The Vision of ERC’s Composition According to the Epira Law (Part 2)

Part 2

11 June 2018

III. The vision and mission of the ERC are actually simple.

 The vision is for the Assurance of adequate supply of electricity, entry of the private sector, and the assurance of fair and reasonable rates.

The missions are to open the sector to true competition as a way to encourage investments and achieve least cost power for the consumers.

Actually being a Good ERC Commissioner should not be that complicated.   It should not take lawyers and scientists to take these simple vision and mission to heart and make them their guiding stars.

IV. Lost in Translation….and Implementation

When I was a volunteer technical analyst for one of the key framers of the Epira Law from 1998 to 2002, poring over volumes of position papers from regulatory foreign consultants from the USA, England, and Australia,  I picked up one truism from a USA regulator. “we know we wanted to deregulate, we just forgot why”.

I thought at that time it was cute. Just did not realize that it will be so true on many people who will be implementing the Epira Law.

It is in the implementation that we forgot the why of the Epira Law. As an institution with such mandate that will define the power sector that is vital to the country’s industrial competitiveness, to our quality of life, and to our cost of living, the ERC lost its way and soul after the first Chairman, a lawyer but non-politician, was replaced by a succession of politician-lawyers.

To start with, the Epira Law was set up to be circumvented with the influential lobbyists inserting ambiguities and watering down many provisions on cross-ownership, competition, anti-monopoly, rate setting. Even the privatization of NPC assets was set up that early to be corralled by them at bargain prices. One group tried hard to marginalize the electric coops evidently to make them easier to take over as they have been trying to do for years.

          How did the ERC end up with so much responsibilities and power under the Epira Law? The common answer was that the Bicam framers of the law did not trust the DOE. To this observer though, looking at the exchanges of drafts and counter drafts in the Bicam, I believe the key Senators were more inclined to concentrate the power in the ERC as the regulator because It is obvious their patrons want to retain their influence in the implementation of the new law, and the proven way to do that is through the regulator, the ERC as they did in the old ERB.

The succession of lawyers Chairman seemed more interested in “outsmarting” the law, stretching the boundaries of logic and patriotism, and forgetting one thing sacred that is even higher than the Epira Law which is basic protection of the public interest.

To them it seems the implementation of the Epira Law was a game.  Being lawyers, they seem to have felt so powerful in interpreting (and selectively implementing) the law the way they want. And as politicians, it appeared making deals in writing rules that accommodate their friends and still be technically within the language of the law was the big game and feeling of empowerment.  One Chairman gave most of what Meralco wanted and resigned after to run for Congress but lost despite his campaign war chest.  By the way, his implementation of the Epira Law caused a P2 per kwh jump in Meralco’s rate that up to now we have not recovered.

In the last four years one let down for the consumers is the new Commissioners demonstrated no interest in recognizing the anti-consumer nature of the rules and showed much less interest in changing them.  Is it professional courtesy to the previous Commissioners? How about the consumers and country?

A big part of what’s wrong with the ERC is its adoption of strictly judicial processes that prevents legitimate concerns of consumers from being duly heard. The judicial system of ERC seemed designed to stifle consumer views and favor the moneyed applicants specially private distribution utilities whose battery of highly paid lawyers are charged to the consumers as part of their “regulatory compliance” budget approved by the ERC.

The problem with the current strictly judicial processes is that it had not actually resulted to fair and balance decisions at the ERC especially when it comes to rates and rate setting rules. Not many people know that private distribution utilities are effectively no longer regulated so they can make unlimited profits. And not many realize that we have breached the power generation limits aimed by the Epira Law and that there is now a cartelization.

This bias for the judicial system is a serious concern now that it seems most of the incoming new commissioners to replace the retiring ones are reportedly lawyers.  The legalese problem will continue and can worsen.

V. Inter-Disciplinary Challenges at the ERC

It is true that as a quasi-judicial body, the ERC needs one or two lawyers as commissioners. But the ERC also needs knowledgeable members in project finance  and in power generation and distribution. They need veteran electrical engineers.

If you are a new ERC Commissioner, you are of course given briefings on how things work within the Commission. So you learn and are made to accept that the methodologies that are in place are the right way of implementing the law, including all the anti-consumer provisions and eschewed processes. The details of 100’s of applications are so much that  it will take you about a year to even start wondering (from your conscience) why things are that way. Why specific provisions of the Epira Law are not being implemented and why public interest is not being protected.  You are thrown to the trees before you can see the forest.

Of course one thing you are pre-conditioned is that the ERC Commission is a collegial body.  To belong, a new Commissioner has to play ball and be one of the boys.  Commissioners are known to have heated disagreements. The way some of them roll their eyes when one of them is clearly favoring some applicants.

Most of the appointees to the Commission are actually highly intelligent. However, the learning curve is long for a lawyer to understand the inner workings of power generation, the intricacies of project finance upon which their rate setting is based, the ground level challenges of power distribution in the islands. CPA’s might be able to pick up the WACC concepts but they too will take time to learn the technical.  It appears it is not emphasized to them ERC’s mandate to protect the public interest.  While they are learning, they are subject to manipulation of the more senior commissioners or senior directors. The dragon establishment is just too big.

VI. Creating a Good Commission

The Epira Law made an effort to attract good talent by providing attractive salaries and retirement packages by providing in Section 39

“The Chairman and members of the Commission shall initially be entitled to the same salaries, allowances and benefits as those of the Presiding Justice and Associate Justices of the Supreme Court, respectively. The Chairman and the members of the Commission shall, upon completion of their term or upon becoming eligible for retirement under existing laws, be entitled to the same retirement benefits and the privileges provided for the Presiding Justice and Associate Justices of the Supreme Court, respectively. “ That means attractive and set for life pensions in the millions a year.

