Energy Poverty

FIRST PERSON By Alex Magno (The Philippine Star) Updated September 27, 2011 12:00 AM

We have the highest energy costs in all of Asia — maybe even the world. That should be a consuming concern for government. More and more sectors are worried that reducing energy costs ranks very low in this administration’s priorities.

Last week, business groups, trade unions and economic advocacy groups such as the Foundation for Economic Freedom (with which I am affiliated) banded together to demand a strategic plan from government for bringing down energy costs. No such plan exists.

Energy costs are now a major poverty-inducing factor. As energy costs rise, consumers are forced to reallocate their household expenses away from other essential needs such as food and education. The phenomenon is called “energy poverty.”

At the moment, of course, the authorities are scrambling to ensure enough generating capacity to meet rising demand. Nothing, of course, is more expensive than having no power at all. For too many years, however, we have been in this mad scramble to meet rising energy demand that we accepted higher costs for power.

The key turning point towards the dysfunctional and inefficient energy infrastructure we endure happened in 1986.

After the Marcos regime was overthrown, the new government led by Cory Aquino decided to mothball the Bataan Nuclear Plant. For good measure, and for some unfathomable reason, Cory also abolished the Ministry of Energy, the government agency in charge of strategically planning our energy future.

The Marcos government’s energy plan was anchored on two major but controversial projects: a series of hydroelectric dams along the Chico River and the Bataan plant. After both were scrapped by the Aquino government, no alternative plan for baseload power capacity was put together.

By the late eighties and early nineties, the country was plunged into darkness. The economy dramatically contracted as the brownouts stretched to cover most of the working day.

When Fidel Ramos took over as president, his first priority was to restore energy sufficiency. He sought emergency powers from Congress to accomplish that goal within the first year of his administration.

We did achieve energy sufficiency — albeit at great cost to the consumer. Investors were willing to come in and put up power plants only on a “take or pay” basis. The quickest things that could be put on line were oil-fired plants that produced energy at the highest cost. They also had large carbon footprints.

After oil-fired plants, the next quickest thing to build were coal plants. These, too, had large carbon footprints. There was no political consensus to rehabilitate the Bataan nuclear plant, the cheapest source of energy. Nor was there political will to continue with the Chico River hydroelectric project, the cleanest possible source of power.

Now, claiming the mandate of the law on renewable energy, government is considering subsidizing renewable energy projects. The subsidies, of course, will be shouldered by all power consumers. It will push up energy costs in this country beyond all economically tolerable levels.

The Foundation for Economic Freedom is opposing the proposal for “feed-in tariffs” to subsidize expensive renewable energy programs. That will only bring up energy costs even more and encourage white elephant projects undertaken while the costs of technology for renewable energy are at their highest.

At the present energy cost regime, there is no way we can attract serious direct investments into our economy. The economic opportunity costs will simply continue to pile up until we are able to bring down energy prices to acceptable benchmarks.

Dagdag-bawas

Something truly bizarre happened while House Bill 4820 was in transit to the Senate for its independent consideration. The Bill proposes carving out 16 municipalities and the City of Iriga from Camarines Sur to form a new province to be called Nueva Camarines.

Way after the bill was signed and sealed by the House of Representatives, its principal proponents are trying to cure its legal infirmities. In a letter to Sen. Ferdinand Marcos Jr. last month, Rep. George Arnaiz sought permission to allow sponsors of the bill to remove one entire section, three paragraphs, 38 sub-paragraphs and 138 lines from the House-approved document.

Apart from the extensive sections they want deleted from the bill, the sponsors want to insert seven amendments to the document. These amendments, in the main, add to the powers of the governor in the prospective new province.

This is highly irregular, to say the least. I am not sure if something like this ever happened in our legislative history. It is a surprise that the congressmen have not expressed outrage at this event. The House, after all, was supposed to have studied the legislative measure thoroughly and carefully voted on its contents. Those contents are now going to be altered on the sly.

The sections of the bill the proponents want to delete by a mere letter to their Senate counterparts run contrary to existing laws of the land. Among these are the Local Government Code and the Mining Act. Surely, they would not pass Senate scrutiny — which surely should be more rigorous than the scrutiny congressmen devote to any piece of legislation that passes them.

Opponents of the plan to partition Camarines Sur claimed the bill was railroaded at the House, without the benefit of careful scrutiny and comprehensive public consultations. The fact that the authors of this bill are now making revisions on the bill passed by their colleagues reinforces that claim.

It might be more proper to return this bill to the House and run it through the normal legislative grind, carefully scrutinizing its contents and considering all opinions on it. Better that than this highly irregular “dagdag-bawas” on the contents of the bill.

