The Betrayal and Treason of Rule 11 of the Epira IRR On Limits of Cross-Ownership

David Celestra Tan, MSK 26 August 2016

How can Meralco, a power distributor, legally arrogate unto itself an unlimited cross-ownership with sister power generators when there was supposed to be a 50% limit?

The Epira Law already allowed Meralco under Section 45 a generous permission to enter into bilateral power supply contracts with affiliated companies of up to 50% of its demand and no bidding required. The Lopez Group that used to control Meralco at least stayed within this limit and only had 2,000mw of First Gas power supply or about 40% of Meralco’s 5,000mw peak demand.

When the MVP Group took over Meralco in May 2010 they clearly believed that the sky is the limit on the generating capacity cross ownership they can have. They proceeded to create a not so subtly named generation company, Meralco PowerGen, with an openly announced objective of 3,000mw of power generating capacity. Obviously all by leveraging their control of off-taker Meralco, the distribution utility, to negotiate sweetheart contracts.

Why do Meralco and MVP’s topnotch lawyers believe that they are allowed under the law to breach the 50% limit set by the Epira Law? Not that the MVP group is bashful about pushing the borders on the ownership and monopolization limits to get their business take over desires as in the foreign ownership limits of utilities like PLDT and Meralco.

They must have discovered, or were told in the process of negotiating the purchase of Meralco, the big monopolization loophole provided by Rule 11 of the Epira IRR and the huge profit opportunities that the MVP Group can have in self-negotiated generation contracts. Imagine having control of the “gold” of the power market and the power to choose and own the generating companies that can get into the Philippine market? That alone could justify the premium they paid for buying control of Meralco.

The MSK organization is not against capitalism and entrepreneurism. We are against monopolization and exploitation of the helpless consumers especially in the provision of public utility services.

Epira Laws Limit on Cross-Ownership

The initial drafts of the Epira Law called Omnibus Power Bill and the myriad of foreign consultants set out to unbundle the power sector with no cross ownership among them. But powerful lobbyists through the series of changes in Energy Committee Chairmen in the Senate and Congress from 1995 to 2001 prevailed. In the final bill only cross-ownership between the Transmission company and the others was prohibited.

Section 45 provided that “to promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the following safeguards..(b)….For the purpose of preventing market power abuse between associated firms engaged in generation and distribution, no distribution utility shall be allowed to source from bilateral power supply contracts more than fifty percent (50%) of its total demand from associated firm engaged in generation”.

Clearly the Epira Law recognized that there would be market power abuse between associated firms engaged in generation and distribution.

It defined “An associated firm with respect to another entity refers to any person which, alone or together with any other persons, directly or indirectly, through one or more intermediaries, controls, is controlled or is under common control with, such entity”.

Section 45 also defined “affiliate” to mean any person which, alone or together with any other person, directly or indirectly, through one or more intermediaries, controls, is controlled, or is under common control with another person. For good measure it defined “control” to “mean the power to directly or cause the direction of the management policies of a person by contract, agency, or otherwise”.

Unknown to most people, in the finalization of the Epira Law in the 2nd week of June 2001, a pitch battle went on the issue of cross-ownership between us who were fighting for safeguards for consumers and the lobbyists of the vested interests who were putting in loopholes in the law as much as they can get away with. The dark forces succeeded in inserting in the last two days of finalizing the Epira Law at the Bicam committee that Distribution Utilities can enter into power supply contracts with affiliated companies up to 50% of their demand. Meralco was only lobbying for 35%. You can guess how it became 50%.

Allowing this 50% cross-ownership is already one of the major weaknesses of the Epira Law and its failure to require that these pass on charges to consumers should be subjected to competitive bidding was a major betrayal of the consumers.

Still this generous 50% limit is being breached by the new Meralco. How is this legally possible?

The Betrayal and Treason of Rule 11 of the Epira IRR

Apparently not happy with a 50% limit, the same vested interests succeeded in finishing the job for monopolization and unlimited cross-ownership between a DU and a generator and redefined the limits set by Section 45 with its own creative language of Rule 11.

The Implementing Rules and Regulations of RA 9136, otherwise known as the Epira Law of 2001 was finalized and passed by the Department of Energy in June of 2002. As an IRR it is supposed to only turn the language of the mother law the Republic Act 9136 into implementable and clearer language. For the most part they have done that.

Except for Rule 11.

Rule 11 Titled “Cross Ownership, Market Abuse and Anti-Competitive Behaviorinitially stayed faithful to the words and spirit of Section 45 of the Epira Law.

It established under its Section 4 the Limits on Concentration of Ownership, Operation or Control of Installed Generating Capacity. —

“ No company, Related Group or IPP Administrator, singly or in combination, can own, operate or Control more than thirty percent (30%) of the installed generating capacity of a Grid and/or twenty-five percent (25%) of the national installed generating capacity”

Under Section 5 it also set Limits on Bilateral Supply Contracts by a Distribution Utility.

“No Distribution Utility shall be allowed to source from bilateral power supply contracts more than fifty percent (50%) of its total demand from an Affiliate engaged in generation”

Then it delivered the coup de grace in redefining cross ownership limits under Section 4(b)

The capacity of such facility shall be credited to the entity controlling the terms and conditions of the prices or quantities of the output of such capacity sold in the market in cases where different entities own the same Generation Facility.

