Clear and Present Danger of Meralco’s Monopolization and Sister Company Generation

David Celestra Tan
18 January 2015

The clear and present danger of Meralco’s bilateral contract monopolization and sister company generation starkly stares all of us in the face. The electricity consumers, government regulators and legislators, and Meralco itself, except the former has been preconditioned by the latter and the middle had been looking the other way.

In the MSK’s advocacy to reduce Meralco’s power rates starting with the generation component where we see a feasible reduction to P4.00 per kwh from the P5.63 per kwh in July 2014, one thing that is surprising is Meralco dismissing it to “have no basis”, the government think tank PIDS also implying that there is no basis, and the ERC itself trying to dismiss the petition to “have no substance”.

Yet the facts and evidence stare us in the face and they are in Meralco’s generation components. Meralco’s PR machinery is currently having a field day trumpeting the reduction in its average generation rate to P4.70 from P5.63 per kwh in July 2014. The reduction though, as we wrote previously, is fortuitous and temporary because of the drop in the global price of coal and diesel and not a result of systemic corrections. It is easy to think it is a non-issue but we must always look at the long term presence of danger.

Meralcos generation cost numbers speak loud and clear

1. Coal power generators

From October 2014 to January 2015, Meralco’s non-affiliated power generation suppliers averaged in price only at P3.4885 per kwh whereas Quezon Power in Mauban averaged P4.65 per kwh or P1.16 per kwh or 33% more. Meralco doesn’t attempt to defend the rate disparity and argues only that QPL is not affiliated with Meralco which is technically true. But the 440mw power contract was negotiated with people close to the then controlling owners of Meralco under same sweetheart deal as the 1,500mw First Gas Power. QPL is now owned by EGAT of Thailand who is now the 49% partner of Meralco PowerGen in the 400mw expansion of the Mauban coal facility.

It is true also that the four (4) other coal suppliers, SEM-Calaca, Masinloc, SMEC Sual, and Therma Luzon Pagbilao, are negotiated contracts but they are nonetheless non-affiliated and the deals were arms-length.

The big price disparity and onerousness to consumers of sweetheart and arms-length power rates is quite clear.

In terms of financial magnitude, Meralco bought 1.01 billion kwh from QPL for the four months October to January. At the higher rate of P1.19 per kwh, the higher cost to the Meralco consumers for QPL power was P1.213 billion! Meralco buys 27.8% of its energy needs from the four (4) cheaper coal suppliers. If it were dedicated to least cost power and dealing on arms-length basis, one would think it would be buying more from these cheaper sources which now averages P3.4885 per kwh. Would they not be asking them to expand cheaper capacity. It chooses to negotiate a power supply contract with its own self for a 400mw Mauban expansion at the rate of P4.30 per kwh.

Meralco PowerGen had announced that it will put up 3,000 mw of new power plants all with negotiated and sweetheart prices and terms with Meralco. All these will be majority owned by Meralco.

If nothing is done by the government, Meralco’s 5500mw power supply will be monopolized by PowerGen at 3,000mw, First Gas at 1,500mw with another 1,000mw expansion, and Summit Group (a significant shareholder of Meralco) at 600mw. The five truly independent power generators (including SPPC-Ilijan) that currently saves consumers approximately P12 billion a year in lower generation rates will practically disappear.

2. Malampaya Natural Gas

Of the three (3) generators selling natural gas power to Meralco, San Miguel’s 1,200mw SPPC Ilijan is non-affiliated and supplies power at P4.4542 per kwh. The Lopez owned First Gas Power are charging P5.4151 per kwh for 1,000mw Sta.Rita and P5.5182 per kwh for the 500mw San Lorenzo, for an average of P5.466 per kwh or a full P1.01 per kwh or 23% higher. They are all using the Malampaya Natural Gas at presumably the same fuel prices and terms.

The two First Gas plants supply 35.6% of the energy purchases of Meralco. That translates to 3.394 billion kwh in the four months. At the higher rate of P1.0124 per kwh, the higher cost to the Meralco consumers is a whopping P3.346 Billion for October to January. The disparity in one year is approximately P10 Billion!

