CHALLENGES IN PRICING ELECTRIC POWER SERVICES IN SELECTED ASEAN COUNTRIES

Transcription

1 CHALLENGES IN PRICING ELECTRIC POWER SERVICES IN SELECTED ASEAN COUNTRIES PHILIPPINES CLIMATE CHANGE AND CLEAN ENERGY PROJECT (C ENERGY) FINAL REPORT APRIL 2013 This report was produced for review by the United States Agency for International Development (USAID). It was prepared by the Center for the Advancement of Trade Integration and Facilitation (CATIF), Inc. for the International Resources Group (IRG).

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3 Challenges in Pricing Electric Power Services in Selected ASEAN Countries PHILIPPINES CLIMATE CHANGE AND CLEAN ENERGY PROJECT (C ENERGY) FINAL REPORT April 2013 DISCLAIMER The author s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government

4 Contents List of Tables... iv List of Figures... vii List of Acronyms of Philippine Distribution Utilities... viii List of Other Acronyms... xi Executive Summary... xiv I. Background Motivation Objectives and Scope Model Cases Structure of the Report... 5 II. The Philippine Electricity Market Market Structure Generation Transmission Distribution Supply Regulatory Regime The Electric Power Industry Reform Act Generation Transmission Distribution Supply Regulation Structure of Philippine Electricity Prices Price Components Tariff Schedules of Selected DUs Trends in Philippine Electricity Tariffs Representative Philippine Electricity Prices Composite Price Base Composite Price Pre-tax Base Composite Price Impact of MERALCO on Composite Price Key Issues Affecting Philippine Electricity Prices Wholesale Electricity Spot Market Pricing of Bilateral Contracts i

5 6.3 Incentives for Indigenous Fuel III. Structure of Electricity Markets in Other ASEAN Economies Indonesia Market Structure Recent Performance Malaysia Market Structure Sector Performance Thailand Market Structure Regulatory Regime Progress and Challenges in Regulation Singapore Current Market Structure Comparison of Philippine and Singapore Wholesale Electricity Market IV. Electricity Prices in Other ASEAN Countries Indonesia Price Structure and Regulation Computation of Tariffs Malaysia Price Structure and Regulation Computation of Tariffs Singapore Price Structure and Regulation Computation of Tariffs Thailand Price Structure and Regulation Computation of Tariffs V. Benchmarking of Philippine Electricity Tariffs Impact of Taxes Impact of Subsidies Impact of Price Differences Synthesis VI. Policy Simulations Components of Base Composite Price Restructuring Taxes Zero VAT Six-percent VAT Almost Revenue-Neutral VAT ii

6 2.4 Franchise Tax Eliminating Subsidies Lifeline Discounts All subsidies Pricing of Indigenous Fuels Geothermals Natural Gas Changing the Basis of Regulation on Distribution Performance-based Regulation for ECs Asset Revaluation for Computation of Revenue Caps on PIOUs VII. Synthesis and Conclusions Annex I. Customer Classes Used in Model Cases Annex II.1 Composition of Residential Tariff for 200 kwh Monthly Consumption in 2011, by DU Annex II.2 Composition of Commercial Tariff for 3 MWh Monthly Consumption in 2011, by DU Annex II.3 Composition of Low Voltage Industrial Tariff for 50 MWh Monthly Consumption in 2011, by DU Annex II.4 Composition of High Voltage Industrial Tariff for 200 MWh Monthly Consumption in 2011, by DU Annex III.1.1 Policy Simulation Results I for Residential Tariff, by DU Annex III.1.2 Policy Simulation Results II for Residential Tariff, by DU Annex III.2.1 Policy Simulation Results I for Commercial Tariff, by DU Annex III.2.2 Policy Simulation Results II for Commercial Tariff, by DU Annex III.3.1 Policy Simulation Results I for Low Voltage Industrial Tariff, by DU Annex III.3.2 Policy Simulation Results II for Low Voltage Industrial Tariff, by DU Annex III.4.1 Policy Simulation Results I for High Voltage Industrial Tariff, by DU Annex III.4.2 Policy Simulation Results II for High Voltage Industrial Tariff, by DU iii

