An Open Letter to Meralco and Metro Pacific

23 August 2014

Dear Sirs:

The Issue for Electric Consumers is whether monopolization of power supply and negotiated self-dealing projects will result to lower power rates. Why don’t you answer this issue and not whether David Celestra Tan is a saint and had a perfect career.

Don’t waste your time because I am not. I am just a duck-raisers son from Binangonan, Rizal. I pay my Meralco bill monthly. Now it is P12.44 per kwh which at $0.29 per kwh is among the highest in the world.  Last December you tried to increase it to P16.59! This is a serious problem and you should recognize it.  I am retired from power and just want to share the expertise that God happen to bless me with in the national search for solutions to high power cost.

Kindly understand that MSK and David Tan’s Advocacy is Pro-Consumers and, believe it or not, is not Anti-Meralco Per Se.

Meralco as the public utility institution is imbued with public interest and must view itself, not as the target, but as the natural arena for this public interest debate, the crucible for balancing private and public interest.

Our consumer advocacy group, Matuwid na Singil sa Kuryente Consumer Alliance Inc, is working for the lowering of electricity rates which is one of the highest in Asia.  This it hopes to achieve by promoting true competition in the power generation sector and rectifying distribution and transmission rate making methodologies that are not fair and reasonable to consumers.  We will also push for more overall  safeguards for consumers including at the WESM.

We are asking Meralco to be faithful to its mandate as a public service utility to truly deliver least cost power to its customers. This it can deliver only if it conducts business on “arms-length” basis and devoid of conflict of interest.

We assure Meralco and their media operators that we have no other agenda than these.  We will not financially or politically benefit from these advocacies other than as electric consumers.  Neither are we working with parties who are players in the industry. Our advocacy rides in the spirit and genuine concern of Filipinos who want to work for lowering of power costs that have been undermining the competitiveness of our country and overburdening our people. MSK’s strength is not in the money this non-profit organization has but in the burning advocacy in our hearts.

It is sad that our country has grown cynical of the motives of people who speak for the public and the consumers.  But yes Virginia there are still truly caring Filipinos.

In this debate we ask Meralco to address the issue of whether monopolization and self-negotiated power supply contracts that will be passed on to the consumers would be fair to the public and would result to lower rates than openly bidded bilateral power supply contracts. Later we will be tackling the unfairness and legality of the Performance Based Rate Making Methodology (PBR) and other regulated charges.

We realize that when the Metro Pacific group took over Meralco, they may have a misconception on the nature of the business and its public service obligation and the limits of the return on investment.  Meralco is a monopoly in the national capital region and serves 74% of the energy needs of the country.

No one should begrudge Metro Pacific for making gargantuan profits in the telephone business in the same manner no one begrudges the SM Group for being the largest mall operator.  That goes for the moneys being made in the real estate sector.  All because there are competition in these sectors. The consumers have choices on whether to use Smart Celfons (we miss you Sun!) or to go to the SM Malls or which condo unit to buy.

That is not the case in power sector where most of us are called Captive customers even by the Epira Law. Meralco as the public service utility has a simple mandate. Provide reliable power at least cost to the consumers.  It can deliver that only if it procures power supply and its equipment and services in a competitive, transparent, and arms length manner.

The Epira law and the ERC allow Meralco stockholders to have a regulated fair and reasonable returns on the investments you incur.  But this is not the place to squeeze every ounce of profit because all of those come from captive consumers who are hapless and have no chance to choose.  Meralco is a public utility monopoly already in distribution. There is no competition. It will work against the interest of consumers if Metro Pacific also monopolizes the generation supply on top of what already have been negotiated with  the Lopez group, its previous controlling owners.

If you wish to argue that Meralco is actually using its hulk and buying power to the advantage of its consumers and that by negotiating with itself and monopolizing power procurement the consumers will be charged less, then present your case to the public. If you disagree with our recommendations to the DOE Task Force for lowering electricity rates present your own and let’s debate. Instead you are mobilizing your massive media machinery to malign those who are raising the issues and trying to protect the consumers.  If you are trying to crush us and not bothering to address the issues , it only means you want monopoly and want the privilege of self negotiating the rates and terms that you want to pass on to the consumers.

These are the messages of consumers crying for reprieve and fairness. Internalize them a little. Most of you are also Filipinos and electricity consumers. Don’t shoot the messengers.

MSK and the David Tan’s among us should not even be raising these issues and risk getting your immense wrath.  You should be doing these in the first place if you are true to your public service mandate. It would also not be necessary if those who are mandated by law to protect the consumers, the Energy Regulatory Commission, the PEMC, and the JCPC are doing enough to protect the electricity consumers.

MSK can only be perceived to be Anti-Meralco if Pro-Consumerism is. Are these two mutually exclusive? Meralco as a franchised public service distribution utility must look after the consumers. If this idea is inconsistent with its investors profit goals, then it may have to choose between being a distributor or generator, but not really both because there is inherent conflict of interest that is inimical to the interest of electric consumers and the national competitiveness.

