Letter to Sec. Petilla of Department of Energy (DOE)

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

30 July 2014

Hon. Carlos Jericho Petilla

Secretary, Department of Energy

Subject: Concerns on the Proposed Structure of the new Independent Market Operator for WESM

Dear Sec. Petilla:

The Department of Energy’s initiative on the proposed transfer of the WESM market operator duties from government owned PEMC to an Independent Market Operator (IMO) is welcome and long overdue and one sure way to make way for consumer-protective reforms in the WESM trading rules. The composition of the new IMO board certainly would make it independent depending who are appointed.

We are concerned however that under the draft reorganization, a Market Participants Group (MPG) is being designated as the main recommending body for rule changes in the WESM.

MPG appears would be composed of the same group of “stakeholders” that had put in the current WESM rules that have turned out to be detrimental to the consumers. This will defeat the purpose of making the WESM’s market operator as meaningfully independent.

Instead we propose that a new truly independent technical committee reporting to the IMO Board should act as recommending body for rule making changes in support of the IMO Board.  The MPG can be a sub-committee that can provide its input in rules and changes to the IMO Board and its rule evaluating and recommending TWG.

 

The assertion of PIPPA that the IMO must be subjected to competitive bidding as envisioned by the Epira law is inaccurate. Rule making bodies and its objectives cannot be subject of competitive bidding with a price in the same way that the tariff making duties of the ERC cannot be subjected to competitive bidding. The government cannot auction ideals and public policy objectives.

We hope these concerns can be considered in the final organizational structure of the IMO.

More power in your power supply improvement initiatives.

Very truly yours,

David Celestra Tan

Co-convenor, Matuwid na Singil sa Kuryente Consumer Alliance Inc.

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10 +2 Remedies for Power Cost Reduction in the Country Specially Meralco

10 +2 Remedies for Power Cost Reduction in the Country Specially Meralco

I. Towards Reducing Power Costs

A. Generation Charge

1. Open the Generation Market to Competitive Bidding specially Base-Load Plants and those intended to serve the captive markets.

This will eliminate the negotiated sweetheart prices, terms, and enforcement of bilateral power supply contracts specially to serve the captive market. Open Competitive Bidding will mitigate harmful cross-ownership and market domination and take down the big barrier to market entry of truly independent power producers who might bring in more competitive rates and technologies. It thus will lead to more independent investments and power supply. There are many business groups, local and foreign, who are interested in investing in power under stable rules. All they need is market access which open bidding will enable.

Big DU’s like Meralco must really pursue in words, spirit, and action, its obligation as a public service utility to provide power “in the least cost manner” to its consumers. This can be achieved only through “arms length” dealings of its procurement of power supply and materials.

This can reduce P0.50 to P1.25 per kwh in Meralco’s average generation charges.

2. Rationalize Market Domination and Amend Rule 11 4(b) of Epira IRR.

This must be aligned with the Epira Laws’  limits on domination of “ownership, operation, and control” of installed capacities, not just “control” as provided by Rule 11. This is the loophole that is allowing market domination.

3.Rationalize the terms of bilateral power supply contracts specially the existing ones of SPP’s (sister power producers).

Require Distribution Utilities to strictly enforce the downtime limits and fuel efficiency of their contracted power generator suppliers.  Make Power Generators Responsible for Replacement Power after their annual downtime limits. Allow guaranteed capacity payments only in not more than 8 years of new power projects.  Generators must be paid only when they operate and actually delivering capacity and energy.

This will protect the consumers from non-transparent shutdowns and the burden of replacement power especially from the volatile WESM.   This will also give the needed rule-signal to the generators to manage more efficiently their operations and maintenance.

This must be imposed not only in the main grid but also in the off-grid areas.

4. Revise WESM trading rules and Rule Making bodies

Make it a market of excess capacity and replacement power. Pay spot market suppliers for their bid prices and not the highest price as the Market Settling Price.  Through ERC establish the economic dispatch price of reserve capacities for each plant.

To facilitate these consumer-friendly changes, reconstitute the market operator and make it more independent from the clutches of the generators who clearly have vested interests in making rules that are profit-oriented.  To give true meaning to independence, the rule making body should be truly independent of the market participants.  The proposed Market Participants Group (MPG) as recommending body for rules is a defacto retention of the current generator-dominated set-up of PEMC. The MPG as the market participants can provide their input but the final decision on rule changes and the IMO Board shall be more or less independent.

Consumers and Buyers of power must also be provided with avenues to provide their ideas on rules, maybe through an office of “consumers affairs representative” in the rule-making body.

B. Transmission Charge

5. Make Systems Operation independent from NGCP.

Section 21 of the Epira Law specifically defined what the concessionaires (INGCP) function would be and it did not include System Operation. In fact, Section 9 defined that System Operation would be a function of the Transco.

NGCP makes its revenue from the use of its transmission lines. If they are the ones who makes the connection rules and ownership boundaries which should be based on technical efficiency and promotion of market competition, their rules could be influenced by the desire to maintain and generate revenue for their transmission wheeling services. This will lead to unnecessary transmission charges and deter the development of embedded generation, something that is essential for power reliability in our archipelagic country.