  1. Choice of Commissioners

The credentials established by the Epira Law are only the start. To create a good commission that can balance the interest of stakeholders and the consumers and the country’s hope for industrial competitiveness, the process of choosing Commissioners and the expertise mix need to be made more objective and multi-sectoral. Even more important is the judiciousness of the appointing authority, the President of the country.

Is it possible to be conflict of interest sensitive? To aim for independent thinking professionals who are not sponsored by and beholden to the big players? Many of us are Christians, proud Filipinos and highly patriotic. But if we owe our appointment to a vested interest, we are already compromised and surely will not be independent.

  1. Presidential Mandate

As important as His choice, is the mandate that he gives to his appointees. The power sector is so important to the country and people that the President of the country needs to provide a clear direction that hopefully will be in synch with his general objectives for the Filipinos. We cannot aim growth, employment, and economic development if our power supply and services are manipulated and overpriced.

The needed systemic and structural reforms at ERC can only happen if the President champions it. Unless we get lucky and the appointed Chairman recognize these problems and takes it upon himself to lead the reforms. It should not really take long to figure out what needs to be reformed. The Epira law provides the main mandates. Just add a true care for public interest, a good heart and spirit,  and we are in business.

  1. Structural Reforms at ERC

Perhaps the Commission can be restructured for disciplinary specialization. Regulated (transmission and distribution) from Deregulated Sectors (generation and csp), Missionary areas and subsidies. Power Generation. Competitive markets. Disputes. Consumer Concerns.   This will allow for efficiency and a shorter learning curve for Commissioners because they can focus initially in certain areas.

The ERC needs a stronger and professional bureaucracy. Career people who will be loyal to the Commissions mandate under the law. People who will dedicate themselves to the pursuit of the ERC’s vision and mission and to the protection of public interest.  The Epira law provided for their trainings and for their competitive and proper compensation.  They are the ones who can help Commissioners shorten their learning curves. The ones who can make the Commission function continuously in the service of our people.

The equally important structural reform is streamlining the ERC. For the Law to lighten its load. For it to not to regulate what should not be regulated and vice versa. For it to be less judicial resulting to time wasting postponements and the denial of consumers viewpoints from being heard.

People expect that there will be major changes in the make up of the Commission. Some are retiring and some are resigning it is reported. We feel bad for these good professional people. The fire breathing dragon turned out too big for them. Or were they just swallowed by the system?Coming from its recent turmoil, it will be an opportunity for the country to rethink and review the methodologies and processes.

This time let us hope we will be more loyal to the vision of the ERC Commission as defined by the Epira Law. Let us undo the mistakes of the early years and be better guided for the future.

Let us now choose new Commissioners carefully. We cannot afford another 10 years of overpriced and exploitive electricity.

Electric consumers are Filipinos too.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
Matuwid.org
David.mskorg@yahoo.com

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The Vision of ERC’s Composition According to the Epira Law (Part 1)

David Celestra Tan, MSK
9 June 2018

Part 1

When the Philippines decided to privatize and deregulate the Power Sector seventeen years ago this month in June 2001, they created an Energy Regulatory Commission to ensure the goals of creating true competition, reducing power costs, and assuring adequate supply of power are achieved.

Indeed, a properly functioning ERC is critical to the success of deregulation and its intended objectives of assuring power supply by encouraging investments in an atmosphere of true open competition, reducing power costs by installing competitive markets,  and putting safeguards for consumers from being overcharged.

Composition of the ERC according to the Epira Law

I. Credential Requirements

SEC. 38. Creation of the Energy Regulatory Commission.

There is hereby created an independent, quasi-judicial regulatory body to be named the Energy Regulatory Commissions (ERC). ……. The Commission shall be composed of a Chairman and four (4) members to be appointed by the President of the Philippines. The Chairman and the members of the Commission shall be

1. natural-born citizens and residents of the Philippines,

2. persons of good moral character,

3. at least thirty-five (35) years of age, and

4. of recognized competence in any of the following fields: energy, law, economics, finance, commerce, or engineering, with at least three (3) years actual and distinguished experience in their respective fields of expertise:

5. Provided, That out of the four (4) members of the Commission,

a) at least one (1) shall be a member of the Philippine Bar with at least ten (10) years experience in the active practice of law,

b) and one (1) shall be a certified public accountant with at least ten (10) years experience in active

6. The Chairman of the Commission, who shall be a member of the Philippine Bar, shall act as the Chief Executive Officer of the Commission.

7. All members of the Commission shall have a term of seven (7) years: Provided, That for the first appointees, the Chairman shall hold office for seven (7) years, two (2) members shall hold office for five (5) years and the other two (2) members shall hold office for three (3) years; Provided, further,

8. that appointment to any future vacancy shall only be for the unexpired term of the predecessor: Provided, finally,

9. That there shall be no reappointment and in no case shall any member serve for more than seven (7) years in the Commission.

10. The Chairman and members of the Commission or any of their relatives within the fourth civil degree of consanguinity or affinity, legitimate or common law, shall be prohibited from holding any interest whatsoever, either as investor, stockholder, officer or director, in any company or entity engaged in the business of transmitting, generating, supplying or distributing any form of energy and must, therefore, divest through sale or legal disposition of any and all interests in the energy sector upon assumption of office.

11. The presence of at least three (3) members of the Commission shall constitute a quorum and the majority vote of two (2) members in a meeting where a quorum is present shall be necessary for the adoption of any rule, ruling, order, resolution, decision, or other act of the Commission in the exercise of its quasi-judicial functions: Provided, That in fixing rates and tariffs, an affirmative vote of three (3) members shall be required.

