Viewpoint: UPDATE: WAR ON CORRUPTION IN BUSECO AND OTHER ELECTRIC COOPERATIVES IN MINDANAO

By the Mindanao Coalition of Power Consumers
November 5, 2017
from David Tauli

In the period 2013-2014, sixteen electric cooperatives in Mindanao entered into anomalous contracts for power supply for their consumers with the 405-MW coal power plant of the FDC Misamis Power Corporation, located in Villanueva, Misamis Oriental. Power supplies to consumers under these contracts were started in 2016, and now have resulted in increased rates of two pesos or more per kilowatt-hour being paid by the consumers of the deviant electric cooperatives, compared with the rates in other ECs that have not entered into the exorbitantlypriced contracts.

The power supply contracts with FDC Misamis were entered into by the electric cooperatives without going through a least-cost procurement process, which is required by the Electric Power Industry Reform Act of 2001 (EPIRA) for distribution utility companies to perform in contracting power supply for their captive consumers. As a result of violating the safeguards provided for consumers by the EPIRA, the electric cooperatives contracted for long term power supply from FDC Misamis at a price of 5.40 pesos per kWh at a time when power supply from other coal plants were being offered at a price of around 4.10 pesos per kWh. It is estimated that the exorbitant profits earned by the coal power plant from the anomalous power supply contracts will exceed one hundred billion pesos (PhP 100 billion) during the 25 years of commercial operations of the power plant. Each consumer of the deviant electric cooperatives in Mindanao is now contributing an average of two hundred pesos (PhP200) per month, for the next 15 to 25 years, to the ill-gotten profits of the FDC Misamis Power Corp.

Since 2014, the Mindanao Coalition of Power Consumers (MCPC) has been campaigning among the officers of the electric cooperatives to have the highpriced power supply contracts renegotiated or rescinded. Only one electric cooperative, the SOCOTECO II serving South Cotabato, had the anomalous power supply contract cancelled. The general managers and members of the board of directors of the fifteen other electric cooperatives did not see anything wrong in contracting for exorbitantly-priced power supply for their consumers. So the MCPC redirected its campaign against corruption in electric cooperatives, and worked on the activation of the member-consumer-owners (MCOs) of the electric cooperatives to take up the campaign against corruption in their own ECs.

The member-consumer-owners (MCOs) of the Bukidnon Second Electric Cooperative (BUSECO) are the first group in Mindanao to organize themselves mainly for the purpose of reducing the high prices that they are now paying for their electricity. The leaders of the MCOs will be holding public forums this week in various places in Bukidnon to inform the public about the reasons for the high rate of electricity in BUSECO, and to determine what actions can be carried out by the MCOs to reduce the rates of electricity.

The rest of this paper suggests the next step that should be taken by the MCOs of BUSECO towards reducing the rates of electricity, and discusses the legal grounds for the action.

File a Petition with the RTC to Annul the Anomalous Contract The first thing that the MCOs of BUSECO should carry out is to file a petition with one of the regional trial courts in Malaybalay to annul the power supply contract entered into by BUSECO with the FDC Misamis Power Corp for power supply from the 405-MW coal power plant in Villanueva, Misamis Oriental.

The grounds for the annulment of the high-priced power supply contract with FDC Misamis is that it was entered into by the officers of BUSECO in violation of the requirement of the EPIRA that distribution utility companies should carry out least-cost procurement of power supplies for their consumers. The EPIRA provision to that effect is in Section 23, paragraph 3, of the EPIRA, which states: “A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market …”

In practice, the “least-cost” requirement means that the DU should carry out public bidding for its power supplies, or implement equivalent means for ensuring that it will contract for the least-cost power supply for the type and quantity that is required for the consumers.

Proof of the Violation of EPIRA by BUSECO in Power Supply Contracting When the petition is filed to annul the BUSECO power supply contract with the FDC Misamis Power Corporation, it should be accompanied by valid proof that the responsible officials of BUSECO violated the EPIRA requirement to carry out least-cost procurement of power supply for consumers. The proof would be provided to the RTC by attaching to the petition a copy of the Decision of the Board of Administrators of the National Electrification Administration in the administrative case (NEA Adm. Case No. 23-03-15) filed against the then OIC General Manager of BUSECO, Deiter Hoff Arellano, that resulted in the dismissal of OIC-GM Arellano for “dishonesty, grave abuse of authority, grave misconduct and conduct prejudicial to the best interest of the cooperative and its memberconsumer-owners”.

The pertinent findings of the NEA on the culpability of OIC GM Arellano for violating the EPIRA requirement for least-least procurement of power supply, as stated in the NEA Decision, are the following:

1. “He [OIC General Manager Deiter Arellano] willfully did not invite GNPower, in particular or other power suppliers for that matter who may have lower rates, to submit a proposal / letter of intent thus depriving the MCOs to avail of a cheaper power rate resulting to the latter’s detriment.” 2, “It is important to note from the documents submitted by the parties, that GNPower offers only PhP4.09 to PhP4.1240 per kWh, as indicated in the Power Purchase and Sale Agreement (PPSA) between BUSECO and GNPower executed on November 22, 2012 and filed with the ERC on February 12, 2014. This rate is significantly lower as compared to the PhP5.40 rate of FDC Misamis as indicated in the ERC applications, ERC Case No. 2014-152 (2-8MW) and ERC Case No. 2014-162 (10MW).”

In their investigation of the charges against OIC-GM Arellano, the NEA found that prior to contracting with FDC Misamis for power supply at a price of 5.40 pesos per kWh, Arellano already knew that power supply can be contracted from GNPower at a price of around 4.10 pesos per kWh. But Arellano did not invite GNPower to submit a proposal to supply the power requirements of BUSECO. Moreover, when Arellano submitted the power supply contract to the Board of Directors of BUSECO for approval, he withheld from the Board the information that power supply can be contracted from GNPower at a price lower than the price “negotiated” with the FDC Misamis Power Corp.

