The last time I met all of you of the Foreign Correspondents Association of the Philippines, also here in Rockwell Club 3 years ago. I recall talking to you about the broad outlines of the problems of the Lopes Group since quite a number of our companies were trying to recover from the impact of the Asian financial crisis, while some of the problems are still with us today, I am also happy to say that the Lopez Group, as a whole is on its way to financial health once more.
This morning, I would like to talk to you about just one industry, an industry we are deeply involved in, namely the electric power industry, where we are involved both in the generation and the distribution end of this industry. After giving you an overview of the industry and the Lopez involvement in it, I would like to discuss the issue of high electricity rates in this country and what I think we, and you as media, can do about it.
The history of the electric power industry in the Philippines can be conveniently analyzed in terms of the swinging of the pendulum, from private power in the pre-martial law period to public power during the martial law years, and today that pendulum is swinging back once more in favor of private power especially after the passage of the Electric Power Industry Reform Act of 2001, better known as EPIRA for short.
The earliest period of the history of the power industry which goes back to the last decade of the Spanish colonial regime as well as the first decade of the American regime, was dominated by private ownership. Established in 1903 by American investors, the Manila Electric Railroad and Light company or Meralco for short quickly became the dominant power company in Luzon. By the outbreak of World War II, Meralco operated not only in Metropolitan Manila but also in 15 outlaying provincial areas, as far north as Dagupan City in Pangasinan down to Naga City in Camarines Sur province in the Bicol area. It was only after World War II that Meralco relinquished its franchise operation in 45 municipalities in 10 provinces to concentrate its attention in the Manila Metropolitan Area and its environs, which was undergoing a tremendous growth in commerce and industry.
But the big expansion of the Meralco system coincided with the transfer of its ownership from American to Filipino hands headed by my father, Eugenio Lopez in 1961. If one can talk about a “Golden Age” for Meralco and private power, it was during the decade of the 1960’s. Those years were an exciting and exhilarating period for the Philippine power sector. And if I now seem to describe that era with vicarious recall, it is because I lived and worked in the middle of it all, having been appointed at the time as Senior Vice President of Meralco Securities Corporation, which was Meralco’s holding company and which is better known today under its new name since 1978 as First Philippine Holdings Corporation.
Consider these factors. In 1961, Meralco had a total generating capacity of about 300,000 KW; by 1972, its generating capacity had increased 5-fold to 1,500,000 KW, all in the form of oil-fired thermal plants. Meralco was putting up one plant every 18 months to keep up with the tremendous demand for power in its franchise area. KWH sales went from 1,700 GWH in 1961 to 5,100 GWH in 1972, or an annual compounded growth rate of 10.6%. By 1972, Meralco’s customer base had grown to more than 600,000 from just 370,000 in 1961. Such a massive drive to expand capacity had never been witnessed in Meralco’s service area before.
But there is one good reason for this expansion. Up to the 1960’s, Meralco was always dependent on National Power Corporation for around 30-40% of its power requirement. But because of long delays in the completion of the Ambuklao and Binga hydro plants in the mid 1950’s, the Meralco franchise area suffered from continuous rotating brownouts from 1956 to 1959. Average cost of imported fuel oil during the 1960’s was .68/barrel, translated to an average cost for all Meralco customer of 5.8 centavos per KWH during this 10-year period --- very cheap power indeed for Meralco customers.
In fact, by the late 60’s, Meralco had the lowest power rates in Asia, and Meralco rates was even lower than those in 43 of the 50 states in the U.S. But what was the price to pay for all these achievements of Meralco? First of all, Meralco’s long term debt rapidly
increased exponentially from Php. 71 million in 1961 to Php.1 billion by 1975. More importantly in 1971 action taken by the organization of Petroleum Exporting Countries or OPEC resulted in several dramatic increases in international oil prices. From a level
of .68/barrel in the 1960’s, Meralco paid .68/barrel in 1973, .50/barrel in 1976 and /barrel in 1981.
