As oil prices poise to breach a hundred per barrel, energy secretary Angelo Reyes does the right thing: Nothing.

Reyes is doing right by not announcing any populist moves. After all, at least as far as I'm concerned, the oil deregulation regime has been doing just fine. If we were in the late '80's or mid-90's, the scandal-ridden administration would already have been ousted by a coup by right-wing adventurists, who, in those times, timed their moves based on the movements of prices in the world oil market.

It is now close to a decade since we finally smashed the old illusion that oil price subsidies were pro-poor, perpetuated for a long time by the middle and upper class leaders of so-called 'people's organizations.' Note that at that time nominal prices were below 20 dollars per barrel. Now the high is about five times. But we don't hear of any outrageous manifestos that the increase is caused by the local ruling class in conspiracy with foreign capitalists, do we?

I have a list of measures the energy secretary might consider, but none of these will lower gasoline prices for the middle class. In the meantime, he should just stand his ground.

Here's a list of easy energy saving tips promoted by Iran's revered president.

Goodbye to long-winded arguments

In the early 1990's I had never-ending arguments with environmentalists about why the National Power Corporation did not include wind energy in its power portfolio. I would always answer that the costs were too high. I said I would agree if there were a democratic process where power consumers would be made aware that the wind option would significantly increase their bills.

Now here is a PCIJ feature by Jaileen Jimeno which finally proves the point, self -serving it might be for me. Since 2005, the power facility Jimeno discusses in the article has been operating.
I must point out , however, that she missed one important point, the economics of wind energy. Since the early 90's , costs have fallen by 80% while costs for the alternatives, especially for fossil fuels, mostly oil and coal, have been steadily increasing. Thus, it is no surprise that wind is now competitive and will become more so henceforth.

GMA ecstatic over wrong things, says former Clinton aide

Joseph Romm, assistant secretary for energy efficiency and renewable energy during the Clinton administration, was unhappy with the remarks of GMA during her recent appearance in a forum of Clinton's Global Initiative. In his post "Why sustainable development is so damn hard, Philippine edition". he quotes the president:

Yesterday, I also announced, for the second time, an initiative where we are encouraging economic zones to be set up around the geothermal sites, because not only can geothermal fields give us power, they also give us jobs because the local governments earn royalties from the geothermal power. And they, by law, they can only use most of it for electricity. So they subsidize the electric bills of the constituents. So now we are creating economic zones there, so that businesses, like electronics, for instance, power incentive electronics firms, will locate there. So aside from the subsidized power bills from the local governments, they will also have the usual investment incentives. So these areas, which are usually far from central Manila, will now have industries, as well as power."

At first I thought she did not have the law right, as I was thinking about provisions in the energy department's regulation (1-94) which does not really impose power rate subsidies in the use of the funds generated, see the power sector reform tracker.

The Generation Company and/or energy resource developer sets aside one centavo per kilowatt-hour (P 0.01/kWh) of the total electricity sales as financial benefit of the host communities of such generation facility, where applicable. The financial benefits are given directly to the host LGU or region, especially to the community and people affected while equitable preferential benefits are being provided to the host region. The accruals of the financial benefits are allocated for the following:

1. Electrification Fund (EF);
   
2. Development and Livelihood Fund (DLF); and
   
3. Reforestation, Watershed Management, Health and/or Environment Enhancement Fund (RWMHEEF).

This is actually the pertinent provision GMA was referring to, in section 294 of the Philippine Local Government Code (RA 7160), which reads:

Development and Livelihood Projects. - The proceeds from the share of local government units pursuant to this chapter shall be appropriated by their respective sanggunian to finance local government and livelihood projects: Provided, however, That at least eighty percent (80%) of the proceeds derived from the development and utilization of hydrothermal. geothermal, and other sources of energy shall be applied solely to lower the cost of electricity in the local government unit where such a source of energy is located.

On a more positive note, the system of subsidies and cross-subsidies in the Philippine power sector has been reformed a great deal since the passage of the EPIRA. For one, most of the inter-grid (among the three major island groups Luzon, Visayas, and Mindanao) and inter-class (between industrial/commercial and residential) subsidies have been virtually eliminated. What remain are the intra-class subsidies in the residential sector with the ‘institutionalization’ of ‘lifeline’ rates supposed to be for the poorest among the poor in all the franchise areas.