These notwithstanding, in a national win-win compromise, if you are able to continue with your 400mw Mauban expansion, your 600mw Redondo coal project in Subic, and your 500mw Pagbilao expansion as negotiated contracts, would you insure that the pass on rates to the consumers are in the P3.80 to P4.30 per kwh range? And would you demonstrate a true commitment to least cost power by opening Meralco’s future requirements to competitive bidding and cooperate to put the country on the road towards a more competitive generation sector?

The issues of monopolization, self-negotiated power supply contracts, conflict of interest from cross ownership, and lack of open bidding for generation cost that will be passed on to the captive consumers are serious matters for the consumers. Meralco’s posture to dismiss this as a mere media propaganda by a consumer group that can be extinguished with a vicious smear counter-campaign is an indication that you don’t really get it,  regard your captive consumers are people you can charge however and how much you want, and do not really take seriously your obligation to supply power in the least cost manner.

I am doing my duty as a Filipino and concerned electricity consumer. I hope Meralco will do its own duty as a public service utility that is faithful to its obligation to provide least cost power to its customers.

We hope Meralco can experience a public service epiphany.

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

Email: david.mskorg@yahoo.com.ph

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It’s time for a new paradigm on bilateral power supply contracts

Out with the old NPC-Type Bilateral Contracts, In with a New Consumer respectful PSA.

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

Part 1

My mother used to say the worst time to go grocery shopping is when you are hungry.  She said you tend to overbuy and overpay. Such wisdom.

Most of the bilateral power supply contracts being signed by the distribution utilities, specially by Meralco with its sister companies, First Gas and the Meralco PowerGen projects, are of the Napocor 1990 power crisis BOT vintage, when the country was not only hungry but starving for power supply.  Part of the reason is most of the practitioners in the independent power producers and their bankers are from that era and have been spoiled by the take-or-pay, guaranteed capacity security of those contracts.

Unfortunately those types of contracts have worked to the disadvantage of consumers, to the undue advantage of the power generators, and the avoidance of accountability by the distribution utilities.

NPC’s BOT type contracts contained features that were essential during that time but should be refined under the current market based power generation industry:

1. Guaranteed take-or-pay capacity payments

2. Maintenance Downtime Allowance (planned outage)

3. No Penalties and responsibilities for excess downtimes

4. Pass on charge for fuel costs

Why they were that way

1. Guaranteed take-or-pay capacity payments

The original power supply contracts in 1990’s were actually BOT types. Build operate and transfer.  The private sector builds the power plant, operate it for an agreed “cooperation” period of say 20 years, and then turn it over to the government. Essentially it is a way for the government to finance building power plants that eventually it will own.

Napocor

In this arrangement, the government owned Napocor buys the fuel and turns it over to the plant operator  who converts it to electricity. For this reason the BOT contracts are structured as an “energy conversion agreement” (ECA).  The plant operator guarantees the government a level of efficiency in converting that fuel into energy. This is called heat rate or kwh per quantity of fuel using their calorific value. But all the risks related to fuel procurement and supply are the responsibility of Napocor.

The purpose of this contract is to assure that power generating capacity is available to meet the demands of the country.  That was the time when it was the main responsibility of Napocor as the generation monopoly.  The plant may not be used fully. It is the responsibility of the government whether the power plants are run and its output dispatched.

This BOT arrangement is essentially a financing scheme for the power plant so the government guarantees that its financing is paid in the form of guaranteed capacity payments or take-or-pay, also called “minimum off-take”. The government intended to own the power plant in the end. Napocor’s obligation to make the payments in turn is guaranteed by the national government that owns it, thus these BOT projects were provided “sovereign guarantees”.

The other variants of this BOT scheme were BOO (build, operate, and own), LROM (lease rehabilitee operate and maintain). Under BOO, the ownership of the plant is not transferred to the government at the end of the cooperation period. Between BOT and BOO, the latter is supposed to have lower rates. LROM is used when the government owns an old power plant but wishes to have the private sector rehabilitate and operate it. The property is leased to the operator.

In these cases also the government contracts for the capacity and still supplies the fuel and sells the power.

Meralco

This is the same scheme that was used when Meralco built the 1500mw of natural gas capacity to assure a market for a minimum 2,500mw market that the Shell consortium wanted for the development of the Malampaya  natural gas pipeline from Palawan. Napocor built the 1200mw Ilijan natural gas power plant as a BOT project with bidding winner Korean Power.   The power plants, the 1,000mw Sta.Rita and the 500mw San Lorenzo, were similarly guaranteed capacity payments and supply of fuel.  These Meralco projects were structured as a 25 year BOO  under which Meralco as off-taker guarantees the capacity payments, the fuel supply, and the dispatch of the power plant and the contracting party, First Gas Power, would build finance and operate the power plant.  They however will not turnover the ownership of the plant at the end of the cooperation period.