The foregoing facts, discussed in the Decision of the NEA, would constitute valid proof that the power supply contract with FDC Misamis was entered into by BUSECO in violation of the EPIRA, and has been grievously harmful to the consumers of BUSECO. Therefore, the anomalous contract should be annulled. Replication of the Anti-Corruption Campaign in Other Electric Cooperatives

The battle against corruption and for the reduction of rates of power supply is being waged now by MCO’s of BUSECO against the officials of the electric cooperative. But this is just one battle in the anti-corruption campaign against electric cooperatives in Mindanao. The BUSECO case could serve as the model for MCOs in other electric cooperatives in carrying out the campaign against their officers (general managers and the members of board of directors). The manner in which the officers in other electric cooperatives have been cheating their consumers through high-priced electric power supply is the same as the way it was done by BUSECO officers. The way for MCOs to stop being cheated by their officers is to replicate in their own electric cooperatives what is being done by BUSECO member-consumer-owners.

David A. Tauli
President, Mindanao Coalition of Power Consumers

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Our National Dance on Market Concentration in Power….and the Resulting Monopolization, Oligopolization, and Cartelization.

David Celestra Tan, MSK

22 October 2017

The DOE and ERC have been dancing around the issue of Market Concentration in Power since the get-go of the crafting and passing of the Electric Power Industry Reform Act of 2001 that we all more  commonly  know as the Epira Law of 2001. If they have been dancing, it was the Bicam Committee of Congress that finalized the Epira Law that wrote the music.

The Epira Law of 2001 aimed to reduce power cost by creating true competition in the power market place. It was the reason the power industry was unbundled into power generation, transmission, distribution, and retail.   A truly functioning competition is a key to protecting consumers in a deregulated sector. The Epira Law is profuse in its aspiration for control of market domination,  monopolization, cartelization, and cross ownership and in its admonition against anti-competitive behavior and abuse of market power.

The good guys among the framers of the Epira Law had tried to put in safeguards to prevent too much concentration of power capacity as a way to assure there will be true competition. Economists estimate that it will take at least four (4) players to assure true market interplay of competition.  Well theoretically. The bad guys acting on the behest of the powerful vested interest put in enough ambiguity in the law to allow for “implementation flexibility” or loophole.

Why is there is need to limit market concentration?

To assure healthy competition in the market place, it is essential to limit the size of power generators so no one unduly dominates the market and assure there will be enough players competing. The Epira law recognized that anyone owning, operating, or controlling a power company would have influence in the availability and pricing of such power plant. Hence they can influence the supply or withholding of such capacity and their pricing in the market.  If there are only a few players and a cartel, they will not be truly competing with each other to the detriment of the Filipino electric consumers.

Undue concentration of capacity will also lead to collusion and manipulation in pricing. We only need to see what happened in November 2013 when WESM prices soared to P62 per kwh. The major players were found manipulating and were penalized.  The case is held up on appeal however and it is not clear when justice will be given to the consumers. In that WESM market exploitation, about P9 billion was the additional charge to the consumers. Yes P9 billion.

Comparatively, there are reports that the ERC is only imposing a total of P500 million in penalties to the guilty manipulators. Since no one is arguing for the consumers, chances are even that P500 million will eventually be forgotten on eternal appeal.

We are now gaming the rules in market concentration and have been dancing around its enforcement.

The Epira Law’s control of market domination are contained in several areas:

  1. Dance No. 1 Started in Section 45 of RA 9136 or Epira Law of June 2001

On market domination of a regional or national grid:

To promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the following safeguards:

            a) No company or related group 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.                        “Related group” includes a person’s business interests, including its                                subsidiaries, affiliates, directors or officers or any of their relatives by                              consanguinity or affinity, legitimate or common law, within the fourth civil                  degree;

(emphasis mine and you will see why)

On market domination of a distribution utility:

Distribution utilities may enter into bilateral power supply contracts subject to review by the ERC: Provided, That such review shall only be required for distribution utilities whose markets have not reached household demand level. 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 an associated firm engaged in generation but such limitation, however, shall not prejudice contracts entered into prior to the effectivity of this Act. An associated firm with respect to another entity refers to any person which, alone or together with any other person, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such entity; and

These provisions avoided the limits on cross-ownership between the generation (power supply) and distribution sector (the bulk buyers and distributors of power)

  1. Dance No. 2 – DOE

The DOE’s Dance Around the 30/25 Limits of Market Concentration under Section 45

It was the Department of Energy that was tasked with writing the Implementing Rules and Regulations (IRR) that was required to implement the RA 9136 Law. The DOE designated the then head of the PSALM to be the chairman of the IRR committee.

The DOE danced around the market concentration limits and further watered it down by providing under Rule 11 Section

                 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. 

That is right! The DOE further watered down the idea of market domination by considering only “control” in determining market concentration instead of “ownership, operation, and control” as required by the mother law that it is supposed to implement. This did not happen by accident or oversight. Clearly it was a committee’s deliberate scheme to marginalize the market domination rule.  I think this is illegal because it contradicted the Epira law itself and those who perpetuated it should be held accountable.

The IRR was approved by the JCPC of Congress.

