f R d i b E SE nergy Subsidy Reform · Main characteristics: • Comppprehensive reform plan • Mitigating measures • De-poli i i i iff iliticizing tariff settings

E S b id R fEnergy Subsidy Reform

CASE STUDY ON ELECTRICITY SUBSIDY REFORM IN THE

PHILIPPINESPHILIPPINES

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Overview:

Electricity h t i th

1997 Asian crisis Reform was l h d ishortages in the

1980slaunched in2001

• Expansion ofgenerationcapacity withindependentpower producers

• Excess productioncapacity

• Huge IPPs-relateddebt owed byNational Power

• Reform took longtime to bear fruit

power producers(IPPs)

National PowerCorporation (NPC)

Main characteristics:

• Comprehensive reform planp p

• Mitigating measures• Mitigating measures

li i i i iff i• De-politicizing tariff settings

Comprehensive Reform Plan:

• Transfer NPC’s assets andliabilities to a “bridge” companyto implement privatizationto implement privatization

• Establish an independentregulatory commission to

l h l i i regulate the electricity sector,including tariffs

• Unbundle tariffs and eliminatecross-subsidization (except forlifeline tariffs)

• Introduce wholesale spot• Introduce wholesale spotelectricity markets

• Introduce competition indist ib ti (l )distribution (long run)

Mitigating Measures:

• Lifeline tariffs havebeen introduced

All l iffResidential tariffs in Manila, September 2013

(Peso per kWh)

– Allow lower tariffsfor users whose electricity consumption remains below

kWh consumption

Charge for generation,

transmission, etc

Lifeline subsidy

Charge for lifeline subsidy Tax etc Total

50 6.62 -4.66 0.00 3.46 5.4270 6.62 -3.21 0.00 3.48 6.89remains below

certain levels – Cross-subsidized by

other consumers

70 6.62 3.21 0.00 3.48 6.89100 6.62 -1.81 0.00 3.53 8.34200 6.62 0.00 0.11 3.64 10.36300 6.62 0.00 0.11 3.99 10.72400 6.62 0.00 0.11 4.35 11.07500 6.62 0.00 0.11 5.00 11.72600 6 62 0 00 0 11 4 99 11 71

• Electricity forindigent families hasbeen subsidized

600 6.62 0.00 0.11 4.99 11.71700 6.62 0.00 0.11 4.99 11.71800 6.62 0.00 0.11 4.99 11.72900 6.62 0.00 0.11 5.00 11.72

1000 6.62 0.00 0.11 5.00 11.731500 6.62 0.00 0.11 5.05 11.77

– For customers inrural areas that arenot connected tomain power grids

3000 6.62 0.00 0.11 5.17 11.895000 6.62 0.00 0.11 5.22 11.94

Source: Meralco.

p g

De-politicization of Tariff-Setting:

15

Philippines: Electricity Sector and Public Sector Balance (In percent of GDP)

00

Nonfinancial public sector balance

National Power Corporation balance (RHS)00

-1-5

-2-101999 2000 2001 2002 2003 2004 2005 2006

2001 reform 2004-05 tariff increases

Sources: IMF staff reports.

Lessons:

• Comprehensive reform can eliminate electricityp ysubsidies

• Mitigating measures can lessen adverse effectsMitigating measures can lessen adverse effectson the poor

• Electricity reforms can take a long time toElectricity reforms can take a long time toimplement

• Success hinges on political will throughout theSuccess hinges on political will throughout theprocess