A more independent systems operator can also better judge the proposed transmission expansions and channel them where they should be installed.

This conflict of interest in the functions of NGCP must be corrected.

6. Systems Loss Charge

The ERC had established under its Resolution 17 of 2008 that the Systems Loss of private distribution utilities that can be passed on the consumers is 8.5%.  However, for many years the systems loss charges on Meralco’s electric bills of residential and commercial consumers range from the current 11.5% to 15.4% of the generation charge and indications are that systems loss charges to industrial consumers are lower at 6.5%.

There is a need for transparency and integrity in how the monthly charges are determined by Meralco and the distribution utilities.

C. Distribution Charges

7.  Cancel PBR and revert back to RORB.

PBR (Performance Based Rate Setting) is the worst of both worlds. In addition to being allowed a return on rate base on installed facilities as in the old RORB system, PBR further allows for making the consumers pay in advance for the future and promised investments of the Distribution Utilities like Meralco. And they don’t even have to make the investments as long as they “deliver a level of performance as established by the ERC”.  In effect the consumers are being charged for investments and returns the DU stockholders did not even make. PBR added P0.20 to P0.50 per kwh in the distribution related charges of Meralco.

Section 25 of the Epira Law provided that the retail rates must be based on investments “incurred”. The allowance for alternatives “to promote efficiency” rate setting must be construed strictly to the best interest of the consumers. Making investments to improve system efficiency is the duty of the DU and its stockholders. Why transfer that to the consumers? DU’s make a return on their investments anyway under RORB.

If the consumers are the ones being made to pay for the capital investments of a DU, then these contributions must be classified as capital contributions, loans from the public, or donated assets where the DU or Meralco should not be allowed to make a “return” capital investments on those in the future.

If we revert back to the the old RORB, there would be a need to tighten the rules to prevent similar padding. See report of PB Associates for ERC in 2007 (ERC Website)

8.  Impose Strict Competitive Bidding rules for procurement and contracting of rate base assets.

There is no assurance that Distribution utilities are procuring their materials and services in the most competitive manner. In fact many are awarded to favored suppliers at negotiated prices. This leads to an overpriced rate base. A 10% overprice in rate base is a 10% overcharge in distribution rates.

9. VAT Taxes

Electric power is a primary input for production and the original Epira Law of 2001 provided that it is zero-VAT rated and exempted.  VAT on power must be phased out over a fiscally affordable timetable for the country. We can start by restoring the zero-Vat rating of industrial customers, then the commercial and eventually the residential consumers. As a minimum there should be no VAT on generation charges.

The government can eliminate the Vat on power supplied from the Malampaya gas where it is already making a windfall since its price is indexed to the foreign price of energy.  Imposing VAT taxes on this indigenous gas is like double-dipping on the Filipino taxpayers and consumers.

VAT should also not be imposed on Systems Loss, which is energy lost and not consumed by the public.

10. Universal Charges on Missionary Electrification

This UC-ME is creeping up on the consumers, starting from about 0.03 per kwh to P0.095 per kwh now. A big contributor to this missionary subsidy is the high cost of the temporary power solutions of the SPUG division of Napocor.  The longer term role of Napocor in missionary electrification should be clearly defined so that they can come up with long term solutions. Because they are in limbo, they are forced to adopt only band-aid solutions which are the very expensive rental generators that are priced for short term but rented continuously for years, contributing significantly to the UC-ME that is passed on to the national consumers. Napocor’s mandate for long term missionary electrification should be established.

The NEA and the Distribution Management Committee of the ERC might want to step up and provide guidance on proper power planning by EC’s.

II. Plus 2 for National Power Reliability

11.  Provide for a Stronger Power Planning Function with Meaningful Enforcement Capability

The Department of Energy’s power development plan is essentially a narrative of the state of the country power and energy sector and a tally of what it calls “indicative and committed projects.  It must include strategic plans in the areas of energy mix and locational targets.

It must be expanded and provided with an enforcement capability.  Under the current rules, the private sector do not really have to follow. This can be remedied under the current law if the ERC mandates that all bilateral contracts must be subjected to open competitive bidding that will be under the auspices of the DOE. (Please See Recommendation No. 1). Of course, the DOE must see that its planning group is provided the resources to hire, train, and retain good talent.

If the DOE is too political to perform this critical national function long term, then maybe it is time to consider creating a Philippine Energy and Power Planning Commission.  The current functions of the ERC for making rules on the Grid and the Grid Management Committee can be made part of this overall planning commission for more comprehensive and coordinated plan.  Then the ERC can concentrate on its daunting rate setting tasks.

12. Allow the Government through the DOE and NPC to undertake Strategic power generation capabilities.

It can start with reviewing the privatization of the governments remaining power generation assets and see which ones can be strategically retained. It can be strategic reserve and should not include base-load plants unless the private sector is not stepping up.

Luzon’s 2000mw of hydro projects could have been ideal for this strategic role. Depending on the rules of the WESM, the governments strategic power generation capacity can be the calibrator of supply whenever needed to prevent under supply and spikes in WESM prices.  After all, the fuel of hydro which is mountain water is public domain. Hydro used to be under P3.00 per kwh. Now it is traded at the WESM at P23 per kwh.