              3. Dance No. 3 – ERC

The ERC’s Texas two-step dance on Market Concentration

Section 45 designated the ERC to put in the safeguards. “To promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the safeguards:

The ERC for its part passed Resolution No. 26, Series of 2015, which was primarily based on the provisions of Section 4 of Rule 11of the Implementing Rules and Regulations (IRR) of RA9136 which provides for control as the basis for crediting the installed generating capacity of a Generation Facility to a Generation Company and its affiliates or related entities

Consequently many generators proceeded to own installed generating capacities without fear of violating the limits on market concentration even if they own the plant as long as they don’t operate or control the facility. For a while no one was at risk of breaching the limits. But now that big generators Aboitiz Power,Meralco, San Miguel, Lopez Group, and Ayala Group are on the acquisition binge, this issue became urgent and important.

The ERC’s Step Forward

The ERC apparently reacting to feedback that Rule 11 of the Epira IRR maybe illegal, took the first step forward to review the methodology and released an Issues Paper on August 19, 2015 signed by then Executive Director Atty. Saturnino Juan, calling for comment from industry stakeholders on a proposed

REVISED GUIDELINES FOR THE DETERMINATION OF INSTALLED GENERATING CAPACITY AND ENFORCEMENT, OF THE LIMITS ON CONCENTRATION OF OWNERSHIP, OPERATION OR CONTROL OF INSTALLED GENERATING CAPACITY UNDER SECTION 45 OF REPUBLIC ACT NO. 9136″.

ERC CASE NO. 2015 – 005 RM

In about October 13 2015 they released the draft new rules in determining the concentration of capacity

“The proposed amended Guidelines, on the other hand, provides that in the determination of the Generation Companies’ market shares and potential breach of the 30% and 25% market share limitation, it shall be separately determined based on three (3) separate tests, as follows:

           a. Ownership test;

          b. Operation test; and

          c. Control test.

The generation company and its related group, if any, should comply with all the abovementioned tests. In the event that the generation company exceeds the limits in either of the tests required, the ERC shall consider the same as a breach of any of the market share limitation. If a generation company and its related group exceed the limits as periodically determined and set by the ERC in accordance with the Guidelines, it is obligated to inform and report such breach and the reason therefor to the ERCwithin the prescribed period from the occurrence thereof.

Thus, the Commission seeks the comments from the various industry stakeholders on the proposed amended Guidelines pursuant to Section 4s(a) of RA 9136.”

The draft revision does not go far enough but it would have been a big step forward towards correcting the legal infirmity of Rule 11 but also the control of market concentration and domination.

  1. The ERC’s Step Backward

The ERC then quietly “held in abeyance” the rules on the determination of market concentration by passing Resolution 3 of 2016 on March 15, 2016. It was quiet only because it was unnoticed under to the pandemonium that came with the extension of the CSP policy by 6 months from November 6, 2015 to April 30, 2016 which they passed on the same day and session on March 15. The ERC effectively also “held in abeyance” the implementation of the CSP policy.

And the rest is history. Meralco took advantage of the extension that in 41 days it was able to hammer 3,551mw of PSA with 5 strategic partners who are willing to be the minority partners (and plant operators) of Meralco PowerGen.

Freed from the market concentration limits “held in abeyance” by the ERC, they also proceeded to acquire the 1,000mw Global Business Power of the George Ty group and Aboitiz for its part acquired controlling interests in erstwhile competitor 1,200mw GN Power.  Meralco partner EGAT of Thailand also bought 45% of the 800mw AES Masinloc coal plants in Zambales. GBP in turn bought controlling interest in the Alsons coal projects in Mindanao.

(see article on ERC-Meralco conspiracy, 6 October 2017 by ABP)

  1. Knight in a Shining Armour

One energy official who has been asking the right questions is Senator Sherwin Gatchalian, the Senate Energy Committee Chairman.

Could the young Senator Gatchalian be the knight in a shining armor for consumers? Can he “hip-hop” and “twerk” the rules for an enlightened limit on market concentration? Can he put ERC to task for “holding in abeyance” the market concentration limits?

In a keynote speech reported by the BusinessMirror,  Sen. Sherwin T. Gatchalian said the metric used to determine the market-share limitation should be reviewed. 

The law specifies installed generating capacity as the measure in computing market shares. 

However, Gatchalian said, this is not reflective of the true market power of a company since the installed capacity is different from the power generated and the actual power injected to the grid. 

The share of coal in the country’s total installed capacity is approximately 35 percent, but its share in actual generation is 48 percent. For natural gas, its installed capacity is only 16 percent, but its actual generation is 22 percent. 

As a consequence, Gatchalian said, the use of installed generating capacity underestimates the true market share of a company, especially if its plants have comparatively higher capacity factors. 

According to the senator, almost 60 percent of the installed energy capacity is controlled by only three firms.  These are First Gen of the Lopez Group at 19.63 percent, San Miguel Corp. at 18.73 percent and AboitizPower at 17.48 percent. 

“There exists no formal monitoring of associated party contracting between generation companies and distribution utilities,” Gatchalian said.

“We have to [undertake a review]. It has to be an ERC recommendation. We will have a dialogue with ERC to look at it. We will talk to them on how to remedy this,” Gatchalian said. 

(See our article on The  Betrayal and Treason of Rule 11 of Epira IRR, 26 August 2016)

We hope you really do Sir. It will be a big step forward towards liberating the electric consumers from being captives of cartelization, oligopolization, and resulting negotiated contracts. 

It is the Line Dancing to Electric consumers Emancipation we have been waiting for.

Matuwid na Singil sa Kuryente Consumer Alliance Inc

matuwid.org

david.mskorg@yahoo.com

 

 

Legislators Incessantly Pressuring ERC for Meralco Must Equally Show Concern for Electric Consumers

David Celestra Tan, MSK

16 October 2017

Almost everyday Legislators have been bombarding the ERC with press releases to pressure them to expedite the approval of Meralco’s seven (7) midnight power supply contracts. They subject the ERC Commissioners to hearings that are supposed to be “in aid of legislation” with distinct intent to pressure the ERC to “take action and resolve” the Meralco power supply agreements. A clear lobby for approval of the PSA’s not only of Atimonan One (1,200mw), Redondo Power, and the 700mw St. Raphael but the rest of the seven (7) midnight power supply contracts totaling 3,551mw. Never mind that the PSA’s were negotiated and denied the consumers their right to competitive least cost power. Never mind that the contracts effectively created a cartel, something harmful to the consumers and clearly prohibited by the Epira law that the Congress passed in 2001.