7 List of Tables Table I.1 Assumptions used in Model Cases... 3 Table I.2 Customer Classes used in Comparing Prices... 4 Table II.1 Installed Generation Capacity in the Philippines by Ownership, Table II.2 Installed Generation Capacity in the Philippines by Grid... 7 Table II.3 Installed Generation Capacity in the Philippines by Fuel Type, Table II.4 Energy Generation: Philippines, Table II.5 Energy Generation by Plant Type and Grid, Table II.6 Number of Distribution Utilities by Grid: Philippines, Table II.7 Electricity Sales and Consumption: Philippines, Table II.8 Components of Residential Electricity Tariffs with 200-kWh Monthly Consumption of Selected DUs, July Table II.9 Components of Commercial Electricity Tariffs with 3-MWh Monthly Consumption of Selected DUs, July Table II.10 Components of Low Voltage Industrial Electricity Tariffs with 50-MWh Monthly Consumption of Selected DUs, July Table II.11 Components of High Voltage Industrial Electricity Tariffs with 200-MWh Monthly Consumption of Selected DUs, July Table II.12 Tariff Components Table II.13 Electricity Tariff for MERALCO Residential Customers with 200-kWh Monthly Consumption Table II.14 Electricity Tariff for MERALCO Commercial Customers with 3-MWh Monthly Consumption Table II.16 Electricity Tariff for MERALCO High Voltage Industrial Customers with 200-MWh Monthly Consumption Table II.17 Profile of Philippine Electricity Tariffs during Table II.18 Representativeness of Computed Composite Prices Table II.19 Composite Prices by Customer Class and Region Table II.20 DUs with Transitory Elements in their Price Schedules in Table II.21 Base Composite Prices by Customer Class and Region Table II.22 Impact of Removing Transitory Elements from Composite Prices Table II.23 Pre-tax Base Composite Prices by Customer Class and Region Table II.24 Percent Decline in Base Composite Prices after Removing All Taxes Table II.25 MERALCO and Composite Prices Table II.26 Regression of Spot Price (ESP) against Excess Supply (EXSUP) Table II.27 Regression of Spot Price on Excess Supply and Peak Demand Table II.28 Elasticity of WESM Spot Price to Excess Supply and Peak Demand Table II.29 Means and Standard Deviations of Generation Prices Table II.30 Salient Features of Selected Bilateral Contracts Table II.31 Incentives Available for the Development of Fossil Fuels Table II.32 Incentives Available for the Development of NRES Table II.33 FIT Rates for Renewable Energy Sources Table III.1 Installed Capacity (MW) and Energy Produced (GWh) in Indonesia, Table III.2 Installed Capacity in Malaysia by Major Power Producers, Table III.3 Electricity Fuel Mix in Malaysia Table III.4 Comparison between Single and Enhanced Single Buyer Models Table III.5 Comparison of Philippine and Singapore Wholesale Electricity Market Table IV.1 Electricity Subsidy in Indonesia, by Customer Category, Table IV.2 Tariff Schedule in Indonesia for Selected Customer Categories Table IV.3 Indonesian Tariffs in 2011 for the Four Model Cases Table IV.4 Regular vs. Prepaid Pre-tax Tariff in Indonesia iv

8 Table IV.5 Tariff Schedule in Malaysia for Selected Customer Categories Table IV.6 Malaysian Tariffs for the Four Model Cases Table IV.7 U-save Rebates to Singapore Households Table IV Tariff Schedule for Selected Non-Contestable Customers in Singapore Table IV.9 Singapore Tariffs for the Four Model Cases Table IV.10 Tariff Schedule in Thailand for Selected Customer Categories Table IV.11 Thailand Tariffs for the Four Model Cases Table IV.12 Effects of Thailand Tariff Restructuring on Consumers Table V.1 Conversion Factors for Local Currency Units Table V.2 IEA Estimates of Electricity Subsidy in Selected ASEAN Economies Table V.3 Comparison of Electricity Tariffs after Removing Taxes Table V.4 Comparison of Electricity Tariffs after Removing Subsidies Table V.5 Comparison of Electricity Tariffs after Adjusting for Price Differences Table VI.1 Some Proposed Legislations to Lower Electricity Tariffs Table VI.2 Composition of Base Component Prices by Customer Class Table VI.3 Base Composite Prices without VAT Table VI.4 Impact of Removing VAT on Base Composite Prices Table VI.5 Base Composite Prices with Six-Percent VAT Substituting All Taxes Table VI.6 Impact on Base Composite Prices of Substituting All Taxes with Six-Percent VAT94 Table VI.7 Base Composite Prices with Almost Revenue-Neutral VAT Replacing All Taxes95 Table VI.8 Impact on Base Composite Prices of Replacing All Taxes with Almost Revenue- Neutral VAT Table VI.9 Base Composite Prices with Franchise Tax Replacing All Taxes Table VI.10 Impact on Base Composite Prices of Substituting All Taxes with Franchise Tax97 Table VI.11 Base Composite Prices After Removing Lifeline Discounts Table VI.12 Impact on Base Composite Price of Removing Lifeline Discounts Table VI.13 Base Composite Prices After Eliminating All Subsidies Table VI.14 Impact on Base Composite Price of Eliminating All Subsidies Table VI.15 Royalties on Natural Gas and Geothermal Table VI.16 Bilateral Contracts on Geothermal Electric Power Table VI.17 Computation of Proportionate Rebate Using Royalties on Geothermal Table VI.18 Base Composite Prices with Proportionte Rebate of Geothermal Royalties Table VI.19 Impact on Base Composite Prices of Proportionate Rebate of Geothermal Royalties Table VI.20 Computation of Additional Rebates to DUs with Forward Geothermal Contracts106 Table VI.21 Base Composite Prices with Additional Rebates to DUs with Forward Geothermal Contracts Table VI.22 Impact on Base Composite Prices of Additional Rebate of Geothermal Royalties to DUs with Forward Geothermal Contracts Table VI.23 Natural Gas Production, Consumption and Trade in Selected ASEAN Countries107 Table VI.24 Possible Distribution of Electricity Rebates Using 2011 Natural Gas Royalty 109 Table VI.25 Base Composite Prices with Rebates from Natural Gas Royalties Table VI.26 Impact on Base Composite Prices of Rebates from Natural Gas Royalties Table VI.27 Regulatory Classification of Electric Cooperatives Table VI.28 Base Composite Prices Post-Completion of ECs Transition to PBR Table VI.29 Changes in Composite Prices of Post Completion of Transition to PBR Table VI.30 Impact on Base Composite Prices of Post-Completion of ECs Transition to PBR117 Table VI.31 Dates of Entry of PIOUs to PBR and Applicable WACC and WCF during the First Regulatory Period Table VI.32 Revaluation of MERALCO s Assets for Regulatory Period July 2007 June Table VI.32 MERALCO s Regulatory Asset Base: Replacement vs. Historical Cost Table VI.33 Depreciation Expenditures under Historical Cost Approach in RAB Table VI.34 Regulatory Asset Base under Historical Cost Approach Table VI.35 Maximum Annual Revenue Requirement under Historical Cost Approach v

