Where does an 800 lb Gorilla Sit? Anywhere it wants to!

By David Celestra Tan
Co-convenor, Matuwid na Singil sa Kuryente Consumer Alliance Inc.
18 August 2014

Wikipedia says “800 pound gorilla” is an American English expression for a person or organization so powerful that it can act without regard to the rights of others or the law. The phrase is rooted in a riddle:

“Where does an 800 lb. gorilla sit?”

The answer:

“Anywhere it wants to.”

This highlights the disparity of power between the “800 lb. gorilla” and everything else.

The term can describe a powerful geopolitical and military force, or, in business, a powerful corporate entity that has such a large majority percentage of whatever market they compete within that they can use that strength to crush would-be competitors. (The metaphor includes an inherent bit of hyperbole; the highest weight yet recorded for an actual obese gorilla is 600 lb (270 kg). The average weight is 400 lb.)

A truly competitive power market cannot exist with the presence of an 800lb gorilla in the middle.

Sadly such is the situation in the Philippine power sector that the Epira law tried to deregulate with aspirations for a competitive market, the holy grail of market-based power cost reduction.   There was such a 500lb gorilla in the old structure that was already dominant enough and had the motivations and political and financial wherewithal to assure that the new Epira Law that was passed in 2001 allowed it to become an 800lb gorilla in the market place. And they succeeded under a profligate government that oversaw the implementation of the deregulation and privatization until 2010.

The Epira I Law has been a fiasco for the government and the consumers. It has been less its imperfections but its imperfect implementation. Enough though has been said about that.

When Meralco got its Mega Franchise renewal in 2003 officially consolidating the original Lopez areas with the 100% additional areas annexed by the Marcos regime, it became the 800lb gorilla in the power market place. The watered down versions of cross-ownership and anti-monopoly and anti-competitive provisions of the Epira Law insured that the giant gorilla is free to roam the power landscape and to impose its will on all the players especially on the captive consumers, who are charged the negotiated amount they want, with the supposed regulators who should protect the public, appear to be merely rubberstamping the rate setting methodologies and Meralco’s rate applications.

It would have been good if as part of the strategy to reform the power sector and create structural competition, that the government only gave back to the Lopez group their rightful original Meralco franchise area, and auction off to another franchise holder the Martial law areas annexed by the government like big parts of Batangas, Laguna, Quezon, Bulacan, and Rizal.A bidding for Meralco II would have generated a lot of revenue for the government andcreated geographical competition in the distribution market. But that’s water under the bridge.

As the 800lb Gorilla controlling 74% of the Luzon power market and representing the largest and most viable market for power generation suppliers, everyone had to kowtow to Meralco. And they cannot openly compete with them because Meralco even under the Lopez Group had their own power generation business, courtesy of Section 45 of the Epira Law.Essentially, whoever controls the 800lb Meralco gets to say who gets to play in the power generation market for the long term.The Lopez group got back big time into power generation through the 1500mw First Gas Power, sustained in its early start up two years by the PPA charges. That was parlayed into EDC, now the largest geothermal generator in the country.

(Meralco, then and now, likes to say with a straight face that it doesn’t make money in power supply and only acting as collector).

Nonetheless, this market dominance and cross-ownership only matter because of the adverse impact on the consumers cost of electricity.

While there are technically many players it has become a Meralco fraternity, cooperating and appear to be coordinating in the market in their market trading schemes. The Energy Regulatory Commission that was supposed to provide the public a level of protection against abuse and manipulation and the Philippine Electricity Market Corp. that is supposed to do the same in the Spot Market, have failed the public.

This is worse than taxation where at least the peoples representatives vote before new taxes are imposed and the process of collection has accountability and level of control and transparency.

Not the current power sector. And it is getting worse for the country and consumers.

The disruptive power of an 800lb Gorilla extends beyond the free interplay of supply, demand, and competition in the power sector, and into the socio-political, governance, and media sectors of the nation and people.

That 800lb Gorilla had actually been sold and apparently part of the sales pitch was it can actually be turned into a 1000lb Gorilla and even create another 800lb Gorilla in the generation sector. It should be noted that none of the estimated P50 billion paid to acquire the majority shares of Meralco was infused to the utility itself but to its previous controlling shareholders.