The pressure is borderline inappropriate because the ERC has the sole discretion on whether to approve or disapprove applications and should not be interfered by the Legislature. It is inappropriate because Congressmen are clearly lobbying for approval of these projects.

One of the most vocal lobbyists is Rep. Danilo E. Suarez of the 3rd District of Quezon where the 1200mw Atimonan One project will be located. He is reported to have claimed that the ERC had failed to act on this project’s application since 2012 and he is asking the ERC to explain the delay in the approval. Someone clearly misinformed the good congressman.

The ERC only accepts applications for approval of signed power supply agreements. The Atimonan One contract was signed only on April 26, 2016 and applied with the ERC a couple of day later on April 29, 2016. In fact it is assigned the ERC Case No. 2016-092. There is no way Atimonan One had been applied for in 2012. It may not even have been incorporated in 2012.

The Meralco applications have incited the vehement objections of consumer groups requiring ERC to address them and observe due process. Who is to blame for the longer time it will take to properly evaluate them and rule on the contracts “fair and reasonableness”?  Meralco is trying to ram through the throats of consumers these 3,551mw of 20 year contracts it negotiated with its sister company Meralco PowerGen.  Had they gone through arms-length truly competitive bidding then the ERC approval process probably would be been cut and dried and consumer groups would not be opposing.  In these anomalous midnight contracts, the Legislators are practically asking the ERC to short circuit due process and approve the contracts. This borders on the blatant.

Equally Important Concerns of Consumers

Nonetheless, Legislators have rights to use their legislative prerogatives the way they choose. It is up to their voters to judge them. We just wish that if they truly are concerned about power needs of the country, that they should equally show concern for electric consumers. And consumers equally have serious concerns.

  1.  Meralco Cartel

The 3,551mw of power supply contracts effectively creates a Meralco Cartel of six companies that combined will control almost 15,000mw of the country’s 20,000mw by 2022. ERC is specifically mandated by the EPIRA law to guard against cartelization. So it seems Legislators should have reasons to ask ERC to explain why it is not investigating the possible violation of cartelization by Meralco. This issue threatens the long term growth and competitiveness of the power generation sector.  And in fact It deserves legislative attention.

  1. CSP Vs Negotiated Contracts

Perhaps it will also be a productive use of legislative time and resources if they look into whether CSP would really result to much lower rates than negotiated contracts. Just to settle the issue once and for all.  Meralco signed a solar power supply with Solar Philippines at only P2.99 per kwh after a CSP. Just a few months before they negotiated with the same Solar Philippines at P5.39 for 50mw. This after Solar Philippines announced a few months before in June 2016 that it can sell solar at P4.00 per kwh.

The difference in the negotiated and the bidded contract with the same Solar company is a whopping P2.40 per kwh or P200 million a year for the 50mw.

Should this not raise legislative eyebrows and warrant Congressional hearings.

  1. Violation of Congressional Franchise

One area that is unquestionably right up the alley of Congress is Meralco’s violation of its Congress granted franchise and a lot of things Meralco under the MVP Group had been doing should raise logical concerns among Congressmen if due attention is being paid.

Meralco’s public service franchise granted to it on July 21, 2002 under Republic Act 9209, (called then as mega franchise bill) more succinctly defined their customer service obligations as it provided under Section 4 that “the grantee shall supply electricity to its captive market in the least cost manner….the grantee shall charge reasonable, just, and competitive rates for its services to all types of consumers located in its franchise area.”

“The grantee shall not engage in any activity that will constitute an abuse of market power such as but not limited to, unfair trade practices, monopolistic schemes and any other activities that will hinder competitiveness of businesses and industries.

Those are necessary conditions of the Meralco franchise.

The negotiation of the 3,551mw of power supply contracts and the resulting cartelization of the power generation sector seemed obvious violations of public service franchise. If these negotiated contracts with a chosen few who are willing to be minority partners of sister company Meralco PowerGen are not abuse of market power.., unfair trade practices, monopolistic schemes and …activities that will hinder competitiveness of businesses and industries” we don’t know what is.

In the least, Congress should be looking into it.  Lets hope they finally take notice.

We wish Congressmen will equally show concern for the interest of electric consumers instead of pressuring ERC for approval of questionable and anti-consumer contracts.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

 

 

Meralco Midnight Contracts an ERC-Meralco Conspiracy?

Evelyn VirayJallorina

Alyansa para sa Bagong Pilipinas

6 October 2017

Did ERC actually conspire with Meralco in making way for MeralcoPowerGen to sign the 3,551mw of new power supply agreements?

Our cause oriented group, Alyansa para saBagongPilipinas had filed a complaint with the Office of the Ombudsman against the ERC Commissioners for abuse of discretion and dereliction of duty for extending the November 6, 2015 deadline to April 30, 2016 for the requirement of competitive biddings (CSP) for the signing of Power Supply Agreements that will be charged to the consumers.

Consequently Meralco was able to fast track the negotiation of 3,551mw of power supply agreements with project companies controlled by its sister company MeralcoPowerGen that corner 100% of the base load requirement of Meralco for the next 20 years at negotiated prices. The contracts were signed on April 26 and 27 2016 and filed with the ERC a few days later a day before the extended deadline.