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Waste - FIRST PERSON By Alex Magno | The Philippine Star News Opinion

Waste - FIRST PERSON By Alex Magno | The Philippine Star News Opinion

Uncompetitive

FIRST PERSON By Alex Magno (The Philippine Star) Updated March 26, 2011 12:00 AM

 

Perhaps a new law ought to be passed allowing private operators of public utilities to scour the open market for more efficient insurance coverage. When that happens, insurers will compete with each other to come up with the most efficient packages for the utilities.

Inefficient insurance covers produce costs that are eventually passed on to consumers by way of added tolls and charges. The old law, enacted presumably when all utilities were nationalized, restricts the choice of insurer to only one: the GSIS. The GSIS, therefore, is a monopoly with no pressure to provide better cover for lower premiums.

Insurance cover is, of course, indispensable. We saw in the case of the damaged Japanese nuclear plants that calamities and unforeseen risks could debilitate vital public utilities. When misfortune happens, the utilities ought to be able to call in insurance cover to quickly rebuild damaged facilities and keep economic disruptions to the minimum.

The same formula operates for individual vehicle owners and corporations who run our major utilities. All insurance policies involve payment of premiums actuarially arrived at by insurers. In a competitive environment, some companies might offer better cover for lower premiums.

Even if they charge the same premiums, some companies might offer a lower deductible threshold than others. In the case of ordinary cars, owners are normally asked to pay for the initial P5,000 of the total costs of insurable damages. If cost of repair is less than P5,000, the owner shoulders the entire cost. If the car is totally lost, the P5,000 might seem more than reasonable.

For large utilities, the insurance premiums run into millions of dollars. A higher deductible threshold for damaged plant and facilities could mean that a lot of cases of plant or equipment loss falling under the threshold will have to be paid for by the utilities company and not by the insurer.

Take, as a case in point, the National Grid Corporation of the Philippines (NGCP), the private company that has taken over what used to be the National Transmission Corp. (Transco).

NGCP, as did its predecessor, pays the GSIS an annual premium of $8.7 million to cover risks due to natural catastrophe or acts of terrorism. The GSIS policy features a deductible cover of $5 million (or about P200 million) for the annual aggregate of claims, $2 million for each and every loss for its submarine cables and the same $2 million for each and every incident of loss to terrorism or sabotage.

It was Transco’s experience, and now the NGCP’s, that most incidents of loss did not exceed the deductible threshold. From 2006-07, Transco’s losses from 10 separate incidents beyond its control totaled about $2.85 million. For 2007-08, losses such as terrorist attacks on power lines and towers amounted to $1.36 million. From 2008-09, the same category of losses from 12 separate incidents amounted to $2.4 million.

In all cases, the losses fell within the deductible threshold and the Transco was not able to collect a single dollar from the GSIS. All the accumulated losses accrued to operating costs passed on ultimately to consumers.

With a new law that enables greater competitiveness for the provision of insurance covers, our public utilities might find a much better deal — and less need to pass on losses to consumers.

Pipeline

There is no certainty about when oil prices will begin to relax. There is, likewise, no certainty about when we could begin delivering oil products to the city in the most economical way: using the pipeline that runs from Batangas to Pandacan, including underneath the controversial West Tower condominium in Bankal, Makati.

First Philippine Industrial Corporation (FPIC) spared no effort fixing the leaking portions of the pipeline, cleaning up the spill and conducting full remediation of the affected area. The pipeline operator recently hired an internationally recognized environmental remediation company, CH2M Hill, to work around the clock developing a permanent solution to the problems created by the pipeline leak.

For months now, FPIC has been hauling and treating the wastewater that continues to seep into the West Tower basement. Soon, an on-site water treatment facility will be installed in the affected area.

As an act of goodwill, FPIC offered residents of West Tower some amount to compensate for the troubles caused by the oil leak. After full remediation, the company is confident the affected residents may safely return to their homes.

The efforts of FPIC to remediate the area, solve the water seepage into the condominium’s basement and eventually reopen the pipeline are now in a bind, however.

In order to test the integrity of the pipeline and see if there are any more leaks, FPIC must turn it on. But the residents of West Tower have blocked that by winning a Writ of 

Kalikasan from the Supreme Court.

In order to permanently solve the problem of water seepage, the FPIC needs to see the engineering plans for the building. The residents would not give them access to those plans. The Makati engineering office, surprisingly, claims it has no copy of the engineering design. Even the builder of West Tower has no copy. The plans might help in determining if a flaw in the condominium’s engineering design actually caused the oil leak and continues to cause water seepage.

Lately, the residents, encouraged by a few lawyers, have filed multi-billion peso civil suits against the FPIC. Not only have they refused to cooperate with efforts at remediation, they now want the pipeline shut down completely. Without using that pipeline, consumers will have to pay millions more each day in additional fuel costs to cover the expense of hauling the oil overland.