Similarly, all these three contracts were negotiated but again the difference is San Miguel is non-affiliated and the two First Gas contracts were sister company sweetheart deals that will be an albatross on the Meralco consumers for 12 more years.

In total, the Meralco consumers have paid P4.65 billion more for the higher contracted rates for Meralco’s sister company generators just for the four months from October 2014 to January 2015.

Yet, Meralco is trying to say there is no basis for MSK’s petition that the generation rates will be lower if they are not negotiated and subjected to open bidding and monopolization by sister generators are banned. May be that is to be expected from Meralco but for the ERC who is mandated by law to protect the public interest, to appear to be apathetic to the petition, is a great disservice to the people and country. Facts and Figures don’t lie.

It is tragic that no one in government seem to be alarmed in the face of this clear and present danger.

So long Pope Francis. We hope our government leaders and Meralco and Metro Pacific are moved by your wonderful messages on compassion, something deserved by electric consumers. God Bless .

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It Will Take a Village to Reduce Meralco’s Rates

By David Celestra Tan

MSK has studied and identified the various charges that have been adding up to high electricity rates for Filipinos in the Meralco franchise area that serves 72% of the electricity needs of Luzon island. These are the basis for our Ibaba ng P3 Campaign. Essentially what we have done is get past the justifications of Meralco and unravel the mystery out of these high rates line by line. We have taken the first small consumer step by filing a petition with the ERC to pass a resolution mandating the open competitive bidding for power supply contracts that will be passed on to the consumers. There will be more rule-change petitions that MSK will file.

We have a long way to go however before those small steps become giant leaps for consumers, who have long been ravaged by the power industry system that is supposed to serve them well. Obviously, MSK cannot do it by itself. It can only act as catalyst for reform and show the way. It will take a village to reduce Meralco’s rates.

First, the Meralco’s residential and commercial consumers, its captive customers, must want the reduction and be willing to go beyond complaining and to take action. The ERC must take cognizance and pass the competitive contracting resolution, improve the transparency of systems loss charges, and the reasonableness of the PBR rate making methodology. So far it appears indifferent.

The Department of Energy will have to provide enlightened policy direction and energy mix strategies. Most urgently it needs to improve the trading rules of the WESM specially the “market settling price”, the must run unit (MRU) policy, and market manipulation safeguards. The DOE must further recognize and work to close the loopholes in the law that have been allowing the monopolization and domination of the generation sector specially Rule 11 Section 4 of the Implementing Rules and Regulations of the Epira Law.

Our Senators and Congressmen must rise up to the challenge and amend the law to close the loopholes and amend the IRR accordingly. They must be willing to cleanse the Epira Law of 2001 of its anti-consumer flaws. They must rectify the consumer betrayal of Republic Act 9511 which erroneously threw in the Systems Operator authority to NGCP as part of its transmission line concession. We must rationalize transmission line charges while we still can. NGCP’s P0.95 per kwh charge includes P0.36 per kwh for ancillary services that have been of doubtful benefit to consumers.

The BIR and Department of Finance must be willing to rationalize the VAT taxation of power. The E-Vat Law of 2004 added P1.30 per kwh to our electricity bill. The DOE and JCPC must give Napocor a longer term missionary electrification mandate so that it can adopt more cost effective solutions to island power generation. Costly Temporary Rental generators are proliferating all over the islands. The DOE must be judicious in administering the missionary subsidies and discourage unscrupulous competitive biddings and power supply contracts. All these result to high Missionary subsidy that has added P0.19 per kwh to Meralco consumers and rising. So are the stranded contracts and assets of PSALM. They too will be hitting the consumers with more universal charges.

The big players in the industry, who are mostly diversified conglomerates, must similarly cooperate and recognize that it is to their long term interest to help the country become energy competitive, strengthen the economy as a whole, and improve the purchasing power of the consumers. They cannot strangle the geese that lay the golden eggs for their various businesses in shopping malls, real estate, telephone services, water, transport and etc.

Malacanang will have to provide the leadership and set the tone for a national resolve to reduce power costs. We are aspiring for Asian Economic Community integration but our power cost will be a big handicap. High power cost is an Achilles’ heel of the BPO and Call center industry which drives professional employment, middle class demand and the real estate boom. It is still two years before a new leadership comes in after the May 2016 elections. Let us hope the current government will not let the consumers down and do enough to put the country on the road towards rationalized power cost and competitive rates, a lasting patriotic legacy.