Project Bankability and cost impact

Typically the power plant costs are built with debt or long term financing of 20 to 25 years to the extent of 70 to 75%. The balance is put up as equity of the project proponents.  To support the project loan there needs to be an assurance of revenue from a credit worthy off-taker.  This is the main rationale for the guaranteed capacity payments, also called take-or-pay and minimum energy off-take or MEOT.

In the case of Napocor, this resulted to huge losses  from its guaranteed take-or-pay obligations when the power plants were not used fully.  The governments losses were aggravated when Meralco renege on its contract to buy power up to 2005 and the government got stuck with the monthly capacity payments on power generating capacity that was not being used.  A net penalty of P19 billion was supposedly agreed between Napocor and Meralco to settle the case.

In the case of Meralco its obligations under the First Gas agreement is completely passed on to its consumers as part of its total purchase of power.  The monthly increases are passed on as “purchase power adjustment” or PPA. Meralco had to pay the guaranteed monthly payments even if the plant was not operating fully or is not dispatched due to the claimed failure of Napocor to make available transmission capacity to deliver the power to the Metro-Manila load center.  Similarly if there is an interruption in fuel supply from Malampaya, they also get paid.  Meralco’s purchased power adjustment (PPA) alone reached P3.00 per kwh in 2002 and 2003 and it was the first consumer upheaval against the Epira Law of 2001.

During the power crisis of the 1990’s these guaranteed payments were essential to assure bankability of the project and debt service cover for the 10 to 12 year loan period specially if it is a BOT where eventually the ownership of the power plant is turned over to the off-taker.

In the case of Napocor many of its 25 year BOT contracts supposedly had ladder capacity payments where payments are reduced after the original loan period.  It does not look like there is such a thing in the contract negotiated between Meralco and its sister generator.

2. Plant downtimes for Planned and unplanned maintenance

These power plants are allowed annual maintenance downtime allowances of 45 to 60 days. Coal power plants have lower downtime allowances because their boilers are supposed to have an annual maintenance of only 20 days as compared to diesel power plants that uses reciprocal engines with infinitely many more moving parts that need maintenance.

The power crisis era BOT type bilateral contracts pay the power plant their capacity fees even during their downtime allowance period.   Napocor was paying Hopewell/Mirant for Sual and Pagbilao, Ilijan, and Caliraya-Botocan.  Meralco was paying for the guaranteed payments to QPL Mauban and the 1000mw Sta. Rita and the 500mw San Lorenzo natural gas plants.  These cause significant uptick in the average generation cost per kwh that Meralco is passing on to the consumer when those plants are down for maintenance.  Meralco paid San Lorenzo P9.99 per kwh when its output went down 85% in November 2013.

A critical issue on these maintenance downtimes is the lack of transparency in monitoring whether these contract power plants are exceeding their downtime allowances.   Between Napocor and its IPP there is at least an “arms length” monitoring of contract performance including fuel efficiency limits.  In the case of Meralco it is hard to assure when their sister company generators are down.  If they choose to nonetheless pay, they can pass that on to consumers as part of their average generation cost.

PPA has been back!

It is not clear whether the public is aware that the PPA (purchased power adjustment) that tortured them in 2003 and 2004 had actually been reinstalled by the Energy Regulation Commission and is now called AGRA (automatic generation rate adjustment). Let’s hope that under the AGRA rules, that there are corresponding safeguards to assure that there is no undue pass on charges and that the DU’s are managing their bilateral contracts properly. It doesn’t seem like there are consumer protection.

In the power fiasco of November and December, there were significant incidences of power generators claiming boiler tube leaks that caused Meralco to buy the shortfall from WESM and there seem to be no interest from the authorities to find out whether there was collusion or market manipulation. The Epira Law mandated the ERC to investigate these types of market abuse and violations.

3.  No Penalties for excessive downtimes

Maintenance downtime is a complex issue because it is hard to tell whether the boiler leaks were a result of legitimate technical failure or actually neglect or cutting corners on due preventive maintenance that responsible power plants should be spending on. It is hard but it can be detected with honest to goodness and vigilant monitoring system.  Some sectors are concerned that the series of boiler leaks among generators were convenient coincidences happening at the same time.

In any case, under the current bilateral contracts, the IPP is not responsible for the cost consequences of their planned and unplanned downtimes.  It is Meralco and the DU’s who have the burden of buying the replacement power which unfortunately is automatically passed on to the consumers.  Meralco non-chalantly tells the public they are helpless and can’t do anything about it and that they are just collectors and do not make money on the generation side.  It is most pathetic to hear the country’s largest public service utility, which has the franchise to provide power in the least cost manner to its customers, cop out and say that for many years.

4. Pass on charge of fuel costs

Under most of these BOT type contracts, the responsibility to buy and supply fuel is with the off-taker, Napocor or Meralco. Changes in prices of fuel including the fluctuations in foreign exchange are passed on to the consumers.  This is actually not necessarily disadvantageous to the consumers.