At this point, we can say both the remediation effort and the testing of the pipeline are held hostage by narrow interests conveniently overlooking the greater public good.

What FEF is all about

Here's an old paper presented by FEF's former President Alex Magno explaining what FEF is all about.  This was posted in the Friedrich Naumann Foundation website in 2003.

The Foundation for Economic Freedom:
Role and Tasks in a Milieu of Protectionism
Paper presented by Professor Alexander R. Magno, president, Foundation for Economic Freedom, at the fifth workshop of the Economic Freedom Network, Jaipur, India, 25-28 September 2003


The Foundation for Economic Freedom (FEF) was established eight years ago by individuals concerned over the low level of public appreciation for the dynamism of a free market economy.

The FEF was designed specifically to be an advocacy institution, operating on a low overhead budget, and engaging principally in public diplomacy. At the core of this institution is the Council of Fellows, composed of highly visible and respected business leaders, retired bureaucrats and academic economists.

The Council of Fellows is led by former Prime Minister Cesar Virata and former finance secretary Roberto de Ocampo. The Council includes three former economic planning secretaries --- Cayetano Paderangga, Felipe Medalla and Dante Canlas. The present economic planning secretary, Romulo Neri, is likewise a fellow.

Presently, the President Gloria Macapagal Arroyo’s Cabinet includes, apart from Neri, two other fellows of the FEF. These are Budget Secretary Emilia Boncodin and Labor Secretary Patricia Sto. Tomas. An FEF fellow heads the Philippine International Trade Corporation and the Transmission Corporation, which is tasked with privatizing the power sector. Three members of the FEF are with the board of the Development Bank of the Philippines, including the chairman of the board and the president.

The profile of the FEF Council of Fellows is the institution’s main resource. That profile allows the FEF to call government’s attention to urgent policy issues and commands the public’s attention during vital policy debates.
Over the past 8 years, the FEF has stood as the institution of reference on several policy issues touching on the process of reinventing the Philippine economy from an inward-looking to a trading one.


Liberalization of Oil Sectors

The initial stimulus for establishing the FEF was the great oil price debate that happened during the 1994-95 period.

At that time, the oil industry in the Philippines was nationalized and oil pricing regulated. A levy was collected on oil price sales and pooled into what was called the Oil Price Stabilization Fund. The Fund was, theoretically, a means to moderate sharp price movements in oil due either to currency realignments or instability in the global markets.

In reality, the fund, which was constantly at a deficit especially in the aftermath of the first Gulf War, became a channel for subsidizing oil prices at great cost to public sector finances. While the fund existed, oil pricing became highly politicized. Every increase in pump price was met with large demonstrations and paralyzing transport strikes. No political leader was willing to accept the political cost of obeying market dictate on oil pricing.

Subsequently, oil pricing was dictated more by the political balance of power rather than by market forces.

In the 1994-95 oil price debate, government actually raised prices to reflect real world pricing. This was also a necessary step leading to the eventual liberalization of the oil sector. Allowing the artificially low prices to persist would have discouraged the entry of competitive new players in the sector.

The oil price increase, however, provoked the formation of a large coalition of political groups demanding a rollback. The coalition was called Kilusang Rollback (Rollback Movement) and included leftist organizations, trade unions, farmers groups and a large number of prominent clergymen who declared that oil price increases were “anti-poor.” The coalition mounted street protest and called for paralyzing general strikes.

Facing midterm elections in May 1995, the Ramos government buckled under the pressure from the streets. Oil prices were rolled back. As a result, the public sector deficit spiked up by P30 billion and oil imports increased abnormally by 30%. It was clear that artificially priced oil produced not only massive bleeding of public sector funds, it also led to imprudent consumption of an imported and highly polluting commodity.

Through the oil price debate, no one stood up to defend what was an overwhelmingly unpopular decision to allow oil prices to seek their market level. No group confronted the highly politicized pressure from the streets to argue that it was the oil subsidies that were “anti-poor” because they diverted scarce public funds from education and health services that served the lower income groups more. Oil subsidies benefited richer Filipinos who consumed as much as fifty times more gasoline per capita than lower income Filipinos who relied on public mass transport.

It was during this period that the fellows of the FEF decided that there was a need for an institution that would dare take unpopular positions on issues where populism reared its ugly head. There was need for an institution that would address the broad public and insist on taking a longer view of the economic policy issues at hand, a view beyond the short-term political contingencies and beyond the normal public inclination for instant gratification.

Those of similar mind and concern for the quality and reliability of our economic policies began meeting to discuss the feasibility of establishing an advocacy institution. Because such an institution would often stand against what was more popular in the policy debates, it was necessary for this institution to be composed of truly respected intellectuals and public servants. It was also important for the institution to be constantly independent of vested interests.