For businesses and industries in a developing country like the Philippines, the only thing worse than high power costs is unstable and unpredictable power costs.  We must eliminate volatility in rates and supply.

We believe this menu of remedial measures can bring down power costs by P2.00 per kwh or 15 to 20% overall.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

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Smear Campaign Will Not Stop MSK’s Fight Vs Abuse in Power Charges

It is clear that people wanting to continue their happy regime of consumer abuse in the power charges are threatened by the strength of MSK and David Celestra Tan’s ideas and the purity of our goals for the people and country’s energy competitiveness.

Instead of maligning our person, why don’t they challenge the following ideas?

  1. A truly competitive Power Sector is better for consumers than Monopoly and market domination
  2. The Open Bidding of Bilateral Power Generation Contracts will bring lower rates than negotiated sweetheart deals between sister companies and their incestuous contracts.
  3. A controlled domination of generation supply will create  better competition for better rates.

The Department of Energy’s Multi-Sectoral Task Force to Reduce Electricity Prices in the Country is one forum in which issues like this can be at least debated.  And MSK is willing to contribute to the national search for solutions. We will instead just submit our ideas to the well-meaning Dept of Energy and expound on the mechanics of our ideas for reform if called upon and invited by the government. We are asking the Honorable Secretary Petilla to excuse us from further participating in the open discussions. It is unfortunate because we felt we can enunciate better the improvements for the consumers.

MSK is anyway pursuing other legal avenues for its fight for the consumers and will bring specific advocacies designed to spare the consumers from further abuse.

The attacks on my person is regrettable because I am hardly the issue. It is the consumers and how they are being unfairly charged.  I nonetheless forgive those who are allowing themselves to be used for their right to make a living the way they know how.

I am a person of humble beginnings and just like millions of hard working Filipinos I am proud of the best that I had accomplished out of what the Lord had blessed me with. Certainly, as a small entrepreneur I have had more than my share of challenges along the way that we have to deal with and survive.

I had been a victim of the energy establishment and suffered from its politicized decision making and you can interpret “politicized” the way you want. I have forgiven them too. God really has a sense of humor I try to keep in mind.  I thank Him for the enough successes out of what it felt like gazillion challenges. I thank Him for keeping me a simple person with modest needs and simple happiness.

As a very private person it is the farthest from my mind to be in the forefront of public debate and be in the news. However, as I retire , I kept realizing that the power sector is a mess and the consumers continue to be failed by the energy establishment. Things will get worse with the status quo and even more monopolization. The Philippines will have a continuing cycle of power crises unless there are systemic reforms, including liberating it from the clutches of monopoly and manipulation.

I learned a lot along the way in the power sector and fortunate to have participated and see up close the power deregulation and privatization law from 1998 to its passing in 2001 of the Epira Law, a very bewildering law.  I felt it would be selfish to just walk into the sunset and not share the knowledge that can be useful to the people in alleviating their electricity burden.

Surely, there are many of those who are enjoying the windfalls of this broken system. How much money they make however is not the issue. It is how the consumers are being treated and overcharged.  Clearly, it is only their voices that they want heard by the country to continue the havoc on the consumers in the same way they managed to see the emasculation of the Epira Law and its IRR, the trading rules of the WESM, and our regulatory environment. Do we debate that the consumers have not fared well under this system?

In the search for solutions,  I can be a born Royalty of England or Mother Theresa and it will not matter. It is the merit of our proposals, precision of our ideas, and the purity of our purpose for the consumers that counts. Let us debate the real issues that are relevant and beneficial for the consumers.

A resource rich smear campaign will not stop MSK from fighting for the fair treatment of consumers and stop the abusive system that overcharges power.

MSK will take the advocacy through the legal avenues that are available to it to pursue reforms for the consumers.

David Celestra Tan

Co-convenor,

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

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Meralco, Don’t Shoot the Messenger

Yes to More Power Projects, No to More Generation Monopoly and Cross-ownership and market domination.

By David Celestra Tan, Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Consumers do not argue with Meralco that the Philippines needs more power supply. That there have not been major power plants built in Luzon since the passing of the Epira Law of June 2001. That unless we do so now the country would be plunged into a power crisis and economic tailspin. Those are accepted realities.

But do these new power supply projects have to be by Meralco’s sister companies with negotiated sweetheart contracts and rates? Do these have to be monopolized with little regard to  assure least cost power for the consumers? Do we now have to totally neglect the country’s aspirations for a competitive power environment where there are enough players truly competing with each other, where harmful concentration of power supply is illegal? Are we now allowing the total junking the Epira Law, save for its inserted provisions that can be exploited and circumvented to ravage the consumers with more atrocious pass-on charges? It should emphatically be NO!

We realize that the country is now preoccupied by the PDAF and DAP scandals and the filing of cases and arrests of those supposedly involved. Those scandals involved P25 billion over many years. The overcharging to consumers at a modest P1.00 per kwh amounts to P25 billion a year in the Meralco area alone and it comes out of the consumers’ pockets month in and month out in the last 10 years. How much is the damage to the economy and employment from the uncompetitive power costs?

