The Betrayal and Treason of Rule 11 of the Epira IRR On Limits of Cross-Ownership

David Celestra Tan, MSK 26 August 2016

How can Meralco, a power distributor, legally arrogate unto itself an unlimited cross-ownership with sister power generators when there was supposed to be a 50% limit?

The Epira Law already allowed Meralco under Section 45 a generous permission to enter into bilateral power supply contracts with affiliated companies of up to 50% of its demand and no bidding required. The Lopez Group that used to control Meralco at least stayed within this limit and only had 2,000mw of First Gas power supply or about 40% of Meralco’s 5,000mw peak demand.

When the MVP Group took over Meralco in May 2010 they clearly believed that the sky is the limit on the generating capacity cross ownership they can have. They proceeded to create a not so subtly named generation company, Meralco PowerGen, with an openly announced objective of 3,000mw of power generating capacity. Obviously all by leveraging their control of off-taker Meralco, the distribution utility, to negotiate sweetheart contracts.

Why do Meralco and MVP’s topnotch lawyers believe that they are allowed under the law to breach the 50% limit set by the Epira Law? Not that the MVP group is bashful about pushing the borders on the ownership and monopolization limits to get their business take over desires as in the foreign ownership limits of utilities like PLDT and Meralco.

They must have discovered, or were told in the process of negotiating the purchase of Meralco, the big monopolization loophole provided by Rule 11 of the Epira IRR and the huge profit opportunities that the MVP Group can have in self-negotiated generation contracts. Imagine having control of the “gold” of the power market and the power to choose and own the generating companies that can get into the Philippine market? That alone could justify the premium they paid for buying control of Meralco.

The MSK organization is not against capitalism and entrepreneurism. We are against monopolization and exploitation of the helpless consumers especially in the provision of public utility services.

Epira Laws Limit on Cross-Ownership

The initial drafts of the Epira Law called Omnibus Power Bill and the myriad of foreign consultants set out to unbundle the power sector with no cross ownership among them. But powerful lobbyists through the series of changes in Energy Committee Chairmen in the Senate and Congress from 1995 to 2001 prevailed. In the final bill only cross-ownership between the Transmission company and the others was prohibited.

Section 45 provided that “to promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the following safeguards..(b)….For the purpose of preventing market power abuse between associated firms engaged in generation and distribution, no distribution utility shall be allowed to source from bilateral power supply contracts more than fifty percent (50%) of its total demand from associated firm engaged in generation”.

Clearly the Epira Law recognized that there would be market power abuse between associated firms engaged in generation and distribution.

It defined “An associated firm with respect to another entity refers to any person which, alone or together with any other persons, directly or indirectly, through one or more intermediaries, controls, is controlled or is under common control with, such entity”.

Section 45 also defined “affiliate” to mean any person which, alone or together with any other person, directly or indirectly, through one or more intermediaries, controls, is controlled, or is under common control with another person. For good measure it defined “control” to “mean the power to directly or cause the direction of the management policies of a person by contract, agency, or otherwise”.

Unknown to most people, in the finalization of the Epira Law in the 2nd week of June 2001, a pitch battle went on the issue of cross-ownership between us who were fighting for safeguards for consumers and the lobbyists of the vested interests who were putting in loopholes in the law as much as they can get away with. The dark forces succeeded in inserting in the last two days of finalizing the Epira Law at the Bicam committee that Distribution Utilities can enter into power supply contracts with affiliated companies up to 50% of their demand. Meralco was only lobbying for 35%. You can guess how it became 50%.

Allowing this 50% cross-ownership is already one of the major weaknesses of the Epira Law and its failure to require that these pass on charges to consumers should be subjected to competitive bidding was a major betrayal of the consumers.

Still this generous 50% limit is being breached by the new Meralco. How is this legally possible?

The Betrayal and Treason of Rule 11 of the Epira IRR

Apparently not happy with a 50% limit, the same vested interests succeeded in finishing the job for monopolization and unlimited cross-ownership between a DU and a generator and redefined the limits set by Section 45 with its own creative language of Rule 11.

The Implementing Rules and Regulations of RA 9136, otherwise known as the Epira Law of 2001 was finalized and passed by the Department of Energy in June of 2002. As an IRR it is supposed to only turn the language of the mother law the Republic Act 9136 into implementable and clearer language. For the most part they have done that.

Except for Rule 11.

Rule 11 Titled “Cross Ownership, Market Abuse and Anti-Competitive Behaviorinitially stayed faithful to the words and spirit of Section 45 of the Epira Law.

It established under its Section 4 the Limits on Concentration of Ownership, Operation or Control of Installed Generating Capacity. —

“ No company, Related Group or IPP Administrator, singly or in combination, can own, operate or Control more than thirty percent (30%) of the installed generating capacity of a Grid and/or twenty-five percent (25%) of the national installed generating capacity”

Under Section 5 it also set Limits on Bilateral Supply Contracts by a Distribution Utility.

“No Distribution Utility shall be allowed to source from bilateral power supply contracts more than fifty percent (50%) of its total demand from an Affiliate engaged in generation”

Then it delivered the coup de grace in redefining cross ownership limits under Section 4(b)

The capacity of such facility shall be credited to the entity controlling the terms and conditions of the prices or quantities of the output of such capacity sold in the market in cases where different entities own the same Generation Facility.

In cases where different Persons own, operate or Control the same Generation Facility, the capacity of such facility shall be credited to the Person controlling the capacity of the Generation Facility”

This is a total redefinition of the cross-ownership limit contrary to the clear vision of the Epira law. Generating capacity limit is now determined by who is selling the capacity and output to the power market which by its warped language is the one “controlling the capacity”.

This is also a total revision of the Epira Laws definition of “control” which was “ the power to directly or cause the direction of the management policies of a person by contract, agency, or otherwise” under Section 45. That kind of “control” mostly come from ownership and membership in the board and management committees.

Central to the question of “control” is the ability to decide the price and availability of the generating unit to the market. And who is going to believe that “power to directly or cause the direction of the management policies” of a multi billion peso enterprise like a generating company will not be influenced by its stockholders and officers?

Here is another case where we are now lost in why we are doing things. Why the Epira Law is endeavoring to limit concentration of capacity towards the objective of assuring competition in the market place and why it is limiting cross-ownership between distribution utilities and generating companies.

The whole idea is assuring there would be enough independent power generators competing with each other to truly create the kind of honest to goodness competition that will bring down power to “least cost” for consumers. It includes competing for bilateral contracts and the WESM spot market. That cannot be achieved if the DU is allowed to pick and choose its own generators, negotiate sweetheart deals, and cartelize the generation sector.

Cross-ownership between the Distribution Utility and the generator put them in positions to negotiate sweetheart prices, sweetheart terms, and sweetheart administration of the power supply contract. When faced with a decision to generate revenue for its generating company or to protect the public from unnecessary and avoidable pass on charges, which do you think the conflicted cross-owners will choose?

 

What are the betrayals and treason of Rule 11?

1. It redefined the Epira laws definition of “control” as the marketing of the capacity and not considering ownership and operations.

2. In determining concentration of capacity, it restricted the counting of the generating capacity to the party “controlling” it as defined above and not counting it to the owner and operator.

3. These two just about totally removed the 50% cross-ownership limits already generously allowed by the Epira law between the distribution utility and the generating companies.

4. This means a distribution utility can own even 100% of a generating facility and it will not count against the limit of cross-ownership of 50% as long as he doesn’t do the marketing of the power capacity, which is the new definition of control per Rule 11.

5. With Meralco’s generators all interlocking in ownership, there cannot be true competition in the generation sector in bidding for bilateral power supply contracts and in the WESM spot market. How can related generators honestly compete with each other? What chance do the consumers have against coordinated action and collusion and price manipulation among them?

Whoever perpetuated the mangling of Rule 11 betrayed the Filipino consumers and committed nothing less than treason against the people and the Philippines as a country. What right do you have to deprive our people of their right to competitive power, to protection against manipulation, to be treated fairly. To deprive them, on a monthly basis, of their hard earned income with overpriced electricity?

To make a mockery of the Epira Law that took the country more than five (5) years to deliberate and pass? In the pursuit of competitive power, the government privatized Napocors generating assets and contracts at firesale prices, leaving the people with P500 billion in stranded loss and liabilities that will again be passed on to us.

