Mandatory CSP – The devil is in the Implementation

27 November 2015
David Celestra Tan, MSK

The passing of the Mandatory Competitive Selection Process (CSP) is a major and bold policy shift of the DOE and an enlightened regulatory stand by the ERC that should usher in a new era of pro-consumer safeguards and perhaps true “least cost” power.

The key word though is “it should”. A lot depends on how it is implemented and whether the regulators would shoot themselves in the foot by allowing circumvention and rigged biddings.

We are still waiting whether Meralco was able to maneuver to get its three Meralco PowerGen projects exempted or beat the new rules that set the cut off criteria as those bilateral power supply contracts that have been approved or applied for at the ERC at the time of the effectivity of the CSP policy. We know that the ERC had already reviewed Meralco’s 460mw coal power project in Mauban. It is possible that the 600mw Redondo Power in Subic, a joint venture of Meralco and Aboitiz who together control 75% of the energy market of the Philippines, had also beaten the deadline. How about the announced 1000 natural gas project of Meralco PowerGen in Atimonan Quezon? Could its ERC application been fast-tracked after the June 30, 2015 announcement of the DOE Circular for CSP? Who knows what other Meralco mid-night contracts had been signed and filed with the ERC while Meralco was fighting all out to delay the ERC Resolution for implementation?

If these mid-night contracts have managed to beat the rules, the mandatory CSP would be a pyrrhic victory for the consumers. It will not mean much for Meralco’s captive consumers for the next 25 years and Meralco would effectively have monopolized its power generation. Let us hope the ERC did not participate in a deplorable hoodwinking of the consumers about the benefits to them of the mandatory CSP regulations.

We are also waiting whether Meralco and its Chairman MVP will open to competitive bidding its next 1,060 mw of power generation supply instead of just negotiating them with its subsidiary generators.

MSK is submitting this week to the ERC and the DOE its contributions on the CSP implementing rules. We are seeking to address the concerns raised by Meralco on the role of the Third Party, mandatory aggregation, and etc.

Some salient points:

1. The forecast of its own power requirement and the amount of capacity that will be bid shall start with the DU itself but subject to the validation of the DOE, Third Party, or other institutions that would be deemed appropriate. The true power planning capability of the government must be strengthened complete with enforcement mechanism.

2. The Third party would not be asuper and arbitrary body but a facilitator and administrator of the CSP to assure proper, transparent, and judicious evaluation and award.

3. CSP’s that are clearly designed to favor a sister company like a power plant that should be delivered in three (3) months or a plant in a specific location, and etc. We advise against Swiss Challenge as a bonafide CSP because it is designed to favor a particular technology or proponent. Only in pioneering technologies should it be allowed.

4. Aggregation should not be mandatory. Capacities of sufficient economy of scale to be attractive to bidders is the only criteria.

5. The DOE can lead the bidding of reserve capacity for emergency or security of supply in case the private sector is not stepping up and these do not necessarily mean it would be the government absorbing the costs.

6. CSP process can be competitive bidding, request for proposals, and negotiations in that order and as long as it is transparent and competitive.

Filipinos are known to be so smart they pass wonderful and pioneering rules. But we are also known to shoot ourselves in the foot in the implementation, to compromise and lose our way and forget about why the law is being passed.

Epira Law, A wonderful law that lost its way

The EPIRA law of 2001 is a monument to this regrettable trait. It started with wonderful words on aspirations for anti-monopoly, competitive markets, least cost power, anti-market domination. But then it inserted under Section 45(b) the permission for a DU to contract with an affiliated company up to 50% of its demand. And this is in the very section called anti-monopoly and cross-ownership. If that is not enough, the DOE and DOF then that oversaw the drafting of the Implementing Rules and Regulations to make the Epira implemented, inserted Rule 11 which provided a cathedral sized loop hole for monopolization. We seem to be too smart, we know how to outsmart ourselves in the same law.

The Mandatory CSP rule is also a wonderful rule. But whether or not it will really benefit the consumers depends on its implementation where normally we succumb to the devil.