The sufficiency of power supply for the country should be addressed hand in hand with assuring that these power supplies are at the least cost to consumers. The only way to assure that to consumers is if these are subjected to open competitive bidding and not negotiated between sister companies.

Meralco had been announcing its 3,000mw power projects as the solution to Meralco’s power supply problem under its own Meralco PowerGen. Their drumbeaters say they must be emulated. People and the government are being threatened of power shortages and brownouts. Could they have not called for open bidding a year ago? With the way they are forcing the monopolization, a power crisis might become a self-fulfilling prophecy.

3,000mw of crossly-owned power generating supply is 60% of Meralco medium term demand and will most likely dominate 75% of their energy requirement. The announced projects are base-load type technologies.

In circumspect, Metro Pacific and the Meralco group are just being businessmen trying to take advantage of the loopholes that had been inserted in the Epira law and its IRR. In our society the businessmen who exercise restraint whenever something will hurt the public even if their act is allowed by the rules are rare. There are smaller distribution utilities who are truer to their public service obligations and have called for open bidding for their power supply, something not against the Epira Law. Treating the electricity consuming public truly well can be done folks!  I guess People handle the legal vs moral dilemma differently and according to their moral compass.

The porous rules were in place before the Metro Pacific group bought the stake of the Lopez Group.  Most likely, when they did, the “business model” of Epira 2001 and the opportunities for incremental income from cross-ownerships were factored in the valuation.  Now they are trying to actualize the business model and facing the wrath of the consumers. We don’t know how it works in the stratosphere of these big guys and it really doesn’t matter. It does not even matter how much money they make. What matters is how the consumers are safeguarded against overcharging and the capitalists’ openness to doing so. Distributing electricity is a public service and operates as a government granted franchise. Treating the public well is a duty, not a lip service.

The Epira Law provided that power generation is not a public utility.  And the mindset in that sector is free enterprise for profit which is not bad as long as it is done competitively. Fair game, fair win, fair returns.  A business group cannot be in both serving two masters, the public as a distribution utility and the stockholders as a power generator.  (Search the article “Evils of Cross-Ownership” by Inquirer columnist Neal Cruz)

Unfortunately, the imperfectly law of 2001 was implemented imperfectly under the previous administration that ran the country from 2001 to 2010.  Now the current administration, deserving or not, is faced with the responsibility of taming the Epira I dragon that is too entrenched and even too media powerful.

Now we understand why the USA outlaws the ownership of media by public utilities. Is the Philippine society and politics mature enough to pass a true anti-trust law?

The consumers gasping for relief have really no one to reach out to but the government, especially ERC and the DOE.  Both of which are thinking in the right direction of compelling the subjecting of bilateral power supply contracts to open competitive bidding, a rule that is within their current powers to implement. But it remains a question of whether those good policies will come on time to spare the consumers from irreversible market domination, harmful monopolization, and negotiated sweetheart contracts.

On negotiated bilateral contracts, it is really not only the declared price that can hurt the consumers but the terms of the contract especially the capacity payments that are charged to Meralco consumers whether the plants are running or not. One sweetheart contract had a 4% variance provision in their fuel, something that can mean hundreds of millions in pass-on overcharges to consumers.

Yes, technically there are allowable downtime provisions in PSA’s but who will be policing the dealings between sister companies? Who do they choose, the consumers or their stockholders? This is why the 500mw First Gas San Lorenzo was paid 9.99 per kwh in December when it declared a shutdown and a 60% drop in its output in December. Then the Meralco consumers were hit again when it bought the undelivered power to WESM at P33 per kwh. Consumers get it coming and going!

Let us not forget that the 100% jump in the generation rate in January happened because Meralco’s IPP’s mysteriously declared outages at the most inauspicious times. Between a sister company buyer-seller, the consuming public is not necessarily a concern.

This blog can only discuss the policy alternatives. It is really up to the government to do something about it. And if they don’t or are unable? Sad for the Filipino consumers.

Maybe YOU can afford to pay Meralco’s high rates. But what about the rest of the consumers and the many small businesses? When the Epira law called us CAPTIVE customers we did not know what it meant. Now we know how it feels.

Years from now, we will all individually look back at this time, and know in our hearts what we tried or failed to do at this turning point in our electric service rules and prices.

Meanwhile, Meralco, please address the issues. don’t shoot the messenger.

matuwidnasingilsakuryente@yahoo.com

Politics & Government - Top Blogs Philippines

Its Time to Make Power Grid Systems and Market Operations Independent, (Part I)

by David Celestra Tan

an original blog post

I don’t know if I learned much from my economics professor but one of the few things I remember is him asking “what is the most important part of the pushcart?”. The wheels, the frame, or the push bar? This is much like the ongoing debate on what has gone wrong with our power system? The generators, the distributors, the regulators, the WESM market, the negotiated prices?

As in the pushcart, the most important part is the PLAN that dictates how all the pieces will work together.

In the power sector, behind the visible players are four (4) rule makers of which only two are being commonly discussed. The DOE, for its supposed power development, planning, and strategy function and the ERC for its regulatory function that gives price signals to all sectors.