Where there is no safeguard for the consumers is when there are interruptions in the supply of fuel, which happens when Napocor’s coal suppliers fail to deliver fuel on time in the right specifications or when Malampaya’s gas supply is impaired due to maintenance or other reasons.  Napocor and Meralco still pay the BOO/BOT generating companies their guaranteed capacity fees and fixed costs.  QPL Mauban contracts its own fuel supply.

Between Napocor and its BOT plant operators there is arms-length validation of the fuel conversion efficiency that is guaranteed by the plant operator.  In the case of Meralco and its sister company First Gas Power however, there is no such “arms-length” guarantee that the fuel efficiency is being met. All fuel costs are passed on to the consumers.  Even in the procurement of substitute distillate fuel during the maintenance downtime of Malampaya’s fuel supply as in November and December 2013,  there are no safeguards to assure that the fuel are procured competitively.

Things were these ways because the country was in power crisis and we needed to encourage foreign investors to quickly come in and build power plants.  We were hungry and had to buy. We are in a new market era now and our distribution utilities need to sign bilateral contracts that have evolved from that power desperate era 20 years ago into something more balanced and respectful of consumer rights.

Next:   A need for a new paradigm in bilateral power supply contracts

How Much Reduction in Power Cost do we need?

By David Celestra Tan
12 August 2014

Everyone agrees that the power cost in the country is so high. We know it is painful in the pocket every month. We know it takes away hard earned pesos that otherwise could be spent on food, medicine, education. We also know that the Philippines has the highest power costs in Asia and that we are not industrially competitive because of it.

There is a national clamor for reducing power costs. Yes, but by how much? Would P1 per kwh reduction be enough? Would a P2 per kwh reduction good enough to make us industrially competitive against our Asian neighbors?

At the Department of Energy’s Multi-Sectoral Task Force to Find Ways to Reduce Prices of Electricity, the Philippine Independent Power Producers Assn (PIPPA) presented their own views on how much it should be reduced to be competitive against other Asian countries. They said it is about 20% or P1.75 per kwh. The macro-analysis was done by Engr Chrys F. Herrera one of the best Filipino utility economists and a high official of American IPP, AES Corp. that owns the 460mw Masinloc Coal Power Plant. Chrys at a young age was a vice-president for Finance of Napocor. Chrys and I worked together in the small IPP, Edison Global Electric in the early 1990’s after he left Napocor. Chrys is one of the Filipino pioneers in the IPP industry, having been tasked with finalizing the first BOT project of Napocor with Hopewell. I got my first education on BOT power generation from him. I have not talked to Chrys for a long time since he joined AES. I ran into him at the PCCI power committee meetings about a year ago.

The macro-analysis was quite impressive and I got goose bumps when his presentation at the Task Force came up with P1.75 per kwh target reduction which was uncannily in the same ballpark as the P2.00 our advocacy group, Matuwid na Singil sa Kuryente Consumer Alliance Inc initially presented in writing to the Task Force just days before.

Before you dirty minds get any ideas, the target number is as far as the similarities go between Chrys Herreras analysis for PIPPA and my analysis for MSK.

Chrys tried to answer the question “How much should our power cost be reduced?”. My analysis for MSK sought to answer the question “How much CAN our power cost be reduced?”. Different take-off point, Different methodology.

I have since revised my estimate of achievable power cost reduction to P3.00 per kwh.

PIPPA is supposing that of the P1.75 per kwh reduction, a total of 1.60 can actually come from various government sacrifices like giving up VAT, revenue on natural gas, and more BOI incentives. Only P0.10 will come from reduction in average generation rate! (Pilyo ka Chrys!). This has been the line of First Gen’s Ernie Pantangco for many years.

MSK’s position is, of our proposed target of P3.00 per kwh power cost reduction, fully half or P1.50 per kwh can come from the reduction of Meralco’s average generation rate from the current P5.50 per kwh range to P4.00. This will be by the introduction of true competition for bilateral contracts and changes in the WESM trading rules. The rest of the P3.00 per kwh reduction can come from various rate setting methodologies and the curbing of system abuses as detailed in MSK’s 10 point recommendations to the Task Force. We will detail the basis for our calculations once MSK gets its chance to present its recommendations.

His detractors can say whatever they want about DOE Secretary Carlos Jericho Petilla, I believe there is a daredevil quality about him that makes him put his guts on the line for what he believes in. (We just wish he doesn’t offer to resign from his job too often when something important is not achieved. In the power sector, getting things done in the time frame he wants is not totally under his control.)

Is the Jericho in him willing though to take on a P3.00 per kwh power cost reduction target? That is actually a meaningful target and an achievable dream. Can he get President Pnoy to buy-in to this national comeptitiveness goal?

How about it Secretary Petilla? The nation is holding its breathe.