The new system of lifeline rates is much better than the old one, where each franchise area had almost complete leeway over them, but still is not good enough. For instance, in the Meralco area, households consuming up to 100 kilowatt-hours a month are subsidized even though this threshold is way above what poor households consume on average (as determined by the official povety count). Historically there are two possible motivations for such lifeline rates.

The more compelling is the notion that the poorest households underconsume electricity because they don’t consider the positive effects on the children’s education and their own access to media and social connectivity have on the rest of society, coupled with unwarranted coupling because of limited possibilities for pleasure at night.

The other is with society’s desire to work toward equality of opportunities and incomes/outcomes. Most economists agree that this objective could be pursued much better through outright cash handouts rather than subsidies for specific goods.

What alarms me in the Philippine context is the ‘populist’ attempt by the current administration to work for the granting of special electricity rates to many special zones, defeating the purpose of the power sector reform act. It is in this light that GMA’s announcement must be viewed. She had no hand in the enactment of the local government code but instead of working to revise the pertinent provisions, it panders to some special interests. Note that the subsidized rates are based on a fixed total to use for subsidization and would have the effect of raising residential rates in the affected communities. In my own estimation, greater industrial activity would lead to more pollution. While the increase might not be that much in the overall inventory, it is the intent and the pandering to special interests which is worrying.

Our right to rate government: XXX

Featured last week in The Big Picture were guests discussing the MTRCB rating of the documentary ‘Rights’ which should have been screened in time for the 35^th commemoration of Martial Law. The film, according to its producers (I have yet to see it) deals with recent human rights violations in the country. Kiri Dalena, one of the two in the first segment of the show, had to defend the intent of the film. In my book, she shouldn’t have had to. Movie-making is not journalism and is not bound by rules of fairness, because that is for viewers, with all their pre-dispositions, to judge. But in the next segment, A certain Erik F. Mallonga, who chaired the MTRCB’s second review committee for the film, sounded reasonable but the subtext of his message was: I have the power, and I deem the film not subversive at all, so let it be shown to the public above 13.

I must admit I was disappointed at the host Ricky Carandang who had kid gloves on, tolerating Mallonga’s power trip during the show. In his column in Manila Times Monday (October 1), the power-tripping censor states:

I found the documentary to be a finely crafted and aesthetically appealing 30-minute collage of human-rights violations; it was a riveting mix of actual video footages and dramatic reenact­ments on this subject matter. The First Review Committee ruled that the film’s scenes were allegedly “presented unfairly, one-sided, and undermines the faith and confidence in the government and duly constituted authorities, thus not for public exhibition.” As the filmmakers were absent during the first review, they forfeited the opportunity to defend or justify their position that “Rights” be given a “General Audience [G]” or “Parental Guidance [PG]” rating. The filmmakers came in full force during the second review...

What struck both filmmakers and the Second Review Committee members, however, was the earlier judgment that the film “undermines the faith and confidence in the government and duly constituted authorities.” We, in the Second Review Committee, honestly thought otherwise. There was nothing in the movie that called for a revolution, rebellion, overthrow, armed uprising or insurgency against the government. There was no incitement to sedition. There was no “clear and present danger” to the stability of the government that the military and police have to respond with armed might. (In contrast, the board found the Erap’s account of his overthrow seditious, and Mallonga did not elaborate further).

Mr. Mallonga, if you were not a censor, only one or two people would actually care for your opinion and since I don’t know you, I have no right to rate your intellect, especially in regard to evaluating artistic merit. But people like you, who pretend to know better than us viewers, in modern civilization, should have been kept in your mother’s womb, if it could still accept you.

There have been a number of ‘artists’ who have accepted posts in the MTRCB. They probably rationalized to themselves that “better me than them’ and you should be thankful “I’m more intelligent and liberal.” Sorry Mr. Mallonga, but I protest being one of your subjects. The right thing to do, for anyone who sees herself/himself as an intellectual, is to simply reject the nomination. You also do not appreciate that it is innately wrong for government to ban material on the basis that such might “ undermine faith in government.” If the public uses all its senses it might realize that government undermines faith in itself, in the most indecent ways.