And there is the most important which is Meralco itself. It must embrace least cost power as its mantra as a public service utility. It is within its right to develop a cost efficient energy mix and subject its purchases of power to competitive bidding instead of negotiating with itself and monopolizing the power generation supply of Meralco. It must rid itself of this conflict of interest and do business in arms-length basis. It is within its capability to shepherd and manage the contractual obligations of its power suppliers specially the uptime and reliability obligations of their power plants. Meralco only needs to want to.

In the P3.00 per kwh feasible reduction in Meralcos power cost, fully P2.20 or 73% is within Meralco’s own control and capability to initiate and achieve. (generation cost, systems loss and distribution charges). They only need to find it in their hearts to be true to their mandate as a public service provider. Meralco’s Filipino management and executives must view this as a patriotic duty. Least cost is part of its public service obligation. In the power cost reduction village Meralco is the center.

Reducing the Philippine power cost especially in the Meralco area by P3 per kwh is an achievable dream. We however as a people must want to and cooperate and row in the same direction. MSK hopes it is showing the way towards rectifying this unintended conspiracy against the Filipino consumers.

We have identified eight (8) varied areas for reform. It will take some doing even for all of us working as a village to reduce Meralco’s power rates.

If not us, who? if not now, when? Otherwise we have no right to complain, bear the consequence of our own apathy, and reconcile with the unkind deed of consigning our own children and country to a future of overpriced power. Sad.

Maybe we all can find enlightenment, courage, and epiphany in the Pope’s visit.

David Celestra Tan is a CPA and a founder and former president of the Philippine Independent Power Producers Assn. He is a co-convener of Matuwid na Singil sa Kuryente Consumer Alliance Inc. (MSK) which is dedicated to working for reforms and rule-changes in the power sector to reduce power cost and make the country energy competitive. Follow the issues in the matuwid.org website. Comments can be sent to david.mskorg@yahoo.com.ph.

How Much Should Meralco be Allowed to Profit as a Public Service Utility?

by David Celestra Tan
2 January 2015
Part I

Let us start the New Year by going back to the basics of Meralco’s rates, which is how much should they, as a franchised public service utility, be allowed to profit?

The next relevant question is should they be allowed to profit only in the distribution side or also on the generation side?

The electricity rates of Meralco have been skyrocketing since the passage of the Epira Law in 2001. Remember the PPA jolt of 2002? Then Meralco’s distribution rates which increased 40%. All these years the consumers are only being told carefully crafted justifications why the rates in the Philippines are high, why Meralco has no control over it, and why the consumers should consider it fair and reasonable and accept it as part of life in the Meralco area.

Two years ago someone commissioned a study by an Australian consulting firm which in the end claimed and publicized widely that the reason the other Asian nations have lower rates, like Indonesia, Thailand, Malaysia, Vietnam, etc. is because those countries are subsidizing their power and the Philippines is charging true cost of electricity. They may have a point on the fuel subsidy issue but that’s not the only reason our rates are high. We all seem to have fallen for it, including the think tanks, academia, and government policy makers, and conveniently the DU’s themselves. What a carefully crafted ruse!

While our advocacy group, MSK, had come up with specific reforms that will reduce the cost of the pass on charges of Meralco by P3 per kwh or 25%, these are in the areas of power supply procurement and administration process, in regulatory methodologies, spot market rules, in taxation and other government policies, including legislative rectification. All have nothing to do with government subsidies of fuel.

A fundamental question we have not asked is How much should Meralco be allowed to profit as a public service utility? This is central to the issue on what retail rate setting methodology should be adopted in determining Meralco’s distribution charges. It is even more fundamental than whether it should be PBR (performance base rate setting) or RORB (return on rate base).

Beside the percent per annum of returns, should it be based on their “investment” which is the price at which they bought control of Meralco and paid to the previous owners? Should it be based on the assets of Meralco or on the equity of the stockholders that are reflected in the books of Meralco? Should it be return on equity or return on assets? Should the assets be valued at historical cost or reappraised replacement value? Should that return be income tax free or not?