(Hey Chrys, buy me coffee sometime!)

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

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The evils of cross-ownership in power industry (2)

by Neal Cruz, republished from Philippine Daily Inquirer website, September 07, 2007

MANILA, Philippines — The previous column dwelt on proposals to amend the Electric Power Industry Reform Act, or Epira (endorsed by President Gloria Macapagal-Arroyo) because instead of reducing power rates, which was its original intent, it resulted in even higher rates and, in the future, even a worse situation. One of the major flaws of Epira was in allowing cross-ownership of corporations in the power industry.

The previous column discussed three of the five evils of cross-ownership: (1) it resulted in higher power rates; (2) it subverts the development of the power generation sector; and (3) it will cause billions of pesos in losses to the government. This column dwells on the last two evils.

Evil No. 4: It corrupts and impedes good governance. Cross-ownership breeds an enormous monopoly in both generation and distribution sectors that will overpower the regulatory agencies, energy policy, and, worst, control politics in the country.

An analysis of the present composition of the Senate is not very encouraging. Seasoned political analysts agree that the Lopez empire’s influence in the Senate is formidable. It also holds a significant sway in the House of Representatives. It owns and maintains a formidable media machinery that can make or unmake a politician seeking national office like a seat in the Senate, the vice presidency, or the presidency.

Already, even while the committee assignments in the Senate were still being worked out, Sen. Joker Arroyo publicly declared that there is no need to amend the Epira? He said only the Joint Congressional Power Council is needed to do the job?

Such a premature declaration dismissing the urgent need to amend one of the most abusive and flawed pieces of legislation ever passed by any Congress in the republic bodes ill for all consumers. To understand Arroyo better, it was during his watch as executive secretary of President Corazon Aquino that Manila Electric Co. (Meralco) was turned over to the Lopezes lock, stock and barrel with nary an audit and evaluation of what the Lopezes ought to have been given back. A franchise area far bigger than the original franchise of Meralco was given to the Lopezes. They got more than what should have been given back to them and what they did not own at all.

The evils of patronage politics and the power and influence of money and a media machine certainly aggravate the culture of corruption in the country. It also makes the task of amending Epira a daunting effort.

Evil No. 5: Electricity will continue to be overpriced and abuse of consumers will remain unchecked. The accompanying disinformation campaigns that this behemoth can launch to protect its interest or hide abuse from the unsuspecting public results in a misinformed public, very susceptible to abuse.

Today, the Philippines’ power rates are among the most uncompetitive in Asia, thus affecting our country’s industrial and commercial performance. Tens of millions of dependents of overseas Filipino workers see their hard-earned remittances eroded by the high electric rates. No matter how hard our people work, a huge amount of their income is eaten up by skyrocketing electricity rates. Now is our chance to excise an evil in our system to give our people some measure of relief from already difficult times.

Completely banning cross-ownership between power distributors and generators is not only urgent but a matter of national survival. We cannot afford its evils.

Click here for part 1

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Five evils of cross-ownership in power industry

by Neal Cruz, republished from Philippine Daily Inquirer website, September 05, 2007 

President Gloria Macapagal-Arroyo has endorsed the amendment of the Electric Power Industry Reform Act (Epira), which, contrary to its original intent of reducing power rates, has instead led to higher rates, the second highest in Asia, next only to those in Japan, a rich and highly developed country with a standard of living many times higher than ours. The Epira was copied from the California model of deregulating and privatizing the monopolistic power industry by creating competition in every sub-sector. Competition will force the players to reduce costs and be more efficient to be able to sell more electricity.

It is difficult for laymen to understand the workings of the power industry. For their benefit, therefore, here is a simplified explanation of the power sector and the Epira and its flaws:

Electricity flows from the generating plant through the transmission lines to the distribution lines of the distribution utility, like Manila Electric Co. (Meralco). The distributor connects the users’ residences, factories and business establishments to the power sources, installs meters and does monthly readings, sells the electricity and collects the monthly bills.

The Epira that was passed in June 2001 divided the industry into four sectors: generation, transmission, distribution and supply. Transmission and distribution, however, are considered natural monopolies in providing the lines through which power flows and will continue to be regulated sectors under the supervision of the Energy Regulatory Commission (ERC). The ERC’s job is to make sure that the rates of these two monopolies will always be reasonable and fair.

Accordingly, Section 36 mandated the unbundling of rates and functions of these four sectors.

The National Power Corp. (Napocor) was split into two: generation and transmission. The distribution side was also split. Each one was required to submit its own rates for the review and approval of the ERC.

For the whole thing to work for the benefit of the consumers, there has to be enough players in the generation and supply sectors that will compete with one another in serving the customers.

Section 23 states the whole purpose of the Epira: A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market. But this obligation is nullified by the evil of cross-ownership.

What is cross-ownership? It is the case of a company in one sector, say distribution, owning a sister company in another sector, say generation. There is a conflict of interest here. A distributor cannot supply electricity at the least cost if it has to buy power from a sister company selling its electricity at a high rate.