II. Regulatory Responsibilities

Those are the general credential requirements.  Now let us see what the Epira Law had tasked them to do so we can have an idea on what kind of technical and integrity qualifications are needed to properly perform as a Commissioner beyond their credentials. In addition to Section 43, the ERC is also tasked with implementing many rules provided for in the various sectors of the power industry.

  1. SEC. 43. Functions of the ERC. –The ERC shall promote competition, encourage market development, ensure customer choice and penalize abuse of market power in the restructured electricity industry. This Section listed specific duties of the ERC from “a” to “u”. among which are:

f) In the public interest, establish and enforce a methodology for setting transmission and distribution wheeling rates and retail rates for the captive market of a distribution utility, taking intro account all relevant considerations, including the efficiency or inefficiency of the regulated entities. The rates must be such as to allow the recovery of just and reasonable costs and a reasonable return on rate base (RORB) to enable the entity to operate viably. The ERC may adopt alternative forms of internationally-accepted rate-setting methodology as it may deem appropriate. The rate-setting methodology so adopted and applied must ensure a reasonable price of electricity.

k) Monitor and take measures in accordance with this Act to penalize abuse of market power, cartelization, and anti-competitive or discriminatory behavior by any electric power industry participant;

u) The ERC shall have the original and exclusive jurisdiction over all cases contesting rates, fees, fines and penalties imposed by the ERC in the exercise of the above mentioned powers, functions and responsibilities and over all cases involving disputes between and among participants or players in the energy sector.

(c) Enforce the rules and regulations governing the operations of the electricity spot market and the activities of the spot market operator and other participants in the spot market, for the purpose of ensuring a greater supply and rational pricing of electricity;

2. Section 45 is one of its most challenging mandates on “Cross Ownership, Market Power Abuse and Anti-Competitive Behavior.” To promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the following safeguards:

a) No participant in the electricity industry or any other person may engage in any anti-competitive behavior including, but not limited to, cross-subsidization, price or market manipulation, or other unfair trade practices detrimental to the encouragement and protection of contestable markets.

b) No generation company, distribution utility, or its respective subsidiary or affiliate or stockholder or official of a generation company or distribution utility, or other entity engaged in generating and supplying electricity specified by ERC within the fourth civil degree of consanguinity or affinity, shall be allowed to hold any interest, directly or indirectly, in TRANSCO or its concessionaire.

3. The ERC shall, within one (1) year from the effectivity of this Act., promulgate rules and regulations to ensure and promote competition, encourage market development and customer choice and discourage/penalize abuse of market power, cartelization and any anti-competitive or discriminatory behavior, in order to further the intent of this Act and protect the public interest. Such rules and regulations shall define the following:

4. (a) the relevant markets for purposes of establishing abuse or misuse of monopoly or market position;

5. (b) areas of isolated grids; and

6. (c) the periodic reportorial requirements of electric power industry participants as may be necessary to enforce the provisions of this Section.

7. The ERC shall, motuproprio, monitor and penalize any market power abuse or anti-competitive or discriminatory act or behavior by any participant in the electric power industry. Upon finding that a market participant has engaged in such act or behavior, the ERC shall stop and redress the same. Such remedies shall, without limitation, include the imposition of price controls, issuance of injunctions, requirement of divestment or disgorgement of excess profits and imposition of fines and penalties pursuant to this Act.

We do not mean to reprint the Epira law. Just took a sampling of the ERC’s responsibilities mandated unto it by the EPIRA Law so you can get a feel of the enormity of the job that was dumped on the ERC to make power deregulation and privatization work.

 Good to review as we embark on its possible reform.

Next the vision and mission of the ERC are actually simple!

Who is to Blame for the Delays of the 1,200mw Atimonan One and 600mw Redondo Power Coal Projects? Meralco, Consumer Groups, or ERC?

David Celestra Tan, MSK
4 June 2018

The country needs additional power supply specially the modern and cost efficient kinds. The 1,200mw AtimonanOne “supercritical coal plant” and the 600mw Redondo Power project would have come in nicely in 2020 and 2021 to boost the power supply to our growing economy.

Now these two plants totaling 1,800mw are in limbo and crying for approval of the rates and PSA. The ERC has been put in a bind  because they were found guilty by the Office of the Ombudsman of evidently favoring Meralco by belatedly extending the implementation of the CSP policy for bidding power supply agreements.

Meralco with the help of their congressional sympathizers have been incessantly pushing for the approval of these two projects and raising the spectre of brownouts if they are not started soon. They also raised the issue of higher project costs with the EPC contracts having expired. That means they are already angling for a rate increase even before the approval of the projects.

Who is to blame then for the Delays of the two projects? Is it the Alyansa Para sa Bagong Pilipinas Inc (ABP) a consumer group that filed the complaint to the Office of the Ombudsman and to the Supreme Court or the MVP Group that tried to short-cut the process by hastily awarding the contract to its sister company Meralco PowerGen on April 26, 2016, just 3 days before the mysterious new deadlineof April 30, 2016? Or is it the brilliant person at ERC who thought this 3,551mw caper will not be noticed, buried in the avalanche of 90 applications for PSA’s in the ensuing extension? There are elephants among the herd sirs!

The MVP Group through its subsidiaries Meralco and Meralco PowerGen had been working on these two projects for years. The 600mw Redondo Peninsula coal project in Subic had been in development for at least 5 years before the original CSP policy deadline of November 6, 2015.  Its fight with the environmental groups is well chronicled.  Why did they not have a power supply contract signed with Meralco as early as 2012 when negotiated contracts were still legal?