Two other rule makers that underpin many of the workings of the power sector are subterranean but very profound in their impact not only on the efficiency of the system but also the consequent costs to the consumers.  Those are the Systems Operator (SO) and the Market Operator (MO).

The Market Operator (MO)

It makes the rules on how the Wholesale Electricity Spot Market will work and the trading and consumer safeguard rules. This is currently being performed by the Philippine Electricity Market Corp. which although headed by a DOE appointee as President is actually dominated by the “stakeholders” who are composed of the power generators as inserted in the Epira Law of 2001 specially during the critical times in its inception when the trading rules were being established.  Nonetheless, the Epira law provided that this is temporary and an Independent Market Operator must have been appointed long time ago.

For all the things being said about new Energy Secretary Carlos Jericho Petilla as a politician and as a newbie in the power sector,  compared to his last three predecessors, he  is at least thinking outside the box looking for solutions and making do with what he has at the DOE and PEMC Bureaucracy. It is refreshing that he is at least pushing for the appointment of an Independent Market Operator (IMO) so that the trading rules of WESM can be balanced for the consumers and not be dictated totally by the “stakeholders” who benefit from the rules.  (where did that P62 per kwh market cap come from?) It is only through the appointment of an IMO that the WESM rules can be made reasonable. It is currently so stacked against the electricity consumers.

The Systems Operator (SO)

According to the WESM website,” In simple terms, the MO is responsible for coordinating all the commercial aspects of WESM transactions while the SO takes care of the physical implementation of these market transactions”. The roles of the MO and SO in scheduling and dispatching power are defined in Chapter 8 of the Philippine Grid Code.

If the IMO is being at least discussed, the appointment of an Independent Systems Operator (ISO) is not  commonly brought up.  The Systems Operator dictates how the grid will function including the rules of grid connection.  That is currently performed by the concessionaire National Grid Corp. of the Philippines, which is dominated and managed by State Grid Corp, of China.

The economic and efficient dispatching of power supply to the national grid needs to be operated by a truly independent system operator to assure the fair and competitive access and the transmission of power in the most cost effective manner. Allowing the transmission services provider to also act as the system operator, who makes the access and competition rules and establishes metering points as revenue-gates, creates a conflict of interest that lead to profit-motivated systems decisions that cause higher charges to consumers.

NGCP has been observed by generators and distribution utilities to be making rules that appear to be motivated by a desire to retain and expand service coverage and hence revenue for the transmission company NGCP.

The independent systems operator is supposed to implement rules of connection for generators and distributors in ways that will be economically and technically efficient. The Epira Law also mandates that it must provide access to all users and promote competition in the power marketplace.

NGCP however has been overreaching its transmission service coverage using its authority as systems operator.  It must concentrate on expanding and upgrading the HV transmission system to efficiently and economically transmit major power sources to the load centers.  The congestions in the transmission systems have been causing  a significant increase in charges to the consumers referred to as “line rental charges” which is apparently a term used by PEMC to refer to line congestion and transmission systems losses.

A lot of conflict has been on the ownership of sub-transmission lines of 69kv in most areas and 115kv in the Meralco area and the connection lines of the embedded generators.   NGCP has also been at loggerheads with power generators in its attempt to extend the boundaries of its service ownership up to the power substations of the power generators.

Part of the problem is the method of setting and approval of the Transmission Development Plan which , like its cousin Power Development Plan prepared by the DOE,  is a hodge-podge of projects driven purely by the private sector with little locational strategy.

As an example, NGCP has been applying to build a 230kv submarine transmission system to connect Mindoro Island to Luzon at a cost of P12 billion that the Luzon consumers will pay for starting from the planning stage.  It was based on a dubious claim that Luzon consumers will benefit from a 300MW coal power plant that can be built on Mindoro island when the the nearest coal reserve is 18 kilometers away in another island of Semirara. Luzon consumers can source that 300mw from the  generators in Luzon island itself without paying for a P12 billion transmission system.

Actually under the Epira Law that provided under Section 21 the privatization of Transco, it clearly defined the role of the buyer/concessionaire (NGCP) to “be responsible for the improvement, expansion, operation, and/or maintenance of its transmission assets and the operation of any related business.”

The responsibilities of the National Transmission Company (Transco) as defined under Section 9 clearly includes that of being theSystems Operator, a function that is not authorized to be included for transfer to the private concessionaire as specifically defined by Section 21 on Transco Privatization.

How NGCP, as managed by the State Grid of China, was allowed to arrogate unto itself the right to be the Systems Operator is perplexing.   NGCP, who as facilities investor and operator of the transmission grid, has a right to a fair return on its investment. However, for it to be the rule making body for grid connections as System Operator, is to give them the right to print money by making rules not for power transmission efficiency and market competition but to optimize its revenues, a prescription for unnecessary increases in pass-on charges to consumers.  This is probably the business model that the SM Group bought into.

State Grid of China obviously has the technical and operational skills and financial muscle to do a good job as a concessionaire. And it is the Filipinos who put them in the position to be both systems operator and transmission services provider.  Chinas power grid is a monopoly and the State Grid of China’s operating mind set is that of a monopoly and not for opening the transmission system for the promotion of open market competition.  NGCP is not a fit for Systems Operator if the Philippines is to be successful in creating a truly competitive generation market.