In addition, in February 1970 as a consequence of serious trade and balance payment deficit of the country, a floating exchange rate system was adopted by the government. Thus by the early 1970’s , the Golden Age of Meralco and private power in general came to an end. Henceforth, there was to be no more cheap power . The 3 factors of exchange rate, inflation and fuel prices, sounded the death knell of the old era of private entrepreneurial power. The pendulum would now swing in the direction of public power.
Hand in hand with the economic crisis came the political crisis. On September 21, 1972, President Marcos declared Martial Law. He padlocked congress and rounded up his political enemies and critics and shut down all independent media including my father’s newspaper Manila Chronicle, which was critical of the graft and corruption of the Marcos regime. It was during this period that our family was stripped of both ownership and management of Meralco and by Presidential Decree No. 40, all power plants of Meralco were sold to National Power Corporation and NPC could henceforth own and operate as a single integrated system all generating facilities supplying electric power to the NPC grid.
With the advent of martial law a separate Ministry of Energy was created. Power generation, transmission and distribution enjoyed the highest priority in the new agency’s plans but almost exclusively as a government-sponsored and funded activity. Of all the plans of the Ministry of Energy, the one that met a measure of success was geothermal power.
Today, Tiwi, Mac-Ban, Palimpinon and Tongonan geothermal plants totaling close to 2,000 MW continue to operate and point the way for further development as an important indigenous resource. On the other hand, the Philippine Nuclear Power Plant in Bataan today serve as a monument to the corruption and greed of the Marcos dictatorship. It has cost the taxpayer in excess of billion without
providing one kilowatt of power to the country. In the post-EDSA euphoria, absolutely nothing was done to address the problem
of power inadequacy. By 1990, with the unexpected strength of our economic resurgence, that inadequacy became very evident and the brownout era began in earnest.
Executive Order 215 issued by President Aquino in 1989 and implemented in 1990 gave rise to rapid mobilization of private capital for purpose of developing “fast track” B.O,T. power projects as palliatives to the power crisis that struck us in full force from 1991 onwards. Palliative in the sense that these quick- to-put-up oil-fired plants were meant to cover the supply gap till such time as large, predominantly coal-fired and gas-fired baseload plants enter into operation in the late 1990’s and early years of 2000.
FPHC together with Meralco, JG Summit and PhilAm Life participated and won one of these 15-year B.O.T. projects sponsored by the National Power Corporation, a 215 MW oil-fired diesel plant in Bauang, La Union, which came on line in August 1994. But the bigger involvement of FPHC in power was in the development of the natural gas to power business, with the establishment of two combined cycle gas-fired power plants in partnership with British Gas, namely the 1000 MW Sta. Rita plant which started in April 2000 and the 500 MW San Lorenzo plant that started in January 2003, both located in Batangas City, and selling all its power output to Meralco.
At this point, we have to ask ourselves why Philippine power rates today are so high vis-à-vis our Asian neighbor?
Why Are Philippine Power Rates So High vis-a-vis Our Asian Neighbors?
From having one of the lowest power rates in the world in the late 60’s, today the country finds itself struggling with one of the highest power rates in the region, if not in the world? So what happened? There are numerous reasons but let me zero-in on a
few of the most important.
As we have already indicated, firstly, the era of cheap imported oil that pervaded the 1960’s came to an abrupt end in the early 70’s. During the martial law period, a lot of emphasis was given to developing indigenous energy sources such as geothermal,
hydroelectric, and natural gas.
But our country’s drive to develop these indigenous sources of power from that time till the present paled immensely in comparison to our Asian neighbors. It’s a major obstacle that holds us back from competing effectively with neighboring Asian countries for manufacturing jobs. It’s good to keep in mind that the price of electricity is determined predominately by the cost of fuels used for power generation. Fuel cost could account for anywhere from a low of 5% to as much as 40% of the ultimate cost of electricity to the consumer. Despite distribution utilities like Meralco being the face that deals with consumers, more than half of that electricity consumer’s monthly bill comes from the power generators. Thus, the power generation sub-sector of the electricity industry, particularly the choice of which technology and fuels our country uses to power its electricity needs, has the biggest impact on end-consumer prices.
