A Caution to DOE Secretary Al Cusi On A Realistic Energy Mix Policy

David Celestra Tan, MSK
25 July 2016

Dear Secretary Cusi:

You are coming into the Department of Energy that had been touting an Energy Mix objective of 30% coal, 30% natural gas, 30% renewable Energy, and 10% all others.

We trust that you will not automatically buy into these numerical targets that had unclear basis.

Caution No. 1

Reducing Coal to 30% is not achievable for the next 40 years.

Meralco and the MVP Group are trying to preempt the Duterte Government and Your energy tenure by hurriedly signing seven (7) contracts totalling 3,551mw of coal power supply negotiated with sister companies, affiliates, and partners last April 26, 2016 and filed with the ERC at 7am on April 29, a day before the extension granted by the ERC.

Those 3,551 of “fast break” coal projects brought to 4,100mw contracts that Meralco signed recently that will supply up to 90% of the energy needs of the National Capital Region within the next 10 years and those contracts are valid for 20 to 25 years. If we do the math, those Meralco coal projects alone translate to 55.8% of the national energy needs considering that Meralco consumes 62% of the energy needs of the whole country. So adopting a 30% goal for coal in the energy mix target for your administration will not be credible nor meaningful.

If we add the 2,000mw of coal projects being developed in Mindanao and the 2,000mw coal projects in the Visayas, coals share in the energy mix will eventually be 80 to 90%.

Caution No. 2

Clean Energy is not necessarily Renewable Energy alone.

Any targets for clean energy should therefore be called clean energy and not Renewable Energy. What’s the difference? It must be realized that Renewable Energy has become synonymous to expensive subsidized energy and those who have influenced the Department of Energy into adopting 30% RE as an energy mix target is setting up the country for expensive subsidies. Towards that fallacy, the government even has a board named National Renewable Energy Board (NREB) acting as lobbyists for solar and wind.

RE Law of 2008 identified several technologies for support. Solar, Wind, Biomass, and Mini-Hydro. (forget about ocean energy, why should the Filipino consumers subsidize their development?) Of these, mini-hydro and biomass are both grid-competitive and deserving of more rational government support.

Clean Energy means the inclusion of large clean energy projects as a program for development. Large hydro, geothermal, energy efficiency. We have probably 3,500mw of large hydro projects and 2,000mw of geothermal. Let us support their rehabilitation and expansion. We already have a significant 25% of clean energy. Let us not be misled into thinking we need 30% Renewable Energy. The Philippines should welcome renewable energy but let us wait until they are affordable and the developers reasonable in their profit expectations.

There is a need to rationalize the role of hydro in the grids. Privatizing Agus in Mindanao will surely turn them into ancillary reserve plants which means they will no longer be baseload supplying power to the people of Mindanao at P2.50 per kwh and become ancillary power supplier selling at P5.00 to P10 per kwh to the private buyer. This is what happened to the hydro plants in Luzon whose population lost the source of P1.90 per kwh power when the hydros were privatized.

If Meralco were truly looking for cheaper sources on arms-length basis, they would be working hard to secure cheaper hydro as a main source.

Caution No. 3

Natural gas options need more determined DOE impetus as a way to balance our energy mix. There are pioneering CNG projects that deserve government support. They are being locked out of the Meralco market because the CSP policy is not being implemented with resoluteness at the regulatory level.

If the government sponsors a CSP for gas with Meralco as participant it is most likely that the private sector will come up with reasonable solutions. The existing natural plants of First Gas and Kepco will probably be interested in eventual conversion to LNG/CNG.

Caution No. 4

Energy Efficiency and Demand Side Management Programs must be part of a total energy mix approach for the country. The top 3 are all addressing supply. The country needs programs to address the demand side. Roof Top solar is a form of curbing the demand side of the energy mix.

Not all coal is the same. Perhaps the dirty coal should be eliminated and clean coal technologies can be improved. There is coal gasification technologies. If we cannot immediately reduce coal in the least we can make them cleaner. Why not look at the smaller new nuclear technologies that are a lot less risky. How about fission technology in the future? And let us not allow Meralco to force the issue and lock up their supply with self-negotiated contracts and prices for the next 20 years, rendering the DOE policy of CSP useless.

We wish you success in providing a more rational, practical, and achievable energy mix policy for the country.