The 1,200mw Atimonan One in Quezon is a more recent development project but Meralco started kicking it around in 2013 yet, a good two years before the November 6, 2015 effectivity of the CSP regulatory implementation.  I mean the MVP Group and Meralco had known as early as June 2015 that a CSP policy pronouncement had been established by the Department of Energy and the ERC had 120 days to issue an implementation resolution.  They could have crafted a PSA in 90 days or months before the November 6, 2015 magic date.I mean it took them only 40 days from March 15, 2016 to April 25, 2016 to hammer seven complicated contracts with five different partners.

There are indications that Atimonan One was still in the conceptualization stage at that time and its consortium is not yet finalized. In essence the MVP group was still looking for a partner who would agree to being a minority.

According to the OMB, as late as January 2016, Meralco was still petitioning the ERC to approve their right to undertake a swiss challenge bidding as a form of CSP.  The ERC disapproved the request. What transpired in the talks between ERC and Meralco between January and the March 15, 2016 decision of ERC to postpone the CSP implementation we might never know…..but can guess.

The fact is consumer groups could not help but smell a rat at the evident fast tracking of seven (7) PSA’s totaling 3,551mw by Meralco and its sister company Meralco PowerGen on April 25 and 26 2016, just enough to prepare an ERC application and make a filing with the ERC in the early morning of April 29, 2016. Halatanamanmasyado. To their bad luck, the integrity of ERC had been put in a bad light when one of its top officials committed suicide claiming corruption in the regulatory agency.

Is consumer group ABP (and the other consumer groups Bayan Muna and Agham) to blame for the so far two years delay (2016 to 2018) in these two projects?

At the end of the day, it is still the public interest that should be primordial to everybody.  And consumer groups are willing to listen to a win-win solution to at least half of the 3,551mw in the public interest.  We tried asking the DOE to intervene. We tried asking the ERC for a dialogue on what can be a good compromise. They are not interested apparently being sore at public interest group ABP for getting them suspended. Or they have a solution that will get these short-cut projects still forced to approval.

Perhaps when a national emergency had occurred.  It will take only a “coincidental” breakdown of power plants that are also owned by the Meralco partners in these projects and widespread brownouts to bring down the Meralco population to their knees begging for electricity. Yes, damn with the CSP, give me light!

Let us be realistic. Had Meralco undertaken a CSP in 2016, they would have completed the evaluation and awarding already by early 2017 which is a year ago. Then those projects would have broken ground in early 2017 and 2 years away from completion by now.

This is the MVP Groups short-cutting at their determined effort to monopolize power generation at rates they negotiated among themselves that has backfired. And now it will be the Meralco customers eventually suffering.  Don’t look at the consumer groups sirs. We were not the ones who violated the rules.

Would the MVP Group agree to subject half or 1,750mw to a true CSP and the other half including Atimonan One and Redondo to some fine combing by the consumer groups of their negotiated contracts to eliminate unfavorable terms to the consumers?  How about 600mw to Atimonan, 300mw to Redondo, 300mw to Semirara, and 600mw to San Miguel? Bid the rest as natural gas projects. Will the ERC see the sense in this in the public interest? Or will it be an all or nothing deal? Who will intervene? Help!

At this stage it does not matter who is to blame. Let us hope someone will lead the resolution in the public interest.  We need additional power supply by 2020 and 2021. And let us start truly bidding the new plants for 2022 and onwards. We hope we consumers are not sacrificed too much.

And how is your summer?

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com

While on a brief vacation:

I was reminded I am in California when my male haircutter said “my husband works in the pharmaceutical industry”.

Abolishing the ERC and Creating a New Regulatory Agency are not the Keys…it is Heart and Spirit (Part 2)

David Celestra Tan, MSK
27 May 2018

Part 2

Many of the Problems of the ERC have been self-inflicted

2. If the ERC had the right regulatory soul for the consumers and faithful to its clear mandates under Section 38 and 43 of the EPIRA law, it would have interpreted Section 43(f) morally and did not effectively deregulate the profits of the distribution sector like Meralco which now makes a 25% return on equity every year instead of 12%.

In fairness, the current Commissioners did not write these. However, we wish they were more willing to rectify the situation under their watch in the last 4 years. Your consumer organization MatuwidnaSingilsaKuryente Consumer Alliance even filed a petition with the ERC for a change in the PBR rule. They were not sympathetic. Meanwhile the estimated overcharge of about P0.75 to P1.00 per kwh in the Meralco area continues.

3. The ERC could have protected the consumers by requiring the competitive bidding of power supply contracts for regulatory approval. They did not need the DOE to make it a policy. That could have been a regulatory prerogative. Section 45 of the EPIRA while allowing the contracting of power by DU’s with affiliated companies, was silent on the need for bidding but did not also prohibit bidding. Protecting the public interest should have been the defining soul of the ERC and they could have required so.

And when the DOE made CSP a policy and when the ERC itself adopted its own rules to implement it, it inexplicably postponed it thus opening the floodgates for negotiated contracts that evaded its own CSP policy. It is hard to fathom.

4. Treason of Rule 11 and ERC’s own rules for determining “concentration of capacity” limits are a continuing ruse.

The EPIRA Law under Section 45 also limited the ownership, operation, and control of generation capacity by a group to 25% of a national demand and 30% of a grid demand. Rule 11 of the EPIRA Law blatantly dropped “ownership” and “operation” and limited the prohibition to only “control” in determining concentration. The result is a sister company of a DU like MeralcoPowerGen can own majority shares of a lot of power plants contracted with Meralco but it will not count against their domination limits if they have a partner “control” the capacity.

The old ERC dutifully wrote its rules for determining market concentration according to the limited view of Rule 11.  However, there is evidence that former ERC Chair ZenaidaDucut and Executive Director Saturnino Juan tried to rectify the situation by passing a new formula in determining market concentration by including an “ownership” test and “operators” test in addition to the “control” test.