A snapshot of how countries compared in 2003 with regards to fuels used for electricity generation reveals how far ahead our Asean and Chinese neighbors are in the development of indigenous sources of energy for their power sector, and how much lower the industrial rate in all these Asian countries compared to our own rate (except in Japan where it is higher than ours).
Even today, though our indigenous fuels in the mix seem to have improved to almost 70% we still haven’t narrowed the gap in our
electricity prices vis-à-vis our neighbors and our indigenous fuels in fact appear costly.
This brings me to my second point. It’s a sad fact that despite the rhetoric heaped on encouraging the use of indigenous fuels in the country we continue to impose heavy taxes and royalties on indigenous fuels, like natural gas and geothermal steam, which
together produce more than 47% of our electricity needs. Indigenous fuels are made artificially more expensive than imported ones because of this tax and royalty burden. Take the case of our country’s own natural gas from Camago-Malampaya. The power plants using clean natural gas from our own shores are made to look more expensive relative to power plants burning imported coal because of these taxes and royalties. This treatment is sad and ironic because in neighboring countries like Thailand and Malaysia natural gas used domestically is even subsidized. In the Philippines we do not even need to subsidize natural gas. All it wants for is a level playing field vis-à-vis alternative fuels. By our own DOE’s reckoning, we have prospectively ten more Camago-Malampayas and another 10,000 MW of geothermal potential out there. But if government policies on taxing indigenous fuels continue, our power industry will continue to build more power plants that burn imported coal which contributes to air pollution and global warming and it will be less likely that untapped reserves of indigenous clean fuels like natural gas and geothermal steam will be brought to market
Another major reason is that the selling price of Camago-Malampaya gas is indexed to crude oil prices. When we signed with Shell and Occidental Petroleum back in 1998 crude oil prices were only at US a barrel. Today the oil pr ice has more than quadrupled. Yet I do not think the costs of running Camago-Malampaya have increased by anywhere close to the same multiples. So I invite you to draw your own conclusions as to the size of that windfall being reaped by the Camago-Malampaya gas sellers. I hear that the total investment in this venture has already been recovered.
In First Gas’ selling price of P4.76 per kilowatt-hour to Meralco, fully P 3.25 per kilowatthour or almost 70% (68%) is the cost of gas and approximately P 1.79 per kilowatt-hour out of that P3.25 goes to government in the form of royalties. On top of all that the
consumer still pays P0.56 per kilowatt-hour in the form of a 12% VAT for power using Camago-Malampaya gas.
Thus, even if we use more indigenous fuels in our power generation mix today that reality doesn’t lead to lower electricity prices and is not likely to spur more development of indigenous energy until these structural disincentives are corrected.
Thirdly, the public suffers when power supplies are not planned ahead of time. Because of the nature and gestation period of power system investments, forward planning is essential in order to meet future electricity demand. The scrapping of the Bataan Nuclear Power Plant by the Aquino government in 1986 led to a huge gap in the country’s power supplies and the lack of any substitute power plants and reserves led to the crippling 10-12 hour brownouts of the early 90’s we all still vividly remember.
The country’s scramble over the next few years to build and contract for power plants at the height of the power crisis clearly demonstrates the perils of getting caught with your proverbial pants down. The worst time to contract for new supplies is when investors are few and the urgency is great. The latter necessitated that government contract for expensive power barges and oil-fired plants that could be put in place in a hurry (one or two years). Then came a mad rush to build plants for a manufacturing sector that never materialized due to the Asian crisis of 1997.
