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Interview

Reynaldo Umali, Congressman, Representative of the Energy Committee, Philippines

22.01.2014 / Energyboardroom

Reynaldo Umali, Congressman & Representative of the Energy Committee, identifies fundamental shortcomings in the prevailing EPIRA reform and privatization process. He explains how his own constituency of Minodoro can be regarded as a microcosm of the Filipino power generation sector and proposes innovative solutions for aligning business interests with inclusive development that lessens the vulnerability of off–grid communities.

In your recent “EPIRA: Where are we headed?” speech, you claim that the EPIRA law has fallen short of its promise to provide a stable and reliable supply of electricity at a reasonable price—its raison d’être. What amendments to the EPIRA do you recommend to overcome its shortcomings?

There are a number of issues that undermine EPIRA’s efficacy. EPIRA fragmented the power sector into different divisions, namely generation, transmission, distribution and supply, but the bulk of the issues lie in generation alone. The generation sector was privatised because its potential was considered to be restricted by the monopoly enjoyed by the National Power Corporation (NPC). There are continuing challenges to achieving reliability and stability of power supply. These are key considerations for our power model because access to a reliable power supply is necessary for economic development. Without power we will be hard pressed to maintain the Philippine’s current 7.5 percent annual GDP growth. The dynamics of the power sector must be considered carefully because whilst previously power generation was a state-run business, now privatisation means that poorer rural areas are being ignored by private companies. Businesses will always locate to where commercial imperatives leave them at best advantage; this does mean that rural communities sometimes face a longer wait for electrification. The Philippines needs to develop smaller business groups focused on distributed generation systems in order to bring power to the smaller island groups as well.

The micro-power plants that can service smaller areas and local consumers must be strategically directed to areas where capacity is most needed. There are also perennial concerns about the generation source of power. The question of what is the best suited source of energy for the consumer, such as renewable or diesel power must be addressed. EPIRA promised energy at a reasonable rate, but the definition of ‘reasonable’ is still unclear. This is one reservation I have about the act because the Philippines must consider the needs of a highly diverse group of consumers, including of course those in the rural provinces.

The Philippines has the highest prices of electricity in South East Asia. How do you think the price can be reduced to satisfy the needs of this diverse group of consumers?

Power in the Philippines is mostly derived from fossil-fuel sources and since these resources are absent in the Philippines, it is necessary to import. The unstable price of oil is a significant obstacle to creating a low-cost electricity supply here in the Philippines. The island nature of the Philippines, and the long distances to our neighbours in the region means that we must generate power here, as it is not feasible to connect to any other countries’ power grids.

As previously mentioned, generation was the responsibility of NPC. Enticing business to generate power here in the Philippines has been one means of increasing competition in this market and we expect this to reduce prices; however, at the same time there is still a great deal of missionary electrification that needs to take place in rural areas in the Philippines. But due to limited demand, these areas are less appealing to private business interests, who naturally gravitate towards supplying concentrations of demand. The Secretary of Energy must ensure that these business interests are managed in a way, which promotes development across the country.

Is Mindoro one of the rural areas that need support to grow their electrical infrastructure?

Mindoro is well thought of as a microcosm of the Filipino power generation sector. Mindoro is a largely off-grid, mountainous, island province that relies on local generation systems and has less than a million inhabitants. The Eastern and Western areas of Mindoro have differing energy needs, which raises questions about which is the most suitable technology to satisfy local demand.

Currently, most of the power systems in Mindoro are oil based, which is costly and polluting. There is ambition to install additional hydro-electric schemes to expand the 3MW of existing capacity on the island. Within the power sector economies of scale are highly important. Creating sufficient capacity is then more troublesome because of the divergent requirements for the two areas, and it could also result in higher prices than those found elsewhere in the country.

Do you agree with NPC’s recent, more direct approach of enforcing brownouts/blackouts in order to deal with non-paying cooperatives?