Because of this Rule 11, all these severe costs to the country and the people is coming to naught.

For all its deficiencies, the Epira law was correct in trying to limit the installed generating capacity that a company or related group can “own, operate, or control” (Section 45(a)) for any one of those can give a party in the position to control, price, and withhold the generating capacity from the market, which will manipulate the “supply” that impacts market prices.

Section 45 of the Epira Law and Rule 11 of its IRR were there in the law and rules before the MVP Group took over Meralco in May 2010. But they are exploiting the loopholes to the limit and actually openly monopolizing, negotiating, and cartelizing the sector.

Ownership, Cross-ownership, and Cartelization of the Generating Capacities by Meralco and the MVP Group?

We already know that the MVP Group controls Meralco, the largest power distribution utility with a demand of 6,000mw, more than 62% of national demand.

On the generation side, We already know that they ended up owning 51% of the 455mw San Buenaventura expansion in Mauban. We also know their control of the 600mw Redondo Peninsula coal project in Subic.
They got bolder and more voracious in the recent months.
In May 27, 2016, the MVP Groups affiliate First Pacific bought 56% of Global Business Power of the George Ty Group which in turn bought 15.6% of another Meralco affiliate Metro-Pacific Investment (MPIC). MPIC already owns 49.96% in Meralco in addition to a 50% ownership in Beacon that owns 35% also in Meralco.

Two of the seven (7) midnight power supply contracts of Meralco totaling 670mw were signed with Global Business Power. The 70mw is for a coal plant as far away as Iloilo that will go through 800 kilometers of power transmission and several submarine cable systems. That is clearly self-dealing to the detriment of the Metro-Manila consumers.

In July 14, the joint venture between Meralco and San Miguel was signed on Mariveles Power Generation which got a 528mw contract. Meralco would own 49% and San Miguel 51%. On July 29, Meralco announced a 50:50% joint venture with DMCI/Semirara for the St.Raphael Power Generation Corp. which got a 400mw among the seven (7) midnight contracts.

Redondo Power that got a 225mw contract is owned 51% by Meralco in partnership with Therma Power of the Aboitiz Group. The Atimonan Energy One to which Meralco assigned 1200mw of power is majority owned by Meralco but it is not yet announced who will be its partner with Aboitiz and Ayala as rumored possibilities.

Before these new joint ventures and alliances, the other Meralco owner with 27.1%, favorite white knight JG Summit, bought 30% of Global Business Power where Meralco PowerGen had bought 20% in 2013. New Meralco partner EGAT of Thailand under its investment arm New Growth BV own 49% of the 455mw San Buenaventura. EGAT had bought 40.95% of Meralco supplier Masinloc Power Partners of the AES Group. EGAT owns 98% of QPL Mauban which has a 460mw coal power contract with Meralco.

In all these generation projects, Meralco PowerGen or any of the MVP group affiliates will own anywhere from 49% to 60%. Because of Rule 11 and its redefinition of “control” and how installed capacity for purpose of determining market domination and capacity concentration, NONE OF THESE 4,100MW will count against the ownership and market control of the MVP Group.

If we consider that Meralco’s various partners control an additional 5,000mw of the country’s power generating capacity, 9,100mw of the country’s 14,000mw capacity would be in the hands of one Meralco Cartel. That’s 65%, way over the limit for any affiliated group.

And we are only considering generating capacity. If we base it on the guaranteed contracted energy in kilowatthours stated in the seven (7) midnight power supply contracts, the Meralco cartelization will in run into 95% of the energy needs of Meralco. Meralco buys another 5% of energy from WESM, where the majority of the energy supplied also come from their affiliated generators.

Congress can annually conduct an investigation into suspicious simultaneous downtime of power plants, periodic spikes in power rates and the spot market prices. The ERC can issue show cause orders. They can do table evaluations of power rates negotiated between and among sister distributors and generators. If we as a people, as a nation, as a government, are incapable of stopping this market domination and conspiratorial cross-ownerships, the above actions will be nothing but exercises in futility and incapability in the face of the giants that the country allowed to grow beyond controllable. That would be oligarchy and oligopoly.

Rule 11 is a abhorrent betrayal of the Filipino consumers, nothing less than treason to the country and its industrial competitiveness.

Cross-ownership, monopolization, and cartelization of the generation sector only deal with domination of Capacity. Sweetheart negotiations of pass on charges to consumers is another and it would have been partially corrected by the CSP policy. We don’t know if the MVP group had something to do with the mysterious moving by the ERC of the CSP midnight by five (5) months. We just need to follow the trail of sweetheart financial benefits from the seven (7) midnight contracts totaling 3,551mw that the CSP extension would allow to evade the competition policy.

 

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Matuwid.org

Disclaimer

David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Was active as volunteer in finalizing the Epira Law to some key Senators. Through his blog matuwid.org in retirement he only seeks to share his expertise in power policy and strategy for the public good towards reducing the power cost in the country and eliminating abuses and monopolization. He assures the consumers and participants in the movement that he has no vested interest other than as a consumer and will not benefit financially from any of the advocacies and certainly will not participate directly or indirectly with any potential bidders in a true CSP.

IPP’s Surrender to Meralco’s Market Capture and the Rise of the Power Oligarchy

“We know we wanted to deregulate, we just forgot why we are doing it!” a USA regulator lamented. That in a nutshell is the state of the deregulated and privatized power sector in the Philippines, resulting to one of the highest electricity rates in Asia, and headed towards uncontrolled concentration, domination, and abusive rates and terms.

Concept of the EPIRA Law

The whole idea of the EPIRA law of 2001 is to reduce power costs by creating true competition in the different sectors of the Power Industry. Generation was unbundled from transmission and distribution and there was not supposed to be cross ownership among them to assure this healthy competition for the benefit of the consumers.Assuring there is a fully functioning competition especially in the generation sector, and its spot market called WESM, seems an idea that is totally lost now among the government policy makers, regulators, and legislators.

There can be a functioning competition in the generation sector only if there are enough independent players competing against each other. The private sector however will not do it on their own because alliances, market cooperation, and coordinated strategies will tend to be more convenient and lucrative. It is up to the government to create and guard an industry structure where competition among generators is assured to safeguard consumers.

Self-Contradicting Provisions

One of the most self-contradicting provisions of the Epira law is Section 45 that ironically professed to prohibit market domination and anti-competitive behavior but proceeded under its own paragraph b to allow distribution utilities like Meralco to enter into bilateral contracts with affiliated companies up to 50% of their demand and is silent on the need for competition. Hence, negotiation between affiliated companies obviously became allowed. (What the law does not prohibit, the law allows!) This is the handiwork of the powerful lobbyists to tilt the rules in their favor.

That put Meralco the largest power distributor with 5,000mw demand the ability to choose who they will contract with and 50% or 2500mw allowed to be with their affiliated generators. In essence to also choose who gets in to be major players in the generation sector. That is so much market power. Meralco serves 75% of Luzon, equivalent to 62% of the country’s energy needs.

Independent Power Producers (IPP’s)

Until a few months ago the Philippines had an appearance of a robust generation sector with sufficient independence and competition among them. Top tier Power generators San Miguel Corp, Semirara, AES of USA, EGAT of Thailand, Kepco of Korea, TeamEnergy of Japan, Therma Power of the Aboitiz Group, First Gas of the Lopez Group have power supply contracts with the new Meralco but they are nonetheless independent.

There is also Global Business Power that concentrated in the Visayas, the Ayala Energy in coal and wind in Luzon, Transasia trying to do projects in Luzon and the Visayas, the Filinvest Group of Gotianun mostly in Mindanao, the Alsons Group also in Mindanao, Salcon Power in the Visayas, GN Power in Mariveles and Mindanao. Then there are the 2nd and 3rd tier players in renewable energy mainly solar, run of river hydro, wind, biomass and pocket players in diesel plants.

New Era of an Open and Competitive Power Generation Sector

When the Department of Energy passed in June 2015 a new country policy of requiring mandatory bidding for bilateral power supply agreements specially base-load, it ushered in a new era stopping self-negotiated power supply contracts whose sweetheart rates are passed on to the consumers. It was a major boost of commitment to upright regulation when the then new ERC Chairman Jose Vicente Salazar led the issuance of the ERC Resolution 13 mandating that the DU’s conduct a CSP for the power supply contracts that they will submit to the ERC after November 6, 2015.