Meralco is now being run as a pure for-profit organization, not the public utility provider that it should. By their stock market pronouncements, its profit goals is maximization without regard to the limits in a fair investment and fair return for a regulated public utility.  It announced it is expanding into the provinces evidently eyeing electric cooperatives specially Pampanga, Zambales, Tarlac,  Batangas, Quezon, Palawan, and Mindoro. (it can become so big, Wikipedia will have to invent another weight class for the market Gorilla!)  Epira I is dying if not yet dead.

Realistically, we cannot do anything about Meralco’s market dominance as a distribution utility. Too late for that (for now!).  We at least should not allow it to become a King Kong.

The only thing we can really do now is to kneel down and pray for divine intervention, that this giant gorilla can somehow be séanced with a true public service epiphany and  become a gentle giant.

This it cannot be if it also becomes a giant gorilla in the power generation sector.

So what is worse than having an 800lb gorilla in the distribution market?

Another 800lb Gorilla in the power generation market.

And what is worse than that?

When the two of them are brothers and sisters!

And what is even worse than that?

If the two gorillas can morph into one.

Growing another 800lb Gorilla in the generation sector.

That the Metro Pacific group fully expected to expand big time into power generation using its control of the Meralco distribution market was clear from day one of their negotiations with the Lopez group and most likely part of the Lopez sellers pitch. They cited in their website the opportunities in the generation sector as part of the reason for the majority stake in Meralco.

Sources in the other independent power generators including the acquirers of the large hydro projects shared that they approached Meralco about long term contracts but it was clear Meralco is only looking at them as short and medium term suppliers.   Metro Pacific immediately formed Meralco PowerGen with declared intentions of building a 3,000 mw portfolio of coal and natural gas projects, which are undoubtedly majority owned by it. The self-negotiated power supply contracts are for 25 years with sweetheart prices and guaranteed payments, running or not.

This would be on top of the power generation portfolio of the Lopez Group that is enjoying sweetheart contracts with the Meralco that they used to control. In addition to the 1500mw Sta. Rita and San Lorenzo natural gas plants, they are adding 500mw San Gabriel and perhaps aiming to make it 1,000mw.

Between Metro Pacifics ambitions for a 3,000mw power generation projects and the Lopez groups 2,500mw, the two groups will monopolize 85% of the 6,500mw Meralco within 10 years. All with negotiated power supply contracts.

Given the legal and political realities of the situation, it may be too late to avoid the new Meralco getting significantly into power generation. The 400mw Mauban expansion is far along and maybe also Redondo (600mw) and Pagbilao (500mw). Realistically these projects may also be needed to assure power development from 2015 to 2016.

But maybe Meralco can be convinced to limit themselves to this 1,500mw (25% of Meralco’s power demand), keep the negotiated rates and terms in the P4 per kwh range,and cooperate in putting the country on the road to a truly competitive power generation sector with a controlled level of cross-ownership.Sort of being a cuddly 400lb gorilla instead of an overpowering and menacing 800lbs.

The rest and Meralco’s future needs can be subject to open competitive bidding.

If the profit margins in the regulated distribution business is too limiting for the corporate profit objectives of Metro Pacific perhaps they can choose to be really big in the unregulated power generation sector and give way to another business group who can be happy with the guaranteed but regulated profits in the distribution side.Profits that are based on fair investment, fair return.

Epira I dismantled the monopoly of Napocor in power generation AND transmission. Now what is emerging is a private sector monopoly in power distribution AND generation. Back to where we were before martial law and further away from a competitive power market that will bring down power costs to the consumers. Are we coming full circle?

There is a need for the government to take a stand on this matter. It is chilling that there is no quiver whatsoever from the government side on this issue of monopolization, unbridled cross-ownership, and the continuing lack of true competition in the generation sector.  The DOE, ERC, Malacanang, Congress. Nada?

Why do we think a giant gorilla will impose its will and get away with high rates to the consumers?

Because they can!

Future Articles:

Yes, Meralco Can Be A Gentle Giant (Alternate Link here)
Revenge of the Consumers – Options Now to Reducing Power Costs
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Stars Not Aligned for Proper Amending of the Epira Law

Certain quarters—legislative leaders, consumer groups, party-list groups—are calling for the amendment of the Epira, or the Electric Power Industry Reform Act of 2001. There is no question that the 13-year-old Republic Act No. 9136 has been a disaster for the government and power consumers, and needs amendment. Its gaping holes concerning true competition and anticompetitive behavior, market manipulation, cross-ownership, and sustainable power development have caused power costs to spiral, especially in areas covered by Manila Electric Co.