9 Table VI.36 MERALCO s Tariffs without Asset Revaluation Table VI.37 Regulatory Impact of No Asset Revaluation in Selected DUs Table VI.38 Impact on Tariffs of Selected DUs without Asset Revaluation Table VII.1 Comparative 2011 Electricity Tariffs after Adjusting for Taxes and Subsidies 125 Table VII.2 Indonesian and Malaysian Subsidy-Adjusted Tariffs Compared to Philippine Tariffs Table VII.3 Potential Policy Changes to Lower MERALCO Tariffs vi

10 List of Figures Figure II.1 Price Variations by Customer Class and Month in Figure II.2 Monthly Spot Market Price: July 2006 December Figure II.3. Spot Price (ESP) vs Excess Supply (EXSUP): WESM, Jun 2006 Dec Figure II.4 Bilateral Contracts Quantity vs Spot Market Quantity Figure II.5 Share in MERALCO s Monthly Generation Charge: Major Energy Sources Figure II.6 ESP and WESMPRICE Figure II.7 Generation Prices of MERALCO s Sources of Energy Figure III.1 Structure of Indonesian Electricity Market Figure III.2 Structure of Malaysian Electricity Supply Industry Figure III.3 Structure of the Electricity Market in Thailand Figure III.4 Policymaking Bodies in the Electricity Sector in Thailand Figure III.5 Structure of Electricity Industry in Singapore Figure VI.1 Histogram of Lifeline Discounts Figure VI.2 Maximum Average Price based on RAB valued at Historical Cost vii

11 List of Acronyms of Philippine Distribution Utilities ABRECO AEC AKELCO ALECO ANECO ANTECO ASELCO AURELCO BANELCO BASELCO BATANELCO BATELEC I BATELEC II BELS BENECO BILECO BISELCO BLCI BOHECO I BOHECO II BUSECO CAGELCO I CAGELCO II CAMELCO CANORECO CASURECO I CAPELCO CASELCO CASURECO II CASURECO III CASURECO IV CEBECO I CEBECO II CEBECO III CEDC CELCO CELCOR CENECO CENPELCO CEPALCO CLPC COTELCO DANECO DASURECO DECORP DIELCO DLPC DORECO DORELCO ESAMELCO FIBECO FICELCO Abra Electric Cooperative, Inc. Angeles Electric Corporation Aklan Electric Cooperative Albay Electric Cooperative Agusan del Norte Electric Cooperative Antique Electric Cooperative Agusan del Sur Electric Cooperative Aurora Electric Cooperative - Mainland Bantayan Island Electric Cooperative Basilan Electric Cooperative Batanes Electric Cooperative Batangas I Electric Cooperative Batangas II Electric Cooperative Bauan Electric Lights System Benguet Electric Cooperative Biliran Island Electric Cooperative Busuanga Island Electric Cooperative Bohol Light Company, Inc. Bohol I Electric Cooperative Bohol II Electric Cooperative Bukidnon II Electric Cooperative Cagayan I Electric Cooperative Cagayan II Electric Cooperative Camiguin Electric Cooperative Camarines Norte Electric Cooperative Camarines Sur I Electric Cooperative Capiz Electric Cooperative Cagayan de Sulu Electric Cooperative Camarines Sur II Electric Cooperative Camarines Sur III Electric Cooperative Camarines Sur IV Electric Cooperative Cebu I Electric Cooperative Cebu II Electric Cooperative Cebu III Electric Cooperative Clark Electric Distribution Corp. Camotes Island Electric Cooperative Cabanatuan Electric Corporation Central Negros Electric Cooperative Central Pangasinan Electric Cooperative Cagayan Electric Power & Light Power Inc. Cotabato Light & Power, Inc. Cotabato Electric Cooperative Davao del Norte Electric Cooperative Davao del Sur Electric Cooperative Dagupan Electric Corporation Dinagat Island Electric Cooperative Davao Light and Power Company Davao Oriental Electric Cooperative Don Orestes Romualdez Electric Cooperative Eastern Samar Electric Cooperative First Bukidnon Electric Cooperative First Catanduanes Electric Cooperative viii

12 FLECO GUIMELCO IEEC IFELCO ILECO I ILECO II ILECO III ILPI ISECO ISELCO I ISELCO II KAELCO LANECO LASURECO LEYECO I LEYECO II LEYECO II LEYECO III LEYECO IV LEYECO V LUBELCO LUECO LUELCO MAGELCO MARELCO MASELCO MECO MERALCO MOELCI I MOELCI II MOPRECO MORESCO I MORESCO II NEECO I NEECO II Area I NEECO II Area II NOCECO NOLCO NORECO I NORECO II NORSAMELCO NUVELCO OMECO ORMECO PALECO PANELCO I PANELCO III PECO PELCO I PELCO II PELCO III PENELCO PRESCO PROSIELCO QUEZELCO I First Laguna Electric Cooperative Guimaras Electric Cooperative Ibaan Electric Corporation Ifugao Electric Cooperative Iloilo I Electric Cooperative Iloilo II Electric Cooperative Iloilo III Electric Cooperative Iligan Light & Power, Inc. Ilocos Sur Electric Cooperative Isabela I Electric Cooperative Isabela II Electric Cooperative Kalinga-Apayao Electric Cooperative Lanao Del Norte Electric Cooperative Lanao del Sur Electric Cooperative Leyte I Electric Cooperative Leyte II Electric Cooperative Leyte II Electric Cooperative Leyte III Electric Cooperative Leyte IV Electric Cooperative Leyte V Electric Cooperative Lubang Electric Cooperative La Union Electric Company, Inc. La Union Electric Cooperative Maguindanao Electric Cooperative Marinduque Electric Cooperative Masbate Electric Cooperative Mactan Electric Company Manila Electric Company Misamis Occidental I Electric Cooperative Misamis Occidental II Electric Cooperative Mountain Province Electric Cooperative Misamis Oriental I Electric Cooperative Misamis Oriental II Electric Cooperative Nueva Ecija I Electric Cooperative Nueva Ecija II Area I Electric Cooperative Nueva Ecija II Area II Electric Cooperative Negros Occidental Electric Cooperative Net operating loss carry-over Negros Oriental I Electric Cooperative Negros Oriental II Electric Cooperative Northern Samar Electric Cooperative Nueva Vizcaya Electric Cooperative Occidental Mindoro Electric Cooperative Oriental Mindoro Electric Cooperative Palawan Electric Cooperative Pangasinan I Electric Coopertive Pangasinan III Electric Cooperative Panay Electric Company, Inc. Pampanga I Electric Cooperative Pampanga II Electric Cooperative Pampanga III Electric Cooperative Peninsula Electric Cooperative Pampanga Rural Electric Cooperative Province of Siquijor Electric Cooperative Quezon I Electric Cooperative ix