So why is that a problem for consumers?

NGCP makes its money as a return on the value of its assets used in the service of transmission of power. The more extensive its assets and system coverage the more assets it will have and hence the more revenues it will be allowed. It is determined by the ERC as the Maximum Allowed Revenue.  It is computed based on the value of its installed assets and because of Performance Based Rate making (PBR), also on their projected or promised investments.  As in Meralco, they do not have to make the investment as long as theoretically they deliver the “performance” that is prescribed for them.  PBR allows for regulated distribution utilities and the transmission company to make a profit even on investment that they only promised and have not yet incurred.

There is a need to insure that NGCP’s proposed projects are really based on what a competitive national grid requires and not just for expansion.  The ERC is supposed to have a Grid Management Committee that will oversee the activities of NGCP.

Anti-distributed generation and embedded generation

The Department of Energy, the Energy Regulatory Commission, and the Joint Congressional Power Committee may not be realizing that NGCP’s interpretation of the Grid Code and its role and discretion acting as the System Operator is resulting to increased centralization of power and anti-distributed generation and embedded generation, denying electric users and small distribution utilities the opportunities to save the P0.90 per kwh transmission charge for the consumers and the attendant 3% energy transmission losses.

Embedded generation is the production of power within the territory of the user or distributor and feeding power directly to their distribution system as opposed to generating power from large power plants from long distances that had to pass through high voltage transmission lines. This is an essential part of creating a reliable power system in an archipelagic country like the Philippines and unequivocally encouraged by the  Epira Law and the Philippine Grid Code.

Obviously if these embedded generators do not pass through the transmission system, NGCP does not generate revenue from that power.  NGCP, as the systems operator, makes the required grid-impact studies for power projects.  They however are observed to be foot-dragging and restrictive when it comes to embedded generators and owners of connection lines apparently to protect their revenue interest.

Embedded generation and distributed generation in increasing capacities and wider adoption is a technological wave of the future especially for the Philippines that has so many islands.

One way to assure that is to make sure the Systems Operator who implements the rules of transmission competition is truly independent with pure focus on technical and economic efficiency for the consumers.

Ancillary Services

NGCP as the system operator has been negotiating ASPA’s or ancillary services purchase agreements and passing on the cost to the consumers. These are supposed to provide reserve and voltage regulating services that may be needed by the national grid to make it reliable and stable.  Supposedly they have signed about 400mw of such ASPA’s but in the system debacle of November and December 2013 in the Meralco area, the reserve power services that the consumers have been paying seems unaccounted for. Were they instead traded in the Wholesale Electricity Spot Market (WESM) at P33 per kwh?

Did NGCP demand the delivery of those reserve power when they were needed? This aspect has not been explained.

Awakening Transco

To assure that the national grid operates better and configured for technical and economic efficiency for the consumers, the appointment of a truly independent system operator is long overdue. As a minimum the governments own Transco can be the Systems Operator, independent from NGCP.  It must do the Transmission Development Plan . To professionalize, it must be provided with the ability to hire, train, and retain good talent. More importantly it must be infused with a deep public service soul.

There is a need to review the Philippine Grid Code to clarify many grey areas to make sure none is misinterpreted for their profit-interest.   It should not be forgotten that the Philippine Grid Code and many of the rules approved by the ERC were actually written by the old National Power Corp. whose mindset was similarly monopolistic.  We need to update the rules according to the new paradigm of open market competition.

Quality of transmission facilities

Transco must be asked to assert itself as the asset owner to set standards on the equipment and facilities that are being installed and charged to the consumers.  It is in a better position to assure that the performance standards required by the Philippine Grid Code is complied with by the concessionaire.

Our power pushcart needs to work better so that Electricity consumers can receive the proper services that they pay for. The Plan and Rules from independent systems operator and WESM market operator is an imperative.

Part II – A Need for an Energy and Power Planning Commission with enforcement power.       

 

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Power Supply, Monopoly, WESM, and Tide

by David Celestra Tan
an original blog post

Like stand-up comedian Johnny Carson used to ask in his joke routine, name four things that clean you better than Clorox? Answer for Meralco consumers: Tide, Sweetheart Power supply, power monopoly, and WESM

The electricity consumers in the Meralco area will be taken to the cleaners more by the evolving power supply industry with unbridled monopolies and the unchanged electricity spot market or WESM.

The Department of Energy had launched a task force to come up with ways to reduce electricity prices in the country. Members are Meralco, Electric Coops, Generation industry lobby group PIPPA, Chambers of Commerce, government agencies, consumer groups, and other stakeholders. The first serious deliberation is July 17, 2014 yet.

In his introductory speeches DOE Secretary Jericho Petilla mentioned about requiring distribution utilities to contract 100% of their power requirements through bilateral contracts, an evident attempt to discourage overdependence on the volatile Wholesale Electricity Spot Market, which market failure caused the 74% one month increase in generation charges in December and an abhorrent spike of 100% in January.

