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.