If I were you Mr. Mallonga, find a more decent job, and let’s see if you deserve more than the minimum wage. Otherwise, I recommend that you seek the advise of Rep. Teddyboy Locsin on how to make yourself happy alone, and start to grow hair on the back of your palms.

Corrruption and inefficiency in Philippine Rural Electric Cooperatives

The conventional wisdom is that the major reason for inefficiency and corruption in rural electric cooperatives in the Philippines is the lack of incentives for good management. Because there is no group of private stakeholders large enough to care how an REC (rural electric cooperative) performs, the managers are left to their own devices, especially if their pay is not linked to such performance. While the coop members elect the boards of directors which in turn supervise the managers, that is pretty much where their participation ends, which is why it has been said that the RECs are cooperatives only in name.

REC elections are also said to be well-contested because the boards exercise tremendous political power; in some cases even more so than local government elections. In fact, the party-list party of the rural coops, APEC, has always been a top vote-getter in national elections owing to a large bloc of ‘command votes.’

Occasionally a group of members might have enough community spirit to exercise vigilance over management while the rest of the members simply ‘free-ride’ on their efforts. This is also why the standard (and perhaps even dogmatic) prescription is to encourage the entry of private capital imbued with a profit motive to lower costs. But that is just one solution to enforce greater accountability and efficiency, by encouraging greater membership participation.

This is what this account of graft and corruption in BATELEC II (Batangas Electric Cooperative II) illustrates: member vigilance and heroic management. The board, elected in 2003, is facing charges of corruption brought by some members (in 2005) for approving and awarding a P75 million computerization contract to I-Solv, a company based in Metro Manila, with a paid-up capital of P62,500 and organized just a few days before the contract award in April 2004.
The graft charges were presumably lodged after the National Electrification Administration (NEA) audit, at the instance of the same group of members, found the whole project irregular for lack of the proper technical study and bidding. Furthermore, the board had usurped the authority of the bids and awards committee, the audit said. It also found that the board approved a 100% overprice of 10 boom trucks. In this controversy, general manager Marlyn Caguimbal has been on the side of the members.

It is unfortunate that PDI reporter Marlon Ramos ends his account with developments way back in 2005 and thus leaves us wondering on the status of the case and what other actions, if any, the NEA has taken against the board.

About nine years ago, I had occasion to visit the offices of BATELEC I, the other REC serving Batangas, and was impressed by the professionalism of management. The REC had been chosen for a brief historical case study, excerpted in a chapter of The Challenge of Rural Electrification, Strategies for Developing Countries, edited by Douglas Barnes and recently published in May by Resources for the Future (RFF) and Energy Sector Management Assistance Program (ESMAP). I co-wrote the chapter on the Philippines “Power and Politics in the Philippines” with Gerald Foley.

wiretaps in aid of effective electricity spot market regulation

A funny thing happened on the way to a competitive electricity market in the Philippines.

Let me start again. A funny thing happened when the electricity regulator was investigating anti-competitive behavior of the state-owned utility. The regulator said there was no prima facie case even after the market operator furnished them with affidavits admitting such behavior. This is one for the books, but not surprisingly because the country lacks a history of anti-trust litigation.

Let me start again. In September last year, the Philippine Electricity Marketing Corporation (PEMC) lodged a case with the ERC accusing the PSALM of market manipulation. The investigator of the ERC did not even have to call Jack Bauer of CTU. The affidavits of the PSALM agents are clear that they bid to get a desired price.

Then the ERC dismissed the case for lack of prima facie evidence.

It seems like the ERC was looking for legally wiretapped conversations which could have gone this way.

Hey Juan, at the peak demand, we should tweak our bids this way and that.

Unfortunately for consumers, ERC was not forward-looking enough to install bugging devices in the rooms of PSALM and the ERC or NPC. What a pity.

So the spot market celebrated its first anniversary in the first week of August without fanfare because PSALM was demanding a to collect P9 billion, the difference between spot rates and administered prices imposed by PEMC for two months last year.