The CSP rules created an open and competitive power generation sector where the willing and able power generators, local and foreign, can come into the market by being competitive , efficient, and innovative with technology. No barriers to entry. No need to have special connections with the DU. Just good old fashioned competitively priced power.

While the government was promoting the CSP policy the Meralco group continued announcing its target of 3,000mw of power projects for its subsidiary Meralco PowerGen, as if telling the government “stop us if you can”.

The independent power generators were calculating their moves. Some sharpening their organizations for the open bidding that might happen. Others discussing schemes with Meralco and the MVP group, who cannot be ignored because they “control the gold” of the power generation market which is the power distribution utilities, the largest of which is Meralco. Lets remember the “golden rule”. He who controls the gold makes the rules, courtesy of Section 45 of the EPIRA law.

When independent generator, EGAT of Thailand approached Meralco for a 460mw expansion of the Mauban coal facilities, insiders said they only offered P3.80 per kwh. By the time the negotiation was finished, Meralco PowerGen became the 51% owner of the project and the rate became P4.35 per kwh. Within the same timeframe a group of eight (8) electric coops in the north got a bid of P3.78 per kwh for only 135mw of aggregated demand.

After November 6, 2015, Meralco had been lobbying at both DOE and ERC to be allowed to hold their own CSP bidding, for “swiss challenge” biddings where they preselect the original proponents of an unsolicited proposal which most likely will be their own affiliate, and strong lobby against an independent bid administrator to conduct a bidding as envisioned by the DOE Policy. They also threatened both DOE and ERC to take them to court on the CSP policy.

The independent generators were waiting if the government specially the ERC will be steadfast in its commitment to CSP especially when the ERC Chair was quoted to have said “we lament the failure to see the public’s clear benefit from the CSP. We will respect the legal process even as we seriously consider our own legal options to make sure we defend the public interest, as well

Moving the Midnight and Parting the Red Sea

Things changed however when the ERC announced on March 15, 2016 that it was “restating” the effectivity of the CSP requirement to April 30, 2016. This signaled to the power generators that Meralco and the MVP group can really make things happen, like Moses parting the red sea with the wave of his wand. (Actually some of them heard weeks before March 15 that ERC will move the CSP midnight.)

Even the likes of Ramon Ang of San Miguel, who until then have been a staunch competitor of MVP, can see who is the “Moses” in the power generation landscape and will not be so impractical as not to surrender to the MVP group who obviously can make things happen, has market control, and now regulatory capture.

(As a consumer group we were rooting for Mr. Ang because he represented an entrepreneurial force that can bring consumer-beneficial competition in the cellphone sector with Telstra and the power generation sector, two hopes and dreams that banished)

After clearly one of the most frenetic periods of negotiations to finalize 3,551mw of power supply contracts in 60 days, Meralco and their new subsidiaries and allies signed the PSA’s on April 26, 2016 and filed the applications with the ERC at 7am on the 29th, a day before the April 30 midnight set by the ERC.

1. 300mw with RP Energy in Subic with Aboitiz
2. 400mw with St. Raphael in Calaca with Consunji group
3. 1,200mw with Atimonan One. With Aboitiz or Ayala?
4. 528mw with San Miguel’s Central Luzon Premiere in Pagbilao Quezon
5. 528mw with San Miguel’s Mariveles Power in Mariveles, Bataan
6. 70mw with Panay Energy Development in Iloilo with Global Business
7. 600mw with Global Business Power in La Union

While the 3,551mw of contracts represent only 59% of the projected 6,000mw power demand of Meralco, the minimum off take energy total 24.885 Billion kwh is equivalent to 75% of its energy requirement. If we add the 455mw San Buenaventura and the remaining contracts with QPL and former Affiliate First Gas, most of Meralco’s base-load power requirements for the next 25 years are tied up with these negotiated contracts.

The seven (7) power supply contracts have amazingly identical language, pricing formula, and ERC application, apparently using the 300mw RP Energy as the template that was finalized and signed on April 20, 2016. Imagine five (5) of the largest power generation groups and their lawyers in one room hammering power supply contracts that will tie up the Meralco consumers for the next 25 years in a race to beat the new 45 day opening provided by the ERC. Three of them (Ayala, MVP Group, and RSA Group) just had the competitive barrier broken down among them when they signed the Telstra frequency buy off.

If that is not enough, the new Cartel is trying to push an era of non-transparency in the regulatory approval process. Their ERC applications are asking for identical and unprecedented “motion for confidential treatment of Information”. Among the information being withheld from the public? 1) Purchase Power Rate and breakdown of rates, 2) data on operating and maintenance expenses, 3) cost analysis, and 4) operating expenses. These are critical information needed to determine whether the rates are fair and reasonable.

The Rise of the Power Oligarchy and Oligopoly

The Power generators surrender to Meralco’s imposing market (and now regulatory) power is evidenced by the spate of dizzying controlling acquisitions as everyone succumbs to MVP’s “dealmaking” legacy. Now Meralco, the largest utility supplying the energy needs of the center of commerce and industry of the Philippines with 75% market share in Luzon, is now controlled by a few inter-linked generators.

In May 27, 2016, the MVP Groups affiliate First Pacific bought 56% of Global Business Power of the George Ty Group which in turn bought 15.6% of another Meralco affiliate Metro-Pacific Investment (MPIC). MPIC already owns 49.96% in Meralco in addition to a 50% ownership in Beacon that owns 35% also in Meralco.

Two of the seven (7) midnight power supply contracts of Meralco totaling 670mw were signed with Global Business Power. The 70mw is for a coal plant as far away as Iloilo that will go through 800 kilometers of power transmission and several submarine cable systems. One wonders about the technical and economic advantage to Meralco consumers of buying power that far from the Meralco load center when there are so many other options closer to home for 70mw.

In July 14, the joint venture between Meralco and San Miguel was signed on Mariveles Power Generation which got a 528mw contract. Meralco would own 49% and San Miguel 51%. On July 29, Meralco announced a 50:50% joint venture with DMCI/Semirara for the St.Raphael Power Generation Corp. which got a 400mw among the seven (7) midnight contracts.

Redondo Power that got a 225mw contract is owned 51% by Meralco in partnership with Therma Power of the Aboitiz Group. The Atimonan Energy One to which Meralco assigned 1200mw of power is majority owned by Meralco but it is not yet announced who will be its partner with Aboitiz and Ayala as rumored possibilities.

Before these new joint ventures and alliances, the other Meralco owner with 27.1%, favorite white knight JG Summit, bought 30% of Global Business Power where Meralco PowerGen had bought 20% in 2013. New Meralco partner EGAT of Thailand under its investment arm New Growth BV own 49% of the 455mw San Buenaventura. EGAT had bought 40.95% of Meralco supplier Masinloc Power Partners of the AES Group. EGAT owns 98% of QPL Mauban which has a 460mw coal power contract with Meralco.

Even the Visayas Grid will be dominated by four main players Meralco through GBP, Aboitiz Power, Green Core of the Lopez Group, and Kepco.

It’s all now in a family. How can there be true competition in CSP biddings and even in the WESM? If their cartel and interrelated power players get away with the seven (7) midnight contracts there would be no meaningful CSP biddings for Meralco consumers for the next 25 years, only gesture biddings for minor and shorter term contracts like peaking and reserve power. There would not be a credibly functioning power spot market. Sadly, this is happening at a time when the Philippines just passed The Philippine Competition Act (Republic Act 10667) which defines, prohibits and penalizes three types of anticompetitive conduct: anticompetitive agreements, abuse of dominant position, and anticompetitive mergers and acquisitions. If what is being done to the power generation sector is not against all these, we don’t know what is. If this is not a cartel, we also don’t know what is.

What we have is now a Power Oligarchy and Oligopoly. What chance do the consumers have of getting honestly competitive power?

Things will change only if the government recognizes this crime against consumers and country and would be willing to act to prevent it. This actually is the more productive subject of the Senate investigation on power.

Next: How is Meralco able to negotiate most of its power supply with affiliates? Who is the Culprit?

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org

Disclaimer
David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Was active as volunteer in finalizing the Epira Law to some key Senators. Through his blog matuwid.org in retirement he only seeks to share his expertise in power policy and strategy for the public good towards reducing the power cost in the country and eliminating abuses and monopolization. He assures the consumers and participants in the movement that he has no vested interest other than as a consumer and will not benefit financially from any of the advocacies and certainly will not participate directly or indirectly with any potential bidders in a true CSP.

