Power sector reform

The author is the senior policy analyst and a member of the Management Collective of Action for Economic Reforms. This piece was originally presented at the Privatization of Infrastructure Seminar held Jan. 5-6, 2003 in Hyderabad, India, as part of the Asian Social Forum.

In the 1990s, fundamental power sector restructuring swept developing
countries around the world. In a workshop held in Bangkok in October
2002, activists from South, Southeast and East Asia shared their
country experiences in power reforms.

These are stories with the same plots and progression. They are about
increasing the role and power of foreign corporate interest in the
provision of a very critical public utility. They start with the
introduction of various schemes for private sector participation in the
early 1990s, such as service contracts, management contracts,
concessions and build-operate-transfer (BOT) contracts and their
numerous variants.

Incidentally, an independent power producer (IPP) executive calls this
period “The Gold Rush.” Towards the end of the 1990s which continues at
present, the reforms have progressed towards fuller privatization and
deregulation of the sector following the World Bank (WB) and Asian
Development Bank (ADB) models of unbundling.

The stories also share the same principal actors. On one side of the
policy change is the influential ADB and WB with their sector studies
and sector loans backed up by their jet-setting consultants (at times
industry players themselves) and local allies in the academe. On the
other side are often-unaccountable governments. The members of the
corporate sector, vested interests all, follow closely behind.

Lastly, there is ever-growing evidence that these stories will share
the same conclusions: the reform process resulting in higher
electricity prices for consumers, greater probability of private market
power in the sector, less environmental protection, less consumer
protection, and legitimacy of wrong policies and corruption.

The experience in Philippine power sector restructuring adheres
faithfully to such a storyline. The state-owned National Power Corp.
(Napocor), which built dominance in the power generation and
distribution from its creation in 1936, started a process of reversal
beginning in the 1990s.

In generation, Napocor entered supply contracts through BOT and its
variants with private power producers in quick succession. Between 1993
and 1994, some 27 contracts between IPPs and Napocor were put in
operation delivering new capacity of 2,859 megawatts. This trend
continued over the rest of the 1990s. At present, there are more than
40 IPP contracts in power generation.

The privatization process reached new heights when President Gloria
Macapagal Arroyo signed into law on June 8, 2001 Republic Act No. 9136,
or the Electric Power Industry Reform Act (EPIRA) of 2001. It is a
comprehensive legislation mandating the deregulation and full
privatization of the electric power industry in the Philippines.

This law provides for the vertical unbundling of the electric power
industry into four subsectors: generation, transmission, distribution
and supply.

Deregulation takes place with the law expressly declaring that
generation is not a public utility operation, and providing that the
sector is competitive and open. This has the effect of overhauling the
present setup where the government owns/controls the construction of
generation facilities throughout the country. Also, not anymore being a
public utility operation, generation was carved out from the
constitutional requirements of franchise and nationality limitations on
ownership.

Privatization takes place with the law mandating the sale of Napocor’s
generation assets and contracts with independent power producers, along
with real estate and other disposable assets.

The transmission sector, while remaining classified as a common carrier
subject to regulation, will also be privatized either through an
outright sale or a concession contract.

The privatization of the Philippine power sector was not an autonomous
act of government. At each step, the heavy hand of the WB and the ADB
guided the government.

The WB started the process by highlighting the financial problems of
the Napocor in its 1988 Philippine Energy Sector Study, and made a
pitch for BOTs. The WB then saw the severe brownouts in early 1990s as
an opportunity to push BOTs further, and to propose the unbundling of
the system in a new sector study in 1994.
In 1998, the ADB intensified the pressure by extending a $300-million
loan for the power sector restructuring program that culminated in the
passing of the EPIRA.

The WB and the ADB used the “carrot and stick” lending structure to the
hilt. The lending for institutional reforms was bundled with loans
intended for Napocor’s investments in the expansion of transmission
networks. The 1998 ADB loan was also provided in the context of a joint
standby assistance program with the International Monetary Fund and the
WB.

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