In the recent two weeks, there has been a distinct campaign in the media raising the alarm bells that requiring distribution utilities to contract 100% of their power requirements through bilateral contracts will increase the rates to consumers. One columnist went as far as singing the praises of the WESM by saying “a wholesale spot market.. is the only way to go if we want a sane power sector. It is the only mechanism for independently benchmarking prices. Consumers will be more vulnerable to profiteering and monopoly pricing without the spot market”. “The spot market is a better guarantee for fair pricing for a product beset by constantly varying costs” the column continued.

Is this the same WESM that had a P62 per kwh allowable bid price with an average of P33 per kwh in November and December? Is this same PEMC whose supposed elaborate market monitoring and audit team failed to raise a hoot even if the prices skyrocketed to P62 per kwh in certain hours because “it did not violate” the rules? Is this the same PEMC whose patriotic conscience was not even bothered that the generation charge in the Meralco area jumped 100% in January?

WESM is low now because it is temporarily under close scrutiny by the ERC, DOE, and the consuming public. It is subject to a market secondary cap by ERC. Players who exploited the market are apparently trying to strategically behave so that the current rules will not be changed. What will they do when no one is looking again?

Obviously the media campaign is on behalf of someone who does not want to be forced to enter into bilateral contracts with independent power generators. Actually this analyst believes that it is not really entering into bilateral contracts that they fear but the move of the DOE and ERC to mandate that all bilateral contracts for the captive markets should be subjected to open competitive bidding. That will preclude them from negotiating sweetheart deals with their own power generation projects, which they announced to be 3,000mw.

In fairness to Secretary Petilla, what he appear to be espousing is really less dependence on the volatile WESM spot market not the literal 100% bilateral contracting. Obviously the concept needs some refinements in mechanics.

More on WESM.

WESM has been not only Meralco’s favorite pass-on charge but pass-on-blame since its launching in June 26, 2006. Over the years Meralco always blames the WESM for increases in generation charges. That and El Nino and NPC. When its rates skyrocketed by P4.15 per kwh in November and P5.00 per kwh in December 2013, Meralco thought nothing of passing it on to the consumers with the approval of the ERC before Christmas of 2013. When the consumers revolted with the timely Supreme Court petition of Bayan Muna, Meralco belatedly asked the ERC and PEMC to re-run the market. Now it appears they are campaigning to have the WESM rules maintained as is with its mandatory pool and market clearing price system that have so battered the consumers. For the general public, the maintenance of the current rules of WESM offers the Metro Pacific Groups 3,000mw power generation projects under Meralco PowerGen a built in incremental market for excess capacity at market settling prices or revenues in the range of P10 to P33 per kwh.

Open Bidding not negotiated Monopolization

What should be of concern to electric consumers is not really that there will be bilateral power supply contracts because there should be power supply. It is the negotiated sweetheart prices and monopolization by Meralco instead of opening it for open competitive bidding that can overcharge the consumers. Open bidding is the only way the electric consumers can have a chance at lower competitive generation rates.

The 3,000mw of negotiated sweetheart contracts are an in-your-face affront to the clear words and spirit of the Epira Law for a competitive market and its anti-monopoly, anti-market domination, and anti-competitive aspirations. It is up to the DOE and ERC to step in to stop the rampaging monopolization.

As to the cleaning agent Tide, it has been consistently judged in consumer surveys to clean better than Clorox. For you kids, Johnny Carson was the long time host of the Tonight Show before Jay Leno and now Jimmy Fallon.

Politics & Government - Top Blogs Philippines

Power Development Should be a 3-legged Tower

By David Celestra Tan 1 July 2014

Developing the Philippines power supply and energy mix must be founded on three equally important legs.

One leg is sufficient power supply, second leg must be lowest cost power, and third leg is environmentally friendly power.

In an ideal world all three (3) legs must be equally pursued for a wholistic and sustainable power generation mix. If only one becomes primordial, the other two is sacrificed and it hurts the interest of the consumers and the country.

Leg One – Sufficient power supply

Surely the country needs continuing additions to its power supply to meet the growing needs of our population and the Philippines robust economy.

That requires the creation of a power plant investment and  structure that encourages new local and foreign private generators and the existing ones to expand and improve the efficiency of their  power plants.

On the government side, they must provide an approval and permitting process that are facilitative of the timely construction of these additional power facilities. More important the Department of Energy must provide a policy direction on energy mix and the strategic locations for power development. The Board of Investments for its part must incentivize this energy mix and locational objectives for new plants in the country.

On the project proponents’ side, they must choose technologies and locations that are respectful of current laws and environmental sentiments of the host communities.

On the distribution utility side, specially Meralco that controls 74% of the Luzon power market, they must provide equal and competitive access to their market to encourage more independent investors and consumer-protective “arms-length” power supply projects. This is the better path to power supply development, not monopolized self-dealing projects.

Leg Two – Lowest Cost Power

The hallmark of reducing power cost is subjecting it to truly competitive processes and the strategic blending of the energy mix where lower cost energy resources are harnessed if they are available.

The problem with Luzon and now Mindanao is there is too much emphasis on building power supply without really considering the cost impact to the consumers.