If you read the ERC decision you'll know that the investigator didn't need to call Jack Bauer of CTU because the PSALM affidavits were quite candid and in themselves incriminatory.

The continuing decline of energy sector institutions

Just had dinner with a reliable newly elected congressman who quoted other neophytes requesting anonymity in aid of obscurity. The buzz in the House is that the unpalatable Michael Defensor is being groomed to be energy secretary. From good to acceptable to bad to worse. What say you?

Being clear on going nuclear

I would not worry too much about reported plans by the energy department, with the imprimatur of the president, to 'study the possibility' of harnessing nuclear power in the country. There is no lack of things to worry about in this world, and there is no dearth of interesting subjects to study either. For all I care, Secretary Reyes can study nuclear physics and rocket science, but on unofficial time. I will start worrying when he gets distracted from the more important tasks of introducing real competition and lowering rates in the power sector and achieving the goals of the rural electrification program.
While I keep an open mind on nuclear power, especially as a potential solution to the risks of global warming, this is a non-starter for the Philippines, where the justifiable knee-jerk rejection of nuclear power is informed by the intertwined issues of corruption and safety.
It came to pass without much ado that the foreign debt of more than $ 2 billion incurred under clearly fraudulent conditions for the Bataan nuclear plant was finally fully paid in April this year. While many in legal circles felt we had a strong case against the Marcos henchman Disini and the supplier, Westinghouse, the Aquino administration had opted to settle out of court with the latter for a meager $25 million worth of old turbines. I don't know what happened to Disini. The Aquino administration also opted to honor the obligation but transferred it from the books of the National Power Corporation to the national account. (Just think how much higher NPC rates would have been if the white elephant had been part of utility's rate base. To its credit, NPC has at least managed to generate some income from the Morong complex by operating a hotel and cabanas---respectable houses meant for the power plant staff--- open to the public for conferences and private breaks. I've tried fishing by the wharf there and snagged some poisonous fish--- no not from any nuclear contamination because no fuel rods were ever stored there. There is also a good firing range for target shooting). Aquino officials shuddered at the thought of triggering cross-default provisions, used to shield banks from the consequences of their bad decisions---sound familiar?---- and lengthy litigation, had they chosen a more militant stance.
That same fear also probably was behind the attitude of the committee tasked to review the contracts with the independent power producers. From the very beginning, it chose a non-confrontational stance. But I've digressed enough.
Perhaps, Secretary Angelo Reyes was misquoted in this reportage on his view that nuclear power would help decrease power rates. A recent Economist article argues this hope rests on shaky ground. I'm all for nuclear power, but for Vietnam, Indonesia, and Thailand. Let them, as long as that decision has popular consent. On safety and sustainability, he can be guided by this real expert. Also, what to do with spent fuel and the risks of nuclear proliferation remain unresolved.
Notwithstanding Three-Mile Island, Chernobyl, and the fears evoked by current difficulties in that Japan nuclear plant undergoing repair after an earthquake, many risk assessment experts would probably tell you that Filipinos living around a nuclear plant would have a greater chance of dying from a motor accident (getting hit by a tricycle?), a fall resulting from a carelessly thrown banana peel, or from the bullets of political hitmen than from a nuclear plant failure. But subjective risk perceptions are always part of objective reality and that is where the main problem is. Moreover, it will probably take us at least fifty years to resolve the issue of safety in this country, where many controversies one hopes could be resolved by hard science never seem to be. (For lack of resources and intellectual boldness, neither the department of energy nor of science and technology could even come to a simple judgment on some alleged fuel-saving automotive gadgets that a former environment secretary had installed in his department's vehicles).
But what is there to study anyway? The energy secretary must of course appreciate that we are not at the forefront of nuclear research and would thus have to depend on technological advances from abroad. He wants a technical pool? For what and at whose expense? Most of the people sent by NPC to train for nuclear plant operations opted to remain in the United States, and my acquaintances who came back formed part of NPC's brain trust, mainly in desk jobs in planning and in environmental work, and are now in the private sector after the utility's downsizing.
As far as I know there is no legal prohibition against putting up a nuclear plant in the country, but the proponent would have to pass the difficult environmental and social hurdles. Identifying potential sites? Okay. We can always let local governments with suitable sites volunteer and take care of the problem of social consent. Cebu? Just kidding. Unless of course one option under study is for government to get back into the business of generation, which some would consider foolish.
Finally, on climate change, we should not worry about that too much either, not in the sense of spending our meager resources. Our climate change policy should be anchored on the fact that historically and currently, we are a very minor source of so-called greenhouse gases. To the extent that we are almost certain to suffer from hotter average temperatures, our national policy should be one of seeking justice and compensation from the culprits, the developed countries responsible for the accumulation of these gases. We should adopt policies encouraging less GHG emissions, sure, but not at the expense of the poor and more important priorities. For one, we can tax, to the extent possible, the energy consumption of the rich.
Okay, let's be open, and just leave it at that.