For a nation badly in need of a solution and direction in its power supply and costs, amending the Epira presents a compelling panacea. But the question is not whether we need to amend the law but whether we want to risk amending it. It may get worse. The stars are not aligned for amending the law in ways that will work for the country and consumers.

We in the Philippine Independent Power Producers Association are against amending the Epira. But our reasons are different.

It’s claimed that there is more “competition” in the generation sector because there are more players. It’s claimed further that the WESM (Wholesale Electricity Spot Market) is working, and that the Epira should be allowed to continue and will eventually bring down power costs.

For the record, let us count the ways that the Epira has been a horror for consumers and for power competitiveness:

• Instead of creating competition, the power generation sector has become consolidated and controlled by the groups that also control the distribution market: Metro Pacific and Lopez Group in the Meralco area, and the Aboitiz group in Cebu and Davao. The Summit Group is entering power generation by virtue of its purchase of San Miguel Corp. shares in Meralco. New projects for Meralco are mostly majority-owned by Metro Pacific through Meralco PowerGen. All these are going to have negotiated power supply contracts.

There are more generation players now compared to only one under the old National Power Corp. monopoly. But it does not mean there is true competition. We went from monopoly to “oligopoly meets monopsony.”

For all intents and purposes, the generation market is closed to truly independent power generation investors, unless they partner with the blessed ones who bring to the table the key to any major power generation project—the long-term power supply contract—and their attractive power rates and friendly terms. They decide on their own what should be charged to the people. This is worse than taxation, where at least the people’s representatives vote on it and the collection is more transparent.

This anomaly was made possible by the deadly one-two punch of Section 45 of Epira and the accompanying Rule 11 of its Implementing Rules and Regulations.

• The futility of Section 71 to assure security of supply has to be corrected through amendment or supersession. We need to recognize the reality that in the end, it is still the government’s responsibility to assure power supply at the lowest cost, which it can do only if it has the ready capability to supplement supply and intervene in markets if the private sector is not adequately serving the public interest. This is not about the government competing with the private sector, but about providing electricity consumers some safeguards for assurance of supply and protection against exploitative market pricing. It would be a deterrent to market abuse and manipulation and, hence, an essential element of a sustainable market-based power structure.

• Transmission systems operation and planning must be restored back to National Transmission Corp. (Transco).

RA 9511 or the Transmission Concessionaire Law should be superseded and systems operation reverted to the original intent of Sections 9 and 21 of the Epira designating Transco as the systems operator, and not the concessionaire National Grid Corp. of the Philippines.

• There are many areas in the Epira that need to be clarified or strengthened, like the rate-setting mandate of the Energy Regulatory Commission, the energy planning and enforcement capability of the Department of Energy, cross-ownership, value-added tax, and a clearer objective of the WESM.

We are, however, looking to the legislative landscape and the players for reform, and we are not seeing the elements that can ensure a propeople and proconsumer amendment. Consumers don’t stand a chance against the vested interests. Instead of opening the market and controlling cross-ownership, it can become more monopolized. Foreign ownership of distribution utilities and Genco ownership in NGCP can be allowed with tricky subtle language and insertions.

The Epira has had disastrous results, except for those who manipulated it, because of last-minute revisions. Permission for distribution utilities to buy up to 50 percent of their power demand from an affiliated company was inserted in the last two days of finalizing the bill. Until then, only 30-35 percent was being considered. There is no guarantee that this will not happen again in amending the Epira.

We should not risk opening the Epira to amendments now. Instead, let us do what is doable under the current law in terms of better proconsumer implementation. There’s plenty, such as:

• The generation market should be opened and monopoly and sweetheart deals reduced. This can be achieved if the ERC can pass a resolution requiring competitive bidding for all power supply contracts to supply the captive markets. Both the DOE and ERC have the latitude under the Epira to mandate competitive bidding.

• The ERC can eliminate the inequities of rate setting methodologies like PBR and systems losses. Systems-loss rules can be tightened. It is within the ERC’s power to do so.

• The DOE can improve the trading rules of the WESM to provide for more safeguards and protect against manipulation. The highest dispatched price (called market settling price) is so against consumers and must be changed to paid-as-bid, where suppliers will be paid only for the price they bid. This will establish the true market price for electricity, which is not a commodity.