This new rule was “deferred” by the ERC on that fateful day of March 15, 2016, same day and Commission session when the CSP implementation was extended by almost six months to April 30, 2016.

5. The Travesty of Systems Loss Averaging

The ERC is supposed to have passed a rule limiting the systems loss of private distribution utilities like Meralco to 8.5% (recently they claim the limit is being reduced up to 6.5%).

So why do we captive and commercial customers in the Meralco area pay about 9%. That is the travesty of systems loss averaging that the ERC is allowing Meralco. They charge large industrial customers only 3.5% systems loss but chargers us 9 to 10% and ERC is allowing it as long as Meralco’s average is less than 8.5%.  Meralco has been boasting that their average is 6.75%. We captive customers use and pay for about 60% of the energy sales of Meralco and we are charged higher than the limit, just because of systems loss averaging.  And the process of computation is even less transparent. The recent announcements of lower systems loss means little to consumers as long as it is averaging. What is just is for Meralco to charge the maximum of the new 6.5% to any customer. It is their right if they want to charge industrial customers less but no consumer should be charged higher than the legal limit.

6. Judicial Processes

MSK has been filing petitions at the ERC and making an effort to contribute to the democratic processes that is supposed to be its hearings. One rude awakening for us in trying to represent the consumers is to realize that the ERC processes are so enamored with being “judicial” and there is little effort in using the “quasi” prerogative to protect the consumers.

Consumers cannot appear at the ERC and argue meaningfully unless it follows trial rules of court. You need a lawyer for that. And how many consumers can afford to hire lawyers just to present their case.  They are against the well paid Meralco lawyers, whose fees are ironically paid for by the consumers through the “regulatory compliance” budget of Meralco as approved by the ERC. Talk about injustice and insult to injury.

Our observation is the ERC in its public hearings, behaves more like an impartial judge in a court trial and the consumer advocates the complainants. The ERC cannot be an impartial judge in these proceedings. It has its own mandate to regulate and assure fair and reasonableness of applications and not judge the objections of the consumers. Consumer representatives are there only for additional input.  The ERC must interrogate and cross examine the witnesses and presentations made by the DU applicants.

This has been resulting to the failure of the ERC to consider legitimate consumer concerns because they are silenced by rigid trial and legal processes that gags consumers from fairly expressing their views.

Perhaps they should add a “consumers only” hearing in the process,  the objective of which is to hear and understand the concerns of consumers for the Commissions consideration. No interference from the highly paid wily lawyers.

7. Motu Proprio duty to guard against anti-competitive behavior and cartelization of power

Things are out of hand in the continued monopolization, oligopolization, and cartelization of the power generation sector..The five partners of MeralcoPowerGen own and control 14,000mw of the country’s 16,000mw installed generating capacity.How can there be true competition? The EPIRA law is very clear under Section 45 in the motuproprio duty of the ERC to investigate the occurrence of these anti-competitive behavior. Wikipedia defines “ Motuproprio” as Latin meaning “on his own impulse”. It describes an official act taken without a formal request from another party. The EPIRA law is clear under Sections 43, 45, and 70 on the ERC’s legal mandates that it should perform “motuproprio”. No need for consumer groups to file motions.

Your organization MSK had filed a petition almost a year ago for ERC toinvestigate the evident cartelization of Meralco’s and the country’s power generation supply.If only to try to point out to the ERC things of public interest that are being overlooked. Sadly, there seem to be no interest in stepping up to such clear patriotic and mandated duty…..and eerily no one else in government is raising a hoot including the normally cantankerous Congress.

8. Independence of the ERC Commissioners

The kind of independence that the ERC Commissioners need that can serve the electric consumers is the one from their heart, mind, and spirit….to make judicious decisions for the best interest of the consumers. This cannot be legislated.

Abolishing the ERC and creating a new one however will not change things for the better because that is not where the problem is. The country needs to do a better job at choosing future commissioners. The current crop of commissioners are known individually to be professionals with high level of integrity in their previous careers. Why they have been acting they way they have as a collegial body is quite perplexing.One misguided cow leading the herd to the promised land?

Creating A Better Commission (note, not commissioners)

Future reform legislation for the remaking of the ERC should consider rules for better choices of Commissioners….rather creating or forming a better Commission.  Like potential commissioners cannot hold or run for public office from Mayor and up to Vice-President five years before and after being a commissioner. Like Lawyer Commissioners should be chosen by the President from a short list of three (3) endorsed by the Lawyers League just like choosing the Justices of the Supreme Court. The CPA Commissioner can be endorsed by the PICPA. New commissioners should be required to hold dialogues with consumer groups and stakeholders so they get first hand the concerns of electric users.  These still are not guarantees but it gives the consumers a better chance of not getting handpicked commissioners by vested interests.

In the end though the quality and integrity, and the marching orders, of the ERC Commissioners as a body depends on the appointing authority which is the President of the Philippines and to some extent his DOE Secretary.  Let us hope President Duterte remains true to form in his genuine interest to improve people and country.  This also cannot be legislated. It is in the heart, spirit, and will.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
Matuwid.org
david.mskorg@yahoo.com

ABOLISHING ERC AND CREATING A NEW POWER REGULATORY AGENCY NOT THE KEYS…..IT IS HEART AND SPIRIT. (Part 1)

David Celestra Tan, MSK
23 May 2018

Part 1

In February 2014 we wrote in the Philippine Inquirer about the Epira Law being an imperfect law that is imperfectly implemented.  As it relates to the Energy Regulatory Commission that it created under Section 38 the imperfections of the law pale in comparison to the damage done to consumers and country of the imperfections of the regulatory agency itself in the implementation of even its very clear mandates under the law.