The ERC Commissioners claimed that the extension was not designed to favor Meralcobut in response to the request of many affected distribution utilities and IPPs who had signed contracts but were not able to apply with the ERC by the original November 6, 2015 deadline. Allegedly, ERC decided to give them time to complete their applications for those signed contracts.

Meralco claimed that they were NOT one of those who requested which appear to be true because their contracts were not signed until April 26 and 27, 171 days after the November 6, 2015 original CSP deadline.

Meralco and the MVP group however are reported by newspapers to have lobbied against the CSP policy from the beginning.  Their chairman claimed that CSP is illogical and would work against consumers. At various times since 2014, they also lobbied for the delay in the implementation of the CSP policy, to make it voluntary, for them to be allowed to do swiss challenge type biddings. They also fought the requirement by DOE to have the bidding process administered by Third Party consultants. From December 2015 to February 2016 they were reported to have been unofficially lobbying to be allowed by the ERC to do swiss challenge bidding evidently to assure their favored generators win.

Then on March 15, 2016 the ERC Commissioners under Chairman Salazar mysteriously extended the CSP deadline thus giving Meralco enough time to fast track an unheard of 3,551mw of power supply contracts with five (5) strategic partners who have apparently agreed to be the minority partners of Meralco’s power generation sister company, MeralcoPowerGen. That was a record 41 calendar days to finalize very complex power supply agreements that must have included tough negotiations and corporate approvals for the partnership with MeralcoPowerGen.

The ERC Commissioners’ claim however that the extension was not intended to favor Meralco appears to be belied by a twin resolution that they passed on the same fateful day of March 15, 2016.

We noticed that the ERC Commissioners passed an accompanying resolution no. 3 series of 2016,

 “A RESOLUTION HOLDING IN ABEYANCE THE ISSUANCE OF THE ERC RESOLUTION SETTING THE ANNUAL INSTALLED GENERATING CAPACITY PER GRID AND NATIONAL GRID AND THE MARKET SHARE LIMITATIONS PER GRID AND THENATIONAL GRID”

The ERC has this duty to assure the limitations of market share domination as established by Section 45 of the Epira Law. Power generators are limited to own, operate, or control not more than 30% of a grid and 25% of the national grid. Their Resolution recognized that

“Section 45 (a) of Republic Act No. 9136 (R.A 9136), orthe Electric Power Industry Reform Act (EPIRA), states that no company orrelated group 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;

On 14 December 2005, the Energy Regulatory Commission (ERC) adopted and promulgated Resolution No. 26, Series of 2005 entitled “A Resolution Adopting the Guidelines for the Determination of the Installed Generating Capacity in a Grid and the National Installed
Generating Capacity and Enforcement of the Limits on Concentration of Ownership, Operation or Control Installed Generating Capacity under Section 45 of Republic Act No. 9136” (Market Share Guidelines);”

For the year 2016, the ERC established the limits in its Resolution 3 of 2015 as follows:

That means in Luzon no generator should own, operate, or control more than 3,917mw, 709mw in Visayas, and 649mw in Mindanao. Nationally no one should have 4,396mw.

To determine compliance of each generator, the ERC was guided by Rule 11 which watered down the restriction to only “control” instead of the Epira Laws criteria of own, operate, or control. There is an issue of the illegality of Rule 11 since it fails to comply with the Epira Law.

The ERC under its previous Chairman ZenaidaDucut apparently was seeking to correct the error of Rule 11 and had drafted a new formula for determining the compliance of each power generator to include ownership, operation, or control instead of only control.  On August 19, 2015 the ERC published the draft changes and invited all stakeholders to submit their comments under ERC Case No. 2015-005 RM. Signing with Chair Ducut were Commissioners Asirit, Non and Taruc.

The ERC is supposed to establish the new limits for the coming year by March 15 of every year. Why did they “hold in abeyance” the limits instead of establishing one on March 15, 2016?

It appears it was to avoid highlighting limits that could be breached by the concentration of capacity.  The ERC Commissioners seemed to know in advance that the postponement of the CSP that they were passing would result to certain IPP’s to acquire significant power generating capacity.

We suspect that the two resolutions that were passed on the same day were not made independent of each other but a premeditated facilitation of the largeMeralco power supply contracts that they knew will beat the April 30, 2016 deadline.

The passing on March 15, 2016 of Resolution 3 of 2016 holding in abeyance the limits on concentration of generating capacity belies ERCs claim that the postponement of the CSP policy that was resolved on the same day of March 15, 2016 were made independently and did not favor Meralco.

We believe that there was clear conspiracy between ERC and Meralco on the CSP. ERC evidently knew that large contracts will be signed and they were preventing the violation of capacity limits.

 Will the Ombudsman listen?

 Alyansa para saBagongPilipinas

Meralco’s Abuse of Market Power Corrals Generators Into a Meralco Cartel …..With Long Term Implications (Part I)

David Celestra Tan, MSK

21 September2017

Meralco’s public service franchise specifically prohibits it from engaging “ in any activity that will constitute an abuse of market power such as but not limited to, unfair trade practices, monopolistic schemes and any other activities that will hinder competitiveness of businesses and industries”.

Meralco’s electric distribution  franchise did not come with the right to also monopolize power generation. In fact they are specifically prohibited from abusing their market power.

Yet that’s exactly what Meralco and the MVP Group apparently was able to do on April 26 and 27, 2016 just in time to beat the new April 30 deadline set by the ERC.  They negotiated and signed seven (7) power supply contracts totaling 3,551mw that will corner 80% of Meralco’s energy needs with several strategic partners but all controlled by its sister company MeralcoPowerGen.