• The ERC can similarly require more competitive bidding for asset procurements of the distribution utilities to prevent overpricing and consequent overpricing of returns on these rate base.

Let us not risk amending the Epira now. We don’t know what will result. Let us wait until the stars are better aligned for an honest-to-goodness amendment.

David Celestra Tan (david.mskorg@yahoo.com.ph) is a founding director and former president of the Philippine Independent Power Producers Association. He is coconvener of the Matuwid na Singil sa Kuryente Consumer Alliance Inc. and an advocate of power cost reduction.

As appeared in http://opinion.inquirer.net/80328/stars-not-aligned-for-amending-epira

Locational Strategy Needed for Philippine Power Development

David  Celestra Tan
5 November 2014

If the Philippines were to continually develop its power supply to meet its growing needs it requires predictable and well planned generating capacity additions and a better planned proactive transmission development program.

Currently, private power generators choose their own locations based on their own parameters. Individually, they deal with the environmental and other permitting challenges in the local communities. The receptivity of local officials and militancy of cause oriented groups vary greatly. This makes for very unpredictable power project completions.

Transmission Development

On top of this, our transmission development plan is necessarily reactive in nature in compliance with the “non-discriminatory” access for transmission services mandated by the Epira Law. NGCP as the transmission service concessionaire has an obligation to build transmission lines to connect these new power projects to the grid. So in general the NGCP projects are three in nature. One, projects to upgrade old and inefficient installed facilities. Two, transmission lines to reduce congestion and or improve power reliability and redundancy. Three, transmission lines to connect new power projects to the grid. (of course there is a 4th which is to expand their coverage boundaries to increase their revenues)

The costs and guaranteed returns of NGCP on these projects are recovered from the consumers as part of the transmission tariff. If this trend continues, the transmission wheeling charges will continue to rise without really insuring that transmission lines are judiciously built and efficiently used.

As examples, due to a lack of locational strategy, new private power projects in the Visayan region are sprouting in “environmentally tolerant” islands like Panay, Cebu, and Leyte. Little is happening on Negros island. Hence, NGCP will need to build submarine cables which are very expensive. It is currently on a quandary to build an 80mw expansion of the Negros Panay submarine cable system whose costs do not actually justify the economic use.  Happily for Negros Island there are private sector investors who are undertaking power projects using biomass technology that will utilize sugar cane industry thrash that abound on Negros island. Summit group, Metro Pacific we heard and even the Lucio Tan group. It would be cheaper to upgrade the overhead transmission lines on the island itself than to build inter-island submarine power cable systems.

NGCP is rushing a 138kv transmission line to connect a new mine mouth coal plant of San Miguel in Mindanao and they have been interconnecting the other big coal projects.  On the island of Mindoro, NGCP is trying to connect it to Luzon at a cost of P11.9 billion to be paid by Luzon consumers. And the benefit? a theoretical 300mw coal plant project on the island that can supply Luzon.  Our advocacy group, MSK, argued that it will be cheaper for Luzon consumers to buy that 300mw from Luzon power projects without need for a 11.9 billion investment in transmission facilities. We hope the ERC will listen to reason.

Not many consumers are aware of the significant impact to them of PEMC’s “line rental” charges which come from congestion in the grids which in turn can be better avoided with better planned locations for power generating plants.

Talking about Luzon, the transmission line corridor from Batangas, where a lot of power projects are proposed, to the load center of Metro-Manila is already congested. We cannot continually build lines. Concentrating such transmission capacity will also make the country’s power system vulnerable to natural calamities and disasters in one area.

It is time to balance the system by similarly building power sources from other directions like Quezon and the Bataan peninsula and Zambales.  Instead of forcing the issue on locating the 600mw Redondo coal project in Subic, why not develop the old nuclear plant area in Morong as an energy zone and finally use that white elephant. There used to be a 230kv line from Morong to Hermosa but that has since been pilfered.

How about Quezon on the Pacific coast of the country? (Whatever is happening to the Laiban dam hydro project?)

Power Generating Zones

The government needs to show the way. A comprehensive study on where in the country should new power projects be developed must be conducted. Multilateral agencies would gladly help with this study like the ADB, JICA, and even World Bank. This will include the strategic thinking on the kind of fuel and technologies that can be used.  Now, if we leave it up to the private sector, it will all be coal.