Current pronouncements of abolishing the ERC to be replaced with a new Board of Energy or Philippine Power Regulatory Commission will unlikely make much difference for it would be impossible to legislate against what truly ails the power regulatory agency which is a consistent lack of a true regulatory soul that would be committed to balancing the interest of electric service providers and those of the electric consumers that need to be safeguarded under a deregulated sector.

It is hard to get excited about the publicized creation of a new regulatory agency when you hear the sponsors starting on the wrong foot.

“The ERC needs to be an independent body”.? Excuse me sirs, the ERC degenerated to what it is because it successfully parried in 2004 attempts of the DOE to coordinate policy. “Independence” only meant they didn’t want to be interfered with in whatever they were doing. And see the result?

.A reported new sponsor of an ERC abolition is quoted by the papers to say “if the ERC becomes an attached agency of the DOE, it would still be prone to corruption activities.”

.”I think if the ERC becomes an attached agency of the DOE, that would be more subject to a lot of abuses, whereas if we leave the ERC as an independent body, I think we just need to strengthen it more so we can take out the issues of corruption and abuse,” he said……So sad.

We are for strengthening the ERC more. The ERC being allowed too much independence, whether by omission or commission of the Executive Department, whether directly by the office of the President or through the DOE, is actually part of the problem.  The implication that issues of corruption and abuse at the ERC were results of interference from DOE is something new to us. We have not heard that before so we are wondering where that premise is coming from. It has been too independent (and unfortunately also too non-transparent and divergent) since 2004.

In fact in the current imbroglio about the Meralco’s seven (7) midnight power supply contracts totaling 3,551mw, and the resulting cartelization of the power generation sector, consumers have been begging unsuccessfully for the DOE to intervene to break the impasse and assure future power supply.

Imperfections of Epira Law as it relates to the ERC

Let us start by remembering that the success of a deregulated power sector and the achievement of lower power cost to the consumers depended on the creation of a truly competitive power sector. One where truly independent power generation investors can also come in an atmosphere of open and level playing field competition to assure the continuous inflow of more and better power supply. A successful deregulated sector in turn needs a strong and truly independent ERC.

  1. The Epira law put too much burden on the ERC to make power deregulation work. The ERC was a new creation after the old ERB was abolished. And it struggled mightily under the weight of its monumental mandate.
  2. Rather than making the ERC concentrate on rate making and promoting competition, the Epira law gave it responsibilities like inspections and provisions of operating permits to power plants and self-generators, functions that the government bureaucracy turned into full scale processes that duplicated the work of the DOE or the grid operator the NGCP.
  3. The Epira Law failed to unequivocally prohibit cross ownership between a generator and a distribution utility. (Thanks to the powerful vested lobbyists) And worse under Section 45 failed to require competitive bidding for power generation supply contracts that would be passed on to the consumers. The Epira Law Implementing Rules that was written by the DOE made it worse by writing Rule 11 which further opened the loophole for concentration or domination of generating capacity. It dropped “ownership” and “operation” as part of the criteria and limited it to only “control” in clear contravention of the Epira Law that it is supposed to faithfully implement.
  4. The Epira law made its language too vague on many key areas that opened the door for manipulation. (Thanks again to the powerful lobbyists). Under Section 43(f) the EPIRA Law opened the door for “alternative rate making methodologies” which unfortunately was parlayed into a “performance based rate making” (PBR) methodology that is disastrous for consumers.

Imperfect Implementation by the ERC

The ERC as the implementor of the EPIRA Law rules of competition and rate charges to consumers lost its regulatory soul after the first Chair Fe Barin was “kicked upstairs” because the powerful DU’s “could not work with her”. I guess we all know what that means. And the rest is history….the horrific kind for consumers circa 2002 to 2016

Many of the problems at the ERC have been self-inflicted.

  1. Regulating what should not be regulated…..and vice versa

One reason the ERC is swamped and overworked, and hence had become slow and inconsistent, is because it is regulating things that it should not regulate. Do you know that if a utility wants to reduce its rates, they cannot do so without ERC approval? Heck, anyone who wants to drop their rates should be welcome.

The generation sector is supposed to be a deregulated sector but the way they approve the power generation sector, they are crossing the line towards regulation. In their job of determining “fair and reasonableness” of the generation rates they compute and establish profit limits. That is regulation. Instead to assure fair and reasonableness, they should insure true competition and establish protective industry rate benchmarks.  This would reduce substantially the applications and hearings at the ERC.

Not Regulating what should be regulated.

Conversely, the distribution sector that is clearly a regulated sector they refuse to truly regulate. Meralco makes 25% return on equity yearly instead of the Supreme Court ruling of 12%. ERC is content in hiding under the veil of “Performance Based Rate making” or PBR rate making methodology….as if it is a rate making policy for public service utilities. PBR is only a method of computing rates. The country’s rate policy is “least cost power”, ”distribution sector is regulated”. See Section 2 of the EPIRA law that outlines the Policies of the State.  These are also enunciated by the Supreme Courts ruling for 12% maximum limit.  Some Commissioners are claiming that Meralco’s 25% return includes “unregulated profits”. This is regulatory abdication.

For transparency, may we respectfully ask ERC to require Meralco to separate the accounting and reporting for profits of regulated and unregulated businesses?

(to be continued)

True Significance for Consumers of Meralco and Solar Philippines P2.99 Solar Deal

David Celestra Tan, MSK
27 April 2018

Did upstart solar entrepreneur Leandro Leviste of Solar Philippines just totally disrupted the once so ebullient in itself multi-billion solar industry with its audacious P2.99 solar rate for 85 megawatts of solar for Meralco?