God Bless
Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Update: The Emerging Truth About Meralco’s Interim Distribution Rate Reduction of P0.1883 per kwh

David Celestra Tan, MSK
17 July 2016

A year ago in July 2015 Meralco urgently petitioned the ERC to reduce its distribution rate by 10.4% to P1.3939 per kwh from P1.5822 that was approved for the Third Regulatory period of July 2011 to June 30, 2015.

Meralco’s media machinery went on overdrive trumpeting its voluntary rate reduction. Consumers were overjoyed. The Matuwid na Singil sa Kuryente Consumer Alliance (MSK) was nonetheless curious because it seems out of character for a Distribution Utility with a long culture of overcharging consumers and pushing the limit on profits, both regulated and unregulated. What gives?

A reduction is a reduction and welcome relief for consumers so your consumer group MSK endorsed the immediate provisional approval. Nonetheless we registered as an intervenor to find out if the P0.1883 voluntary rate reduction is the correct amount and sufficient. Last Friday, July 15, MSK finally had a chance after waiting for six months to cross-examine Meralco’s presented expert on rate setting Engineer Roderick Dennison N. Nacu, a Mechanical Engineer with an MBA degree from UP and a 21 year veteran of Meralco with the last 10 as Asst Vice President of the Rates and Pricing Office. Mr. Nacu is in charge of the preparation, supervision, and review of the calculation of Meralco’s proposed rates for each regulatory year.

Here are some of the truths emerging about the reduction that can be bothersome for the consumers.

1. Its not a voluntary rate reduction!

The P0.1883 per kwh is actually the component of Meralco’s rate for the Third Regulatory period of July 11 to June 30, 2015 that was allowed by the ERC to recover the under recovery from the Second Regulatory Period (July 2007 to June 2011).

Truth 1: That authority to recover the under recovery from the previous period actually expired on June 30, 2015. It was not therefore a voluntary rate reduction by Meralco as their media pronouncements were claiming. It would have been illegal for them to continue charging beyond June 30, 2015 and they should stop charging that component automatically. But wonderful PR spin don’t you agree?

Truth 2: There actually was no rate reduction from the Third Regulatory Period to the Fourth Regulatory Period. They are charging in the interim the same basic rate. (The reason it is interim is the ERC had not come out yet with the rules for the Fourth Regulatory Period of July 2015 to June 2019. The existing methodology is PBR. MSK has also petitioned ERC to rescind it because it is illegal and contrary to Section 25 of the Epira Law. Read our article on the subject)

Truth 3? Asked if the P0.1883 per kwh reduction is what he, as the rate setting expert of Meralco, had recommended to the Management of Meralco for approval, Mr. Nacu demurred and said only that he submitted many figures. In a way, saying the P0.1883 per kwh was a choice of Meralco’s top management. The amount was discretionary? Hmmm.

2. Chance of over recovering the under recovery of 2nd Regulatory Period

Mr. Nacu, in his sworn affidavit, said in computing the P0.1883 per kwh recovery, “Meralco used the norminal values of the under recoveries for the four-year period….. and divided it by the Forecast Energy Sales from RY 2012 to 2015….. to arrive at Php0.1883 per kwh”.

This means if Meralco’s actual energy sales (kwh) for 2012 to 2015 are higher than the forecast, Meralco would be over recovering the nominal amount of previous under recovery. Asked about it in the cross-examination, Mr. Nacu said under the ERC’s rules, what is being approved is the rate. If Meralco sales grew higher than the forecasted energy volume used , Meralco keeps the additional revenue. Mr. Nacu added that it was ERC who determined that forecasted energy volume, clearly trying to pass responsibility to ERC.

(Before I was improperly interrupted by Meralco’s lawyer Francis Dino S. Antonio, I was going to ask Mr. Nacu if ERC’s approval was based on Meralco’s application or if the ERC comes up with its own forecast of energy volume as he was implying?) ,br>
Anyway, Is this true Chairman Salazar? Is ERC allowing Meralco to overrecover the underrecovery? In the past, Meralco is known to petition for recovery of under recovery. Would they petition to refund any over recovery? Mr. Nacu said Meralco keeps any additional revenue from higher sales. We thought Meralco’s return on investment is regulated?