Stealing President Rody’s Thunder

Meralco’s Seven (7) Midnight Coal Contracts Pre-Empted Duterte Government’s Say in Energy Mix, CSP, Electricity Rate Reduction, and Economic Development.

David Celestra Tan, MSK
14 August 2016

Part 2

It is not an exaggeration to say that Meralco, by moving fast before the elections, actually checkmated any new Government, which turned out to be Duterte, before they could sit in the table and learn how to play power chess.

President Rody won because of his promise to eradicate drugs, crime, and corruption. But that would be only a third of his legacy. The other third would be infrastructure development and the last third would be in economic and fiscal policies and programs.  In the latter, Meralco and its cartel are stealing his thunder if they can get away with it.

  1. Energy Secretary Al Cusi’s Energy Mix Target Subverted Before it Could Start.

By forcing the issue on these 4,100mw of coal projects, Meralco  subverted any effort of the Department of Energy to rationalize the country’s energy mix under which they initially hope to limit coal to 30%.  These new coal projects will supply easily 90% of Meralco’s needs for the next 25 years. Since Meralco uses 62% of the country’s energy needs, their coal contracts is equivalent to 56% of the country’s power supply. Add to that the 3,000mw of coal projects in Mindanao and the Visayas and it’s easy to see the Philippines will not come close to limiting coal to 30%.

Meralco has a long record of overcharging the public and still say with a straight face that they are doing the consumers a favor. Things have not changed under the MVP Group and now it appears they are hoodwinking even the government and its new team.

The Philippine Star reported as recently as July 29 (90 days after the Meralco signed the coal contracts) that “Business titan Manuel V. Pangilinan has been among those pressing the government to come up with a clear-cut policy direction on the appropriate power fuel mix the country needs as it pushes for cleaner technologies.” “We need a policy direction (on) what is the appropriate fuel mix for our people. And once that’s decided businesses will build the plants, whether it’s a gas plant, coal plant, or renewable plant. So we just need direction” MVP said. This after being fully aware that the 4,000mw coal midnight contracts Meralco signed will preempt any government goals in energy mix.  It was a regrettable double talk, the equivalent of a head fake and back door play in basketball. In trying to justify their opposition to CSP and insisting on self-negotiating power supply contracts, MVP also has been quoted in interviews that “the CSP policy is illogical as it allows gencos to decide whether or not to participate. This gives gencos the ability to dictate prices. You shifted the power to price over to the gencos and we’ve seen what happened in December 2013 when prices spiked. The 2013 incident pertains to when Meralco’s rates shot up by P4.15 for December and P5.30 for January because it had to source power from the WESM where distributors such as Meralco buy their power supply from Genco’s”. “The market power should be with the DU’s which are obligated by law to find the least cost. But if you are a power generation firm then you are not under that obligation.” Well said concept.Meralco’s President Oscar Reyes for his part came up with a new spin. “Without any generation capacity Meralco would effectively be only a price and supply taker”meaning by negotiating they have a say in the generation buying price and not just the generator or the WESM. He implies that by negotiating it would be good to protect the consumers.

Wonderful words….sana!. But the truth is since Meralco as the “price setter” is negotiating with sister company generators, they become one as the price setters and the Meralco captive consumers the helpless price takers. Consumers are the ones paying for the charges but they have no say in it. In the least the DU power supply that will be charged to them will have to be subjected to a true competitive bidding, giving them an ounce of safeguard against pricing abuse.  This is exactly the reason for a Third party administered CSP.

Meralco buys only 5 to 8% from WESM, the price of which skyrockets when Meralco’s own contracted generators go out and supply is reduced. This  includes the periods of generous downtime allowances provided by Meralco when the generators are still being paid their capacity fees. It’s a double whammy to consumers because the consequent higher prices of WESM are passed on to them. (Consumers really get no respect).

 Remember also that during the crisis of December 2013, Meralco was reported by the market investigators to have instructed their IPP Therma Marine to bid the highest P62 per kwh contributing significantly to the higher market settling price that ravaged the consumers.

The country’s energy had already been mixed for us by the MVP group and its cartel.All coal and worse they are all negotiated sweetheart deals. Did someone say Indonesia is a major source of Coal which also happens to be the country of the reported owner of Meralco?

Secretary Cusi may need to stick around for 25 years before he could start reducing coal’s share to 30%.

 

  1. Aspiration to reduce power rates in the country

Any aspiration of the new government to reduce power costs will have to start with power generation because that is 60% of the total bill. And it is the sector that had been non-transparent with negotiated sweetheart prices since 2001 when the power industry was privatized and deregulated. These Seven (7) negotiated contracts will effectively shoot down any meaningful power cost reduction program of the new government and the succeeding governments for the next 25 years.  

 

  1. National Integrity and Governance

Only a few months ago the Philippines was about to make its power generation sector truly competitive with a new policy to stop self-negotiated power supply contracts that are passed on to the consumers and to require competitive bidding by the DU’s including Meralco which will make the procurement process competitive and transparent and will open the power generation sector to more independent generation companies. We were so proud and everything was in place. The ERC only needed to implement.

Faced by a Meralco threat,  ERC Chairman Jose Vicente B. Salazar said “the commission would exercise its legal authority to defend the issuance of ERC Resolution 13 if challenged in court”.“While we respect anyone’s right to take legal action, we lament the failure to see the public’s clear benefit from the CSP. We will respect the legal process even as we seriously consider our own legal options to make sure we defend the public interest, as well,” Salazar was quoted to have said in a text message.

Then the unthinkable happened on March 15, 2016. Out of nowhere and without much public debate, the ERC moved the effectivity date of the CSP rule to April 30, 2016, thus parting the red sea for the filing and exempting of any new power generation projects Meralco wanted.

It is perplexing that the ERC, instead of coming up with judicious transitional rules for the country, threw in the towel, essentially abandoning the whole ideal of competitive generation rates to consumers for the next 25 years at least in the premier Meralco area and abdicating on its mandate to safeguard the interest of the consumers.  They moved the midnight and parted the red sea. What made them do it?

 

  1. Who would care enough to stand up for the Filipino electric consumers? A defining moment for the Filipino spirit.

Meralco’s package of seven projects and contracts, if they really are allowed to avoid the CSP policy,  would be damaging for the consumers and the country in more ways than one.

 

    1. a) It would be a disgraceful circumvention of our law. A damning indictment of our integrity and ability as a nation and people to implement our rules that are clearly made to protect the public interest. It is regrettable to see that our temerity to fool around with our own rules knows no limit for propriety and patriotism.
  1. b) Monopolization, or its buyer side cousin, Monopsony, are not just “high fallutin” terms for economists. They are actually blatant subversions of the rights of consumers to fair charges and to be treated with respect. In the power sector, what is involved is the provision of public services in least cost manner as clearly provided by the Epira Law of 2001.Activities by the private industry participants to subvert these rights, and to deny them least cost electricity, are nothing less than crimes against the consumers.There cannot be least cost power unless it is market determined through an honest to goodness competitive bidding. Our anti-graft laws have indicted government officials for using people’s money without bidding. Passing on generation charges to the people without bidding is like dipping into their pockets monthly. At easily P20 billion a year in higher charges nationwide, this is as big as drugs, crime, and corruption. Government officials who facilitate these subversions and who look the other way are even more guilty because it is their job to uphold and protect the public interest.

Who would care enough to stand up for the Filipino electric consumers? This is a defining moment to the modern day Filipino spirit.

  1. Economic Sabotage

It is also a subversion of the country and economic sabotage to perpetuate schemes that will preclude competitive power for it deprives the country its ability to be economically competitive, to create jobs and to assure the right of 90% of our 100 million people to make a decent living and take care of their families.

The next 40 years is predicted by Japanese business leader Lee Sawaki to be the golden age for the Philippines whose young productive population of 20 to 65 years and average of only 23.5 years, gives it a “population bonus”. Japan, Taiwan, Singapore, Korea,  and even Thailand had become prosperous because of it. But they had finished their “population bonus”. It’s the Philippines turn. Those countries were able to capitalize because they also had low power costs that made their manufacturing and commerce competitive. The Philippines cannot achieve its growth opportunity unless it brings down its power costs. Do we have the national resolve to do what is right to make this country truly great?