13 QUEZELCO II QUIRELCO ROMELCO SAJELCO SAMELCO I SAMELCO II SEZC SFELAPCO SIARELCO SIASELCO SOCOTECO I SOCOTECO II SOLECO SORECO I SORECO II SUKELCO SULECO SURNECO SURSECO I SURSECO II TARELCO I TARELCO II TARELCO II TAWELCO TEI TIELCO TISELCO ZAMCELCO ZAMECO I ZAMECO II ZAMSURECO I ZAMSURECO II ZANECO Quezon II Electric Cooperative Quirino Electric Cooperative Romblon Electric Cooperative San Jose City Electric Cooperative Samar I Electric Cooperative Samar II Electric Cooperative Subic Enerzone Corporation San Fernando Electric Light & Power Company Siargao Island Electric Cooperative Siasi Electric Cooperative South Cotabato I Electric Cooperative South Cotabato II Electric Cooperative Southern Leyte Electric Cooperative Sorsogon I Electric Cooperative Sorsogon II Electric Cooperative Sultan Kudarat Electric Cooperative Sulu Electric Cooperative Surigao Del Norte Electric Cooperative Surigao del Sur I Electric Cooperative Surigao del Sur II Electric Cooperative Tarlar I Electric Cooperative Tarlac II Electric Cooperative Tarlar II Electric Cooperative Tawi-Tawi Electric Cooperative Tarlac Electric, Inc. Tablas Island Electric Cooperative Ticao Electric Cooperative Zamboanga City Electric Cooperative Zambales I Electric Cooperative Zambales II Electric Cooperative Zamboanga Del Sur I Electric Cooperative Zamboanga Del Sur II Electric Cooperative Zamboanga Del Norte Electric Cooperative x

14 List of Other Acronyms APRI AR ARP BCQ BPP BST CCGT CEPA CERA COC CP CPI CRB CWIP DOE DSM DUs ECs EGAT EGCO EHT EIA EMA EMC ENCON Fund EPIRA EPPA EPPO ERB ERC ESC ESP ETAM EXSUP FAC FCPT FIT GCGI GPRICE GST HEUC HTH HTL HTS ICERA IEA IEC IED IMO IPPA IPPs IRR AP Renewables, Inc. Annual Report Allocated Regulated Price Bilateral Contracts Quantity Biaya Pokok Penyediaan Bulk Supply Tariff Combined Cycle Gas Turbine Committee on Energy Policy Administration Currency Exchange Rate Adjustment Coal Operating Contract Composite Price Consumer Price Index Central Registry Body Construction-work-in-progress Department of Energy Distribution, Supply and Metering Distribution Utilities Electric Cooperatives Electricity Generating Authority of Thailand Electricity Generating Company Extra High Tension Energy Industry Act Energy Market Authority Energy Market Company Energy Conservation Promotion Fund Committee Electricity Power Industry Restructuring Act Electric Power Purchase Agreement Energy Policy and Planning Office Energy Regulatory Board Energy Regulatory Commission Energy Supply Contract Effective Settlement Price Electricity Tariff Adjustment Mechanism Excess Supply Fuel Adjustment Cost Fuel Cost Pass-Through Feed-in-Tariff Green Core Geothermal Inc. Generation Price Goods and Services Tax Hourly Electricity Uplift Charge High Tension High High Tension Large High Tension Small Incremental Currency Exchange Rate Adjustment International Energy Agency International Energy Consultants Investigation and Enforcement Division Independent Market Operator Independent Power Producer Administrator Independent Power Producers Implementing Rules and Regulations xi

15 ITH JCPC JETRO LGUOU LMP LRMC MAP MC MCC MCE MCP MDOM MEA MEUC MO MOEN MOPS MSSL MSW NEA NEMS NEPC NGCP NPC NRES ODRC OECD PEA PEAKDEM PEMC PFC PIOUs PIS PLN PPA PSA PSALM PSC PSO RAB RATCH RCOA RDWR RE RFSC RORB RSEC-WR RTWR SEP SESB SESCO SMEC SMP SO SP Income Tax Holiday Joint Congressional Power Commission Japan External Trade Organization Local Government Unit-Owned Utility Locational Marginal Price Long Run Marginal Cost Maximum Average Price Monitoring and Compliance Members Contribution for Capital expenditure Market Clearing Engine Market Clearing Price Market Dispatch Optimization Model Metropolitan Electricity Authority Monthly Electricity Uplift Charge Market Operator Ministry of Energy Mean of Platts Singapore Market Support Services Licensee Municipal Solid Waste National Electrification Administration National Electricity Market of Singapore National Energy Policy Council National Grid Corporation of the Philippines National Power Corporation New and Renewable Energy Sources Optimized Depreciated Replacement Cost Organization for Economic Cooperation and Development Provincial Electricity Authority Peak Demand Philippine Electricity Market Corporation Power Factor Charge Private Investor-Owned Utilities Performance Incentive Scheme Perusahaan Listrik Negara Purchase Power Agreement Power Supply Agreement Power Sector Assets and Liabilities Management Corporation Power Supply Contract Power System Operator Regulatory Asset Base Ratchaburi Electricity Generating Holding Public Company Ltd Retail Competition and Open Access Rules for Setting Distribution Wheeling Rates Renewable Energy Reinvestment Fund for Sustainable Capital expenditures Rate of Return Base Rules for Setting Electric Cooperatives Wheeling Rate Rules for Setting the Transmission Wheeling Rates Singapore Electricity Pool Sabah Electricity SDN Berhad Syarikat Sesco Berhad San Miguel Energy Corporation System Marginal Price System Operator Singapore Power xii