The resulting overcapacity and expensive fast-track power plants combined with the indispensability of minimum offtake provisions in most power contracts (NOTE: Financing not possible without Take-or-Pay provision) bloated power prices beyond what they should have been. This could be prevented with careful, more deliberate planning of our energy needs. Of course much of this is water under the bridge and did happen partly because of the transitions and discontinuities that marked our country’s history at that point in time. Some of these will be corrected as electricity demand grows to narrow the overcapacity gap. But the truth is today, after more than a decade and a half, we continue to live with costs borne from those necessary decisions that had to be made at the height of a crippling power crisis. That is indeed the worst time to make such critical decisions but with proper anticipation and planning it doesn’t always have to be that way.
What Should The Country Be Doing About High Power Costs?
When faced with high electricity rates, the typical impulse of governments is to suppress and subsidize power prices. We’ve tried that in the past and it’s led to net losses of NPC ballooning to close to a third of the country’s Consolidated Public Sector Deficit. This was a fiscal disaster in the making. Fortunately, since then government raised NPC rates thereby stemming some of the bleeding and passing new taxes to improve its finances. Subsidizing power rates has not been, and will never be, good for the country. When prices to end-users do not reflect their real cost to society this in fact leads to wasteful consumption of a resource we can barely afford. Power price subsidies lead to distorted consumption patterns that have perverse, unintended consequences such as low-income taxpayers subsidizing rich residential consumers.
However, today the country has chosen the path of reforming its electricity industry. The Electric Power Industry Reform Act, or EPIRA for short, intends to introduce more choice and free market forces into our electricity industry as opposed to a past that
relied almost entirely on central planning and regulation. When the law was passed in 2001 after more than 6 years of deliberations it was lauded internationally as one that would make the Philippine power industry among the most progressive in Asia.
We have to remember that the industry is one in transition right now and we are in the midst of crossing over from being highly regulated to one where market forces and competition are being introduced as new disciplining pressures on industry players. The
electricity sector is also shifting from being predominantly government-owned to one that will hopefully be placed in the hands of responsible private owners as PSALM is successful in disposing of the NPC assets. The transition will not be easy. As expected,
there will be resistance from quarters wanting to keep the status quo but the power reforms have to be relentlessly pushed towards completion in order to work. There’s no escaping that fact. The worst thing we can do today as a country is to waffle indecisively
as to whether we should have gone this route in the first place. Restarting the legislative process by amending the law while crossing midstream is the surest way to drown and mire the economy in another power crisis.
My simple suggestion here is to take the power reforms to completion and make the industry attractive to investments. The more vibrant the competition, the better the chances for reducing power costs and subsidies from government.
Even while the industry embarks on this rocky road towards reform the growing need for power never sleeps. And despite the overcapacity that existed since 1999, we are slowly seeing that considerable surplus being eaten up by growth. The power
shortages of the early 90’s and the stiff costs that resulted from the crisis have indelibly stamped in our minds what happens when we fail to plan ahead for our power needs.
EPIRA, however, changed a lot about how and where that happens. Since EPIRA was borne in an environment that mistrusted centralized government procurement of power, today responsibility for forward planning lies with the distribution utilities and
cooperatives themselves. If they get it wrong, they reap the consequences. In other words, planning ahead must still happen, but today they must occur under decentralized conditions. And that can only happen effectively when you have financially healthy
utilities that aren’t beleaguered constantly in fighting regulatory and judicial battles for survival. In particular, how can we expect Meralco, which accounts for more than 60% of nationwide demand to effectively plan for the burgeoning needs of a modernizing
country when it finds itself endlessly threatened with refunds and other millstones from our judicial sytem?
Probably the most critical task for the future is to keep a constant watch on improving the fuels and technologies we use for generating electricity. Power generation technologies as well as relative fuel costs are changing rapidly day-to-day. Technologies and fuels such as Liquefied Natural Gas, Clean Coal alternatives, maybe even Nuclear, which is undergoing a renaissance worldwide for its carbon-free nature, should be given a second look. Aside from making the right long-term bets on what mix will be best for the country we must continually drive to develop a stronger base of cheaper indigenous sources of energy. Over time we must reduce our reliance on imported fuels if we want to gain a competitive edge on power costs with respect to our Asian neighbors.