Mikey Arroyo's thin line on energy

I have no idea where he came from, but he has a lucky mother. But when I saw him on ANC last night saying there was a thin line between the independence of the Energy Regulatory Commission and the wishes (populist and manipulative) of the executive, I was alarmed. Rep. Mikey Arroyo, chair and lone member of the House energy committee, at first seemed cautious, until the interviewers got the better of him. And that was when he not only betrayed his ignorance (forgivable) and then his political tendencies (unforgivable).
Most every observer of the Philippine energy sector would agree that one of the main problems of sector regulation is the lack of transparency aggravated by the discretionary powers of the regulator, complexed with the political influence of whoever wields executive power. Sometimes, this weakness is utilized by all sorts of contending political factions (including, unfortunately, those from the Left and who should know better).
The independence of the regulatory bodies in the sector has seen some ups and downs in the close to three decades I've been in it, as an active participant and observer. I must say we might be hitting anothe new low.
Less power to you, Mikey Arroyo.

p.s. My favorite senator and neighbor, who went epileptic with the appointment of Angelo Reyes as energy secretary, must be baying at the moon.

Masinloc and Philippine power rates (1)

Except for the self-congratulatory releases from the energy bureaucracy, the response to the successful bidding of the 600-MW coal-powered Masinloc plant has been muted. At $ 930 million, the bid of Singapore-based and AES-led consortium was 50% more than the winning bid of YNN Pacific, which forfeited its rights after failing to pay the required downpayment last year. The Power Sector Assets and Liabilities Management Corporation (PSALM) has divulged neither the bids of the five other bidders nor its reservation price. But its announcement did say that all the bids surpassed the latter. Some reporters revealed all the bids, but the figures have neither been confirmed nor denied. This is PSALM's release.
In the first round, all the competing bids were revealed to members of Congress whose various committees launched investigations in aid of one thing or another. But let’s get back to this later.

So, what would the sale, if concluded successfully, mean for the Philippine electricity consumer? The short and long answers are, it depends on how competitive the electricity markets in the country will really be in in both the medium and long term.

To understand the consequences for the consumer, we need first to understand how the privatization of NPC assets affects NPC rates in the short run. In the short short run, it won’t. This is because of the so-called regulatory lag, which delays warranted upward or downward adjustments in rates due to changed circumstances. But in the medium and longer term, my bet is the high valuation by the winning bidder presages higher rates, and not just higher rates, but higher rates based on higher profit margins for the new owner of the generation asset. (In nominal terms, there is no way but up for rates because of higher fuel prices based ultimately on world demand).

If the sale is concluded, then, before the end of the year, the new owners will be a new participant in the wholesale market. Most of its net revenues will depend on the market-clearing price and its operating costs----mainly variable or fuel costs. Let’s grant that the latter does play a role in the equation, because the new managers, with greater accountability to the new owners, have greater and more palpable incentives to reduce costs. But I find it difficult to imagine that the differences in the bids can be attributed to this factor. In my experience, the owners and managers of newly privatized power assets usually retain the technical personnel, whose bright ideas were just suppressed and ignored by a system lacking in incentives and accountability. The new owners don’t have an Einstein up their sleeve and even if they did, the other bidders would have had access to him or her, at the right price.

My guess is that the new owners can justify their high valuation or recoup their investmentsonly by exercising market power in the wholesale market. In the long run, this is not necessarily bad for the consumer. But in the the short and immediate periods, expect higher rates, but don’t blame me.