16 SPPs SPUG SREP T & D TMI TNB TOU TRANSCO TSC UC USEP VAT VQ VSPPs WACC WCF WEP WESM Small Power Producers Strategic Power Utility Group Small Renewable Energy Producers Transmission and Distribution Therma Marine Incorporated Tenaga Nasional Berhad Time-of-Use National Transmission Company Transition Supply Contract Universal Charge Uniform Singapore Energy Price Value Added Tax Vesting Quantity Very Small Power Producers Weighted Average Cost of Capital Working Capital Factor Wholesale Electricity Price Wholesale Electricity Spot Market xiii

17 Executive Summary Surveys after surveys on electricity prices invariably show the Philippines to have one of the highest in the region. And yet in 2001, the Philippines introduced competition and regulatory reforms in its electricity market to address uncompetitive prices. In the decade that followed, however, electricity prices increased faster than inflation, which kept Philippine rates above other developing countries. This study analyzed the structure and individual components of Philippine electricity prices, and compared them with rates in selected countries in Southeast Asia, namely Singapore, Indonesia, Malaysia and Thailand. The tariffs in these selected economies were adjusted to approximate cost of supply and ensure comparability. Changes in regulations and policies were also simulated to identify impact on end user prices. The prices were constructed based on four model cases: (i) a residential customer with monthly consumption of 200 kwh; (ii) a commercial customer connected to low voltage wire with 3 MWh monthly consumption and 16 kw peak demand; (iii) an industrial customer connected to low voltage wire with 50 MWh monthly consumption and 195 kw peak demand; and (iv) an industrial customer connected to high voltage wire with 200 MWh monthly consumption and 520 kw peak demand. Philippine Electricity Prices Between 2004 and 2011, MERALCO prices increased by an average annual rate of 6.9 to 8.7 percent, depending on customer class, whereas average inflation during the period was 4.8 percent. As a result, real electricity prices increased, which can be traced to removal of subsidies, introduction of new taxes (particularly VAT in 2006) and adjustment in distribution charges. Table 1. MERALCO Electricity Tariffs by Customers Class, Low Voltage Residential Commercial Low Voltage Industrial High Voltage Industrial Price per kwh (nominal): Average annual change (%) Price per kwh (in 2000 prices): Average annual change (%) Although MERALCO s customers account for about three-fifths of total electricity consumption, the prices of this largest distribution utility (DU) do not represent the Philippines. Each of the 140 DUs in the country follows a regulated price schedule that reflects supply conditions in their respective franchise area. The upshot is a wide variation of prices across localities. A residential customer, for example, may be charged from Php5.50 to Php per kwh depending on location. To represent these different prices, a base composite price (i.e., an average price, weighted by actual consumption and after removing transitory elements) was constructed for each model case. In 2011, the base composite prices by customer class and major island group were as follow. xiv

18 Table 2. Base Composite Prices by Customer Class and Region (per kwh in Philippine peso) Region Residential Low Voltage Commercial Low Voltage Industrial High Voltage Industrial NCR Luzon Visayas Mindanao All regions With rate rebalancing due to industry reforms, prices have been aligned with costs. As a result, residential customers pay 19% more per kwh than industrial customers, while a residential customer in Luzon pays 44% more than one in Mindanao. Locational pricing distinguishes the Philippines from its neighbors where a uniform price schedule is adopted in all parts of Thailand and Singapore, and most parts of Indonesia and Malaysia. Prices are also more volatile in the Philippines since the schedules change monthly, as opposed to quarterly in Thailand and Singapore (for noncontestable customers) and irregularly in Indonesia and Malaysia. In addition, residential customers are still heavily subsidized in Indonesia, Malaysia and Thailand, whereas inter- and intra-class subsidies have been eliminated in the Philippines due to reforms. Benchmarking Philippine Prices That pricing structure and regulation are different across countries underscores the pitfall of drawing conclusions from a mere comparison of retail tariffs. In 2011, the retail tariffs in the five countries are as follow: Table 3. Comparative Electricity Retail Prices, 2011 (in Philippine peso per kwh) Low Voltage Low Voltage High Voltage Residential Commercial Industrial Industrial Philippines Singapore Indonesia Malaysia Thailand Clearly, while Philippine prices are close to Singapore s, they are a multiple of those prevailing in Indonesia, Malaysia and Thailand. Residential customers in the Philippines pay nearly four times the price levied on their counterpart in Indonesia, while industrial customers are charged at least 60 percent more than their equivalent in Thailand. Several factors may explain these wide differences. One is tax: effectively 9% in the Philippines, as opposed to 6% in Malaysia and 7% in Singapore and Thailand, albeit 10% in Indonesia. But the bigger contributor to the price differences is the implicit subsidies to state-owned utilities. The International Energy Agency (IEA) estimated that the electricity subsidies in 2011 in Indonesia, Malaysia and Thailand were at least 5.56, 0.94 and 5.67 billion US dollars, respectively. These estimates are conservative when compared to actual government transfers to the Indonesian utility (Perusahaan Listrik Negara) of US$10.24 billion just in The Malaysian utility (Tenaga Nasional Berhad) received a much smaller direct transfers (about US$153 million in 2010; undisclosed in 2011), but hefty fuel discount of at least 26% on the market price of indigenous fuel. The actual subsidy on Malaysian electricity price is reckoned to be about six times the IEA s estimate. The subsidy in xv

