Meralco’s Increasing Rates Due to Outdated “Down and Still Pay” Allowances

David Celestra Tan, MSK
21 February 2016

Meralco recently announced its rate will increase P0.42 per kwh which many consumers and apparently including the ERC and the DOE find inconsistent with the 55% drop in world fuel prices. Of the P0.42 per kwh increase this month, P0.25 or 60% is from generation charges, 0.08 or 19% is from higher transmission charges of NGCP, taxes of 0.05 (12%) , and others of 0.04 per kwh (9%).

Since fuel prices have remained low, the increase could have come only from fixed capacity payments. Meralco had further warned the public to expect more increases because of the coming hot summer months and the scheduled downtimes of more of its contracted power plants. This means Meralco will be paying for capacity fees even during the downtimes for maintenance that the generators are allowed under their power supply agreements. Since there is no output from these plants, the capacity payments will increase the average generation rate passed on to the consumers.

Origins of Guaranteed Capacity Payments during contracted downtime allowances

Guaranteed capacity payments are designed to assure the bankability of power generation projects especially in the aftermath of the power crisis of the 1990s. This is a key provision in the BOT contracts signed by NPC, which is supposed to receive ownership of the plants at the “T” time or transfer. The owners of Meralco followed suit even if their projects with affiliated companies First Gas (1500mw) and QPL (440mw) were BOO, build own and operate and Meralco the off-taker will never gain ownership of the asset. In fact, these two sweetheart contracts were the cause of the mysterious“PPA” charges (Purchased Power Adjustments)that ravaged the consumers in late early 2000’s, when generation charges jumped 50% from the NPC monopoly regime.

It became known as “take or pay” or minimum energy off-take. What most people did not know was that it also included “down and still pay” provisions where the off-taker Meralco or NPC still pay even if there is no service to take. This is in the form of a downtime allowance where the power generator is allowed not to deliver the service during the needed maintenance times whether planned or unplanned. This is normally 30 days for each generating unit and 15 days plant downs. Some plants provide for 45 days for each generating unit.
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What are the drawbacks of these that work against the consumers?

1. With the downtime allowance, the off-taker or DU essentially agrees to pay the capacity fees for 12 months even if the service will be available only for 10 months. Power Generators are entitled to assured payments but only for the times that they are providing the service and not even when they are not. If the plant is available but not dispatched by the off-taker, then it may be fair to pay them. But why pay when they are not running and cannot provide the service?

Downtime for maintenance is normal for power plants since they are mechanical equipment that breakdown and need repair and maintenance. However, downtime provisions should only mean the generator is contractually excused from delivering power but not privileged to continue to be paid by the consumers even if their plant is broken down. There should be no reward for non-performance.

2. With such guarantee, the generators do not have the pressure to minimize his downtime and to make the necessary investments for optimum plant reliability. It is a generator flexibility that leaves consumer vulnerable to undeserved capacity charges.

3. In Meralco’s case, the existence of many sweetheart deals between affiliated companies and the coming 1060mw of Meralco PowerGen’s Redondo Power and Mauban expansion, lends to opportunities for lax and sweetheart monitoring of these outages. There is nothing to guarantee that Meralco will not pay its sister generator even if its downtime is in excess of even the contracted downtime limit. In the case of First Gas, there is continuing doubt that they were paid full capacity fees in its first two years when the plants are reported to be actually not yet finished or NPC did not have transmission capacity in the location First Gas chose. They even sued their contractor for the delayed completion of the plant. There is no safeguard against the possibility that, given a choice between putting income in their own pockets or the pockets of the consuming public, that the owners of the distributor-generator would choose the latter.

4. The capacity rate being evaluated and approved by the ERC do not reflect the true annual cost to the consumer of the power rate. Essentially the true monthly cost is the annual capacity rate divided by 10 months, and not 12 months, since the service will not really be available two months of the year. The true cost to consumers would be higher but it’s better than to make them believe the rate is lower when it is not really. This is one compelling reason for a CSP so the generators can sharpen their pencils and not be spoiled by a 2 months free income.

5. Some Other bilateral contract provisions that need to be updated

a) Sell back of undispatched power to the WESM Since Meralco is already paying for the annual capacity fees in its power supply agreement, how do the consumers insure that the sell back of the unused capacity or energy is credited to the Meralco consumers and not provide a double recovery on the part of the generator?

b) Responsibility for replacement power In the November and December 2013 fiasco of the power market, a good number of Meralco bilateral contractors claimed technical shutdowns due to “boiler leaks”. May be those could not have been easy reasons if they are responsible for replacement power in case they are already in excess of their contracted downtime allowance.

c) competitive procurement of fuel There is no current regulatory rule on assuring that the fuel is truly competitive since this is a pass on charge to the consumers. Reports are that the procurement of coal and distillate fuel replacements are done by the affiliated companies of the generators.

4) control of dispatching of the contracted plants by Meralco by a Meralco subsidiary. This is very dangerous for market manipulation and should be looked into by ERC and PEMC to assure it doesn’t happen

5) For brand new greenfield projects essential for the country’s power development especially those in strategic locations may deserve capacity payments including downtime during the first five years to enhance bankability. However, the proponent must be willing to reduce the price in return. Maybe there should also be ladder rate structure where the price is reduced after the original project financing is paid off.

One thing MSK is not able to reconcile is Meralco announcement of the power plants that had downtimes for January 2016 as part of its explanation for the higher generation rate of P0.25 per kwh.

Meralco had announced the Downtime maintenance schedules of its generators for January 2016.
a) Calaca 1 and 2 600mw
b) Masinloc 1 315mw
c) Sta. Rita 10 257.3mw
d) Sta. Rita 40 264mw
e) Sta. Rita 30 265.5mw

An analysis of the Meralco purchases and the dispatch level of each power supplier showed that only SEM Calaca (600mw) had dropped dispatch to 33.8% and 23.7% in December and January. Masinloc still had 98.4% and 91.7% during those months. Sta. Rita had 84.8% and 75.2%. So why imply that these plants shutdowns caused the increase in rate?

The IPP that increased its kwh rate by P5.00 is the Therma Mobile whose dispatch dropped to 5.7% from 10% in December indicating increased supplies from Meralcos base-load suppliers. WESM’S price also dropped significantly in January indicating ample supply to the grid.

Maybe the reserve capacity contracts being entered into by Meralco with Bauang Power and the Panay Power diesel plant as far away as Panay island also needs to be reviewed by the ERC for their usefulness and costs to Meralco consumers.

For August 2016 the following have scheduled maintenance
a) SPPC- Ilijan 190mw
b) Calaca 1 330mw
c) Sta. Rita 20 255.7mw

For September 2016,
a) Sta. Rita 30 and Calaca 600mw

For October and November 2016
SMC Sual 647mw

The ERC instead of waiting until “hell hits the pan” when these downtimes and their capacity payments had already wrecked havoc on the consumers, maybe should conduct a pre-emptive review of the downtime provisions and capacity payments of these bilateral contracts to assure there are no onerous provisions. They must also evaluate how the contracted DU verifies and monitors the downtime allowances to protect the consumers.

Can they ask these generators to schedule their preventive maintenance during the low demand times of the country like maybe in the 3rd quarter? Why are they all bunched up in January?

We are holding our breadth for the next round of Meralco rate increases caused by these outages.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

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