A free market that looks like government-run inefficiency

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Ben D. Kritz

Ben D. Kritz

One of the reasons recent calls to re-nationalize the power sector have not gained much support in spite of a truckload of evidence that the industry is participating in a massive extortion scheme against Philippine consumers and businesses, is that the alternative is not actually all that appealing.

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Government-run utilities, being essentially not-for-profit enterprises and therefore having little incentive to strive for efficiency and effective cost management, are generally regarded as being more costly—if not for consumers, then for the government that has to subsidize power costs—and less likely to provide adequately stable services.

That was the rationale behind the Electric Power Industry Reform Act of 2001 (Epira), and at the time it made sense. Advocates of privatization had only to point to the painfully obvious record of inadequate or unstable service, massive debts, and all-around bad management racked up by the National Power Corp. to make a compelling case that no, the government should not in fact be in the business of producing and distributing electricity.

The small group of power sector players were able to successfully lobby for modifications to the law that gave them absolute control over the industry, and in a sense, every other industry or household that uses electricity. That much was probably inevitable; with few firms immediately available who actually had the capabilities to produce or distribute electricity, and new investment in the power industry being an unavoidably slow and complex process that takes years in most cases, the established players in the industry were always going to have an advantage. And that would have been fine, if the Epira law actually did what it was ultimately supposed to: Guarantee that more efficient and less-costly electricity would be the result.

Instead, Epira simply handed over the electricity business to the members of the oligopoly without bothering to at least ensure they would in fact have to work for the grotesque profits they collect. Two simple ways that could have been accomplished without imposing a draconian regulatory structure on the industry (too much regulation, after all, also defeats the intent of a “free market”) would have been to loosen investment restrictions in the power sector while at the same time imposing challenging limits on the share of the market any one generator or distributor could control. Under those circumstances, anyone in the power business would have been subjected to a healthy level of competitive pressure—they could still earn unlimited profits, but they would have to do it by maximizing performance.

One unpleasant reality the uproar over the Manila Electric Co.’s (Meralco) obscene rate hike has obscured to some degree is that even if the rate hike had never happened, since Epira the cost of power in this country has been unacceptably high even under the best of circumstances. Because there is no incentive for efficient performance—Epira guarantees generators and distributors get paid no matter how sloppy their management is—there is no attempt to practice it.

Aboitiz Power is a good example. At the end of last month, Aboitiz subsidiary Hedcor got itself into hot water with local government officials in the Mountain Province, who sought to impose a temporary halt on Hedcor’s 14-megawatt mini-hydro project along the Chico River, after the company created a mess constructing new roads without first building a debris containment area as specified in its environmental compliance certificate (ECC), according to local officials in the town of Sabangan. Earlier in January, another Aboitiz subsidiary, Therma Marine (TMI), announced it would be refunding P180 million to 21 electric cooperatives in Mindanao for overcharging for power delivered back in 2011. Major rate readjustments and subsequent refunds have become an annual event for TMI in the past couple years; in 2012, the company was ordered to refund the National Grid Corporation of the Philippines after the Energy Regulatory Commission (ERC) reduced TMI’s capital recovery charge for 2010 and 2011, and in April of last year, TMI was ordered to refund the Zamboanga Electric Cooperative P14.25 million after another ERC rate correction.

Aboitiz could explain, and they would basically be right, that all these problems were corrected. In the case of Hedcor, the company apparently reached an understanding with the local authorities to clean up its mess and correct its work plan as quickly as possible; in the multiple cases of refunds due to customers in Mindanao, the company made the necessary arrangements according to the orders given by the ERC. That, however, is not the point. Hedcor certainly knows how to carry out a hydroelectric construction project (it is building another, somewhat larger one now in Mindanao); not following its Environmental Compliance Certificate in the first place, whether or not it was cheerfully willing to correct its mistakes later, only caused unnecessary delays and expense.

And while it was the ERC—itself no more a monument to efficiency than the industry it supposedly regulates—that determined Therma Marine customers in Mindanao were overcharged at various times, the ERC absolutely relies on data provided by the company in making that judgment; the 2012 refund, for instance, was the result of an estimate that was about 40 percent too high. Again, the fact that the appropriate correction was made is beside the point—in every one of these instances, correcting an earlier mistake simply added unnecessary steps and costs to a workflow that should have become second nature long before now.

Although Aboitiz is singled out here as an example, they are by no means unique—and perhaps the ultimate evidence that the entire industry couldn’t find efficiency if it was locked in a phone booth with it is the sadly ridiculous fact that a rate hike by one electric distributor has to be decided by the highest court in the land (while those imposed at the same time and for the same reasons by dozens of other distributors across the country are completely ignored). Amazingly, the Philippines has created a private enterprise-based industry that is every bit as hapless as a government-run power sector, at an overall cost that is just as high. That’s not an easy problem to fix.

benkritz@outlook.com

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1 Comment

  1. Correct! Government has no business running busineses. It should stick to effectively managing the national budget, creating employment, ensuring peace and order and maintaining equal playing field for businesses.

    The Constitution has to be changed. Let us allow foreign utilities companies to do business and give the local oligarchs the run for their money.