On the Island of Palawan, Palawenos have been aspiring to preserve their pristine environment partly because their tourism goals require it. Their people have been so against coal and even mining. Yet, a large Filipino conglomerate who owns millions of tons of low grade coal, had been insisting of building coal power plants in the islands in a display of insensitivity to local sentiments against coal. Its all about profit and there was apparently no concern that it can undermine the tourism aspirations of the whole island province. They won the bid because they offered cheaper coal knowing that the communities are against it. Inexplicably, the DOE and the local electric coop blessed the deal. The communities won’t budge despite the provincial government support and the 15mw coal project had been rejected by communities in two towns. Now the power development on the island had been set-back 4 years and the increased cost to the government in missionary subsidies is a staggering P500 million a year if we count the other island where a similar “win the bid with coal and install diesel” strategy was done and tolerated.  The cost is passed on to the electric consumers. This unpredictability and high cost could have been avoided had there been a government strategy declaring Palawan as a clean energy zone to respect its desire for tourism development.

The challenge and costs of transmitting the power from the Solar and Wind projects under the governments Feed-In tariff program are perhaps being underestimated.  Solar developers just choose their own sites and once again it will be up to NGCP to build the connecting lines. Should these RE power just be delivered to the adjacent electric distribution utilities via cheaper 13.2kv or 69kv line?  Why is the DOE jumping from 50mw solar target under the FIT program to 10 times which is 500mw? Why not 250mw and then the 250mw is in rooftop solar which is not under FIT?  Of course with this subsidized rate investors in solar will come in droves. It is the consumers paying for them. On top of the subsidy for RE, there is this added cost of connecting them to the grid which are all passed on to the consumers as part of the transmission tariff. In Luzon it is currently P1.00 per kwh. With all these additions, how much will that be in five (5) years?

Establishing energy zones will enable the country to develop power generating supply in more predictable timetables.  Environmental requirements for those areas can be crafted to balance community concerns. These special zones can have facilitative rules and incentives similar to those provided to economic free zones.  Winners of competitive biddings for long term power supply can reduce their risks and bid more competitively.

The Department of Energy under Secretary Petilla apparently has a program to work with LGU’s to develop their own power development aspirations. We are not sure about the effectiveness and sustainability of this approach. First of all, the power development is localized and not part of a comprehensive and rational whole. Second, LGU governments are elected every three (3) years so in many cases, power projects that require long gestation can face a changed attitude from the LGU and derail the project.   

In our archipelagic country, an island by island energy development plan would be helpful. However, those have to be balanced by a national strategy that includes a sensible grid connection plan. For example, even if Panay island is very open to more power projects, connecting those generating capacity to Negros, Cebu, and the main grid will cost prohibitively in upgraded submarine cables. It would be more economical to encourage more generating capacity on the island of Negros itself. There are areas in the south of the island that can be receptive.

At some point the island of Mindanao will have to be connected to the Visayan and Luzon grids. There are so many coal projects under development in Mindanao island that it will soon become a power exporting island. We need to connect it to the Visayan Grid.

Systems Planning by Systems Operator must be separated from NGCP

A more independent System Operator is essential to rationalize a national power development plan. The conflict of interest between NGCP being both systems operator and transmission line concessionaire has to be eliminated urgently if this implementable master plan will truly happen.

It is time for a locational strategy in power generating and transmission development.

Matuwid na Singil sa Kuryente Consumer Alliance, Inc.

Email: david.mskorg@yahoo.com.ph

P3 Reduction in Meralco’s Rate An Achievable Dream!

87% or P2.60 will not even come from Meralco’s pockets but from various pass-on charges on which Meralco had been claiming for many years they don’t make money and only act as collectors. Generation charge, transmission charge, systems loss, VAT, universal charges. Only 13% or P0.40 per kwh will come from Meralco’s excess distribution charges due to the questionable “performance based ratemaking” or PBR.

Meralco therefore should have no problem cooperating in keeping with its commitment to public service and true corporate social responsibility.

MSK’s Power Cost Reduction Solution

On October 8, 2014 the Matuwid na Singil sa Kuryente Consumer Alliance (MSK) shared with the Department of Energy’s Multi-Sectoral Task Force to Find Ways to Reduce Electricity Prices our recommendations on how to reduce Meralco’s power rate by Php 3.00 per kwh.