The framers of Epira knew the harmful effects of cross-ownership and prohibited it in the original version. Unfortunately, lobbying by vested interests won over patriotic integrity so that Section 45 which was supposed to ban cross-ownership was watered down, banning cross-ownership only in the transmission sector and other sectors but not cross-ownership between the distribution and generation sectors. Thus, the Lopez family, which owns Meralco, the country’s largest distributor, was allowed to own and operate generation facilities. Epira’s purpose is to make distributors like Meralco buy power from competing power generators to get the least cost. But with the loophole in the ban on cross-ownership, Meralco is now allowed to enter into negotiated bilateral contracts with sister generating companies. This loophole has led to five evils, the end result of which is still high power rates.

Evil No. 1: These bilateral contracts totaling 2,300 megawatts so far were sweetheart deals. They all have guaranteed minimum take-or-pay provisions that were the real cause of the skyrocketing Purchased Power Adjustments (PPA). Meralco contracted power at P5.20 per kilowatt-hour with its sister companies when power can be bought from Napocor and its IPPs (Independent Power Producers) at P3.97 per kWh. This would not have happened if Meralco the distributor was doing business with an unrelated generator at arm’s length. They would have held competitive biddings from generators so that they could supply power at the least cost to their captive customers.

Evil No. 2: Since Meralco represents 72 percent of the country’s power requirements, it has become a monopoly with full rights to choose who gets to supply their power requirements. The Lopezes of Meralco have then become the controller of the country’s new generation sector once Napocor is privatized as the Epira envisions. There will be no real competition as intended by the law and therefore no reduction in generation rates. Also, the future development of the generation sector on which the country depends for its future needs, will be totally dependent on the whims and caprices of one group.

Evil No. 3: There will be few bidders for the Napocor power plants because only the Lopez-anointed investors can come into the sector. The government will lose hundreds of billions of pesos in lost value-recovery from the Napocor assets. Nobody will buy the generators if it cannot sell the generated power to distributors like Meralco.

Remember, there were two failed biddings for the 600-megawatt Calaca power plant of Napocor. And Masinloc was going to be sold only for $524 million to a Malaysian group with the Lopez-owned First Gen Corp. offering only $384 million. In more recent biddings, Napocor’s Masinloc plant was sold for a whopping $930 million, even higher than the Lopez offer of $570 million.

(To be continued)

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Palawan Should Not Have Brownouts

Mainland Palawan only has 37mw of peaking demand. It has power supply contracts with three IPP’s totaling 53.7 MW. Palawan Power of Gozon Group at 15.2mw net, Delta P of Vivant at 13.5mw, and DMCI of Consunji Group of 25mw.  That gives a reserve of 16.7mw or 45%, one of the best among all the islands in the Philippines.

So why is this tourist paradise sufffering from brownouts during its peak tourist seasons?

It seems local coop Palawan Electric Coop is not enforcing its power supply contract rights with its IPP’s just like Meralco appear to be failing to do so and it’s the consumers suffering the consequences.  Is this due to a lack of understanding of their contractual rights, the IPP shortchanging the local distribution utility, or part of a plan to create an atmosphere of a power shortage?  Or is it a combination of all of the above?

The key issue is the services that the IPP’s are obligated to deliver to the off-taker Paleco. Is it  only energy (kwh) or capacity (mw) or both?  This is not commonly understood even by many people getting into the power supply business. And most coop managements are not prepared, or un-informed by their own power generation suppliers, to protect its member consumers by a rightful enforcement of its contractual rights.

IPP’s with bilateral contracts are obligated to deliver two things, energy and capacity.

1. Supply of Energy

Of the two, the delivery of energy in kwh per month or year is the easier to enforce because that’s how they are billed every month, in kilowatthours or KWH.

Paleco’s electricity supply agreement with Palawan Power Generation Inc. (PPGI) calls for the delivery of a total of 74 million kwh a year. Its contract with Delta P calls for an additional 72 million kwh a year. That is a total of 146 million kwh a year. Any balance of its approximately 192 million kwh a year or 46 million kwh will be supplied by DMCI through its existing high speed generators.

From all indications these IPP’s have been complying with their respective annual energy commitment to Palawan based on these annual kwh energy agreements.

So why is Palawan suffering from brownouts?  It has been because the first two IPP’s PPGI and Delta P have not been delivering their capacity obligations.

2. Supply of Capacity

This is the part commonly not enforced by Paleco and even by Meralco on its own power supply contracts.  The delivery of generating Capacity in kw. (Energy measured in kilowatthours is the amount of electricity produced for each hour that you run the generator capacity).   PPGI has contracted to deliver net capacities of 15.2mw of generating supply and Delta P has contracted to deliver 13.5mw capacity. Both plants are in Puerto Princesa. Power Plants do have to be allowed downtime for their maintenance and servicing. Both PPGI and Delta P are allowed 60 days per year (1,440 hours) in downtimes since they are older power plants. Newer power plants are allowed 45 days per year only.

