Module 2: History of the Power System Structure in the Philippines

Electricity was known to have reached the country in 1890. Sociedad Mercantil which became La Electricista
provided electricity in Manila and nearby provinces. La Electricista was established in 1892 in association with the
Compania de Tabacos de Filipinas (TABACALERA). The Municipal Council of Manila signed a 20-year contract with
Sociedad Mercantil Millat, Marti y Mitjans to provide electric lighting for city streets, parks and other public places
originally illuminated by oil lamps. The contract also allowed Sociedad to enter into arrangements with private
customers to have their homes and establishments lighted by incandescent lamps. La Electricista was given rights to
Sociedad’s 20-year contract. MERALCO was established in 1903 and bought La Electricista the following year. By
early 1905, some 40,129 incandescent lights, 495 arc lamps were installed in both public and private areas (Cabrera,
1992).

In 1925, MERALCO expanded services to the municipalities of Rizal and other parts of Luzon by purchasing the
franchises and plants of the small provincial electric companies. It began retrenching its provincial operations after
the Second World War to concentrate on rehabilitation and expansion of its Manila facilities. By 1953, MERALCO had
disposed all its provincial facilities, and in 1961 it became Filipino-owned when a group of Filipino businessmen led
by Eugenio Lopez, Sr. bought MERALCO from General Public Utilities Corporation of New York.

The National Power Corporation (NPC) was established in 1936 to develop the country’s hydroelectric resources. In
1960, the Electrification Administration (EA) was created by Philippine Congress to implement the government’s
declared objective of total electrification as a national policy of the country. The government granted franchises to
private companies to encourage them to set up local distribution systems in rural areas. Some of these companies
generated their own power, but most of them made bulk purchases of power generated by NPC. Up to 1969, EA
helped in the establishment of 217 small systems (each with fewer than 500 kilowatts of capacity) throughout the
country. However, many of these systems did not survive due to technical, financial, and managerial problems. A
1966 study recommended that a total electrification program based on the rural electric cooperative (REC) model
used in the United States be instituted in the Philippines. Two pilot projects were initiated to adapt the U.S. model to
Philippine conditions: (1) Misamis Oriental Rural Electric Service Cooperative (MORESCO), and (2) Victorias Rural
Service Electric Cooperative (VRESCO).

In 1969, the National Electrification Administration (NEA) was created by Congress to replace EA as the
implementing agency of the country’s total electrification policy. Under NEA, the RECs (or electric cooperatives) were
designated as the country’s primary electricity distribution system. NEA was given the authority to establish and
oversee the RECs, to make loans, to acquire physical property and franchise rights of existing suppliers, to borrow
funds, and to extend subsidies to RECs.

In 1970, NEA drafted a total electrification program on a 24-hour daily service to be realized by 1990. However,
external events changed the financial environment for electrification funding. The oil crisis in mid 1970s hiked energy
prices, concessional loans from international agencies declined, and the investment cost of electrification program
drastically increased. Internal factors were likewise not helpful. Financial, technical, and managerial problems beset
many of the small power systems established in this period.

Since the creation of EA in 1960, private utilities as well as government utilities were encouraged to set up
distribution systems in rural areas. By 1971, there were about 479 electric utilities and 876 generating plants with a
total capacity of 2,314,868 kw. In 1970, 8.54 million of the 38 million total population (22.5%) had electric service
and 2.56 million of the 8.54 million (29.9%) resided in rural areas. However, more than 86% of the rural families did
not have electric service (Armas, 1978).

NEA was converted into a public corporation by Presidential Decree No. 269 in 1973. Under this statute, NEA was
given the sole authority to regulate the electric cooperatives, as well as to repeal, alter, and amend its franchises.
NEA’s authorized capital stock was also increased to P1 billion, and the decree empowered NEA to borrow from
foreign and domestic sources. In December 1975, NEA accumulated a total fund of $94.8 million in foreign loans and
P775 million in government budgetary appropriation. By end of 1977, NEA had a total fund consisting of P1 billion
peso component and $103.5 million foreign loan component. NEA disbursed P662.4 million of peso component
which allocated P71.8 million to take over existing franchises in 263 towns and cities. But total cost of takeover was
estimated at P113.1 million in 1977. Of the 596,967 NEA electrified households in 1977, 302,978 households (50.8%)
were formerly served by the private utilities taken over by NEA (Armas, 1978).
Nevertheless, many of the electric cooperatives are beset with financial, technical and managerial problems. At least
61% of the electric cooperatives are not commercially viable and need to be restructured (World Bank, 1989).
Recently, Executive Order 119 (dated August 28, 2002), condones some P18 billion in debts of electric cooperatives
to the National Electrification Administration (and other government agencies). But E.O. 119 also mandates that to
qualify for debt condonation, electric cooperatives must undertake some meaningful organizational and financial
reforms, must submit rehabilitation and efficiency plan to NEA, and must pay its financial obligations to NPC on time.
So far, eight electric cooperatives have been given provisional authority by the Energy Regulatory Commission (ERC)
to cut their rates between 7 and 24 centavos per kilowatt-hour.

Starting with two electric cooperatives in the early 1970s, NEA now supervises 119 electric cooperatives all over the
country. Although the original target of total electrification by 1990 was not achieved, only 5,404 barangays out of a
total of 41,995 barangays remained unelectrified as of December 31, 2002. However, many of the remaining
unelectrified barangays are areas which are called “last mile” areas on the distribution network because they are
technically difficult for grid extension. The challenge for rural electrification is how to maximize connections per
household in remote, marginalized and unserved areas whose geographical isolation entails high cost of power
installation and whose population has a low capacity to pay. A subsidy policy design responsive to the environment
is needed.

In 2001, the Electric Power Industry Reform Act (EPIRA) was passed by Congress to ensure the quality, reliability,
security, and affordability of the supply of electric power. To achieve these goals, EPIRA has mandated the
organizational and financial restructuring of the industry, institutional and policy reforms, and stricter accountability
for generation, distribution, and transmission utilities. Under the EPIRA, only transmission and distribution utilities
need a franchise authority from Congress in order to operate. Generation utilities and electricity suppliers simply
have to obtain a license from the ERC to engage in their respective economic activities. The transition from a highly
regulated to a deregulated electric power industry requires the adoption of market rules, financial and technical
standards, and minimum regulatory requirements in order to make a smooth transition from a regulation-based and
inefficient industry to a market-based and efficient one.

Industry Structure Prior to Electric Power Industry Reform Act (EPIRA)

Government Regulation under EPIRA