19 Thailand, on the other hand, is least transparent since it is passed through domestic price of indigenous natural gas. When taxes and subsidies are removed, the cross-country tariffs are as shown below. Table 4. Comparative Electricity Tariffs after Adjusting for Taxes and Subsidies (per kwh, in Philippine peso) PHL SGP INA MAL THA Residential Low voltage commercial Low voltage industrial High voltage industrial *Based on IEA s subsidy estimate for Thailand; direct transfers to PLN for Indonesia; deduced from the 10 th Malaysian Plan for Malaysia. While Philippine prices are still higher despite adjustments in taxes and subsidies, the gaps are not as sizeable as were found in simple comparison of retail tariffs. Yet they exist nonetheless. A plausible explanation is market structure, which while ostensibly critical, is difficult to track in terms of its contribution to tariff. The industry structure in Indonesia, Malaysia and Thailand vertically integrated and managed by public utilities is bound to produce different prices compared to a market-, private sector-led, unbundled industry such as the one prevailing in the Philippines and Singapore. The Thai public utilities, for example, subsist on a return on capital of 7.5% for the Electricity Generation Authority of Thailand and 5.73% for its two distribution utilities, compared to about 15% for private DUs in the Philippines. Moreover, when the industry is disintegrated or unbundled, profit margins at each stage of production could pile up on prices, unless market competition and prudent regulation are able to keep a lid on margins. If regulation fails to facilitate effective competition, prices in an unbundled industry are inevitably higher than under vertical integration. Price differences can also reflect inherent differences in costs of supply due to network conditions, load demand profile and generation mix, among others. Singapore s network costs are marginal and unique because of its geographic size and dense customer base. Most of the differences in supply conditions are however less obvious and can only be properly diagnosed by a cost of service study, which is beyond the scope of this work. Simulations of Policy Changes Can Philippine electricity prices be reduced without misaligning them with costs or distorting market signals? The study examined the impact on prices of some of the proposed policy adjustments involving tax restructuring, elimination of subsidies, and redistribution of royalties from indigenous fuels. The use of historical instead of current asset values in calculating distribution tariffs, and the change in the basis of regulation of electric cooperatives from cash- to performance-based were also simulated. Possible changes in composite prices as a result of these policy adjustments are summarized below. Table 5. Simulated Reduction in Composite Prices As a Result of Policy Adjustments (per kwh in Philippine peso) Residential LV Commercial LV Industrial HV Industrial Zero VAT % VAT % VAT replacing all taxes xvi

20 Residential LV Commercial LV Industrial HV Industrial 3% franchise tax replacing all taxes Removal of lifeline discounts Elimination of all subsidies Proportionate rebate of geothermal royalties Additional rebates to DUs with geothermal BCs Rebate of natural gas royalties to MERALCO customers only Rebate of natural gas royalties to Luzon customers only Rebate of natural gas royalties to industrial customers only Uniform rebate of natural gas royalties Completion of EC transition to PBR No revaluation of MERALCO assets Adjustments in taxes, followed by rebates of natural gas royalties produce the largest potential reduction in prices. But none of the foregoing results should be viewed as endorsement of any policy change. The merit of rebating to electricity consumers the government share on the utilization of indigenous fuels is debatable since it tends to distort the relative prices of fuels. Similarly, the removal of VAT on electricity would mean less fiscal resources for other public services. Even as asset revaluation increases distribution charges, there are conceptual and practical arguments that justify the use of replacement, instead of historical, costs in asset pricing. Moreover valid objections can be raised in computing rebates on the basis of kwh consumption since it favors heavy users and can be seen as a disincentive for energy efficiency and conservation. The results of the counterfactual simulations in this study are therefore best seen as mere demonstration of the influence that policies and regulations still have on electricity tariffs despite the move towards a more market-based price determination. Considering that generation cost constitutes at least half of electricity prices, the study also analyzed the trend in wholesale electricity prices. It found the spot market prices are influenced by levels of offered supply and peak demand but more by the latter. A 10% increase in excess supply (i.e., offers less demand) is projected to reduce spot prices by 10%, while a 10% reduction in peak demand is expected to bring down spot prices by 20%. Over time, bilateral contract prices are observed to follow the trend in spot prices. This implies that the potential of bilateral contracts to cause a downward shift in prices can only hold in the short term. Conclusion All benchmarking exercises involving electricity prices suffer a major difficulty that even as electricity is considered a homogeneous commodity, it has no international reference price. The fact that a country s prices are higher than other countries of similar level of economic development is certainly a reasonable cause of concern because the economic impact is broad and profound. However, it should not form basis for market intervention without adequate understanding of the causes and nature of higher prices. xvii