That economic growth can be sabotaged by Meralco’s cartelization of power generation with the era of arbitrary power charges if the government and regulators would allow them to evade CSP and impose their will on the government officials who were duly elected by the Filipino people.

Should we not wonder why every time approving power supply contracts need to be justified, there is a corresponding threat of brownouts and power shortages? Of the 4,100mw of Meralco coal contracts, only 70mw will come in this year, 455mw in 2018, 928mw in 2020, and 2,553mw in 2021 to 2023, 5 to 7 years from now. 3,551mw of them rushed to signing on 26 April 2016 to beat the new ERC deadline of April 30, 2016. There is time to do a proper CSP. vNow that power generation is a cartel what is there to assure that there is no orchestration of power supply?  Who will protect the consumers?

It is not Too Late for Pres. Duterte’s Government to Arrest this Crime Against Consumers. Those negotiated coal projects still need to be accepted and approved by the ERC.

We appeal to President Rody to help rescue the electric consumers nationwide especially in the Meralco area. Let us hope he will not allow Meralco’s Power Cartel to steal his thunder for good governance.

Next: IPP’s Surrender to Meralco’s Market Domination, and The Rise of The Power Oligarchy

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org

Disclaimer
David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Through his blogmatuwid.org in retirement he seeks to share his expertise in power policy and strategy for the public good towards reducing the power cost in the country and eliminating abuses and monopolization. He assures the consumers and participants in the movement that he has no vested interest other than as a consumer and will not benefit financially from any of the advocacies and certainly will not participate directly or indirectly with any potential bidders in a true CSP.

Meralco’s Seven (7) Midnight Coal Power Supply Contracts If Allowed will Define us as a People and Nation Beyond Electricity

David Celestra Tan, MSK
August 8, 2016
Part 1

The MVP Group Struck like lightning to cartelize the country’s Power Generation sector while the country was engrossed in choosing its new President. It hurriedly signed Seven (7) midnight long term power supply contracts using coal totaling 3,551mw, and an estimated project cost of P417 billion, with various majority owned companies and new partners and alliances last April 26, 2016, two (2) weeks before the May 9 elections. They filed with the ERC at 7am on April 29, 2016 a day before the six (6) month postponed deadline of April 30, 2016 inexplicably done by the ERC.

1. Power Generation Will Now Be A Cartel and True Competition Will Be in “ICU” if Not Yet Dead.

Meralco’s seven (7) midnight power supply contracts will have larger implications on us Filipinos as a people and a nation in many aspects beyond electricity but let us start there.

Charging the Consumers Whatever they want. vThe midnight contracts, all amazingly with uniform wording and contract provisions and pricing formula, effectively cornered for the next 25 years the Meralco consumers with sweetheart contracts and prices, totally brushing aside the words and spirit of the DOE’s policy on Competitive Selection Process (CSP) or Bidding that the ERC is supposed to be implementing faithfully.

Mandatory CSP as a policy and power cost reduction strategy was adopted by the Department of Energy to stop the long practice of distribution utilities like Meralco to negotiate power supply contracts with its sister and affiliated companies at sweetheart prices and terms which are then passed on to the helpless consumers. Obviously the prices and terms are much higher by 10 to 20% than what it would be had there been an honest to goodness competitive bidding.

The CSP policy would also open the power generation sector to more independent investors thus assuring long term supply at competitive rates. Currently, only those generators who are favored by the DU’s like Meralco can enter the power generation market. Normally they are sister companies.

The DOE under the bold and prescient leadership of then Energy Secretary Carlos Jericho Petilla passed its Circular in June 2015 adopting competitive bidding for bilateral power supply contracts as a national policy. It was a new dawn of enlightened government leadership.

The then new ERC, as the implementing body and regulator in rate setting approvals, took five (5) months until November 6 2015 to pass a Resolutionrequiring that electric distributors must subject to mandatory competitive bidding the power generation contracts they will submit to the ERC for approval. Enough time for Meralco to file an ERC application for any projects and contracts it may have in advanced stages.

Meralco’s seven (7) projects originally failed to make it to the CSP deadline of November 6, 2015. These “pinapalusot” contracts is trying to outmaneuver the Competitive Selection Process (CSP) policy. It involve approximately P99.5 billion a year in generation charges to consumers with a sweetheart premium in the range of P12 billion a year or P240 billion over the next 20 years. Or more once we see their escalator clauses, down but being paid provisions, and minimum payment guarantees that would be charged to the consumers.

Power Generation Will be a Cartel And we know what that means to prices and consumers.

The seven (7) midnight contracts effectively cartelized the power generation sector where most major local generation players have become partners and the country and consumers can no longer expect the kind of genuine competition that will bring down rates. No more truly bidding against each other in bilateral contracts and in the WESM.

This is totally against the EPIRA law’s aspirations for a truly competitive power sector and its admonitions against market power abuse and anti-competitive behavior.

Meralco kept fighting the CSP initiative tooth and nail, at the DOE and at the ERC. They threatened to sue ERC. They were against Third Party bid administrators. They wanted a delay. They wanted to run their own bids and lobbied ERC to allow swiss challenge bidding where again their sister generators will be the unsolicited offeror with the privilege of right to match. For good measure Meralco again threatened ERC with a lawsuit. The DOE for its part told Meralco there will be no extension.

The private sector is profit oriented and they will exploit all opportunities offered by law and rules. It is up to a vigilant and righteous regulatory agency to safeguard the interest of the consumers against exploitation.

The CSP was in place with the DOE and ERC on board. All we had to do as a country was stay the course and implement it properly and honestly! We were at the Throes of Greatness, a chance to demonstrate the Filipinos ability as a nation and race for fortitude to reform and do what is right.

Then something happened on the way to consumer purgatory.

In March 15, 2016 the ERC, claiming “several stakeholders had written them raising issues on the constitutionality on the effectivity of the CSP Resolution”, incongrously extended the CSP applicability deadline to April 30, 2016 almost half a year beyond its original November 06, 2015 effectivity and ten (10) months after the Department of Energy made it a policy for the country to require CSP for bilateral power supply contracts. Enough time to create new projects on paper. ERC’s Resolution 1 Series of 2016 curiously worded it as a “clarification” and a “restatement” of the date and consequently many people did not notice the tectonic shift.

With the CSP Protection Gates opened you don’t know the kind of elephants and gorillas will walk through the opening. Then they came roaring and stampeding through the gates trampling the consumers rights and honor. Except their rampage was not noticed at that time due to the defeaning thunder of President Digongs overwhelming victory.

Meralco’s Seven (7) Power Supply Projects

A few days after the new April 30,2016 deadline, the MVP owned newspaper Philippine Star announced on May 4 Meralco’s signing of Seven (7) power supply agreements totaling 3,551mw and filed with the ERC on April 29 “just before the new effectivity date of the CSP policy” as their press release said.

1. 300mw with RP Energy in Subic with Aboitiz

2. 400mw with St. Raphael in Calaca with Consunji group

3. 1,200mw with Atimonan One. With Aboitiz or Ayala?

4. 528mw with San Miguel’s Central Luzon Premiere in Pagbilao Quezon

5. 528mw with San Miguel’s Mariveles Power in Mariveles, Bataan

6. 70mw with Panay Energy Development in Iloilo with Global Business

7. 600mw with Global Business Power in La Union

MSK and its member cause oriented groups were dumbfounded.

Seven (7) power projects, all coal, and all negotiated, totaling 3,551mw. If we add the 455Mw coal project in Mauban called San Buenaventura, they corner most of Meralco’s energy needs for the next 25 years, more than two decades of no real CSP. If approved it would be the death of consumer “least cost” power, transparent dealing, and the country’s yearning for more competitive power.

Erstwhile truly independent power generators Semirara of Consunji Group, Global Business Power, San Miguel, AES, and EGAT represented very able local and foreign independent power generators that we hoped will be key players in a robust competitive bidding that will truly benefit the consumers with lower rates. They can compete and give Meralco PowerGen a run for its money in a true CSP if and when that happens. Ayala is heard to be a partner in the proposed Atimonan.

Now they are all part of Meralco Power Gen’s Cartel.

Undoubtedly the Meralco cartel will try to justify that the contracts are necessary to assure that the country will not be short of power and avoid brownouts. But more than half of the Seven (7) will not come in until 2020 to 2022. It only takes 6 to 8 months to complete a true bidding for these big projects. Had they started in January 2016 after the November 2015 deadline for the CSP, Meralco would be close to awarding this year and power will start flowing in 3 years or 2019.