 Corralled into becoming  MeralcoPowerGen’s working minority partners  if they want access to the lucrative 6,500mw Meralcodistribution market are erstwhile giant independent generators San Miguel Corp., Aboitiz Group, DMCI, Global Business of MetroBank, and EGAT of Thailand.

 The contracts effectively evaded the new Department of Energy policy to require a Competitive Selection Process or bidding (instead of negotiating) power supply contracts whose prices and terms will be passed on to the electric consumers.  The Energy Regulatory Commission itself passed a resolution requiring that effective November 6, 2015, any new power supply agreements will be accepted for approval only if they went through a CSP.

 Meralco and the MVP group lobbied against this policy from the beginning.  Their chairman claimed that CSP is illogical and would work against consumers. At various times since 2014, they also lobbied for the delay in the implementation of the CSP policy, to make it voluntary, for them to be allowed to do swiss challenge type biddings. They also fought the requirement by DOE to have the bidding process administered by Third Party consultants. From December 2015 to February 2016 they were reported to have been unofficially lobbying to be allowed by the ERC to do swiss challenged bidding evidently to assure their favored generators win.

 Then for some inexplicable reasons, the ERC postponed in March 2016 the implementation of the CSP policy by six months to April 30, 2016 allegedly to give reasonable time to those who had signed power supply contracts as of November 6, 2015 to complete their ERC application and filing documents.

 MeralcoPowerGen’s booty of 3,551mw of 20-year power supply contracts were not signed until 171 days later on April 26 and 27 2016. ERC accepted the applications whichnow appear to be   now on the way to fast approvals. Legislator supporters of the power supply contracts even cajoled President Duterte into signing a EO30 to fast track the approvals of these “projects of national significance” within 90 days.  Consumer advocacy group Alyansa Para saBagongPilipinas filed an anti-graft case with the Ombudsman against the ERC Commissioners for abuse of discretion.

Market Power and its Abuse

 Meralco is the nation’s most dominating distribution utility with a demand of 6,500mw by 2020 72% of Luzon grid and 62% of the national demand. All the other 130 distribution utilities combined, including the Aboitiz owned Visayan Electric of Cebu and Davao Light which are the 2nd and 3rd largest, is just about half of Meralco.  That is a lot of market power to wield in buying supply.A veritable 800lb gorilla in the distribution market. The 122 electric coops nationwide only have demands of 5 to 150mw.

Soon after the MVP Group took over control of Meralco in May 2010, they already formed its own power generation company, Meralco Power Gen, with an announced goal of acquiring 3,000mw of generating capacity within a few years. Even the Lopez Group that used to own Meralco, only had a disciplined level of 1,500mw of generating capacity with an additional 500mw when Meralco’s demand grows.

The demand of these distribution utilities is the gold in the power generation business and as the “golden rule” says, he who holds the gold makes the rules. With that 6,500mw of power market, any generator who wants to build a power plant of any significant size of 300mw and larger will need to be a chosen one of Meralco and the MVP group that controls it. They are the virtual gate keeper to the generation business.  And they appear to have leveraged that market power to the hilt.

The Midnight Contracts and the resulting Meralco Cartel

 Hammered just four (4) days before the gratuitous new deadline of April 30, 2016 by ERC, Meralco parceled out 85% of its future energy needs to the following new partners and the ownerships of MeralcoPowerGen in the project companies

1) Semirara DMCI group,  400mw for 2020 (51% of St. Raphael Power)

2)  Aboitiz Group,  1,500mw for 2021 (51% of both Redondo and Atimonan One)

3) San Miguel Power, 1,056mw for 2020 and 2022 (49% of Central Luzon and Mariveles Power)

4) Global Business Power of the George Ty Group,  670mw,  (51% of North Luzon)

5) EGAT of Thailand, their partner in the 455mw Mauban coal power complex. (51% of San Buenaventura)

Meralco undoubtedly negotiated aggressively with these partners as their officials claimed but it was not only to get least cost rate for the consumers but to overpower them to agree to a 51% Meralco majority ownership. It appears only Ramon Ang of San Miguel hung tough and had a measure of negotiating victory for only a 49% Meralco ownership.

One generator offered to Meralco to expand its facilities with 450mw. At the end of the negotiations, the project became owned 51% by MeralcoPowerGen with the new P4.30 per kwh price reportedly higher by P0.50 per kwh than was originally proposed by the independent power generator.

 The resulting power generation cartel is the largest the country can ever have with a combined 14,000mw of power plants, P1.2 Trillion in assets, P225 Billion yearly revenue, and an estimated overcharge to consumers of P25 billion a year.

The issue is not whether the country needs more power supply. It is the way they are contracting and cornering the power generation contracts among their oligopoly at rates they negotiate among themselves and pass them on to the consumers. It is self-dealing in a grand scale at the expense of the consuming public.

 Anti- monopoly, anti-competitive, and market power abuse rules have to have delineated lines that should not be crossed by the private sector. Unfortunately when the CSP line was drawn by the DOE, the ERC that is supposed to implement it moved the line!

 Overcharge to Consumers

 The rates negotiated by Meralco with their majority owned projects would be passed on to the consumers. It is not only the official base rate generation rates published but there could be sweetheart fuel allowances, generous downtime allowance and minimum capacity payments disguised as load factors, and price escalation indices that can hit consumers further down the road.

 MSK estimates that there is at least a 10 to 15% difference in the base rate of negotiated contracts compared to true competitively bidded projects. Then there is the issue of rent seeking from the distribution franchise.

 Price Premium from Rent Seeking by Distribution Utilities

 On top of the negotiated sweetheart prices,  Meralco as the DU with control of the market and the privilege to negotiate and choose the awardee,  will most likely exact free equity for bringing the critical Power Supply Agreement to the project. It is not going to just throw that into the project without value especially when it is at premium rates. Of MeralcoPowerGen’s 51%free equity or “carried interest” will probably be in the 15 to 25% range since the MVP Group is known to be a shrewd negotiator.  Politically it is called “rent seeking”. It is a powerful negotiating leverage. No PSA no project.

