be left to free market forces.
In most countries, power is highly regulated, owned by the state to a substantial degree, and subsidized by public funds.

Looking back, the EPIRA law was apparently enacted on the premise of an existence of an efficient free electricity market, uninhibited by government.

Unfortunately, there is no such market in the Philippines. Its electricity market is controlled by an oligopoly.

Foreign Interests
While debates are split on whether to nationalize or not the power industry by scuttling the Epira law, there are those who expressed caution against such move.

In a joint statement last week, some groups representing foreign businessmen believe that scrapping or amending Epira will not solve problems hounding the power industry, but will confuse investors regarding the investment climate in the country.

“If EPIRA is sent back to Congress for review, the uncertainty it will introduce into the regulatory regime of the power industry will lead to a potentially chaotic system, and worryingly put our future needs at risk at a time when our supply of power is marginal,” the statement read.

It warned that without stable rules and good investment climate in the energy industry, international and local investors will steer away from making investments in that sector.

But among lawmakers, there’s an emerging consensus that Epira has failed to promote free competition to benefit the consumers and likely to push for some changes in the government’s power privatization policy with a nationalization bias.

Any paradigm shift can’t gloss over the fact that the law has been used as smokescreen to hide patterns of collusion, monopoly and oligopoly among industry players to deceive the consumers without even knowing that they are being robbed.