Whilst I do not deny it is right for monies to be paid where due, it is important to be realistic—it is due to government neglect that these cooperatives lack better electrical infrastructure. The government should act as a catalyst and pioneer development of the necessary infrastructure to deliver a reliable electrical supply. After security of supply has been achieved, however, the private sector is the best agent to deliver sustainability of supply. There is a good balance between private and consumer interests. Proactive management would be far better than using punitive measures like brownouts. Situations like late payment should be dealt with before use of drastic action becomes necessary.

What is your perspective on the “electricity should be free” mindset that has developed in some cooperatives, which is a significant obstacle to sustainable growth of the electrical sector in the Philippines?

I do not think that cooperatives expect free electricity, but I do think that they desire cheap electricity. A balance of reasonability is required to avoid conflagrations between interest groups over the cost of energy. It is important to ensure that affordable energy is available to consumers, but each island or area will have differing costs due to the challenges and opportunities inherent to the local market. Therefore, efforts must be made to find a balance between these interests.

Since EPIRA and the process of privatisation started, the NPC has been a company in decline. Their scope has become smaller since they lost their monopoly, and now they are responsible for less than 10 percent of total power generation in the Philippines. Despite this reduction in scale, they still have the duty to ensure the electrification of rural islands and must deal with many differing local issues to supply energy. Complaints are frequently heard about the supply of energy in remote areas because energy provision in these areas is a difficult operation. It is understandable why cooperatives protest about brownouts and high prices, but equally it should be understood that supply of energy is not easy—progress so far is just the start of a process.

Achieving a 90 percent electrification rate by 2017 will largely depend on the reforms implemented in order to solve the power crisis in the rural areas. Do you think this is feasible?

With so many commitments in the pipeline, this is a goal within reach. EPIRA has been successful in attracting private interests to the Philippines and now we have many companies that are managing new generation capacity and transmission lines. How to capitalise on this growth is the next challenge and maintaining business interests is essential.

The Filipino government has shortened the processing time for service contracts and they have also opened the floodgates for renewable energy development. The problem is that in Mindoro, so many service contracts were issued just prior to my entering office in 2010 that the actual process of starting projects stalled in order for an administration backlog to be cleared. Some service contracts had been incorrectly issued, or supporting studies had not been undertaken and it took about two years to untangle the administrative mess. The policy environment at that time was problematic, but these issues are being addressed and with the right policies, the 2017 target is entirely feasible.

Do you feel that the energy roadmap that Secretary Jericho Petilla and the Department of Energy are promoting is the right way forward?

Secretary Petilla is exercising a great deal of political will and this is a very positive element of his work. There are many issues that require immediate attention. In the instance of unnecessary conflicts, such as that between the NEA and CDA, Mr. Petilla steps in to achieve a resolution quickly and efficiently.

Congress has a policy-making role, and it is the Secretary’s duty to forward this policy. The last congress passed the expanded NEA charter, which strengthened NEA and gave it further powers to intervene when cooperatives fail to pay due rates. Not all Secretaries are as strong willed as Mr. Petilla and I think his focus is not only practical but also admirable. Another element to his role is communicating government objectives to the independent Electricity Regulatory Commission (ERC), which is responsible for setting power rates. Given the total consumption of around 72 billion MWh annually, even a slight deviation from a right and fair electricity tariff would detrimentally hurt economic growth.

It is important that here in the Philippines we have the proper regulatory framework to help the power sector continue developing. The dynamics of private and public concerns must be balanced and managed, and all stakeholders ought to be considered in decision-making processes.

The congress, as the leading policy developer must ensure regulation is appropriate and reasonable, while making effective decisions and operating in a decisive manner to ensure the country has a reliable and stable power supply at reasonable rates. We will do this by making this arena business friendly, and helping cultivate an environment that provides investors with the opportunity to see their commercial interests grow.

 

To read more interviews and articles on the Philippines, and to download the latest free report on the country, click here.

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