TWIN POWER BILLS: LOOKING BEYOND PREMISES

The Philippine Star
08/10/09

Any proposal that promises to lower power rates can be assured of immediate attention from many sectors of society, which is perhaps the reason why Senator Juan Ponce Enrile’s twin power rate reduction bills had received immediate support from the business sector, more particularly, the Philippine Chamber of Commerce and Industry.

The first of the twin bill package seeks to revert to the old system of imposing a franchise tax on the distribution income of power distribution utilities, including Meralco and the electric cooperatives, and other distribution companies all over the country.

The old system would mean imposing a uniform franchise tax, and the bill proposes to be at three percent, in lieu of all taxes, duties, fees and charges. This old system, according to Enrile, is more manageable, fair, and transparent as there will no longer be any suspicion that the utilities’ income taxes and the other imposts that they are supposed to pay are being passed on to the consumers.

The franchise tax, he adds, is also in keeping with the principle that public utilities ought not and must not be used as sources of public revenue as these public utilities render public services to the taxpayers.

The second bill seeks to reduce the share of the government from the net proceeds derived from the sale of indigenous energy resource from the present 60 percent to three percent. What is left after removing the three percent final government share and the income tax on the 40 percent share of the service contractor, which the government assumed to pay out of its contractual share of 60 percent, will be used as a fund for commodity price reduction.

The bill also stipulates that the lower price of indigenous energy sources arising from the reduction of government royalty will automatically and totally be reflected to electric consumers, whether residential, commercial, or industrial consumers.

The problem

While Enrile’s twin bills are laudable in that they attempt to “immediately” bring down prices of electricity coming from indigenous energy sources, let us first of all review why we have electricity prices that is already the highest in Asia minus Japan .

First in the list of reasons is the presence of contracts involving the government and independent power producers (IPPs) that have guaranteed payments through a take-or-pay provision guaranteeing revenues (and profits) even if their private generators do not run at full capacity.

Even if an investigation had been conducted during the early years of the Arroyo administration on 35 IPP contracts, only six were found to be without financial or legal issues. Five were named to have “onerous” terms grossly disadvantageous to government, although none of these contracts were cancelled, and instead simply “renegotiated.”

The other reason for the continuing high cost of power in the country is the inability of open access, as promised by Electric Power Industry Reform Act (EPIRA) to kick in. Open access in principle should allow buyers of electricity to buy from the lower generation sources.

Open access is preambled on the the establishment of a wholesale electricity spot market or WESM, the removal of cross subsidies, the privatization of 70 percent of Napocor’s capacity in Luzon and the Visayas, as well as the transfer of 70 percent of IPP capacity to an IPP administration.

The road to reforming the power sector, which had been in government hands since Napocor was formed in 1936 until the 2001 EPIRA was passed, will take time to effect. We’ve been waiting now for sometime, but no doubt progress, albeit slowly, has been made.

The odds

The thinning patience is understandable, but there are also a number of issues that must be considered in embracing Enrile’s twin bills.

Considering that the gap between government revenue collections as against expenditures is increasing as a result of the current global financial tightness, foregoing the estimated P21 billion that the Department of Finance estimates to lose is a bitter pill to swallow.

Enrile argues that the immediately lost revenues to government will translate to better consumer spending, lower cost of manufactured goods, and increased competitiveness and financial viability of industries. Any tax revenues lost, he adds, will be gained from increased economic activity in other sectors of the economy, and such increased activity will then lead to a broadening of the tax base of other taxpayers and therefore compensate for the reduced collection from the power distribution utilities.

This thinking, which could be gleaned from the Laffer Curve theory posed by an American professor in 1974 and which became the basis of Reaganomics, has its historical lessons: the budget deficit in the Reagan and George W. Bush administrations ballooned with the reduction of taxes, but was reined back when new tax measures were introduced in the Clinton on George H.W. Bush’s governments. Ergo, Enrile’s argument may not work.

Then there is the fact that indigenous energy, being a natural resource, should benefit all, not just those who consume electricity. Perhaps, stipulating which specific sectors should benefit from the collected revenues from indigenous resources, but for a limited period of time, may be more appropriate.

For example, to attract more industries to the country, the cost of electricity in economic zones could be guaranteed at parity or lower than other within Asia . Eventually, when the effect of deregulation on the power industry comes to full effect, any subsidies will be unnecessary.

Also, increased consumer spending does not always translate to higher tax collections, i.e., from the extended Value Added Tax on consumer products. In third world countries like the Philippines , the bulk of consumer spending does not go to things that are subjected to EVAT.

Lastly, and if I still remember my basics right, Malampaya gas had been priced at parity with imported fuels. If there is a huge gap between the price of electricity generated from imported coal and crude oil with that of natural gas, perhaps it is timely to find out how the difference has come to be.

The whole country wishes to benefit from cheap electricity rates. But we must be careful that any new measures proposed to do so will truly benefit all Filipinos including forthcoming generations.

RDG’s extras

Last paragraphs.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, SalcedoVillage, 1227 MakatiCity. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.