We cited the specific bases for the 10 areas for reductions and why we believe there is room for eliminating excesses that result to high rates. The Philippine Independent Power Producers Association (PIPPA) for its part analyzed that the Philippines need a reduction of P2.00 per kwh will make us power competitive with our Asian neighbors.

Meralco, with their well-oiled image management machinery, dismissed the suggestions to have “no basis”. They even went on TV saying the same thing.

MSK is starting a series on the 10 recommendations with further details to help everyone appreciate that this is a realistic target and not a wild number by a consumer group. The Ibaba ng P3 Movement is not an impossible dream.

But What is Meralco’s Rate and to Whom?

Meralco likes to say their rate is a media palatable P9.80 per kwh which is their average system rate. We, the captive consumers who are residential and commercial users and who comprise more than 60% of their energy sales and probably 75% of their revenue, pay P12.30 per kwh.

The reason for the lower average is because they have designed their revenue mix by reducing the rate to their industrial customers and a significant amount of “lifeline” customers. We the captive customers in what we can call the “middle class” of customers are the ones being made to carry the big burden of overprices. For our purposes, we are seeking a reduction of P3 per kwh (or 24%) from the P12.30 per kwh rate to the captive customers, majority of Meralco’s revenue source.

Shocked at the big amount? Yes, our power cost have not been optimized by that much due to pass on charge unconcern by the utility itself, by regulatory tolerance, market structure defects, and government’s own contribution to the rising costs.

The Reduction in Perspective

At the outset let us make clear that these reductions are not intended to make Meralco unviable. They are entitled to have a fair return on their investment. That return however just has to be consistent with the monopoly protection that came with their public service utility franchise and the regulated nature of a distribution utility.

Of the P3.00 per kwh reduction MSK is seeking only about P0.40 per kwh or 13% will potentially be a reduction in Meralco’s excessive income from PBR. The rest of P2.60 per kwh will be from “pass-on” charges like generation, transmission, systems loss, VAT, and universal charges on which Meralco likes to say they are not making money and only acting as the collector. These reductions in pass-on charges are technically revenue neutral to Meralco and its controlling stockholder, Metro Pacific, and hence they should have no objections. This is Meralco’s best opportunity to prove that they are faithful to their obligation to provide power in the least cost manner and true to their long media claim that they don’t make money on the generation charges.

Areas for Feasible Reduction

What MSK did was to analyze every cost item and identified the FAT resulting from the governing regulatory and systemic rules and practices. Our 10 recommendations are line by line on the cost components of your monthly Meralco electric bill.

No. 1 Generation Charge.

Meralco’s average generation charge that it has been passing on to the consumers is about P5.60 per kwh. We believe this can be reduced to P4.00 per kwh. These are the bases of the estimate.

  1. Meralco has been buying power from coal power plants at rates ranging from 3.37 per kwh to 4.34 from truly independent power generators. It is 4.43 to 4.66 from its negotiated source, Quezon Power. It is clear therefore that market prices for base load supply can be achieved at lower than P4.00 per kwh. Hence, if Meralco opens its market to competitive bidding, these generation market prices can be achieved.

Metro Pacific and Meralco PowerGen who apparently own 51% of the 400mw expansion of the Mauban Coal facility in joint venture with current owner of Quezon Power, announced in the media that their rate is P4.35 per kwh. For a 25 year contract base load power supply contract, we believe truly independent generators can bid up to 15% lower. And who knows what devils are in the details of the negotiated power supply contract? Consumers need to be provided a safeguard of competitive rates by subjecting this to competitive bidding.

Below is a chart of Meralco’s generation sourcing mix. These are based on Meralco’s own data for the three months July, August, and September 2014.

Meralco Generation Purchases July, Aug, Sept 2014

  1. From these Meralco data, we can see the contrasts that point to areas for improvements to reduce power costs:
  1. The rates paid to sister power generators are higher by as much as 20% than those negotiated with unrelated truly independent power generators. See First Gas companies compared with the SPPC for the Ilijan plant.

At the DOE task force meetings, Meralco tried to say that First Gas is Not a sister company of Meralco. Our point is those 25 year contracts were negotiated when Meralco was still majority owned by the Lopez group who owned First Gas. The consumers are still suffering from these sweetheart prices 1o years later. Now Meralco PowerGen announced 3,000mw of power projects which corners most of the lucrative contracts of Meralco at rates that they self-deal with themselves.