What do these mean?  It means, both of them will need to be operating or ready to operate this total of 28.7mw for 305 days per year or 7,320 hours. This means the delivery of 28.7mw of capacity for a total of 7,320 hours a year.  Capacity is being delivered when a total of 28.7mw of generating capacity is operating OR when it is ready on standby in reserve to provide ready service.  Distribution utilities do need to have ready generating capacity in reserve in case needed to cover its requirements. It pays to have these reserve capacities.

When these two IPP’s got their Tariff approvals from the Energy Regulatory Commission they were allowed to recover their full recovery fees and fixed costs for the full 15.2mw and 13.5mw respectively subject to the downtime allowances. Hence, the total revenue they are making even if expressed in price per kwh and their billing is based on kwh energy, they are actually being paid for the capacities for the rest of the year beyond the downtime allowances.

For Paleco, PPGI and Delta P must be delivering 15.2mw and 13.5mw net respectively for 7,320 hours per year.

Are they not?

Delta P, owned by Gigawatt Power and Vivant, had been interpreting their service obligation to deliver only 72 million kwh per year. If they deliver this in 13.5mw, they only have to operate 222 days a year or 5,333 hours. Or have to deliver the 72 million in 7,320 hours, they are obligated to deliver only 9.84mw in capacity and not 13.50mw.

What happens to the difference between the 305 days and the 222 operating days?  For those 83 days, Delta P must still have 13.5mw available in reserve and ready for dispatch by Paleco. Their rate recovery as approved by the ERC includes availability on those days because they are only allowed 60 days a year downtime. Having 13.5mw in reserve ready to provide power over those 83 days could cover that additional power badly needed for the summers in Palawan.

PPGI for its part, had been conveniently adopting the similar interpretation. On their 1st electricity supply agreement available from the ERC, PPGI is contracted to deliver 7.2mw and 30 million kwh a year.  They can deliver this in 4,166 running hours. Based on their downtime allowance, PPGI’s 7.2mw should be available 7,320 hours a year or 4,166 of running hours and 3,154 hours of reserve time.  That is 7.2mw of reserve capacity for 131 days a year.

On the 2nd of PPGI’s electricity supply agreement of 10mw gross (8mw net), Paleco is contracted to get 44 million kwh a year from this base-load plant. That is running hours of only 5,500 hours a year. With downtime allowance of 1,440 hours a year, it means PPGI-2 needs to be ready on standby reserve for an additional 1,820 hours a year or 75 days a year. That’s 8mw of reserve capacity enough to last the December to January holiday peak season.

Delta P claims that they are not allowed by the ERC to supply more energy than their 72 million kwh per year. I think this is not correct because the 72 million is the minimum energy and Paleco has the right to buy more if needed by its consumers.  To access these uncalled reserve  capacities, Paleco can seek clarifications from the ERC if needed.

What do these mean to the national electricity consumers?

Paleco apparently believes that their two IPP’s (called NPP’s for off-grid areas) have been meeting their contractual obligations by delivering the contracted energy totaling 146 million kwh. This means they are not requiring PPGI to deliver 7.2mw of standby capacity for 131 days a year (4.36 months of the year) and 8mw of reserve for 75 days a year (2.5 months).  From Delta P, it has been forfeiting 13.5mw 83 days a year or (2.76 months a year). That’s about 289 days of foregone reserve capacities averaging 9mw that could have been dispatched to avoid brownouts. This is the real reason Palawan has been experiencing brownouts.

Paleco actually need only an optimum contracted capacity of about 45mw (peak plus 20% reserve) and needed to contract only 17mw of additional capacity from a third supplier.  It contracted 25mw net, or a full 8mw of excess power supply from DMCI.

Who is paying for these undelivered and excess capacities? WE, the national consumers through the missionary subsidy that is passed on by PSALM as universal charge for missionary electrification (UC-ME). This has gone from an initial 0.035 per kwh to now 0.095 per kwh and increasing.

Electric Coops need to care about costs to the national consumers. Part of the problem is the Electric Coops in the missionary areas only pay the P6.58 per kwh Socially Acceptable Generation Rate (SAGR) and the government is the one paying the balance of  the P13 per kwh true cost of generation or P6.42 per kwh as missionary subsidy.  This is passed on to the national consumers as “missionary electrification” charge.

This is the reason they do not pay attention to properly managing their contracts in the same manner that Meralco did not care much about the downtimes of their IPP’s and PSA generators because they were content with buying the difference from WESM and passing them on to the consumers “automatically”.

In the competitive selection process for El Nido, Paleco is asking for installed capacities of 5mw when the peak load in the area is only 1mw. Even if they double it, they need only 2mw. The 5mw capacity will be paid for through the missionary subsidy. Diesel plants are modular and easily expandable. So why ask for 5mw now when it will not be needed for at least 8 years?