The country’s efforts will go a long way here if government paid closer attention to removing the taxes and royalties that gravely penalize the use of indigenous fuels. Much of these come from old antiquated Marcos-era Presidential Decrees that no longer fit the times and, although they provide revenues for government, these decrees serve to make already expensive power even more so. If we clamor to have cheaper power rates why do we tax it so heavily in the first place?
There are many structural flaws that need fixing on our road towards having sustainably competitive power costs in the country. But given that today’s electricity costs are high we must place strong emphasis on using that expensive power more judiciously. Energy
conservation and efficiency, aside from being the most environment friendly alternative can result in very quick results for end-consumers. Keep in mind that it’s infinitely cheaper to save a megawatt than it is to build one. We can learn from the experience of resource-scarce Japan. Having the most expensive power costs in the world never stopped them from becoming an industrial powerhouse. Instead they transformed themselves into one of the most energy-efficient economies in the world. In their case, necessity was the mother of innovation and development.
There are already a number of economic levers in the power industry that may help spur more efficient use of our power infrastructure. Acronyms you’ve heard of like time-of-use pricing will incentivize consumers to shift their use of electricity to night time when power demand is lower. These will allow more efficient use of cheaper baseload power plants and minimize the use of expensive peaking plants generating savings for everyone.
There are numerous other ways of incentivizing consumers in the more efficient use of electricity but lets remember that when energy prices are high rewards from energy efficiency investments to end-users will be great. Yet, in the Philippines electricity users
have barely scratched the surface in the field of energy conservation. Opportunities here still abound.
Lopez Group Role In The Power Sector
Finally, given our history as well as our country’s energy challenges, I’d like to give you a sense of the role we in the Lopez Group intend to play in the sector. Today we have major stakes in the generation sector thru First Gen and in the Distribution sector as an
investor in Meralco. Although admittedly, partly because of our presence also in media, there are always tensions in our relationships with governments. Despite this, we see ourselves as their key partners in making power reforms work. I hope that over time they will begin to see it this way too. The Philippines is at the forefront of power reforms in Asia. But even if the power industry oftentimes displays the awkwardness of a child learning to walk it’s good to remind ourselves that no one else in this part of the world has taken it this far. The new power sector environment will be a great challenge for us but we will rise to it.
Although our own Wholesale Electricity Spot Market (or WESM for short) is currently experiencing birth pains we welcome and support its role as a price-discovery mechanism for the industry. It’s a difficult time for them right now but I want to express
kudos to the men and women behind the WESM. Transparent and credible markets will be a crucial element in making power reforms work. And although we are hitting a few bumps lately, I believe we are still headed in the right direction. This is something our country should be proud of.
We intend to be very active in the sale of government as well as private power assets for sale. We see acquisitions there as a key piece to First Gen’s growth strategy. In fact we have participated in almost every major privatization auction of the government thus far and have won two hydroelectric plants, Agusan (1.6 Megawatt) and Pantabangan-Masiway (112 Megawatt).
We also have the strongest power development team in the country and we will continue to finance and build new greenfield power plants that will utilize nothing but the best, most appropriate fuels and technology. Our young and dynamic team at First Gen
can hold its own against the best in the world and is proudly Filipino-led. But like my father’s “golden age” they are able to work with the best minds in the business regardless of nationality and in fact we have a number of foreign nationals on the team.
Driving power costs in the Philippines once again to be among the most competitive in the world remains our overriding goal.
In all our interventions in energy we also intend to make the right environmental choices. Today the power generation sector has grown to become the largest contributor to greenhouse gases and global warming. Environmental stewardship is the lynchpin of First Gen’s CSR efforts and in fact many of our employees there contribute a considerable amount of their time to these efforts.