  1. The rates of the Sister Power Producers (SPP’s) tend to increase significantly from time to time due to guaranteed capacity payments when they go on maintenance downtime. These projects have been operating past the original term of their project financings so guarantee of capacity payments even when they are not operating are no longer justified. Instead they can be guaranteed a level of energy purchases but they get paid only when they deliver.
  2. Notable by their absences in these Meralco power supply list are the 2,000mw of hydro power in Luzon. Meralco’s energy mix can be improved to include a level of predictable hydro energy and purchases from cheaper sources than the higher ones. From the Meralco prices, one can observe that the more expensive suppliers get the bulk of Meralco’s supply. If Meralco were buying power on “arms-length” basis with true commitment to least cost power, one would think they would be buying more from the cheaper sources.

The 2,000mw of hydro power is apparently being sold by the new private owners through the WESM at market settling prices reaching P33 per kwh as opposed to a contracted P3.50 per kwh. Let us remember that the “fuel” for these hydro power is rain water from the country’s mountain ranges that technically is owned by the public and public domain. Why sell the water energy at P33 per kwh to the people who supposedly own the water?

The new hydro power owners claim that they never know when water will be made available by the National Irrigation Administration for power generation and hence they cannot enter into power supply contracts. That is bunk. There are sure levels of water and energy that can be available in the course of the year for power generation otherwise these private investors would not buy these hydro facilities. The CBK complex is pump hydro and not used for irrigation. Why is this not contracted directly to Meralco?

  1. WESM prices continue to wreak havoc on the consumers and urgently needs a change in rules to provide safeguards to consumers. The current “Market Settling Prices” which is the highest price bid and dispatched for the trading period needs to be dropped and paid as bid should be adopted. This will also reduce market manipulation.

If these reforms are undertaken on the generation side and implemented in an honest to goodness manner (meaning no bid rigging and collusion) Meralco will have an achievable chance to reduce its average generation charge to P4 per kwh.

Why should they be allowed to monopolize power supply and self-deal and negotiate the prices and terms at prices ranging from P4 to 6 per kwh. This is so anti-consumer and anti-people and anti-country.

  1. Applicable Law

There is no need to amend the Epira law to undertake this reform. Section 45 (a) and (b) of the Epira Law of 2001, while allowing contracting of up to 50% of the demand of a DU with an affiliated generator, it is silent on negotiation or bidding. The DOE and ERC therefore has latitude to require open competitive bidding under the current law.

Interestingly, both the ERC and DOE claim that they are working on regulations to mandate competitive bidding for bilateral power supply contracts. The DOE’s DASAP is a recent proposal and lets hope they will do it with urgency. The ERC claims they have one draft proposal since 2007! ERC also presented it to the Phil Chamber of Commer power committee months ago. Why do these urgent safeguards for consumers ever taking so long through the bureaucratic grind? Sometimes you wonder if they are just going through the motion so they can politically say when asked that they have a regulation already in process. In the meantime, 25 year power supply contracts are already being self-negotiated. Ano pang gagawin sa damo…..kung?

Summary:

  1. Bilateral power supply contracts should be subjected to open competitive bidding. This will also open up the power generation sector to more independent investors with more competitive rates, technologies, and more energy efficient operating systems. This is doable without amending the Epira Law. DOE and ERC just need to step up and do something good for the consumers.
  2. Meralco should restructure its take or pay agreement with First Gas and QPL so that they are only paid when they provide a service and deliver energy. Not when they are down for maintenance which Meralco should be monitoring diligently and accurately. These SPP’s have operated longer than their original loans so the guaranteed take or pay, operating or not, can be dispensed with to safeguard the consumers from undue rates. First Gas San Lorenzo was paid 9.99 in December 2013 due to these guaranteed capacity payments, operating or not.
  3. WESM rules must be changed to drop the current “marketing settling price” system that is so anti-consumer. Perhaps they should adopt a reserve market to provide for a more cost effective and predictable availability of reserve power.
  4. Meralco should improve its energy mix by buying more from cheaper sources and by including hydro power in their contracted power supply.

Generation is only a pass on charge and as Meralco likes to point out they don’t make money on it and only act as collectors. This reform is therefore revenue neutral to them. They must support these reforms in keeping with their responsibility as the franchised public service distribution utility to provide power “in the least cost manner”.

How about it Meralco?