The Philippine solar industry of mostly foreign companies with well connected local facilitators was having a field day with their successful lobbying for a feed-in tariff of P9.68 per kwh in the first round (50mw) and P8.68 in the second round (500mw) of FIT rates. We estimate the annual cost to consumers of at least P5.5 billion per year or a mind boggling P110 billion over the 20 year life of the government FIT commitments for solar alone.

Many of the old guards in the solar industry led by its chief FIT lobbyist Ms. Techie Capellan of the Solar Alliance must be wondering if the young Leviste, son of Senator Loren Legarda, is suffering from misguided juvenile exuberance when he went for the 85mw of grid solar at 2.999 per kwh to beat the original proponent’s then already eye-brow raising P3.50 per kwh. More so that only a few months earlier Leviste and his Solar Philippines just signed a P5.35 per kwh solar rate for 50mw also with Meralco.

In fairness to the young Lean Leviste, his P2.999 or US$0.058 per kwh is within the realm of the $0.03 to $0.05 per kwh rate of large solar projects in the Middle East and Latin America. So P2.9999 is theoretically achievable despite reports that those Middle East projects were provided with very special state sponsored project financing by the rich petro-dollars of those countries.

It is also possible that Leviste is taking a page from the Jeff Bezos Amazon playbook of “build scale even if you lose money now, conquer market position, and make money later”.

At the ERC Hearing on the proposed contract and rate last April 16, 2018, your consumer advocacy group, MatuwidnaSingilsaKuryente Consumer Alliance Inc. (MSK) endorsed the speedy regulatory approval of the 85mw P2.9999 per kwh project. We must have surprised both Meralco and the lawyers of Solar Philippines Tarlac who were obviously expecting an adversarial intervention from MSK.

Actually we have serious concerns on the loose ends of the contract but we endorsed it anyway because a P2.9999 per kwh solar rate is positively disruptive for the consumers. We want to see if young Leviste can really deliver grid connected solar at that rate.

For the record, we are concerned that the contract negotiated by Meralco with Solar Philippines does not specify at least a minimum quantity of energy that will be delivered by the 85mw project. Definitive delivery of energy we thought is essential if the consumers are to truly benefit from the P2.999 rate. With no Energy, the P2.9999 does not benefit consumers. The expert witness presented by Meralco was also evasive when asked which hours of the day the Solar project will deliver energy to Meralco consumers. Instead he said solar facilities normally deliver energy from 6am to 6pm. The smart looking guy must have hated whoever coached him into being vague, evasive, and smart alecky.

To think that Meralco and Solar in their published application for ERC approval claimed a net savings to consumers of P0.0033 per kwh from approximately 50 million kwh a year of energy delivery. So why is this, or a range of minimum to maximum delivery, not in the contract? Is it because Meralco as a utility is so used to negotiating supply contracts with only its sister companies that it cannot negotiate a truly iron-clad contract with a non-sister company (for now).

We estimate that an 85mw solar array can deliver at just 4 hours a day (12 noon to 4pm) 275 days a year (after a generous provision of 90 days a year of rainy and overcast days of downtime), a minimum of 93.5 million kwh a year.

The true significance however of the transaction goes beyond the landmark P2.9999 per kwh solar rate.

The transaction that was done through a rare competitive selection process or CSP by Meralco, with all its imperfection as a swiss or price challenge, resulted to a mind boggling savings to consumers of P2.35 per kwh (P5.35 minus 2.9999).

The 85mw P2.9999 per kwh solar contract is very significant for the consumers and country in that it settles once and for all the debate with Meralco that

1. Subjecting its power supply contracts to competitive selection process or bidding will bring significant savings to the pass on generation charge to consumers. In this case its achieved least cost power is 44% lower than its previous P5.35 per kwh solar rate. If those 4,005mw of coal and natural gas base load contracts negotiated by Meralco with its sister company, MeralcoPowerGen were subjected to CSP, consumers will be happy with a 10 to 20% savings. That’s about P0.30 to P0.60 per kwh or a total of P14 billion a year in savings to Meralco captive consumers or P280 billion over the 20 year lives of the 3,551 mw coal midnight contracts.

2. The 85mw solar procurement also settled the debate on whether competition among non-affiliated companies result to genuine competition and genuine savings to the consumers. As of now, the participants in those solar CSP were not affiliated with Meralco or the MVP group. Solar Philippines, Power Source, Citicore, and Equus of Singapore.

At the end of MSK’s day in the ERC court on April 16, 2018, we filed a petition to the ERC, requesting that the approval must include a prohibition from Meralco or any of its affiliates to buy into Solar Philippines or First Bulacan/Power Source.

Going back to the P2.9999 rate, if Solar Philippines eventually does not deliver any energy to Meralco, we the consumers benefit nothing from the supposed P2.9999 rate.

Let us hope this will be a truly significant project for the consumers. We wish you luck Mr. Leviste.Meralco consumers would be looking for the P2.99 solar with a delivery of at least 90 million kwh a year.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com

The Correct and Legal Way to Determine Concentration of Power Generating Capacity (Part 1)

David Celestra Tan, MSK
1 April 2018

The creation of true and robust competition in the power generation sector is key to achieving least cost power for consumers. The EPIRA Law had established under Section 45(a) the limits on generating capacity a group can own, operate, and control to 25% of national installed capacity and 30% of regional capacity (Luzon, Visayas, and Mindanao).

The policy for CSP is just the first part of the formula to assure competition. CSP or competitive selection process (bidding) of power generation contracts are fairer to the consumers, as opposed to the long practice of allowing negotiations between a distribution utility like Meralco and generators, usually their sister companies.