21 A major motivation for this inquiry is to provide inputs to a brewing debate on whether the Philippines has taken a wrong policy turn when it restructured the electricity market. Critics of the restructuring have cited the still uncompetitive Philippine prices after more than a decade. Yet Indonesia and Malaysia are now coming into terms on the need to restructure their respective industries from the traditional vertically-integrated, state-managed structure to one that is market-based and private sector-led. They recognize that their current tariff structures and fuel subsidies are unsustainable; that their public utilities are underperforming because the market structure does not create enough incentives for efficiency; and that the inefficiencies in the electricity sector are affecting the rest of the economy as it attracts industries dependent on subsidized energy. But just like the Philippines more than a decade ago, these economies are constrained by political realities from pursuing market reforms. On this score, it would be odd to blame reforms that other countries are now seeking to emulate. xviii

22 I. Background 1. Motivation The passage of the Electric Power Industry Reform Act (EPIRA) of 2001 was occasioned by unabated increases in electricity prices, heavy indebtedness of public electric utilities, and perennial threat of supply problems which the government had difficulty addressing. It became clear that a centrally managed electricity system, mainly owned and run by the State, was no longer tenable. This prompted the restructuring and liberalization of the market. With the private sector stepping up on the roles previously belonging to the State, expectations were raised that the sector would become more efficient, and as a result, electricity prices would decline substantially. But in the past decade, prices have generally moved in opposite direction so that Philippine rates remain above those of other countries in the region. A survey conducted by the Japan External Trade Organization (JETRO) 1, for example, revealed that the Philippine capital had the highest electricity rate among 31 cities in Asia and Oceania in The average rate for general use in Manila was US$0.23/kwh, compared to US$0.20/kwh in Singapore, US$0.08/kwh in Bangkok, US$0.11/kwh in Kuala Lumpur, and US$0.09/kwh in Jakarta. Dhaka had the least, at US$0.06/kwh. Although the survey did not include Tokyo, which is reputed to have the highest rate in the region, the fact that the Philippine rates are above other countries with whom it competes for foreign investments and trade is by itself disturbing. Corroborating JETRO s survey is a recent study by the International Energy Consultants (IEC) showing Philippine electricity prices higher than other countries in Asia and Pacific. Although comparable to some developed economies, like Singapore and Australia, Philippine prices are significantly higher than prices prevailing in other developing economies in the region. The Philippines ranked 9 th among 44 economies and 2 nd in Asia behind Japan. 2 The World Bank-IFC s 2012 Doing Business also reported that securing electricity connection in the Philippines is several times costlier than in neighboring countries. The cost of getting connection in the Philippines is 762 percent of its income per capita, while only 78 percent in Thailand, 96 percent in Malaysia and 31 percent in Singapore. It also takes longer to secure connection in the Philippines, averaging 50 days, compared to 35 and 31 days in Thailand and Singapore, respectively. Since these findings relate to the expectations borne by the industry restructuring, they deserve attention. The key issue is whether the results of these different surveys suggest a failure in market reforms. And yet it is arguable if expectations of lower electricity prices are grounded. To be clear, the objective of market reform is to ensure transparent and reasonable prices of electricity in a regime of free and fair competition. It is conceivable that when prices are aligned with costs and subsidies are removed, they could actually rise. But it is also rational to expect the introduction of competition to eliminate the inefficiencies of past monopoly structure, hence reduce costs and consequently prices. The anticipation of lower prices following a decade of reforms is therefore not entirely unfounded. 1 JETRO (2011), The 21 st Comparative Survey of Investment-Related Costs in 31 Major Cities and Regions in Asia and Oceania, April. 2 International Energy Consultants (2012), Regional Comparison of Retail Electricity Tariffs: Executive Summary, June. The study used MERALCO prices to represent the Philippines. Final Report Page 1

23 Costs and prices in the electricity market are functions of a host of factors of which regulation is only one. High prices are not always signals of wrong policy turns in as much as low prices do not necessarily reflect efficiency. Prices that actually reflect costs are far more complex (and uncertain), as they are affected by gyration in fuel prices, generation mix, network conditions and weather, among others. The costs of generating and supplying electricity vary with time of delivery, location and usage of consumers. Therefore, even if market reforms deliver on expectations of fostering economic efficiency and aligning prices and costs there may be no palpable reduction in tariffs if the underlying costs are unaffected by industry restructuring or changes in regulation. Cognizant of these complex relationships, electricity tariffs should be analyzed in relation to the structures of production and market where they apply. Where market structures are not comparable, so are their respective tariffs. To describe one country s tariffs as high or excessive, much less judge the effectiveness of reforms based merely on cross-country comparison of end-user prices is misleading, if not unwarranted. Since there is no accepted international electricity price, the outcome of any tariff benchmarking is at best suggestive, and should not be taken as evidence or measure of excessiveness. 2. Objectives and Scope This study has three main tasks: (i) analyze the structure and individual components of Philippine electricity prices, and compare them with selected ASEAN countries; (ii) approximate supply costs from tariffs and benchmark Philippine costs against those of selected economies; and (iii) identify policy interventions that could lower prices of electricity in the Philippines. It aims to contribute to the discourse on whether Philippine prices are excessive, and if so, whether high prices are a fair indictment of the effectiveness of market reforms. If it can be shown that market structure and regulations do not account for the higher prices of electricity in the Philippines than elsewhere, it should shift the burden away from market restructuring and reforms in explaining the comparative levels in prices. Four other electricity markets are included in this study, namely Indonesia, Thailand, Malaysia and Singapore. These countries were selected mainly because the Philippines is always benchmarked against them. But in fact, only the markets of Singapore and the Philippines are comparable. The markets in Thailand, Indonesia and Malaysia are similar to the Philippines before EPIRA, i.e., centrally managed by a state utility. The similarity ceased after EPIRA. Nonetheless, the electricity prices in the Philippines are still being compared to prices in these countries, especially when assessing the Philippine competitiveness in the region. The study is limited to end-user tariffs in 2011 and regulations directly affecting them. There are other significant factors affecting costs and prices that are not covered in this inquiry, e.g., conditions of network infrastructure and characteristics of load demand. It does not purport to uncover all factors that may explain the level of Philippine tariffs. Nor is it able to present the true supply costs in the markets covered, although tariffs are adjusted by the best available information for comparability. This study proceeded in four phases. The first phase was a general assessment of the market structure and regulation of electricity markets in the five countries. Phase II examined the conditions affecting electricity prices in these economies, particularly price determination, regulations and subsidies. Phase III adjusted the tariffs to estimate and compare the underlying costs of supplying electricity in these markets. The final phase performed counterfactual simulations on Philippine prices to identify the impact of regulations and identify possible interventions to lower the tariffs faced by consumers. Final Report Page 2

