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REGULATION | Contributed Content, Philippines
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Urbano Mendiola, Jr.

Missionary electrification subsidies in the Philippines

BY URBANO MENDIOLA, JR.

The electrification subsidy in missionary areas started on May 1, 1988 with the proclamation by the President of the Philippines that electricity rates in all islands outside the main grids shall be pegged at P2.50/kWh. Thus, the National Power Corporation (NPC) and the National Electrification Administration (NEA) allocated P1.20/kWh for generation and P1.30/kWh for distribution.

NPC also created its Small Island Grid Operations to take over the operation of NEA/EC-owned generating plants. However, NPC's subsidisation of the generation costs of these areas resulted in huge financial losses while NEA's subsidisation of the distribution costs required huge government subsidies.

The enactment of RA 9136 or EPIRA on June 8, 2001 mandated NPC to cede its generating and disposable assets in the main grids to the Power Assets and Liabilities Management Corporation (PSALM) and instead, be responsible for the missionary electrification function aside from dams and watershed management, and operation of the undisposed NPC generating assets.

EPIRA further prescribed a Universal Charge on Missionary Electrification (UCME) in addition to Stranded Contract Cost, Stranded Debt and Environmental Charge imposable to all electric consumers nationwide. The UCME institutionalised the provision of subsidies in areas not interconnected to the main grids so that development and progress in these areas at par with the main grids could happen.

For better understanding of the UCME Subsidy, electricity users in missionary areas are only required to pay the Subsidised-Approved Generation Rate (SAGR) plus any ERC-approved Cost Adjustments notwithstanding the higher True Cost of Generation Rate (TCGR) of these areas.The difference between TCGR and SAGR of NPC, New Power Providers (NPPs) and Qualified Third Parties (QTPs) is claimed from the UCME Subsidy, recovery of which is approved by ERC through Basic UCME and UCME True-up filings by NPC.

The SAGR is also allowed to adjust for changes in fuel and purchased power costs through the Generation Rate Adjustment Mechanism (GRAM) and fluctuations in foreign loan repayments and forex expenses through the Incremental Currency Exchange Rate Adjustment (ICERA). On the other hand, the Basic UCME is allowed to adjust through UCME True Ups in case of lower actual national electricity sales as compared to forecast resulting to collection shortfalls, necessity for adjustments in the GRAM, ICERA and the NPP TCGR, reasonable financing costs incurred by NPC-SPUG to cover loans for UCME subsidy shortfall and other analogous cases.

As of October 2015, 291 NPC-SPUG power plants and 19 NPPs/QTPs with total installed and dependable capacity of 316 MW and 267 MW, respectively, rely on the UCME subsidy to sustain the power supply requirements of 47 electric cooperatives and local government units in 34 provinces consisting of 196 municipalities, 242 missionary areas and 2,929 barangays.

In addition, the UCME also supports the operating costs of NPC's existing 770 ckt-kms of 138 kV and 69 kV transmission lines and 10 substations with aggregate 170 MVA capacity to deliver reliable electricity to load centers in major missionary areas. At present, 832,398 households benefit from UCME subsidy.

Around 400.23 GWh and 460.05 GWh of electricity sales of NPC and NPP/QTPs, respectively, is entitled to UCME subsidy. This subsidy covers a major portion of the fuel cost, depreciation, other operating cost and expenses, and the allowed return on rate base at 12% maximum in case of NPC-SPUG power plants and the difference between the ERC-approved TCGR and the collected SAGR in case of NPPs/QTPs.

The passage of the Renewable Energy Act of 2008 further expanded the UCME subsidy to include the cash-based incentive for RE Developers which aims to attract private RE Developers to put up RE facilities in missionary areas.

This incentive as defined under ERC Resolution No 21, series of 2011, is equivalent to 50% of the universal charge for power needed to service missionary areas where the RE Developer will operate. Unlike the UCME subsidy which is disbursed by NPC, this incentive is disbursed directly by PSALM to the RE Developers.

Prior to EPIRA, subsidies in rural areas not interconnected to the main grids grew from P16.19 million in 1998 to P2.47 billion in 2002. Under the EPIRA regime, the UCME subsidy requirement even grew further from P2.963 billion in 2003 to P6.16 billion in 2014.

However, due to continued decrease in fuel cost commencing the last quarter of 2014, the UCME subsidy requirement went down to P3.51 billion in 2015. On the other hand, UCME subsidies by NPPs/QTPs starting 2006 grew from P7.72 million to P3.7 billion in 2015. It is projected that the UCME subsidy will further grow from P11.81 billion in 2016 to about P19.35 billion in 2020.

Due to the foregoing, the eventual adoption of a UCME reduction and graduation program becomes necessary. Section 3(b), Rule 13 EPIRA IRR provides that NPC-SPUG shall periodically assess the requirements and prospects of bringing its functions to commercial viability on an area-by-area basis at the earliest possible time.

This means that areas that have attained commercial viability should wean from the UCME subsidy. This becomes urgent with increasing electricity demand/growth and thus, pursuing a UCME Reduction and Graduation Program is indispensable.

This program will not only provide the basis for establishing the policy framework for preparing electric cooperatives and their consumers for gradual independence from the UCME subsidy but also the entry of cheaper electricity suppliers, particularly in Private Sector Participation (PSP) and NPC-SPUG areas.

The policy framework for the program will involve options for UCME subsidy reduction and UCME graduation.

For the former, an increased SAGR for high-consuming residential, commercial and industrial customers may be opted while retaining low-consuming residential at SAGR level, adoption of cheaper baseload and/or RE technologies, realisation of 24-hour operation and efficient load profiling, reliable and efficient plant operation through adoption of best O & M practices, re-fleeting and decommissioning programs, private sector participation in missionary areas through competitive selection process and smooth phase-in phase out, and aggressive IEC and promotion campaign by DOE, NEA and NPC.

For the latter, a series of SAGR increases and TCGR decreases that will narrow the price gap and the promotion of main grid interconnection for missionary areas that are already economically and technically feasible may be pursued.

To effectively implement the UCME Reduction and Graduation Program, a critical review of the economic affordability factors, such as per capita income, poverty incidence and human development index, area classification of the province and municipality the missionary area is located, electricity end-consumer classification by the electric cooperative, historical and projected fuel prices, regional development programs and projected increase in UCME subsidy requirement, should be done.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Power. The author was not remunerated for this article.

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Urbano Mendiola, Jr.

Urbano Mendiola, Jr.

Bong Mendiola has been with the National Power Corporation (NPC) for the last 39 years and has wide experience in plant engineering/construction, quality assurance, operations, fuel management, IPP contracts management, and power economics.

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