It is clear from the Meralco website that the new owners, Metro Pacific of the Salim group of Indonesia fully expect to make their target returns on investment in both distribution AND generation when they bought Meralco from the Lopez Group. Metro Pacific, led by Filipino Manuel V. Pangilinan, had declared a target generation capacity of 3,000mw under its newly formed Meralco PowerGen.

A. Distribution Wheeling Business

For now let us first tackle the question on how much should Meralco be allowed to profit from the distribution wheeling business?

(In your Meralco electric bill, Meralco’s charges for the distribution wheeling business are the distribution charge, metering charge, and retail charge.)

For regulatory and rate setting purposes to determine Meralco’s allowable profit as a public service utility and balanced between the interest of the consumers and its stockholders, the fair and reasonable measure is return on assets.

Nonetheless, to address Meralco’s inevitable question on whether it is making enough money for its stockholders, we should also measure their return on equity as shown in Meralco’s official financial statement.

Let us start with the basic facts and considerations.

1. The Business – Meralco as a public service utility
The provision and distribution of electricity is a public service that is delegated by the government to the private sector as franchisee. Among the franchisees obligation as a public service utility is to assure it will invest in the necessary facilities and operate and provide the services to assure sufficient power supply and reasonable rates. It assures that it has the financial and management capability to do so.

Under the deregulated and unbundled structure of the power sector under the Epira Law of 2001, the DU’s business is to provide distribution wheeling services., i.e. the service of delivering the power from the generators and delivered to it by the transmission company to its customers through its own distribution lines.

In return, the government guarantees it with a fair return on investment through rates that are passed on to the consumers but are nonetheless regulated by the Energy Regulatory Commission.

2. Market Protection of a DU like Meralco
Meralco as a public service utility is protected by the government from many business risks specially market competition (in distribution wheeling services) that are faced by other business like shopping malls, real estate, manufacturing, banking, etc.

To assure its viability and provide an environment where the DU franchise holder can keep its rates reasonable and at the same time be economically viable for its investors, the government provides it with a monopoly franchise for its service area. Essentially it has little business risk. Protection from Competition in the distribution wheeling business and full recovery of operating costs, financial consequences of foreign exchange fluctuations, cost of fuel and purchased power, and even its own systems loss and collection efficiency and project delays. If their lines are damaged by typhoons, the repairs are passed on to the consumers. Distribution Market monopoly is granted to it by the government on behalf of the people who are also the electric users.

The government guarantees a fair and reasonable rate of return but the utility must accept the fact that it will be subjected to regulatory oversight to protect the public that they are franchised to serve.

3. Return on and of Investment

This is easier asked than answered. To begin with, there are two parts to this. The percentage and the asset base.

a. How much should be their Return on Investment? Should it be 8% or 10% per year or double the local prime interest rate? Entrepreneurs and their investment bankers, typically like to ask, “how much would be my return from alternative investment opportunities?”. Granted, they should also consider that the risk profile for a DU monopoly is lower and hence justifies lower returns. Profit level is a function of market and operating risks.

b. Next is on which asset valuation are they allowed to profit? Internationally, public service utilities should only be allowed to profit from the investments they put into the utility which is called the “rate base”. To be clear, private stockholders of these utilities are allowed to charge a rate that covers their return of investment (profit and capital recovery plus bonafide operating expenses).

This has long been the practice and called RORB (return of rate base). Majority of US public service utilities make 9.5 t0 10%. Prime interest rates in the US is 2.5% and in the Philippines it is 4.5%. So what should be the fair return on investment for Meralco given Philippine financial and economic conditions?

If Meralco is allowed a 10% return on assets plus an average depreciation charge of 10 years or 10% of asset cost, that means a total of 20% annual cash recovery from the consumers. Every 5 years the consumers is full paying for the asset base of Meralco.

c. Due to heavy lobbying, the Epira Law of 2001 opened the doors for alternative rate making which was used by the new Energy Regulatory Commission to adopt a new rate setting methodology called “Performance Based Rate Making” or PBR. In simple terms, PBR entitled Meralco to not only charge the old RORB but allowed it to charge to the consumers their forecasted investments for the next 4 years. And under the rules set by the ERC, it is not mandatory that Meralco actually makes the investment. The pa-consuelo to consumers is they re-evaluate in the next “regulatory re-set” and “reduce” the allowable rate recovery for the next 4 years. (yes they don’t recover the excess in the last four years which could run into billions in excess charges!)