Anyway, Palawan’s 37mw demand in the coming summer can easily be served by its existing IPP’s provided they demand that PPGI and Delta P deliver their contracted capacities and not only energies (kwh). Otherwise they will be running the DMCI temporary generators which use more expensive regular diesel fuel with incremental operating charges for extra hours, another unnecessary increased costs to the missionary subsidies.

These off-grid areas may be distant and smaller than the power concerns in Luzon and Mindanao but the accumulated impact on the national electric consumers also run in billions a year.

David Celestra Tan
Matuwid Na Singil sa Kuryente Consumer Alliance Inc.

Politics & Government - Top Blogs Philippines

Poor DOE

By David Celestra Tan

When power costs skyrocket the power players blame DOE. When there is shortage of power supply they also blame DOE. Meralco and their allies in the legislature are masters in blaming everyone else except themselves. DOE can’t do anything right and it is not totally their fault.  The Epira law gave them policy responsibilities but not enough enforcement teeth.

By this time the government must realize that power supply and costs is a public service and the government is expected by the people to step up when the private sector fail.

In the face of a projected 200mw shortage of power in Luzon in the summer of 2015, it is the government frantically trying to look for a solution. Unfortunately, under the current structure, any solution by the DOE will be paid for the PSALM who will then pass it on to the consumers through the Universal Charge.

Where is Meralco in the search for solution? Well they say, if you want additional power please approve our negotiated projects in Redondo and Pagbilao and Mauban.  But really, it is the job of Meralco to deliver sufficient power at least cost to its consumers. There is where the rub is. They want the government to approve their self-negotiated contracts and forget about the prices. Another power crisis ploy. Are we hearing the consumers say “hostage”.

Meralco is the distributor for power and they are the contracting party in the bilateral contracts. It is their obligation to look for a solution.  Is Meralco saying that among its IPP’s and PSA’s whose installed capacities total more than 6,500mw, they cannot squeeze 200mw out of them for the summer of 2015 through better scheduling of downtimes for maintenance?

The DOE is bravely trying to deal with the problem but taking on the responsibility but at the expense of the consumers. They propose to rent 500mw of temporary generators at a cost of P2 billion a year plus aeroderivative fuel and who knows what other charges.

In his presentation, Sec. Petilla said of the 3,000mw of emergency generators of large users, only 115mw are willing to participate in an interruptible load program.  And it was Meralco saying it. C’mon, are we saying if the power is cut off to these large users during shortages, they will not turn on their emergency generators for 3 or 4 hours? If that happens it costs them P16 per kwh. That’s what their generators are for anyway.  If they participate in a summer program, and Meralco helps with P4.00 per kwh, it would only cost them P12 per kwh. Hell, Meralco was willing to pay WESM P33 per kwh! And large establishments will feel proud of themselves to have done a patriotic duty. Maybe the rules are not good enough.

Sec. Petilla says the only way to create a  fast solution is for the President PNoy to declare a state of emergency. We cannot blame people being concerned that this can lead to more abusive and expensive contracts.

Meralco and its IPP’s must be chuckling all the way to the bank, with Sec. Petilla trying to run around looking for a solution at government costs when it is really the job of Meralco. Why doesn’t DOE and ERC conduct a downtime audit and contractual performance of these IPP’s before they stick the people with the huge costs of renting 500mw of generators.

Where is the 650mw Malaya power plant in all these? PSALM pays the O&M contractor P500 million a year to keep it ready as a reserve power plant. Is this essentially a security guard agreement? Is there a performance standard for all that money being paid them? Can we not squeeze an additional 200mw in its dependable capacity for the four months from February to May 2015? Even if it costs P300 million in additional refurbishing, it is still cheaper than the P2 billion a year for the proposed 500mw rental generators. Why not turn this over to NPC and keep the plant in shape for the long term?

It is time to revisit Section 71 and amend it to give the government the right to maintain strategic power reserve. Limit them to say 10% or approximately 650mw in the Meralco area. Section 71 is a product of those private power groups salivating over the privatization of Napocor’s power generation assets. And they have succeeded. But still the government cannot escape being made responsible by the people for shortages of supply for power is really a public service.  So might as well have rules to establish and empower the needed rules. This is a good time for President Pnoy to step up to work for honest to goodness amendments to the Epira law specially this Section.

We have seen enough what happens when everything is left with the private sector. Not this strategic service like energy and power that are so vital to the country and its people.

Why doesn’t the ERC pass the resolution now mandating the holding of competitive bidding for bilateral power supply contracts? Let us get the Presidential emergency powers to force Meralco to subject its needs to competitive bidding including this supposed 200mw power shortage in the summer of 2015.

Poor DOE.

By the way,  has anyone heard what is happening in Mindanao? Have they assured that they will no longer have a brownout from Feb to May 2015?

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Politics & Government - Top Blogs Philippines