Let us keep this in mind as we celebrate the day of hero Andres Bonifacio, the founder of the Katipunan.

Happy and safe long weekend!

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

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An Open Letter to Mr. MVP

5 November 2015

Dear Mr. MVP

First of all we want to thank you on behalf of the millions of Filipino basketball fans who enjoyed the games of the Gilas Filipinas and Ateneo teams for your generosity in helping them recruit talent, get great coaches, and become competitive.

We also want to acknowledge the improvements in Meralco’s charges under your leadership, in Systems loss charges (now 10.5% instead of 14.5% a few years ago), distribution charges reduced by 0.18 per kwh recently, and the current lower generation rates of P3.99 compared to 5.60 per kwh just a year ago. These improvements are however not permanent and not enough. We would like therefore to similarly appeal for your cooperation in putting in place permanent solutions to the high Meralco power rates that, if reduced to fair and competitive level, will bring more long term joy and economic upliftment to millions of Filipinos serviced by Meralco.

Implementation of Mandatory CSP

We ask Sir that you do not stand in the way of the implementation of Mandatory CSP, (Competitive Selection Process) in accordance with DOE Circular 2015-06-008 and open the currently closed Meralco generation market to truly independent power generators.

Broader Benefits of Mandatory CSP

The macro-economic benefits of subjecting power supply contracts to Mandatory CSP go beyond just reducing generation rates by market testing them. 1) CSP will open the generation market to more investors thus insuring continued power supply development for the long term; and 2) it will provide a mechanism for the government, especially the DOE, to steer new power projects with a holistic strategy for energy mix, locational, environmental, and transmission systems and costs development. Somethings it does not have now. Meralco might want to view that it is to its long term business interest to treat their customers with respect and to assure their loyalty through superior service and competitive rates and value.

Legal and Fair Profits

We ask that you and Metro Pacific be contented with the legal profits from the distribution franchise and from the 50% of generation services that you are allowed to contract with affiliated companies. Public interest require that Meralco submit to transparent and truly competitive bidding the power generation contracts to assure it is least cost in market terms and not as self-servingly defined by Meralco We realize that the sellers of Meralco to your group may have convinced you that Meralco as the distribution utility has a right to negotiate power supply contracts with its affiliated companies as they had done during their time. Your own lawyers and analysts may have convinced you that the EPIRA Law of 2001 and its Implementing Rules have loopholes (Section 45(b) and Rule 11 respectively) that will enable you to also dominate power generation legally.

Issue is Public Interest and Fairness

The issue however is less of legality and more of public interest, morality, and the fairness of Meralco having the undue royal right to self-determine the projects and prices that it will pass on to the consumers, a privilege that even the government does not have in taxation which is subjected to lengthy debate by peoples representatives in Congress and the Senate, and further reviewed and signed by the President of the Philippines. The ERC reviews of the negotiated Meralco rates are not sufficient to assure the protection of the public. A Regulatory review of rates is to determine fair and reasonableness based on cost data submitted. A competitive bidding will be computed by the bidders for a competitive price. Competition (unless it is rigged) will always beat regulation in bringing down power costs. MSK will be working for the repeal of Rule 11 of the Epira IRR which is the one giving monopolization a semblance of legality.

It would be hard to argue and convince consumers that it is only Meralco who can bring least cost power by negotiating with its sister generators. As long as Meralco continues to deny the captive consumers the benefit of market-tested rates, it will sound insincere whenever Meralco claims it is “promoting consumer welfare”. The sooner Meralco realizes this the better for the country and everyone.