In Pilipino, PBR is LSM. Luto sa Sariling Mantika! (more on this in another article)

4. Rate Base Valuation

If the rates to the consumers would be based on the value of the rate base, the issue for utilities is should it be at historical cost or at their current replacement value?

Do you know that for rate making determination, the old assets of Meralco is re-appraised every so many years?

ERC’s current PBR is based on current replacement value minus depreciation. (Please refer to the ERC PBR Presentation in the reference archives section).

The dissertation is purely from the point of view of fairness to the investor. They don’t discuss what is fair to the consumers who actually has an “equity” in the public utility since they are the ones paying for all its charges and risks including the guarantee of profit. Essentially as the ultimate payors, they are actually the guarantors of the investment recovery and profits of the private investor in Meralco.

Therefore, the consumers are entitled to similar equity and fairness in determining what is the cost of service. This boils down to what is the fair return of investment of the utility investor? Should they be allowed to profit from the periodic revaluations without really investing?

In the case of Meralco, a big part of its capital came from customer deposits which were used to bankroll the capital acquisitions of Meralco. Yet when those assets arose in value like the Meralco property in Ortigas Center, the increase in value goes to the stockholders. Nothing is given to benefit the electricity consumers who practically paid for those assets.

Moreover, the utility has already recovered from them the original cost of the asset base including their profits. Yet, every rate “re-basing” those assets are revalued (of course upwards) and used as a basis to further increase the rates to the consumers. Kawawa naman. They get it coming and going, front, behind, and center!

They only consider the “cost of service” but not really the “affordability of service” to the consumers who do not have the benefit of inflation revaluations.

This is one reason the private distribution utility business is so profitable. They have no risks and they have perpetual recovery from assets that are continually being revalued upwards. With PBR, they even recover in advance their projected capital investments. Things are getting worse for the consumers.

Under PBR the electric consumers are effectively paying for in advance the capital investments of Meralco. What is not clear is whether these assets thus acquired will then become part of Meralco’s asset base on which it will again profit perpetually even if it was the consumers who paid for it?

5. Corporate income taxes

This has long been a contentious issue. Actually this is another issue that has two parts to it.

The question of whether corporate income taxes should be passed on to the consumers is really a matter of how much is the consumers being made to guarantee a fair return on investment of the private utility investor. It can be either net of income tax or gross before tax. Private investors try to compare the profits they will make from other investments and forget that in comparing they are referring to returns that are gross and expecting net after tax returns from the DU business.

Politically though it is not palatable to consumers to be told they are paying for the corporate income tax of Meralco. So the guaranteed return on rate base must be gross before corporate income tax.

The bigger question is the anomalous disparity between what corporate income tax is Meralco passing on and recovering from the consumers compared to what they could be actually paying to the national government AFTER corporate tax avoidance strategies.

In the US, they call this “turning a consumer burden into corporate profits”. From consumer pockets to corporate coffers.

B. Power Generation

On top of this, Metro Pacific would like to profit from the self-negotiated and monopolized power generation supply contracts in Meralco.

The new Meralco (lets call this Meralco III) is evidently expecting to go back to the old Meralco (lets call it Meralco I) under the Lopez Patriarch, the venerable Eugenio Lopez Sr. under whose regime Meralco was both generator and distributor like in the old utility models in the USA. The Epira Laws that was passed in June of 2001 aspired to limit cross-ownership between generation and distribution and market domination and monopoly. Meralco II is the era post-people power when it was returned to the descendants of the old Patriarch until it was sold to Metro Pacific in 2010.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Next: The business models of Meralco II and Meralco III. And Meralco’s ROI.

Are Electric Consumers Double Charged for Ancillary Services by NGCP and its dispatch of MRU?

David Celestra Tan
January 2, 2014

In September and October 2014 Meralco’s purchases from WESM reached astonishing levels of P43.05 and P35.60 per kwh, even higher than the P33 per kwh that wrought havoc on the generation rates in Meralco’s generation rate in November and December of 2013.