The Foundation for Economic Freedom was established as a result of those consultations.


Legislative Reforms

The Foundation began operations with a small grant from the Philippine Business for Social Progress (PBSP). That grant has since run out and the FEF has relied on occasional partnerships with other institutions, using a miniscule backroom operation to support the Council of Fellows.

The FEF played a major role in the passage of two key pieces of legislation that helped liberalize the economy.
From 1998 to 2000, the FEF partnered with several groups to assist in the passage of the Liberalization of the Retail Trade Act. The 1954 law that nationalized the retail trade (reserved it for enterprises that were owned by Filipinos) was highly symbolic for the protectionists. A strong lobby funded by the existing retail companies had prevented liberalization for years.

The FEF worked specifically at putting retail liberalization in the Estrada administration’s priority legislative agenda. The FEF’s research staff supported legislators with research findings to help craft the liberalization law. At the same time, the Foundation mounted a nationwide information campaign to convince the people that an inefficient retail system was harming the poor and that increased investments in the retail sector would help bring drown prices through more efficient distribution of goods.

Although protectionist legislators did succeed in inserting provisions that limited entry of foreign-owned retailers through high capitalization barriers and a brief waiting period before liberalization takes full effect, the passage of the law in 2000 was a substantial as well as symbolic victory. It brought new investments into retail despite the limitations and brought down a previous law that was symbolic of the period of intense economic nationalism in the country.

From 2000 to 2001, the FEF concentrated on the passage of the Electricity Power Industry Reform Act. The reform measure was not a popular one with a public that was used to a nationalized system of power generation and distribution. Furthermore, although the National Power Corporation was losing billions annually, the process of privatizing it would require front-end costs for government.

Despite those considerations, President Gloria Macapagal Arroyo kept the power reform act at the top of her priority legislative agenda and the law was passed a few months after she became president.
From 2001, the FEF has been concentrating on governance reforms, specifically the re-engineering of the corruption-prone Bureau of Internal Revenue (BIR). The Foundation provided both research support to legislators and initiated a public information campaign to win support for the restructuring of the BIR to make it more efficient in its work and more resistant to the lure of corruption.

Although there was strong support for BIR reforms from the present government, the enthusiasm of the legislators was not sufficient to move this piece of legislation quickly enough to pass it before election fever set in. Employees of the BIR, fearful of being laid off en masse, opposed the restructuring. Politicians associated with the influential networks of BIR collectors used every technicality in the book to slow down movement of the proposed reform law through the legislative mill.

The FEF continues to lend its weight to the effort to reform our internal revenue system even if there is danger that elections will freeze the process and a new Congress will shelve the bill. The problem of uncollected revenues is a strategic one. The Philippines has suffered a chronic budget deficit that has now caused the public debt to balloon to unsustainable levels.

In between these major campaigns, the FEF has issued public statements on other issues relating to Philippine economic policy. Despite limitations on the institution’s resources, we have tried to keep maintain a high visibility in the public debate concerning the direction and pace of economic development in the Philippines.


The Economic Freedom Index

As indicated be the preceding discussion, the FEF is principally a public advocacy institution rather than a primarily research-oriented organization.

We collate and package information rather than generate baseline data on our own. For our data needs, we rely on existing economic research institutions as well as on information available from like-minded institutions globally. Networking is a very important component of the FEF’s work.

We have had, on several occasions, found great use for the Economic Freedom Index. It is a valuable source of comparative information that helps the FEF strengthen its case in the domestic policy debate.

When the FEF mounted its campaign for the passage of the Retail Liberalization Act, we relied extensively on comparative economic data from collaborating foreign institutions. During this campaign, we attempted to organize existing consumers groups and build a coalition of consumers opposed to the inefficient retail system that victimizers end-used of goods. In this effort, we received significant support from Australian institutions supporting free market policies.

Last year, the FEF produced a detailed paper critiquing the Index and advancing a number of suggestions. That critique was well received and, at this moment, we have very little to add to it.
But we are sure that the solidarity of free market advocates will continue to be important to us.

We face a global situation characterized by a backlash of sorts to the experience, thus far, of relaxed trade and liberalized economies. In the Philippines, to be sure, there continued to be organized political pressure to reverse the gains made the last decade towards building a more liberal and more competitive national economy.

The FEF looks forward to more campaigns in the near future, at the very least to conserve the gains of previous liberalization measures and to stall the resurgent tide of protectionism --- a tide that will compromise our ability to provide a better future for our people.

We will seek out the support of our allies in the Economic Freedom Network in this effort.

Oxymoronic - FIRST PERSON By Alex Magno | The Philippine Star News Opinion

Oxymoronic - FIRST PERSON By Alex Magno | The Philippine Star News Opinion