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Hypocritical response to rising prices PDF Print E-mail

By Nepomuceno Malaluan*

(The article first appears in the Yellow Pad column of the BusinessWorld, Vol. XXI, No. 234 on Monday, June 30, 2008. It is based on the author's comments delivered during the DRTS Forum on Oil and Power.)

We consumers are all feeling the pinch of rising prices. For May 2008, the inflation rate year- on-year shot up to 9.6%, compared to 2.4% last year. Such drastic increase has been due in large part, directly and indirectly, to the rise in petroleum prices and the high cost of electricity.

Directly, as a commodity group, inflation for fuel, light, and water was 8.2% in May 2008, compared to 4.0% last year. Indirectly, rising energy prices have driven the prices of major commodities upward. Inflation for services was 7.8% for the same period, compared to 1.9% last year. More severely, inflation for food, beverages, and tobacco shot up to 13.7% for May this year, from 2.6% last year.

The poor among us must be feeling the pinch more intensely. For the 4.6 million families (representing 28% of total families) earning under P60,000 per year or under P5,000 per month in 2003, between 6.5 and 7.5% of their expenditures went to fuel, light, and water, compared to 6.0% for the 2.3 million families (14% of total families) earning over P250,000 per year.

The contrast is starker for food. The under-P60,000 earners devoted between 59 and 64% of their expenditures to food, in contrast to 32% for families earning over P250,000. To compensate for increasing food prices, the poor sacrifice their luxury: health and education. As noted by my colleague Rene Raya, the poor decreased their spending for education from 2.9% of total family expenditure in 2003 to 1.9% in 2006, and for health, from 2.1% to 1.7% for the same period.

The Gloria Arroyo administration's response is to dole out money and wage a high-profile battle with Meralco. The effectiveness of this response in terms of public management lies in its simplicity. It portrays a president who cares for the poor and who puts government funds where her mouth is. It publicly identifies a culprit for the public's woes, Meralco, which is run by a conglomerate with a spotty if not bad performance in utilities, such as its failed operation of Maynilad. As an added bonus to having identified a vulnerable target, it is also able to hit back at the same conglomerate whose media arm, ABS-CBN, has been openly critical of Arroyo.

Caring for the poor is not Arroyo's hallmark. To mention just a few examples of policies that have shown lack of sensitivity to the plight of the poor: the increase of the value-added tax (VAT) was imposed during her administration; the allocation for basic education in her 2007 budget was 11.9%, down from 16% in the late 1990s; her agriculture secretary admits the neglect of agriculture, the main source of income for 6.5 million families and where a large number of the poor come from.

The "Pantawid Kuryente: Katas ng VAT" program of GMA is poorly targeted. The one-time cash transfer of P500 will benefit only the poor who are lifeline users (consumers with an electric consumption of 100 kilowatt hours or less) for the billing period ending in May 2008. But a large number of poor families do not even have electricity in the building or house they reside in. Of the families in the lowest 40% income stratum nationwide, only 56% have electricity in the building or house they reside in (National Statistics Office's 2002 Poverty Indicators Survey). The distribution is uneven across regions, with only 30% in the Autonomous Region of Muslim Mindanao and 37% in Western Mindanao of the bottom 40% of income class having electricity in their houses.

Singling out Meralco as the culprit for our electricity woes hides the government's own sins. The independent power producers (IPP) contracted by Napocor in the 1990s remain a key reason for the high electricity prices in the country. The 44 IPP contracts entered into between 1991 and 1999 were vaunted to reduce costs, increase access to best practice technology, and shift key risks to the private sector.

The IPP capacity turned out to be very expensive. Even on contract signing, many of the IPPs already had rates higher than Napocor's generation cost for similar plants. Costs continued to escalate from the start of IPP operations. This was due to the lopsided price risk structures that were favorable to the private sector. It was Napocor, and ultimately the consumers, who assumed the fuel price risk and exchange rate risk of these plants.

Generous off-take guarantees were given based on overly optimistic electricity demand forecast. Up to now, the oversupply from the IPP binge has yet to be used up. Of the 15,937 MW total installed generating capacity as of December 2007, peak demand was only at 8,993 MW. Based on government's estimates, the Napocor paid over P60 billion in 2001 net present value to IPPs for power not used from the start of IPP cooperation periods until 2001. The oversupply was not simple excusable projection error. The risk structure had much to do with the business decisions at that time.

The charges of Meralco cost inefficiencies and transfer pricing practices are also best addressed to the regulator and to Congress. The Energy Regulatory Commission, with a politician appointed by GMA herself as chairman, has the obligation to look behind the Meralco costs and rate base in the exercise of its price regulation powers. The related interest transaction of Meralco with sister IPPs, on the other hand, is allowed under the Electric Power Industry Reform Act provisions on cross-ownership. (To be continued)

* Mr. Malaluan, a lawyer by profession, is a trustee of Action for Economic Reforms, and a convener of the DRTS TWG on Trade and Industrial Policy.
 
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