It did not become an issue to the Meralco consumers because it did not increase rates to the consumers due to the low off-take of Meralco from the WESM at less than 1%.

There is more to the astronomical increase in the WESM rates than meets the eye. Consumer Kris Balitbukel pointed out that the WESM prices for those months would have been around P4.50 per kwh if not for NGCP’s decision as Systems Operator to dispatch “Must Run Units’ (MRU’s) to cover reserves which costs are passed on to the consumers. We see what appears to be double charge to consumers.

Following are the Explanations of Mr. Balitbukel:

December 26, 2014 at 8:25 am

You were too easy in just letting the high WESM prices of P 43.05/kwh for September and P 35.60/kwh for October slip by without closer scrutiny. Except for the P 36.08/kwh for the January WESM, these are the highest WESM charges this year (despite the lower primary price cap of P 32/kwh and the secondary price cap of P 6.245/kwh set by the ERC). These are price shocks that begs examination notwithstanding the impact may have been mitigated by the lesser WESM quantity bought by Meralco during those months.

Our research reveal that that these price spikes did not come from WESM trading (pure spot prices) but from MRU charges, as well as line rentals. MRU stands for Must Run Unit which in WESM operations refers to a power plant dispatched to operate by the System Operator (the “SO” or the NGCP) even after the Market Operator (the PEMC) has already established the Merit Order Table of the plants that will meet the demand at the least cost. MRUs are plants which are “out-of-the-merit-order-table” or sometimes referred to as “out-of-schedule” dispatch (the schedule being the order of the plants determined in accordance with an objective market algorithm, the Market Dispatch Optimization Model, which results in an price-ordered stack of plant capacity offers that provide the least cost to meet the demand).

Further research on the reasons why the SO/NGCP dispatched MRUs reveal that much of it are for system voltage requirements and inadequate reserve levels for which the plants dispatched for MRU were compensated by way of WESM charges. Still further research reveals that in these instances of MRU dispatch by the SO/NGCP, the plants which were made to run are the oil based plants (Malaya, Bauang, Limay, Subic) whose operating costs are quite expensive. There should not be any surprise here the corresponding MRU charges should be high. (The other instances of MRU dispatch pertain to commissioning tests by new plants which should hardly result in incremental WESM charges.)

Voltage quality and availability of reserves are the responsibility of the SO/NGCP for which they are paid their fees. However, in the above instances where MRUs are used, NGCP is solving a transmission problem with a generator solution and effectively is getting a free ride (at the expense of generators) from performing its responsibility in voltage quality and availability of reserves at a cost borne by end-users who pay the WESM charges. The SO/NGCP should solve the voltage quality problems by using its assets for which they are paid transmission charges (automatic on-load tap changers of its substations, shunt reactors and capacitors) and should address the paucity of reserves by purchasing enough of it. But when NGCP is made to get away with NOT doing its responsibilities simply because existing WESM rules allow it the expedience of simply dispatching MRUs whose cost NGCP does not have to bear, then the interests of end-users are grievously harmed when they in turn are made to pay MRU charges which in the first place are avoidable. The average load weighted WESM price, excluding MRUs and line rentals, is about P 4.50/kwh. That MRU should increase this by multiples is simply not acceptable, especially when costs are cavalierly incurred simply because an entity has the power to dispatch MRUs and such power is not subject to review or accountability.

MSK asked Mr. Balitbukel if this is resulting to a double charge considering NGCP is already charging the consumers these reserves under the Ancillary Services Purchase Agreements.

Mr. Balitbukel clarified as follows:

The P 0.36/kwh ancillary services (AS) charges collected by NGCP reflect the actual AS purchases by NGCP. However, our research shows that NGCP is able to purchase only about 45% of the required AS for Luzon and this is what is being passed on as the P 0.36/kwh AS charges to transmission users are AS. BTW, AS refer to the generating capacity deployed for regulating reserves, contingency reserves, and dispatchable reserves. It also includes purchases of KVAR for voltage support, black start capability and interruptible load in lieu of reserves. Because NGCP has not been able to purchase the required KVAR support , it has expediently used MRU for voltage regulation. However, NGCP is paid under its transmission service charge certain amounts to recover the cost of operations and capital for its voltage correction devices such as its automatic on-load transformer tap changers, its reactors, and its capacitors which if properly operated would have obviated the use of MRU for voltage requirements.