The second part is the way the EPIRA law restrictsthe  concentration of power generating capacity to 25% of national installed capacity and 30% of regional capacity (Luzon, Visayas, and Mindanao) under its Section 45(a).

Unfortunately, the Department of Energy in 2002 that was tasked of drafting the Implementing Rules and Regulations of RA 9536 watered down this restriction of the law by disregarding “own and operate” and limited only to “control” in determining market concentration. This has been as much the reason for the uncontrolled consolidation of power generating capacity as the apathetic implementation of the CSP policy. Rule 11 did not disregard “own and operate” by accident. It clearly was a carefully calculated (and illegal) emasculation of the main law which otherwise unequivocally provided that all three, own, operate, and control to be the criteria for limits of concentration. (as we wrote before, whoever perpetuated this must be tried for treason!)

The Energy Regulatory Commission for its part promulgated its Resolution No. 26 Series of 2005 entitled Guidelines for the Determination of Installed Generation Capacity in a Grid and the National Installed Generating Capacity and Enforcement of the Limits of Concentration of Ownership, Operation, or Control of Installed Generating Capacity which took effect on 22 February 2006.

This is essentially an adaption of the “control” limits under Rule 11 and removal of “ownership and operation” as factors for limitation.

So what’s the big deal?  A lot. And a lot because it is one of those subterranean reasons for the continuing lack of true competition in the power generation sector and the resulting higher pass on generation rates to consumers.

Understanding the Basics

If we are to achieve least cost power, we need a truly competitive power sector, where there are enough players who would be truly competing with each other. We would have enough players if there is a limit on how much of the country’s power generation capacity a particular group or related group can own, operate, and control.In countries that are vigilant against monopolies and market manipulation, four players would be enough. However, in the Philippines we probably need minimum six players. Limits on market collaboration must be strictly imposed.

The EPIRA law rightfully said “own, operate, and control” for the reason that in any of those capacity, the power generator would be in a position to influence the availability and pricing of the power.  When the EPIRA IRR under Rule 11 dropped “own and operate” and only retained “control” as the determining factor, they were suggesting that a power generator who own or operate the power plant is not in a position to influence the decision on whether to run the plant or price its power. Tell that to the marines!

In the spot market, that is referred to as “withholding supply capacity” and “manipulation of prices”.

Rule 11 thus defined “control” to mean

“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.” c

Could this be the reason why the multi-ownership of power generating plants became modus operandi among the big guys? Only the part owner who “controls” the capacity will be credited with the capacity for purposes of determining concentration of generating capacity. The other owners and operators of the power plants are not counted with the capacity.

The 3,551mw of the controversial Midnight power supply contracts although all owned 49% to 51% by Meralco PowerGen will not count and not be subject to limit computation since another entity will beassigned to control “the terms and conditions” of the prices or quantities of the output of such capacity sold in the market. Nifty circumvention of the law!

Rule 11 of the EPIRA IRR and ERC’s Resolution 26 of 2005 are the one-two punch against consumers that had been allowing for the consolidation, oligopolization, and cartelization of the power generation sector.

In many public fora your organization MatuwidnaSingilsaKuryente Consumer Alliance argued every chance we have to the ERC and DOE that Rule 11 is illegal and should be amended. An IRR cannot effectively water down and amend the mother law it is supposed to implement.

There was a flickering light at the end of the tunnel

There was a possibility that the ERC under former Chair Ducut and Executive Director Saturnino Juan tried to do something good for the consumers before they exitedby rectifying the illegality of omitting “ownership and operations” of Rule 11 or at least its Resolution 26 of 2005 in counting concentration of generating capacity.

In August 19, 2015 Exec. Director Juan signed an issues paper under ERC Case 2015-005 RM and on October 13, 2015 issued draft rules that would add an “ownership test” and “operation test” in addition to “control test” in determining  capacity concentration and compliance to the limits set by Section 45(a) of the Epira Law.

This planned rules change apparently held a Damocles sword over the plans of the Big Generators to consolidate power generation among themselves.

ERC Snuffs Out Flickering Light

This would have been a big step for the consumers.  But lo and behold, on the fateful day of March 15, 2016, the same ERC Commission session when they decided to postpone the implementation of the CSP policy (Resolution 1 of 2016) , the ERC decided to “hold in abeyance” the adoption of the new methodology adding ownership and operation tests in the ERC’s determination of compliance to market concentration limits. This was Resolution 3 of 2016.

The twin resolutions on March 15, 2016 (Resolutions 1 and 3 of 2016) were actually complementary to each other. Some people knew that the postponement of the CSP policy would result to the signing of significant contracts among related groups that would run counter to the “ownership and operation tests” envisioned under ERC Case 2015-005 RM. The obstacle had to be removed.

The pandemonium that accompanied the postponement of the CSP policy enabled the equally significant ERC Resolution 3 of 2016 to scape public and media notice.  In fact, it was not held in abeyance but filed away hoping that it is totally forgotten.

Two years later on March 20, 2018, the ERC announced its determination of market concentration limits

  1. National Installed capacity of 21,867.11 mw or 5,466.77mw limit
  2. Regional Limits

Luzon            15,175 mw installed, 4,552.79mw limit

Visayas           3,194.88mw installed, 958mw limit

Mindanao      3,496.26mw installed, 1,048.78mw limit

We assume that these are based on the old questionable methodology using “control test” only. We are not aware of any new methodology issued.

When will the government do what is right and look after the people, the electric consumers? Investors in power generation need to make reasonable returns on their investment but do we have to sacrifice the people always in the process?  Can we not find a balance?

In the next article we will tackle who are legally in compliance with the limits set by the Epira Law of 2001, Section 45(a)?

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com