 It means if Meralco is not wielding its market power and it is a true competitive bidding, the profits from the project could be up to 25% less and those, if eliminated, could result to lower rates to consumers by easily another 10%.

Imagine tough dealmakers Ramon Ang of San Miguel, EGAT of Thailand, and George Ty of GT Power squirm in their seats on the subject of MeralcoPowerGen getting 51% of the ownership with say only 30% real equity and 21% free?

Let us remember that Meralco already makes 25% return on equity AFTER tax on the distribution franchise. These super profits on the generation side would be on top of that. All those are ending up in the monthly power bill of Metro-Manilans.

 If there is free equity in the 51% shareholding of Meralco in these projects, it must be given back to the benefit of the Meralco consumers. Or the ERC must reduce its rate correspondingly.  The MVP Group is not entitled to trade on the market power of the distribution franchise granted by the government.

 The Meralco Cartel that Emerged

 In addition to the 4,011mw of 20 year power supply contracts Meralco signed with this chosen strategic partners they already own and would own 10,575mw of power generating capacity in the country by 2021,  resulting to a cartel with a total of 14,586mw of the country’s installed capacity and approximately corner 70% of the energy needs of the top three distribution utilities, Meralco, Visayan Electric, and Davao Light. Our national power demand is projected to be only 15,732 in 2020 and 20,090mw in 2025.

 The Meralco Cartel is not done. Tough industrialist George Ty of Metrobank commiserated to Meralco’s market power that it sold 56% to the MVP Group its 1,000mw Global Business which in turn also bought controlling interest in the Alcantara coal projects in Mindanao.  EGAT of Thailand bought 35% of the 460mw Masinloc plant owned by American IPP AES, which had indicated an intent to sell the rest and will be most likely bought by one of the Meralco cartel.

Aboitiz Energy Ventures thru its subsidiary Therma North Power acquired in December 2016 66.1% of the 604mw GNPowerMariveles Coal plant and 40% of the 600mw GNPowerKauswagan. GNPower is one of the most aggressive competitors in CSP’s for electric cooperatives selling at 20% lower than other coal plants. Now they have become part of the Meralco Cartel.

With 14,586mw of power supply capacity just in one cartel, it also spells death of true competition in the WESM market whether it is Luzon, Visayas, or Mindanao.  Good luck to the new transition team at PEMC that is supposed to make the WESM truly competitive and protected from manipulation.

 Not content,  Meralco  and the Aboitiz Group are also not bashful about wanting to takeover all the electric coops they can acquire. Luzon, Visayas, Mindoro, Palawan. And there is no wanting of LGU officials willing to broker the deals.

16 years since the passing of the EPIRA law in 2001, we turned a Napocor monopoly in power generation into a private sector oligopoly.  And worse this cartel or oligopoly also dominates the distribution sector which Napocor never had.

(to be continued)

 MatuwidnaSingilsaKuryente Consumer Alliance Inc.

matuwid.org

david.mskorg@yahoo.com

ERC Must be Cured Not Abolished Nor Crippled

Posted on: Sep 16, 2017

David Celestra Tan, MSK
15 September 2017

There is no question that the ERC has not been living up to its mandate to protect the consumers, to assure long term supply at fair and reasonable rates. In our book we give them a grade of 65% as an institution, failing in many measures. Our electricity rates are the highest in Asean because of this failure.

We interact with many of their Commissioners, directors, and employees and most of them are competent professionals with true dedications to public service. That’s why we are scratching our heads why this agency as an institution has been doing so badly as an electric industry regulator and seemingly cannot find its way back to true public service.

Many members of Congress, and the consumers they represent, are frustrated with the regulatory agency and it is understandable that they would use whatever congressional power (like budget approvals) they have to jolt this organization if only to make them shape up. The threat to give them only P1,000 budget is a major message. It could cripple the critical public services agency though and we lose the 65% that they do right. Further, we would be barking at the wrong tree.

The Energy Regulatory Commission badly and urgently needs to be reformed in their regulatory philosophy, rate setting methodology, transparency, honesty, and commitment to their mandate under Section 43 of the Epira Law that created it. No argument about that. The Epira Law may even have to be amended.

Things have to start with giving it proper leadership and the President of the Philippines is in a position to do so by appointing a good Chairman. One chosen for integrity, competence, and independence from major power industry players.

There is really no need to shorten the tenure of the now more experienced current four (4) Commissioners. What they need is a new clear mandate from the President. It can be as simple as a “do your job and be faithful to your mandate under Section 43 of the Epira Law. Be transparent and no corruption. Serve the public interest. Create competition and reduce rates. Do what is necessary. No sacred cows” (this last one is very important).If they are disobedient, then the President may need a new team. But first he has to find a good leader who can carry the torch for the consumers.

To be fair, most of what ails the regulatory agency were done by the previous Chairmen and Commissioners. However, the new set of officers have no excuse in not correcting the anti-consumer methodologies.

Abolishing the ERC will cause infinitely more harm and disruption than good. The options for performing the regulatory functions are much worse. Even creating a new regulatory agency will set us back and the consumers are the ones who will suffer.

So how do we gauge whether the current ERC is not beyond salvaging?

Your consumer organization has filed with the ERC several petitions to improve the methodologies and those can be used as tests of whether the current ERC can still serve the public interests or is already hopelessly compromised.