Distribution Franchise Did Not Include Monopoly of Power Generation

It is our position that Meralco’s electric distribution franchise did not come with a royal right to also monopolize its power generation supply, two sectors that the EPIRA is supposed to be unbundling (separating) and reforming to create true competition. There is inherent conflict of interest if the two are at the control of the same ownership and financial interest. Such conflict is inimical to public interest. Illogical Power to Price Recently you were quoted by Ms Myrna Velasco of the Manila Bulletin, a consistently anti-CSP writer, to be saying that the “CSP is illogical because it is shifting the power to price from Meralco to the generators”. That being a pass on charge, “Meralco does not make money on it and that least cost power is a fiduciary trust….that is why market power should reside with the DU”

Meralco consumers have not had much luck relying on Meralco for least cost power. It does not buy power on arms-length basis. What has been illogical is allowing the power to price to Meralco and its sister generators who are both owned and controlled by Meralco and its parent Metro Pacific. Meralco has formed its own power generation subsidiary Meralco PowerGen. It cannot be ignored that Sweetheart deals of the past continue to overcharge consumers to the tune of P6.1 billion in 2013, P10.3 billion in 2014, and so far P5.5 billion in 2015. Our generation cannot consign our children to similar burden for the next 25 years.

Meralco consumers deserve some respect for its intelligence and should be spared from continuously hearing that “Meralco does not make money on it”. We hope we can stop kidding ourselves. So far Meralco had signed with sister company Meralco PowerGen 460mw for Mauban and 600mw for Redondo Power in Subic. Meralco wants to get it to 3,000mw which is a clear monopolization of the generation sector.

You were quoted as referring to the mess in power pricing in the November December 2013 fiasco as justification for Meralco’s right to self-negotiate power supply. Your assistants may have neglected to show you our analysis of what happened in Meralco’s contracted generators during those fateful months. This is contained in our article “Is Meralco Telling Whole Story?” published by the Daily Inquirer on May 11, 2014. It might be enlightening for it to be read by Meralco.

Violation of Fiduciary Trust

It is a blatant violation by Meralco of its fiduciary trust as a franchised public service electric distribution utility by its continued obstruction of the implementation of the CSP and insisting on Meralco’s right to self-negotiate its power supply with its sister companies. There cannot be least cost power unless it is market-tested in a truly competitive, transparent, and judiciously administered and evaluated CSP. Meralco owes it to its customers.

Suing to Deny Consumers of right to Mandatory CSP

We have no doubt that you and Meralco have the force to take this CSP matter to the Supreme Court in what would be a classic Meralco and PowerGen versus Meralco consumers battle where we assume you will try to fight for your groups right to self-negotiate and monopolize power generation under the guise of “consumer welfare”. That would be reverse CSR. The resolve of the consumer volunteers nonetheless should not be underestimated.

Consumers do not begrudge your groups success and the billions you are making in the telecom sector because at least there is a semblance of competition, although we wish the government did not allow the purchase of Sun. Distribution of Electricity is a regulated monopoly. It is wrong and anti-consumer to allow that monopoly to extend to generation. Metro Pacifics choice is whether to monopolize distribution or generation, but not both. 50% of Meralco’s generation, as unfortunately allowed by the current Epira Law, is already a significant profit benefit of its control of the distribution market.

We appeal to your kind heart and sense of fairness.

True human greatness comes from judicious and kind use of power, otherwise it is just brute force. We pray that you may properly discern the judicious use of your pre-eminent position in Philippines business and energy infrastructure.

In basketball what you had generously shared was to make the Gilas and Ateneo teams competitive and give them fair chances to win. Meralco’s electric consumers are asking to have a similar competitive environment where they have an equal opportunity to win. Metro Pacific already has the guaranteed returns in its distribution franchise and the opportunity to have 50% of the energy needs of Meralco on the generation side. What we are appealing to you is not unfair.

Please allow the immediate implementation of the Mandatory CSP and schedule the competitive bidding of the next 1060mw of Meralco’s base load contracts since it already negotiated 1,060mw of coal power projects in Mauban and Subic.

We appeal to your kind heart, generosity, Filipino patriotism, and sense of fairness. In the unending pursuit of that essential part of nation building that is competitive power costs, we ask that you be our teammate.

Sincerely yours and God Bless,

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
David Celestra Tan, Co-Convenor
Aya Jallorina, Executive Director
P3Movement
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