If power cost is a consideration in Mindanao, they would rehabilitate Agus and supply Mindanao with 800mw of cheap hydro power  during normal months at P3.00 per kwh and 400mw during dry summer months. They will complement this hydro with low capacity cost diesel plants of about 400mw with half in bunker c and half in regular diesel plants that will run only for the 3 hour night peak.  The proposed coal power plants shall supply the 1,000mw balance of base load and intermediate power.  What the powers that be are trying to do now is make the more expensive and dirty coal the base-load power at rates of P5.20 to P6.00 of 1,200mw, bunker c diesel at 200mw, and Agus hydro at 300mw of peaking running only at 3 hour night peak and during the breakdowns of the coal power plants.

In Luzon, Electric Consumers and the government are continually being subjected to the power crisis specter, regularly scaring them of power shortage and brownouts so that they will be so cowered that they will succumb to any sweetheart prices and negotiated power supply contracts.

This is how the coming power supplies are being contracted by the D-G Groups, a privileged group of generators whose affiliates also own large private distribution utilities that emerged as a result of the loopholes of the Epira Law and its IRR. As both Distributor-Generator,  they also control large electric distribution  markets as opposed to the truly independent power generators who have to compete and operate efficiently.

The D-G Groups saw it worked in the power crisis of 1990’s when the country suffered from 12 to 18 hour brownouts and the population and government were so dazed that they were in no position to discern and consider the harmful long term effects of negotiated sweetheart power supply contracts with sister companies.

In the Meralco area, the new Metro Pacific group that now controls 74% of the Luzon distribution market (6,500mw) seems unabashed about monopolizing the future power supplies through Meralco PowerGen and its various partnerships. The Meralco market (62% of the country’s power demand) appear to be essentially conserved for the long term for Meralco’s own power generation projects, with truly independent power producers reportedly being offered only 5 year contracts and Meralco’s own projects 20 and 25 years at negotiated sweetheart prices and terms.

The Meralco generation market is on its way to serious monopolization, market domination and unbridled cross-ownership, a very anti-competitive structure that is an affront to the open market and competitive power aspirations of the Epira Law. This does not bode well for the consumers. We should be shaking in our boots.

If Meralco really wants additional power supply and care to be faithful to its obligation to provide power in the least cost manner to its customers as a public service utility,  it should open its market and call for open competitive bidding to new power investors and truly independent power generators. They have not done so in the last 14 years.

Now the Meralco consumers and the government are being warned  of debilitating brownouts if their projects, like Redondo, do not get fast government approvals and allowed to proceed with their sweetheart contracts and rates.

The only way consumers would have a chance at least cost power is if these power supply contracts are subjected to a truly competitive bidding process. Meralco’s announced new negotiated coal power projects (600mw Redondo, 400mw Mauban, and 400mw Pagbilao,   will most likely be in the P5.00 to P6.00 per kwh range, instead of P3.60 to P4.50 per kwh, despite their secured contract terms of 25 years. It will be as much as P9 per kwh when they are down for maintenance due to negotiated guaranteed capacity payments.

The pronouncements of the Department of Energy and the Energy Regulatory Commission that they are moving to require competitive bidding for power supply are moves in the right direction. However it might be pyrrhic and too late to stop the Meralco market’s rampaging monopolization.

The monopolization is exploiting the crack opened by the Epira IRR’s Rule 11, Section 4(b) that watered down the Epira laws intent to control market domination and harmful monopoly.

Leg Three – Environment Friendly Power

Electric consumers have their hierarchy of needs.First they want sufficient power. Under the torture or threat of heat, brownouts, and business interruption, they ask to be given power “even at a high price”. Soon after they get that, they complain when the power cost is high. It is only when the first two are no longer issues that they begin to be concerned about environmentally friendly power.

The private generators specially the D-G Groups cannot be expected to put a high priority on environmentally friendly power or making environment an equal consideration in developing new projects. They want surer power, less risk, and maximized profits. That is just in the nature of “free enterprise”.

It is really up to the government, in our case the Department of Energy and the Department of Environment and Natural Resources, to provide the rules and encouragement for environmentally friendly power.  This ideal must find its way in an energy mix strategy of the Department of Energy and even in a “locational” strategy for future power plants. It should provide more impetus for natural gas, hydro, and renewable energy development.

It is ironic that the Philippines power development plan, or semblance of it, is so out of tune with the international movement for “climate change” projects as espoused by the World Bank and many development finance institutions.

A clear message must be sent to IPP’s trying to ram their coal projects over the manifest objections of the local communities, to back off and be respectful of the people’s environmental aspirations. If they really want to invest why not look at other power generation fuel and locations.

If clean environment is a consideration in Mindanao, we should be talking about a earnest program to rehabilitate Agus-Pulanggi and increase clean energy generation by 400mw. That is a cheaper way to gain 400mw of carbon neutral power instead of 400mw of solar and wind that requires heavy subsidies for 20 years and without the heavy investment in transmission lines to connect these RE projects that tend to be far away from the existing grid lines.

Grid competitive renewable energy technologies like mini-hydro and renewable energies that do not require Feed-In Tariff subsidies should be encouraged with an express lane to implementation. They can bring 500mw of additional capacity without the subsidy cost of solar and wind.

A solid Power Development strategy needs to stand on these three (3) legs.  All three needs to be achieved or the country’s tower of power for the consumers will topple or hobble.

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