Commenting on the list of projects that Meralco applied for to beat the new CSP deadline, even the energy writer of the Manila Bulletin could not help but observe on May 4 that “This comes with striking prominence on a 1,200MW contracted capacity from a subsidiary’s yet-to-be developed Atimonan One Energy, Inc. coal-fired power plant in Quezon province, as well as with other affiliate firms”.

Yes, a “subsidiary’s yet-to-be developed Atimonan One Energy was hurriedly signed and applied for to beat the deadline and escape CSP.

Curiously, their ERC applications were not posted in the ERC website until seven weeks instead of the usual two weeks.

Next: Stealing President Rody’s Thunder

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Matuwid.org

Disclaimer

David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Was active as volunteer in finalizing the Epira Law to some key Senators. Through his blog matuwid.org in retirement he only seeks to share his expertise in power policy and strategy for the public good towards reducing the power cost in the country and eliminating abuses and monopolization. He assures the consumers and participants in the movement that he has no vested interest other than as a consumer and will not benefit financially from any of the advocacies and certainly will not participate directly or indirectly with any potential bidders in a true CSP.

Root Cause of Power Plant Shutdowns Financial Not Technical

David Celestra Tan, MSK
6 August 2016

Everytime power supply in the Luzon grid flickers into yellow alert or the WESM spot prices shoot up, it is the shutdowns of power plants that cause them. Calls for investigations will only show them the reasons were technical- both forced or unplanned, meaning plant breakdown or planned maintenance. The real reasons however are financial.

Power Plants do shutdown for technical reasons. That cannot be avoided. Things go wrong with these mechanical equipment. A lot of times coal plants claim “boiler leaks”. And preventive maintenance does need to be done regularly to keep them operating reliably and efficiently. Coal plants normally ask for 30 days and bunker c plants 45 to 60 days downtime allowances per year in their contracts.

The Manila Standard reported that eight (8) plants are down with unplanned outage and capacities totaling 1,297mw. Another four (4) plants are down on planned maintenance totaling 1,100mw. That’s a whopping 2,397mw of power generators down all at the same time. All of them giving technical reasons for the shutdown. And enough to severely reduce power supply and make the spot market prices to surge.

Technical is not where the problem is however. It is the financial aspects of the shutdowns that are the root causes of the periodic yellow and red alerts and the skyrocketing of the WESM prices.

1.Financial Incentives for Shutdowns

What many may not understand is that during these allowed downtime period for maintenance Meralco still pays them the capital recovery fee and fixed costs as part of the contract. And those are of course passed on to you and me the consumers.

This means there is really no pressure to shorten the annual downtimes per year because they get paid anyway if they don’t run during the downtime period. IPP’s calibrate their maintenance expenses according to their downtime allowance. It is much more expensive to keep the downtime of the plants at 15 days a year compared to 30 day or 45 day downtime. And the 10 or 15 day difference happening at the wrong time can wrought havoc on the power supply of Luzon.

These downtimes are reflected by Meralco as load factor rates. This is the reason the kwh rates of their IPP’s like First Gas, San Miguel, Quezon Power, Masinloc, Therma Marine and etc. go up several times a year by up to 20% during their downtime periods because they are paid the same fixed capital recovery fees even if they operate less and deliver lower kwh energy.

The other financial incentive for a shutdown is when a generator has an affiliate who will benefit from the resulting higher prices in the spot market when there is a reduction in power supply as a consequence of the shutdown.

It is a double blade that slices consumers two ways. First they still get charged for the capacity fees paid to the generator during downtime. Then they can hit with higher WESM prices due to the reduced power supply in the market.

2. Origins of the guaranteed payments during downtimes

Downtime allowances provided for in the Power Supply Agreement were standard and accepted provisions during the BOT days of the PSA’s with Napocor. That was when the government had to assure investors, mostly foreign, of security of investments to entice them to invest in the country and solve the power crisis. And the wily American IPP’s just knew how to minimize their risks. These guaranteed payments including take-or-pay were justifiable then to make them bankable.

However, the Philippines is now a mature power generation market with a proven record of honoring its power supply contracts no matter how onerous the terms would turn out. Guaranteed payments for downtimes when the generators are not delivering service are now outdated and are now working against the consumers.

3. Needed refinement in the PSA on downtimes

The solution is to take away the convenient benefit of downtime when they still generate cash flow even if they are not running. It is like rewarding non-performance.

PSA’s must now be written to pay base-load generators like coal and natural gas only when they are delivering energy. There will still be downtime allowances but those will only be intended to excuse the generator from delivering the service for the downtime period but there will be no guaranteed payments for the downtime.

It means the generator will be paid only for 10.5 months energy and not an additional month and a half for fixed capital recovery fees. The true annual cost to the consumer should be the same although the kwh rate is higher. It will be transparent as to its true cost. Under the paid downtime allowance scheme, consumers are made to believe that the coal generators rate is only 4.50 per kwh and on an average it is actually 4.80 per kwh if the downtime capacity payments are included.

This way there is a financial incentive to reducing his downtime and a big disincentive for downtime. This can result to reduction in outages of power plants by 5 to 8 days a year which will be big improvement in avoiding power shortages and the true cost to the consumers would be transparent.

Shorter downtimes also improves available reserve levels contributing to overall grid reliability.

In an industry where the buyer electric distributor and the seller generators are sister companies things get worse for the consumers when the buyer can look the other way for the excess downtimes of sister generators.

Theoretically the regulators can put in audits and validations to safeguard against abuses but the more effective consumer protection is by the contract structure and to financially disincentivize unnecessary downtimes.

The Technical reasons for downtimes are mostly outward manifestations of the financial root causes of the power plant downtime problems especially when the owners of the electric distributor off-taker and the power generators are the same.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org

David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Was active in the finalization of the Epira Law and served as volunteer technical adviser to key Senatorial, Congressional, and Energy officials. Through his blog matuwid.org in retirement he seeks to share his expertise in power policy and strategy towards reducing the power cost in the country and eliminate abuses and monopolization.

Will MVP’s Legacy Eventually Include Fair Treatment of Consumers?

Super Successful business executive Manuel V. Pangilinan, widely known as MVP, recently celebrated his 70th birthday, and was paid a glowing 12 full page tribute in the national broadsheet, Philippine Star, headlined “Seven decades: A Celebration The MVP leadership legacy”.

How many Filipinos get to celebrate his birthday with a 12 full page newspaper tribute? I doubt even Donald Trump got that. Clearly MVP is a businessman of mythical accomplishments, loved by his colleagues and employees, a paragon of business success, and an inspiration for rising through the ranks in the corporate world.

Indeed Mr. MVP has quite a leadership legacy.  Legions of basketball fans know him as the generous supporter of successful teams Gilas Pilipinas and Ateneo Blue Eagles.  “One thing notable about the character of MVP is his sense of mission for the country, and his unwavering faith in the Filipino… MVP lives by the Filipinos values of hard work, financial and mental integrity, resiliency, compassion, and deep and abiding faith in God.” “MVP singled out three core values that are essential to great leadership: hard work, financial and mental integrity, and passion.”

Our legacy resides in the hearts of those who were affected and touched by our presence as we pass through this life.

MVP’s friends and colleagues hold him in high esteem in their hearts. “I admire his decisiveness, drive, and demanding work ethic. These are inspiring and essential qualities of a great and wise leader” shared lawyer Ray Espinosa. Former Foreign Affairs Secretary Albert Del Rosario said “I feel incredibly blessed to have MVP as a close and true friend. His kindness, generosity, and inspiration continue to permeate our friendship at all times”. The equally illustrious Oscar J. Hilado, Chairman of Phinma for his part revealed that “for MVP, no job was too big nor too small. No task was too daunting, no risk too great, no aspiration beyond reach. He was always driven to outdo.”

MVP has his generous share of “feel good” and “giving back to the community” projects common among the rich and large corporations with CSR or corporate social responsibility. There are hundreds of thousands of poor Filipinos who also benefit from MVP’s various charity advocacies in education with equipment donations, scholarships, and even solar power. His companies donate water systems for neighborhood food programs.