1. Petition to change the PBR Rate Making Methodology to prevent overcharging

The ERC is allowing Meralco to make money on things they have not invested. Under PBR they have effectively deregulated the profit limits of this public service utility. They took the position that the 12% limit ruled by the country’s Supreme Court does not apply because the “economic conditions” are different. Now Meralco regularly makes a 25% annual return on equity AFTER TAX. We would like ERC to be on the side of the consumers and country. Itama lang natin.

2. Systems Loss

The ERC’s own rules put a limit of 8.5% systems loss. But the captive customers that use 70% of Meralco’s energy are charged more than 10.3%. Instead they reduce the systems loss to industrial customers to only 4% and have the temerity to boast that their systems loss is only 6.5% which is the overall average. A regulatory agency with their hearts in the right place for consumers would enforce the 8.5% limit and no customer should be charged higher. It is Meralco’s option to charge certain customers lower but never higher than the 8.5% limit. Itama lang natin.

3. Guard Against Cartelization

It can be argued that the ERC Commissioners committed a misjudgment when they inexplicably extended the deadline of the CSP implementation by six months that enabled Meralco to fast track the signing of 3,551mw of midnight contracts four (4) days before the new deadline. The courts will decide whether there were improprieties.

The ERC however has a clear obligation to assure that the negotiated contracts did not create a cartel and cartelization is clearly prohibited by the Epira Law. The ERC’s duty to investigate and assure that there is no cartelization cannot be disputed.

Your consumer organization MSK has filed a petition with the ERC to investigate and stop the resulting Meralco Cartel. This would be a loud indicator of for whom the ERC Commissioners bell tolls. Consumers or vested interests? Itama lang natin sana.

The ERC needs to be cured not abolished nor crippled. But let us wait to see which one they deserve. In many ways the fate of the institution is in their hands.

MatuwidnaSingilsaKuryente Consumer Alliance Inc. matuwid.orgdavid.mskorg@yahoo.com

Comparing Philippine Electricity Rates vs Asean – Just the Facts

David Celestra Tan, MSK

September 8, 2017

Most Filipino consumers know that every month their electricity bill takes a significant part of his budget.  And he better pay up or his lights will be cutoff.

One side of his brain is revolting but the other side is being brainwashed into believing that it is just life and all people are paying the same.  They are also told that the reason Meralco’s rates are high is because our Asean neighbors are subsidizing their power rates.

Recently some reports are headlined that Philippine power rates are the same as Singapore as if that should be a consolation.

So let us just get to the facts. What is the truth?

The Philippines is the highest in Asean together with Singapore at P5.84 per kwh. But that is only for the Industrial Sector. Still, Thailand is lower by 8%, Malaysia by 19.35%, Indonesia by 71.58%.

For Commercial customers, the Philippine rate for 2015 was P7.49 per kwh and Singapore was only 3% lower. Thailand was lower by 28.3%, Malaysia by 33.64%, and Indonesia by a whopping 71.30%.

 For Residential customers, The Philippine rate is the highest ay P8.90 per kwh and Singapore is lower by 18.32%, Thailand by 38%, Malaysia by 32.36%, and Indonesia by a mindboggling 85.51% at only P1.29 per kwh.  That is one hell of a government subsidy.

One reason our neighbors have lower rates is because they use more natural gas generation compared to us that uses more coal.  That is right, LNG. Despite this, your beloved Meralco negotiated with its sister company MeralcoPowerGen 4,011mw of power projects, all coal! Then they are unabashedly claiming that they are looking for “least cost power”.

Let us remember that in the case of Meralco, 30% of their energy sales are from Residential customers and 40% to Commercial customers. Both of these customer class are charged by Meralco at much higher rates.

Meralco’s charge to all classes of customers for generation is uniform at P4.1299 per kwh in December 2015. One reason their rate to industrial customers is the same as Singapore is because Meralco works hard and gives better deal to these contestable customers.

For example, Meralco’s systems loss charge to industrial customers was only P0.1681 per kwh or 4%.  This is lower than the systems loss rate that Meralco has been boasting about at 6.47% which beats the government limit of 8.5%. Admirable on the surface.

However, Meralco’s systems loss charge to commercial and residential customers as of December 2015 was P0.4322 per kwh or 10.46% of the generation charge which is the right way to compute it.

(Systems loss is the amount of power that Meralco purchases but lose in its system and not able to sell.  Its amount must be based on the amount of the average generation rate.)

The systems loss of 6.47% being publicized by Meralco is the average for all its customers. It is being tolerated by the ERC.  The law says the limit should be 8.5%.  Your consumer group MSK had filed a petition asking ERC to enforce the 8.5% for all customers, not average. So far we have not heard from them.

Currently, commercial and residential customers that comprise 70% of Meralco’s sales are being charged 10.46%, much higher than the 8.5% limit.  In effect, Meralco’s rate for industrial customers is lower partly because they charge them only 4% in systems loss, less than half what they charge us, the captive customers.

We believe the numbers also show that Meralco charges industrial customers lower for distribution, metering, and supply fees.

We also estimate that our Asean neighbors have much lower generation charges than Meralco’s P4.1299 per kwh in December 2015. We are sure if Meralco’s procurement for power supply that it passes on to the consumers are done on arms length manner and honestly trying to achieve least cost power as their franchise require, our generation rate will be much lower by 10 to 20%.

As long as the government is allowing Meralco and the other private DU’s to negotiate the power supply with sister companies and our rate setting methodologies are anti-consumer,  the Philippines will always have the dubious distinction of having the highest rate in Asean.

Being the same as Singapore in 30% of the user base is not good enough. Our economic rivals are Thailand, Malaysia, Vietnam. And we are at a big disadvantage against them in the critical power production cost.  Sadly, it does not need to be this way. Someone in the government especially the ERC just need to move for the consumers.

When will that happen?  We continue to hope. That’s all we have for now.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.