This is our home, this is where all our loved ones live and this is where we’ll stay all our lives. Those beliefs and convictions as a Filipino-owned power company are what make us different from every single foreign power investor that has come to invest in
this country. We in the Lopez Group are proud of that. I hope one day government will recognize this and welcome the fact that they a national champion in us and that they can consider us their partner in our nation’s development.
There is one other item I want to take up this morning. This has to do with a block of shares in Equitable PCI Bank, representing about 7.13% of the Bank's outstanding capital. These Shares are registered in the name of Trans Middle East Equities Philippines, Inc. (TMEE) a wholly owned and controlled company of Kokoy Romualdez. They were sequestered by the PCGG in 1986 on the allegation that they are ill-gotten wealth of Benjamin (Kokoy) Romualdez, the brother in law of Ferdinand Marcos & one of most powerful personalities during the Martial Law years.
Only two claimants to the Shares are usually mentioned in most accounts and reports: (1) the Republic of the Philippines thru the PCGG; and (2) TMEE. I believe it is appropriate to clarify that First Philippine Holdings also claims ownership of these Equitable PCI Bank shares. We are seeking the recovery of these Shares in Sandiganbayan Case No. 0035. First Holdings asserts, in its pleadings before the Sandiganbayan, that ownership of the Shares was wrested from it during the regime of former President Marcos through the use and abuse of power, force, threats, intimidation, and fraud.
Perhaps a brief history is appropriate. First Philippine Holdings was formerly named Meralco Securities Corporation. The Lopez family had a controlling interest in Meralco Securities, which owned the shares of the Manila Electric Company, or Meralco, and many other subsidiaries including a huge block of shares in PCIB. After former President Marcos declared martial law in September 1972, he
ordered the take-over of Meralco. Eugenio Lopez, Jr. was arbitrarily arrested and placed under indefinite detention. Fernando Lopez was stripped of the Vice Presidency of the Republic. Manila Chronicle and ABS-CBN were closed, and their buildings and
equipment were seized without compensation. The Kokoy Romualdez group took control of PCIB.
In view of the unconscionable pressure, the use, misuse and abuse of power, the threat and intimidation, for the peace and security of his family, my father, Eugenio Lopez, Sr. had no choice but sign a document agreeing to turn over control and management of Meralco Securities and other Benpres assets to the Marcos-Romualdez group. The name of Meralco Securities was changed to First Philippine Holdings Corporation.
In 1984, during the Marcos regime, these very valuable PCIB shares were transferred to TMEE without Kokoy Romualdez paying a single cent from his pocket. The Supreme Court in 1996 approved our Motion for Intervention, while the Sandiganbayan ordered these shares and all dividends due them to be held in Escrow at the Land Bank pending the final resolution of the ill-gotten wealth case. To our great surprise, just recently, Martin Romualdez, son of Kokoy Romualdez was able to withdraw about P138 Million of cash dividends and some 30 million shares which were the stock dividends of these mother shares. These cash and stock dividends were supposed to be held also in escrow pursuant to an order of the Sandiganbayan.
What we find shameful and alarming is that the second generation in these illgotten wealth cases, instead of feeling some sense of remorse and thoughts of atonement for the injustices transpired during the Martial Law years, are now taking steps to hold on and personally benefit from these sequestered assets.
We are fighting for our rights in this case as a matter of principle. In fact, we are ready to recommend to our shareholders to allow us to donate half of whatever proceeds may be awarded to us should we eventually win this case, to build 10,000 houses for our
public school teachers and another 10,000 units to the rank and file policemen all over the country. We estimate these 20,000 home to cost some P 2 billion which should be enough for Gawad Kalinga and the Habitat for Humanity group to build these 20,000
houses for our hard working but poorly paid public servants.
Simply, we hope and pray that in the end, justice will prevail.