The published tribute heralded that “MVP is one gifted with the ability to “see” the future, anticipate what the future will bring, and prepare well for its coming. MVP had a compelling vision when he took over the reins of PLDT, Maynilad, Meralco, Makati Medical Center”. “The companies he has acquired or built are living testaments of his dealmaking skills” again said Ray Espinosa.  “MVP has become successful in making his vision a reality, rallying his executives and workforce to join him in the pursuit of his dreams for his corporate organizations”.

When they talk about MVP’s unwavering faith in the Filipino and looking after their welfare, and when they define MVP’s sense of mission “to improve lives of Filipinos” it appears they refer to the hardworking Filipinos who have had wonderful and rewarding careers as part of the MVP Group. It is an accomplishment to behold and we are happy for our countrymen and their families who are richly rewarded for their roles in the conglomerates profit making success.

MVP’s Sense of Mission

MVP is quoted as declaring that “business especially in a developing country like the Philippines should play a unique part in enhancing overall welfare”. Miguel Belmonte enthused that MVP “sees to it that our companies manage to strike a balance between profitability and social responsibility”. Noel Lorenzana, President and CEO of MediaQuest Holdings Inc cited MVP’s “genuine concern for the welfare of the Filipino most especially those in need is something that all people in business should emulate”.

One lady officer of the MVP group who elected to be anonymous summed it this way. “He cares about our country and the plight of our countrymen, as shown in the tangible steps he takes toward progress and alleviation of poverty.”

It is in these statements of MVP’s broader sense of mission “for the welfare of the Filipino” that we as consumers of electricity, telephone services, and water have yet to relate to. We say it is too soon to agree.

In his day job as CEO of Meralco and PLDT we hope that MVP will eventually take to heart the claimed ideals for  genuine concern for the welfare of the Filipino, to improve their lives,  the trait for financial and mental integrity, and compassion for the consumers. Meralco and Maynilad have more than 5 million metered customers serving 40 million people. PLDT has 30 million customers nationwide. It is not an exaggeration to say that the life of every single one of the 100 million Filipinos is touched by one of MVPs enterprises in electricity, water, telephone and hospitals. (If you escape those how about TV basketball and Channel 5?)

It is common knowledge though that PLDT and Smart is providing the slowest internet service in Asia and yet charging a lot. They refuse to charge calls on per 6 second increments as internationally practiced, charging the poor Filipinos instead for minimum one minute, reportedly resulting to undeserved charges of P8 billion a year. In other words they are not giving fair value but profiting a lot. Consumers are just inundated by advertisements.

In power distribution and generation, the consumers aspiration for “least cost” and true competition is getting further and further away from being a reality as Meralco and the MVP power group leverage to the hilt their monopsony in distribution into monopolized and oligopolistic generation sector and the perpetuation of the era of self-negotiated sweetheart deals on charges to the consumers. These coldly denies Filipino consumers the right to competitively determined power rates, the opening of the generation sector to truly independent power generators, and the removal of unfair charges to consumers.

In a laissez faire economic society, we can accept the business tactics of market domination and maximization of profits. We can understand even Machiavellian and Sun Tzu methods in competition. But when these domination schemes are applied in public services like electricity, water, and telephone, it is anti-people, unpatriotic, and exploitive. Because those are essential human life needs that our people have no choice but to buy. Overcharging is certainly contrary to a supposed mission “for the welfare of the Filipino, the improvement of their lives, financial and mental integrity, true compassion for the consumers, and alleviation of poverty”.

Is this the reason the provision of electricity, water, and telephone are no longer referred to by the media as public utilities but as infrastructure projects?

Of course it is not totally the fault of MVP and his Group. The government officials whose job it is to stop these monopolization are making it possible by acts of commission, omission, disinterest, or unawares.   The loopholes in the Epira law, its IRR, and regulatory capture, were there when MVP arrived in the power scene in 2010.

Our greatness though (and legacy) will be defined as much by what we did and accomplished as by what we have elected not to do as disciplined by our true moral compass. We don’t rob just because someone left his door open overnight. We don’t rape just because we had the chance. True power comes in the judicious use of dominant force. Otherwise it is just brute force to overwhelm the weak and vulnerable especially those that failed to get the protection of its own government.  Discipline and restraint equally define our legacy especially where millions of consumers are affected.

Personally, I believe the greatest form of achievement is the one that benefits the most people. And that our legacy will reside in the hearts of those who are grateful for being given a fair deal and fair service. It cannot be done if Meralco continues to charge consumers whatever self-negotiated power generation rates they signed with their affiliated companies and for essentially eliminating competition.

If the professed mission “to promote the general welfare of the people” refer to the people who work for the MVP group, then Mr. MVP’s record and achievement is already legendary.What we hope is that eventually MVP will “see” it in his future to make it part of his legacy to treat the electric, telephone, and water consumers well, to show that what is being charged to them is truly products of genuine competition in the market place, and for Meralco as their electricity services provider to be loyal to the pursuit of least cost power by allowing arms length dealings untainted by conflict of interest.

The way things are going MVP’s legacy to the electricity consumers would be one of a menacing Meralco who, as the 800 lb gorilla with corresponding fierceness, can make the regulators, the department of energy, the legislature, and the Presidency tremble when he roars his disagreement.

He tried to tell the new President to leave business alone, when the monopolistic and consumer exploitive tendencies of the MVP group are precisely the reasons that government should protect its citizens and not leave private business alone (including in mining).

President Duterte’s government may have not yet realized that the MVP group has similarly grown another 800lb gorilla in the generation sector with the lesser players commiserating recently evidently in exchange for access to the Meralco generation market at negotiated sweetheart prices.

Consumers face captivity and burden for the next 25 years. Ironically the 25 years is coinciding with the start of the new government.  It is a national tragedy that will be a sad backdrop to a new era in governance when the Filipino nation harbors so much hope for reform against crime, corruption, and injustice.  Who will step up for us consumers?

Let us hope eventually MVP can find it in his Filipino heart to seek a legacy that will include the fair treatment of Filipino consumers.  At 70 years old now, let’s pray that MVP’s epiphany comes to him soon.

(My epiphany against consumer exploitation came to me 5 years ago hence the birth of MSK)
Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org  

David Celestra Tan is a co-convenor of MSK. He is a pioneer in the IPP industry and one of the founders and a former President of the Philippine Independent Power Producers Assn. (PIPPA). A CPA by education, he is a utility economist and was an active private sector volunteer to key Senators and Congressmen in finalizing the Epira Law of 2001. He saw up close the horse-trading that went on that caused serious flaws in the law. His recent consumer advocacies in retirement are part of his desire to correct the imperfections of the law to finally achieve the law’s goal of reducing power costs, creating true competition, and preventing harmful monopoly. He hopes his “legacy” will include “he shared and tried”
david.mskorg@yahoo.com

PSALM’s ‘STRANDED COSTS” –The Just and Equitable Methodology to Spread the Burden and Time to Rethink the Strategic Use of Remaining NPC Assets

David Celestra Tan, MSK
29 July 2016

Electric consumers nationwide are being charged the so-called stranded costs of the privatization and deregulation of the power sector as provided for in the EPIRA Law of 2001. This item in your bill, Universal Charge – SCC is now P0.19 per kwh and will most likely increase as ERC allows PSALM to recover its accumulated losses. This could reach P0.30 to P0.50 depending on how many years they spread out the recovery period.

The way things are going all debts and losses of NPC that would not be covered by PSALM’s proceeds and collections for privatization would eventually be recovered from electricity consumers nationwide. The losses and deficits are combinations of so many factors, many not be the fault and to the benefit of the consumers. Hence it would be a grave injustice to our people to make them responsible for all the financial losses.

As of October 2015, PSALM is supposed to have sold NPC assets worth US$19.887B with $9.991B collected and $9.896B collectible. It is confusing how much of this money had been used to pay off NPC’s debts as PSALM is mandated by the EPIRA Law.
Legal Basis of the Stranded Cost Charge

There are two main parts to it. The Stranded Debts of NPC and the Stranded contract costs of NPC and the Epira Law defined them as:

“Stranded Debts of NPC” refer to any unpaid financial obligations of NPC which have not been liquidated by the proceeds from the sales and privatization of NPC assets;

“Stranded contract costs of NPC or distribution utility” refer to the excess of the contracted cost of electricity under eligible contracts over the actual selling price of the contracted energy output of such contracts in the market. Such contracts shall have been approved by the ERB as of December 31, 2000;

SEC. 33. Distribution Utilities Stranded Contract Costs Recovery. – Stranded contract costs of distribution utilities shall refer to the excess of the contracted cost of electricity under eligible contracts of such utilities over the actual selling price of such contracts in the market. Such contracts shall have been approved by the ERB as of December 31, 2000.