24 Two sets of findings emerged from this exercise. The first is a comparison of electricity prices in the five countries for residential, commercial and industrial customers. It shows prices before and after adjustments for taxes and computable subsidies, and expresses them into common currency units. The second set of results pertains to the impact of regulations on Philippine electricity prices. These include lifeline discounts and other transfers, taxes, royalties on indigenous fuels, valuation of assets for rate determination, and regulatory reset in electric cooperatives. The results could point to potential areas of intervention that can reduce consumer burden without distorting prices. 3. Model Cases This study adopts the model case approach to analyze and compare tariffs. It involves constructing case scenarios and calculating tariffs that would apply using the price schedules of distribution utilities (DUs) or suppliers where retail competition exists. An alternative approach calculates an average or representative price, which may be an average of unit prices that apply to different customer categories, or an average revenue obtained by dividing total income from electricity sales by the units (or kwh) sold. Average unit price is less representative than average revenue if customer classes are of different sizes or there are wide variations in unit prices. On the other hand, since retail prices normally consist of fixed and variable components, average revenue tends to be lower, the higher the average load of the large segment of consumers, since the fixed component of the price is spread over a larger load. As a result, even if two economies have the same price schedules, the one with a larger average load would appear to have a lower rate. The chosen approach has the advantage that tariff comparison would not be distorted by differences in load. Moreover, since the base models control for differences in customer attributes and location, any remaining tariff variations may be attributed to differences in market structure, regulation or supply condition. However, this approach could be more complicated if the fee schedules followed by utility companies are not readily available, transparent or easy to implement. Four model cases were constructed for purposes of this study. Table I.1 Assumptions in Model Cases Residential Low voltage Commercial Low voltage Industrial High voltage Industrial Typical customer Household Business Small industrial Medium industrial Received voltage Less than 1 kv Less than 1 kv 13.2 kv Peak demand (kw) Monthly consumption (kwh) 200 3,000 50, ,000 Power factor 60% 60% 60% 60% The objective is to estimate the tariff that would apply to a particular customer in a given country based on an assumed monthly consumption during the year This exercise is however fraught with several challenges. First, different tariffs may apply to customers of the same type and consumption depending on their location, e.g., urban versus rural. But in Malaysia, Indonesia and Thailand, a single tariff schedule is applied nationwide. In Singapore, regulated prices apply to non-contestable consumers (those with less than 10 MWh monthly consumption), but contestable consumers can negotiate with competitive suppliers bilaterally. Thus, the actual rates paid by contestable consumers are not publicly known. In the Philippines, each of the 140 DUs has its own price schedule. This necessitates the computation of a weighted average price which is discussed in the next section. Final Report Page 3

25 Prices can vary seasonally with fuel cost; therefore the choice of period when tariffs are calculated can influence the results. Since the generation mix is different in each country, picking a benchmark month can distort the comparison as it may happen that the price of the fuel predominantly used in one country is artificially high during the chosen month. This is less of a concern, however, in heavily regulated markets of Indonesia and Malaysia where price schedules are changed infrequently and often influenced by political mood. The last revision in price regulation in Indonesia was in 2009, hence electricity prices remained constant throughout In Malaysia, prices were last adjusted in June 2011; a 1% feedin-tariff was imposed beginning September In Thailand and Singapore, price adjustments are made quarterly to reflect changes in fuel costs; in addition, base tariffs in Thailand are adjusted annually. Philippine prices, on the other hand, are adjusted every month to reflect changes in generation costs. Given the different periods of price adjustments, it is necessary to take a time frame longer than one month. In this study, the average tariffs for 2011 were estimated. Another difficulty in applying case scenarios is the absence of common customer categories among the five selected countries, and even among DUs in the Philippines. Tariffs are usually differentiated by customer class and voltage levels. A low voltage commercial customer class in one country may not have an exact match with a customer class in another country. The only customer category that is common in all five countries is residential or household. Even this category has subclasses in some countries like Indonesia, but none in others. Thus, it is only possible to compare tariffs for the closest equivalent categories, as is done in this report. Table I.2 Customer Classes used in Comparing Prices Residential Commercial Philippines* RGSA General Service B NIS Small Indonesia Malaysia Thailand Singapore R-1/TR (category 1, power limit 450 VA) Tariff A (Domestic) Residential service Low tension supplies, domestic B-2/TR (power limit 6.6 to 200 kva) Tariff B (Low voltage commercial) Small general service (less than 22 kv) Low tension supplies, nondomestic Low voltage Industrial General Power Industrial Medium Secondary I-2/TR (power limit 14 to 200 kva) Tariff D (Low voltage industrial) Medium general service (less than 12 kv) High tension small (HTS) supplies High voltage Industrial General Power 13.8/13.2 kv Industrial Large I-3/TR (power limit greater than 200 kva) *MERALCO s customer classes. See Annex I for customer classes in other Philippine DUs. Tariff E1 (Medium voltage industrial) Medium general service (12 24 kv) High tension large (HTL) supplies Final Report Page 4