Hypocritical Response to Rising Energy Prices

Malaluan, a lawyer by profession, is a trustee of Action for Economic Reforms. This article was published in two parts in the Yellowpad column of the BusinessWorld. Part 1 came out on June 30, 2008, pages S1/4-S1/5. Part 2 came out on July 7, page S1/4.

We consumers are all feeling the pinch of the rising prices. For May 2008, the inflation rate year-on-year shot up to 9.6%, compared to 2.4% last year. Such drastic increase has been due in large part, directly and indirectly, to the rise in petroleum prices as well as the high cost of electricity. Directly, as a commodity group, inflation for fuel, light and water was 8.2% in May 2008, compared to 4.0% last year. Indirectly, rising energy prices have driven the prices of major commodities upwards. Inflation for services was 7.8% for the same period, compared to 1.9% last year. More severely, inflation for food, beverages and tobacco shot up to 13.7% for May this year, from 2.6% last year.

The poor among us must be feeling the pinch more intensely. For the 4.6 million families (representing 28% of total  families) earning under PhP60,000 per year or under PhP5,000 per month in 2003, they devoted between 6.5 and 7.5 percent of their expenditures to fuel, light and water, compared to 6.0% for the 2.3 million families (14% of total families) earning over P250,000 per year.

The contrast is starker for food. The under-PhP60,000 earners devoted between 59 and 64 percent of their expenditures to food, in contrast to 32% for families earning over P250,000. To compensate for increasing food prices, the poor sacrifice their luxury: health and education. As noted by my colleague Rene Raya, the poor decreased their spending for education from 2.9% of total family expenditure in 2003 to 1.9% in 2006, and for health, from 2.1% to 1.7% for the same period.

The Gloria Arroyo administration’s response is to dole out money as well as to wage a high profile battle with Meralco. The effectiveness of this response in terms of public management lies in its simplicity. It portrays a president who cares for the poor and who puts government funds where her mouth is. It publicly identifies a culprit for the public’s woes, Meralco, which is run by a conglomerate with a spotty if not bad performance in utilities, such as its failed operation of Maynilad. As an added bonus to having identified a vulnerable target, it is also able to hit back at the same conglomerate whose media arm, ABS-CBN, has been openly critical of Arroyo.

Caring for the poor is not Arroyo’s hallmark. To mention just a few examples of policies that have shown lack of sensitivity to the plight of the poor: the increase of the value-added tax (VAT) was imposed during her administration; the allocation for basic education in her 2007 budget was 11.9%, down from 16% in the late 1990s; her agriculture secretary admits the neglect of agriculture, the main source of income for 6.5 million families and where a large number of the poor come from.

The “Pantawid Kuryente: Katas ng VAT” program of GMA is poorly targeted. The one-time cash transfer of P500 will benefit only the poor who are lifeline users (consumers with an electric consumption of 100 kilowatt hours or less) for the billing period ending in May 2008. But a large number of poor families do not even have electricity in the building or house they reside in. Of the families in the lowest 40% income stratum nationwide, only 56 percent have electricity in the building or house they reside in (National Statistics Office’s 2002 Poverty Indicators Survey). The distribution is uneven across regions, with only 30% in the Autonomous Region of Muslim Mindanao and 37% in Western Mindanao of the bottom 40% of income class having electricity in their houses.

Singling out Meralco as the culprit for our electricity woes hides the government’s own sins. The independent power producers (IPP) contracted by Napocor in the 1990s remain a key reason for the high electricity prices in the country. The 44 IPP contracts entered into between 1991 and 1999 were vaunted to reduce costs, increase access to best practice technology, and shift key risks to the private sector.

The IPP capacity turned out to be very expensive. Even on contract signing date, many of the IPPs already had rates higher than Napocor’s generation cost for similar plants. Costs continued to escalate from the start of IPP operations. This was due to the lopsided price risk structures that were unduly favorable to the private sector. It was the Napocor, and ultimately the consumers, who assumed the fuel price risk and exchange rate risk of these plants, many of which are petroleum-based.

Generous off-take guarantees were given based on overly optimistic electricity demand forecast. Up to now, the oversupply from the IPP binge has yet to be used up. Of the 15,937 MW total installed generating capacity as of December 2007, peak demand was only at 8,993 MW. Based on government’s estimates, the Napocor paid over PhP60 billion in 2001 net present value to IPPs for power not used from the start of IPP cooperation periods until 2001. The oversupply was not simple excusable projection error. The risk structure had much to do with the business decisions at that time.

The charges of Meralco cost inefficiencies and transfer pricing practices are also best addressed to the regulator and to Congress. The Energy Regulatory Commission, with a politician appointed by GMA herself as Chairman, has the obligation to look behind the Meralco costs and rate base in the exercise of its price regulation powers. The related interest transaction of Meralco with sister IPPs, on the other hand, is allowed under the EPIRA (Electric Power Industry Reform Act) provisions on cross-ownership.

Curiously, we do not see the same zeal by which the Arroyo administration is flogging Meralco at the downstream petroleum industry side. At this time when we look to government for indications on whether oil price increases are fairly imposed, we do not hear even a whimper from government.

Even as we point out the hypocrisy of the GMA response to the high energy prices, we must not lose sight of more strategic concerns that we need to address.

First, the EPIRA needs to be comprehensively revisited. Regulation under EPIRA is a central problem. One problem is lack of transparency. Given the inherent control of the regulated entities over information, the lack of pro-active initiative on the part of regulators to provide complete and relevant information to the public results in a balance of power heavily tilted against consumers. Add to this the inherent difficulty for collective action of a vast number of consumers, in contrast to the centralized and highly incentivized action on the part of industry players. It is also time we revisited the proper role of government in the electricity industry. Was it correct to strip government of a direct role in generation, as EPIRA wants to have it? Of course our options in regard to finding the proper role for government is complicated precisely by the kind of government we now have.

Second, on the downstream petroleum industry, at the very least the government must improve its performance in price monitoring. The Department of Energy’s (DOE) oil price monitor is confined to a general report on trends in world oil prices and domestic pump prices. The DTI does not seem to care about oil pricing. Under Republic Act 8479 (Downstream Oil Industry Deregulation Act of 1998), the Department of Trade and Industry and the DOE are mandated to promote fair trade practices in the downstream oil industry and prevent cartels and monopolies. The DOE is tasked with monitoring and publishing daily international crude oil prices, as well as follow the movement of domestic oil prices. While the Act speaks of a report by any person of an unreasonable rise in prices to trigger an investigation, this is not a necessary condition for the DOE to give the public an indication that no such unreasonable pricing takes place.

Third, while we are concerned now with the plight of the Filipinos as consumers, we must not lose sight of Filipinos also being producers and workers. In the last two decades, the country has pursued a strategy that gives premium to cheap consumer prices through unilateral trade liberalization. This has come at the expense of income and employment, particularly in agriculture, and promoted the restructuring of the economy towards services. Thus, while the substantial reduction in consumer prices brought about by liberalization alleviated poverty on the whole, studies of liberalizers themselves cannot hide the ugly side. For instance, the simulation results of Caesar Cororaton (2005) also found that: Domestic producers experienced reduced volume and prices for local sales; total output in almost all sub-sectors declined except for non-food manufacturing; labor and capital income from agriculture declined; and income inequality worsened.

Ironically, our producers in agriculture are now enjoying a breath of fresh air with the increase in food prices, but not before liberalization has produced an army of service workers now vulnerable to the price increase.

As we address these strategic concerns, we must be mindful of the trade-offs. But one thing is certain: we need better government, and we need better leadership. Unfortunately for us, this will not come on a silver platter.

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