An Institutional Analysis on the Impact of the Power Industry Restructuring Program in the Philippines

Abstract

The Philippines practices the geographic area franchise concept which obliges franchise holders to connect all households and other potential customers in their franchise areas, unless by doing so it will undermine the financial viability of the distribution utilities. The geographic area concession, which divides the country into area franchises, creates a monopoly supplier in each franchise area. This type of market arrangement has been rationalized by the theory of natural monopoly. The theory implies that long run average cost declines continuously by increasing the supply of electricity. Thus, dividing the market between two or more firms will mean an inefficient allocation of resources because the average cost of supply is higher for each firm. The rationalization of natural monopoly could no longer be justified in the generation sector when increased cost of constructing power generating stations shows that the real cost of power production exhibits decreasing returns to scale. This means that relatively small generators such as those operating combined cycle gas plants can effectively compete against large generators such as those operating large-scale coal and nuclear plants. In the face of the disappearance of the natural monopoly characteristics of the industry, and the high Philippine electricity rates compared to those in neighboring countries, the regulatory regime had to be restructured. Republic Act 9136 (Electric Power Industry Reform Act) was approved on June 8, 2001 by the Philippine Congress to ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products in the global market Energy is considered the life-blood of the economy. It is indispensable in achieving economic growth and critical in sustaining a nations progress and prosperity. Energy is an instrument from poverty reduction and social equity as it serves as an enabling factor to channel grassroots development with the delivery of the much needed public services to marginalized and disadvantaged sectors of our society. The Philippine energy crisis in the 1990s and the push from international financial institutions such as World Bank and the ADB has led the Philippines to restructure its energy sector through the enactment of the Electric Power Industry Reform Act of 2001 (EPIRA). One of the objectives of EPIRA is to achieve the affordability of the supply of electric power and reasonable prices of electricity in a regime of free and fair competition. Alongside this objective are the institutional reforms to effectively implement the delivery of public service in terms of electricity, policy formulation to promote competition and to design the competition environment, formulation and adoption of transparent and progressive pricing mechanism to achieve full cost-reflective tariff structure and implementation of social welfare programs for the benefit of the low-income electricity consumers.

The Philippine electric power industry has embarked on a reform journey to a direction it has not travelled previously. This journey requires the restructuring and privatization of its existing agencies and institutions, and the establishment of a new legal and regulatory apparatus. The ultimate goal of this journey is to create a price-based competition, incentive-based regulation, open access to transmission and distribution facilities, and to attract sufficient private investments to meet demand in the long-run and provide reliable supply to consumers. It is for this reason that this paper looks into the situation of the Philippine energy sector almost a decade and a half years after the enactment of the EPIRA. It focuses on four aspects of the energy restructuring program: regulatory framework, competition, price mechanism and consumer welfare and protection. Furthermore, attention is given on how these four aspects contribute to social welfare.