Meralco’s annual energy sales grew from 30,592 gwh in 2011 to 37,124 gwh in 2015 or a total increase of 21.13% for the four (4) year period. We believe ERC’s forecast is only 3% per year or a total of 12% only for the four years. That’s an excess of 9.13%.( In fact it is not unusual for Meralco to announce energy sales growth of 10% in one month).

Truth 4: Meralco’s total energy sales from 2012 to 2015 is 139,139 gwh, 9.13% of which is 12,703.39 gwh. P0.1883 per kwh is equivalent to P2.39 billion in what appears to be excess recovery for the Third Regulatory Period.

Is ERC really allowing Meralco to overrecover the underrecovery?

3. Meralco profits or return on investment is no longer regulated

That is one of the rude awakenings that consumers is getting from the hearings at ERC. Meralco’s Mr. Nacu said in cross-examination that under PBR rate methodology, it is a price setting methodology, and not a return on investment regulating system. The approval is on the rate. If however, Meralco’s actual energy sales grew higher than forecasted and used for calculating the per kwh rate, Meralco keeps the additional revenue. The profits of Meralco is no longer regulated.

One more compelling reason the Performance Based Rate Setting price method (PBR) must be rescinded. It is anti-consumer and anti-Filipino. MSK had actually filed a petition with the ERC for a rules change to revert back to Return on Rate base which is actually more transparent and fair. We don’t know when the ERC will show any interest.

We are forgetting that power (including telephone and water) are public services only provided by the private sector as franchises. The monopoly is granted by the government and most business risks are passed on to the consumers. Profits must be regulated.

Good news from this ERC proceedings.

ERC’s bureaucracy have long been derided for being incompetent political appointees. We know many good professionals in the agency who truly take their regulatory jobs seriously. The ERC hearing officer assigned to this case is a lady Atty. Grace Lu Santos. Was by herself and handled the proceedings very professionally and coolly. Very balanced, eloquent, and sensitive to consumers. She would not let Meralco’s lawyers get away with their disruptive antics. Clearly when their presented witness is being asked contentious points. Unruliness is normally expected from consumer oppositors. This time it is the Meralco’s highly paid lawyers who were disruptive and inappropriate.

Atty. Grace Lu Santos Is a credit to the ERC and we should all be proud.

The next ERC hearing on the subject would be August 12 2016 at 10am.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Cutting Electricity Rates The Right Way

David Celestra Tan, MSK
9 July 2016

When the subject of reducing power rates come up, Meralco gratuitously suggests “reduce the VAT taxes”. When there was pressure to reduce generation rates, they suggested that the government should eliminate the taxes on Malampaya natural gas that First Gen is using.

This is a classic case of “NIMBY” self-interest, “Not In My BackYard” is an acronym used to refer to host communities’ position that power generation plants are okey to build as long as they are “not in my backyard”. In reducing power rates, Meralco’s wisdom seems “NIMPO”, “Not In My Pocket”.

What is worse than not cutting the country’s electricity rates? Cutting it the wrong way! The key is knowing where to look and be guided by the right conscience and motives.

Looking in the right places. Let us count the right ways.

1. Power Generation
As Meralco itself is saying, this cost component in your monthly electric bill consist of 60% of the total bill and therefore the logical place to start.

Most of Meralco’s power generation supply have been negotiated. About 60% from affiliated generators, 30% from non-affiliates and 10% from WESM and other suppliers. Among coal suppliers, the price Meralco pays to affiliates is 21 % higher than non-affiliates. In natural Gas, Meralco had been paying for many years 15 to 20% higher than the non-affiliated Ilijan power plant of Kepco although there has been parity among them lately.

In the last known comparable figures, Meralco negotiated with its affiliate Meralco PowerGen a rate of P4.35 per kwh for the 400mw Mauban coal expansion, In the same time frame, eight (8) electric coops in Northern Luzon banded together and bidded out a combined 135mw of power generation supply. They got P3.78 per kwh or 15% lower. That’s approximately P1.5 billion a year in higher pass-on charges to consumers. And that is one contract.

If we add the impact of their generous take or pay, downtime, and fuel rate provisions, the true pass on charges to Meralco consumers of these negotiated contracts are actually much higher.

And things will get worse because every single new power supply deal signed and announced by Meralco to the tune of 3,000mw are with “frien