SEC. 34. Universal Charge. – Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC., shall be imposed on all electricity end-users for the following purposes:

(a) Payment for the stranded debts in excess of the amount assumed by the National Government and Payment for the stranded debts in excess of the amount assumed by the National Government and stranded contract costs of NPC and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry;

Where are the Proceeds Going?

To give you an idea on how things are going in paying off NPC debts from the proceeds of privatization, Energy writer Myrna Velasco of the Manila Bulletin reported on September 28, 2014:

“PSALM president Emmanuel R. Ledesma Jr. has disclosed to Congress last week that as of June 2014, the level of power sector debts and contingent liabilities still hover at P609 billion for the principal portion and P150 billion in interest charges.

He reckoned that prior to privatization of the power sector in year 2000, the liabilities had been at P863 billion, while admitting that it had not really gone down that much from then due to array of factors.

In 2000, debts had been at P863 billion… as of June 2014, principal debts had been at P609 billion and interest charges at P150 billion,” Ledesma has noted.

The PSALM chief executive has echoed previous justifications given by his predecessors on the very slow or non-phase out of power sector liabilities despite the flow of hefty proceeds from the divestments of majority of the National Power Corporation’s (NPC) assets.

Ledesma cited the delay in privatization, which he noted had compelled PSALM then to resort to more borrowings to plug its cash requirements to settle maturing debts as well as on alignment of operating expenses of un-privatized generating assets.

Industry watchers, however, have been disputing some of PSALM’s claims – noting that part of the failure on liability management had been the faulty privatization package set for some assets and the ‘fire sale’ undertaken for other facilities.”

An observation of the list of privatized assets in 2012 as reported by the DOE, showed that PSALM privatized 1,296.9mw of coal plants at a price of $996 per kw capacity. A Filipino company buyer paid $602.85 per kw but a foreign IPP paid $1,464.56 per kw after several Filipino conglomerates tried to lowball it at $551 per kw and later upped it to $1,152.75 per kw.

In hydro plants PSALM sold 865mw at an average price of $1,424.88 per kw capacity mainly because a foreign partner of a local conglomerate got involved. In geothermal plants, PSALM privatized 1,202.53mw at an average price of $578 per kw to Filipino IPP’s.

It is in the sale of bunker c power plants where PSALM did terribly as if the plants were scrap. 368.5mw of running diesel plants in Mindanao and Panay islands were sold only at an average of $97.31 per kw capacity, just a little higher than scrap steel. The IPP buyer turned around and signed a 4 year power supply contract with its own distribution utility that will enable it to recover its buying price from PSALM in two (2) years. That’s the power of Monopsony! Now the loss in value is going to be passed on to the national electric consumers as part of stranded contract costs of NPC. (in the “Is the glass half-empty or half full” category, 300mw of NPC diesel plants were just abandoned and government got zero!. I am not kidding pare. This happened in the Philippines and not even the press said a hoot!)

It seems PSALM only got decent prices for the NPC assets when foreign buyers are involved who are willing to pay the true market value of the assets.

DOE figures show that PSALM already collected $9.991 billion but the NPC debts only came down P104 billion or $2.3 billion. Where did the $7.691 billion go? Those funds were specifically provided by law for payment of NPC debts. Isn’t there a law against misappropriating funds?

We believe it is not fair to consumers to make them pay for all the residual debts of NPC not covered by the proceeds of privatization of its assets. There are equitable ways that the debts should be taken cared of.

1. Only Stranded debts that are properly chargeable to consumers

NPC contracts and debts that became stranded because of the need to dismantle its monopoly and privatize its generating assets to create a competitive power generation sector.

2. Stranded contracts and debts resulting from failed government policy.

It would not be fair to dump these on the electric consumers. These include the cost of solving the power crisis of the 1990’s. The 700mw geothermal plant in Leyte was used only 50% in its first 10 years. The balance paid and guaranteed by the national government. The total 200mw of diesel plants in Mindanao that were hardly used. Losses from political projects in large hydro and minimum off take agreements. We must eliminate the higher cost of “fast tracking” the power projects from the consumers share.

3. Stranded debts resulting from neglect of government to protect NPC generating assets. Reduction of asset sales proceeds that patently were at “fire-sale” prices like many small hydro projects and power barges. One thing sad about many of the BOT projects was that at the time of the “T”, transfer of ownership to the government and after the government and the taxpayers have paid for it, PSALM negotiated the sale to the operators like the Navotas power complex from Hopewell, the Mirant assets in Pagbilao and Sual. Many diesel plants were just outright neglected as if they were unwanted assets of no value. People observed that the valuations were non transparent. The 100mw diesel plant in Iligan and the 200mw diesel plant in Bauang Ilocos Norte were allowed to be auctioned off by the local government for “non payment” of local taxes. P5 Billion in value lost. No one raised a hoot.

Another 100mw diesel plant in Panay island was built for P1.20 billion using equipment transferred from Batangas. Less than 2 years later NPC sold it to a well connected operator for P250 million with the diesel plants of Bohol thrown in for free. Then NPC gave the buyer a guaranteed revenue worth P300 million! Why do we do these things?

We forgot that consumers, both as electricity users and taxpayers, already painfully paid for those assets through their guaranteed take-or-pay provisions and when it was time to own them, we gave the assets away. Now the consequent leftover debts will again be charged to the consumers. When would we start showing mercy on the consumers?

It would be wonderful if a Presidential audit of these accounts is done to see how the proceeds of the privatization were used and why little seems to have been applied to reducing the debts as specifically mandated by the Epira Law. Why not hire an independent foreign auditor to sort all these out? (most local auditing firms are conflicted with big local power industry players).

4. Recurring losses and debts of NPC and PSALM The Stranded contracts and debts and losses were supposed to be during the implementation of restructuring of the power sector. It has been 15 years since the EPIRA Law was passed in June 2001. It is about time that there is a cutoff period and start treating NPC remaining assets as recurring.

Why should consumers continue paying for operating expenses and debts not paid because the proceeds were used somewhere else? 5. Time to rethink the smart use of NPC remaining assets

In late 2013 the power plants of the private generators started mysteriously conking out because of “boiler leaks”at about the same time, creating power shortages and sending the WESM spot markets skyhigh to P62 per kwh. The following summer the DOE raised the alarm bells on potential power shortage of 1000mw. The government came face to face with the reality that it had limited options to come to the rescue of the Filipino people. EPIRA barred the government from owning any power generating plant save for the off-grid areas. Section 71 opened the window for governments involvement in power generation in case of emergencies but required a tedious process, starting with a Presidential declaration of emergency and congressional approval, that will take too long to be useful to address power shortages in time.

Privatization or not it is clear that the people expect the government to solve power problems of supply and least cost rates. The government needs ready capability to maintain strategic power generating capacity and reserves. And the best place to start are those remaining power plants that can be used strategically to protect the public instead of giving them away at fire-sale prices to the well- connected who had been drooling over the Agus hydro complex and the CBK pump hydro complex. Selling Agus will turn it into an ancillary services plant and deny Mindanaons with low cost power. Expect an increase of at least P1 per kwh. The 600mw Malaya fossil fuel could be a strategic government asset. How about the Sucat power complex?

Who will buy them anyway at a fair price with Meralco’s power supply for the next 25 years are already locked up in their 4000mw of negotiated sweetheart deals with sister company generators?

Let us rethink about security of supply and the strategic use of NPC’s remaining assets. NPC still has many very qualified people who can run these plants. Especially since the sale of more than 4000mw of NPC plants had not made much of a dent in paying off the NPC debts. It would end up being charged again to the consumers through the ballooning UC-SCC charge.

When would we start having mercy on the electric consumers?

Matuwid na Singil sa Kuryente Consumer Alliance Inc
Matuwid.org

David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Was active in the finalization of the Epira Law and served as volunteer technical adviser to key Senatorial, Congressional, and Energy officials. Through his blog matuwid.org in retirement he seeks to share his expertise in power policy and strategy towards reducing the power cost in the country and eliminate abuses and monopolization. david.mskorg@yahoo.com