Clearly in this case. NGCP has chosen to NOT subject its assets to “wear and tear” of operations by simply running MRUs for voltage regulation. In effect, they were paid for NOT using their voltage correction devices and made users pay avoidable MRU charges for voltage regulation.

As to the inadequate AS purchases by NGCP, the lack in Luzon is in contingency and dispatchable reserves for which the ERC approved rates are lower than the approved rates for regulating reserves (which requirement NGCP is able to purchase). Arguably, if NGCP will fully purchase the AS requirements, it would not double the P 0.36/kwh currently passed on for the 45% it is able to buy. The ERC approved rates are P 2.25/kwh for regulating reserves, P 1.50/kwh for contingency reserve and P 1.25/kwh for dispatchable reserve.

In any case, there is rectitude in requiring NGCP purchase AS in any of these methods considering these are subject to regulation, transparency and competition. Today, NGCP inflicts end-users with MRU charges without any accountability in its decision to dispatch MRU plants. There are no objective standards by which NGCP’s decision to run MRUs can be reckoned with and NGCP cannot be made to pay for its mistakes and capriciousness.

Sent on Dec. 29 at 9:40 am

WESM Price Spikes in November and December 2013 due to abuse of market power or scarcity of supply?
by Mr. Kris Balitbukel

One of the most difficult task in reviewing WESM operations is the determination whether a price spike is the result of abuse of market power or merely by scarcity. Scarcity is easily explained by the law of supply and demand. On the other hand, abuse of market power in the WESM is the ability of a generator (or a firm controlling several generating plants) to increase the price and the ability to benefit from such increase. Market power may be exercised by withholding capacity (Physical Withholding) or by egregiously high price offers (Economic Withholding). To prevent Physical Withholding, the WESM has the “Must Offer Rule”, which requires generators to offer all their registered maximum capacity (the Pmax) in all trading intervals. To prevent Economic Withholding, the WESM Rules have a “Price Cap”, which requires generators to offer their capacity at a price not higher than the Price Cap.

It is important that in reviewing compliance with these rules to remember that violations may have differences in degree as well as in kind. Just like when a person is killed, there is a big difference whether the death is attributable to an act murder or to an act of self defense.

It would seem to be popular to liken what happened in the WESM last November and December as simply “murder” even in the absence of clear and unequivocal findings from the investigation by the ERC Investigation Unit (IU). We need to be objective about this because we need to punish the guilty only and not call everybody a “murderer”.

The IU’s task is a forensic investigation with big data (each of the 34 Luzon generators submitted in each interval ten (10) bid blocks for each generating unit, each block progressively priced starting with the minimum unit capacity priced at zero and the last bid block to be priced at no more than the Price Cap (but not necessarily at the Price Cap). That would mean discerning a pattern of abuse of market power from at least 732,000 data points for November and December 2013. This is a daunting challenge which I am afraid is way beyond the capability, if not competence, of the ERC IU. I hope I am wrong.

There is a train of evidence which would suggest abuse of market power. The WESM monitors concentration indices and an examination of the pattern of these indices would show whether abuse of market power has been committed. There is the Herfinddahl-Hirschman Index (HHI) which shows the extent of market concentration. There is also the Residual Supply Index (RSI) which indicates the presence of a pivotal generator. Then we have records which show who are the Clearing generators, ie, the generator whose bid set the market price for the given interval. Based on these indices, the proximate cause of a high price in a trading interval would need further scrutiny if the same is the result of a clearing price set by a generator belonging to the same firm whose HHI is significant and whose plants became the pivotal generators (because of event(s) resulting in an outage of some plants belonging to the same firm) for that interval when the RSI has become less than 100%.

Sadly, we don’t know whether the ERC is capable of doing this sort of investigation. Again, I hope I am wrong.

MSK Editors Note: The Meralco consumers are entitled to an explanation from the NGCP and PEMC on these issues. We are calling on NGCP and PEMC and ERC to respond and for the DOE to shed light on the MRU rules and how it can be rationalized. Maybe this should be replaced by a Reserve Market?