In cases where different Persons own, operate or Control the same Generation Facility, the capacity of such facility shall be credited to the Person controlling the capacity of the Generation Facility”

This is a total redefinition of the cross-ownership limit contrary to the clear vision of the Epira law. Generating capacity limit is now determined by who is selling the capacity and output to the power market which by its warped language is the one “controlling the capacity”.

This is also a total revision of the Epira Laws definition of “control” which was “ the power to directly or cause the direction of the management policies of a person by contract, agency, or otherwise” under Section 45. That kind of “control” mostly come from ownership and membership in the board and management committees.

Central to the question of “control” is the ability to decide the price and availability of the generating unit to the market. And who is going to believe that “power to directly or cause the direction of the management policies” of a multi billion peso enterprise like a generating company will not be influenced by its stockholders and officers?

Here is another case where we are now lost in why we are doing things. Why the Epira Law is endeavoring to limit concentration of capacity towards the objective of assuring competition in the market place and why it is limiting cross-ownership between distribution utilities and generating companies.

The whole idea is assuring there would be enough independent power generators competing with each other to truly create the kind of honest to goodness competition that will bring down power to “least cost” for consumers. It includes competing for bilateral contracts and the WESM spot market. That cannot be achieved if the DU is allowed to pick and choose its own generators, negotiate sweetheart deals, and cartelize the generation sector.

Cross-ownership between the Distribution Utility and the generator put them in positions to negotiate sweetheart prices, sweetheart terms, and sweetheart administration of the power supply contract. When faced with a decision to generate revenue for its generating company or to protect the public from unnecessary and avoidable pass on charges, which do you think the conflicted cross-owners will choose?

 

What are the betrayals and treason of Rule 11?

1. It redefined the Epira laws definition of “control” as the marketing of the capacity and not considering ownership and operations.

2. In determining concentration of capacity, it restricted the counting of the generating capacity to the party “controlling” it as defined above and not counting it to the owner and operator.

3. These two just about totally removed the 50% cross-ownership limits already generously allowed by the Epira law between the distribution utility and the generating companies.

4. This means a distribution utility can own even 100% of a generating facility and it will not count against the limit of cross-ownership of 50% as long as he doesn’t do the marketing of the power capacity, which is the new definition of control per Rule 11.

5. With Meralco’s generators all interlocking in ownership, there cannot be true competition in the generation sector in bidding for bilateral power supply contracts and in the WESM spot market. How can related generators honestly compete with each other? What chance do the consumers have against coordinated action and collusion and price manipulation among them?

Whoever perpetuated the mangling of Rule 11 betrayed the Filipino consumers and committed nothing less than treason against the people and the Philippines as a country. What right do you have to deprive our people of their right to competitive power, to protection against manipulation, to be treated fairly. To deprive them, on a monthly basis, of their hard earned income with overpriced electricity?

To make a mockery of the Epira Law that took the country more than five (5) years to deliberate and pass? In the pursuit of competitive power, the government privatized Napocors generating assets and contracts at firesale prices, leaving the people with P500 billion in stranded loss and liabilities that will again be passed on to us.

Because of this Rule 11, all these severe costs to the country and the people is coming to naught.

For all its deficiencies, the Epira law was correct in trying to limit the installed generating capacity that a company or related group can “own, operate, or control” (Section 45(a)) for any one of those can give a party in the position to control, price, and withhold the generating capacity from the market, which will manipulate the “supply” that impacts market prices.

Section 45 of the Epira Law and Rule 11 of its IRR were there in the law and rules before the MVP Group took over Meralco in May 2010. But they are exploiting the loopholes to the limit and actually openly monopolizing, negotiating, and cartelizing the sector.

Ownership, Cross-ownership, and Cartelization of the Generating Capacities by Meralco and the MVP Group?

We already know that the MVP Group controls Meralco, the largest power distribution utility with a demand of 6,000mw, more than 62% of national demand.

On the generation side, We already know that they ended up owning 51% of the 455mw San Buenaventura expansion in Mauban. We also know their control of the 600mw Redondo Peninsula coal project in Subic.
They got bolder and more voracious in the recent months.
In May 27, 2016, the MVP Groups affiliate First Pacific bought 56% of Global Business Power of the George Ty Group which in turn bought 15.6% of another Meralco affiliate Metro-Pacific Investment (MPIC). MPIC already owns 49.96% in Meralco in addition to a 50% ownership in Beacon that owns 35% also in Meralco.

Two of the seven (7) midnight power supply contracts of Meralco totaling 670mw were signed with Global Business Power. The 70mw is for a coal plant as far away as Iloilo that will go through 800 kilometers of power transmission and several submarine cable systems. That is clearly self-dealing to the detriment of the Metro-Manila consumers.

In July 14, the joint venture between Meralco and San Miguel was signed on Mariveles Power Generation which got a 528mw contract. Meralco would own 49% and San Miguel 51%. On July 29, Meralco announced a 50:50% joint venture with DMCI/Semirara for the St.Raphael Power Generation Corp. which got a 400mw among the seven (7) midnight contracts.

Redondo Power that got a 225mw contract is owned 51% by Meralco in partnership with Therma Power of the Aboitiz Group. The Atimonan Energy One to which Meralco assigned 1200mw of power is majority owned by Meralco but it is not yet announced who will be its partner with Aboitiz and Ayala as rumored possibilities.

Before these new joint ventures and alliances, the other Meralco owner with 27.1%, favorite white knight JG Summit, bought 30% of Global Business Power where Meralco PowerGen had bought 20% in 2013. New Meralco partner EGAT of Thailand under its investment arm New Growth BV own 49% of the 455mw San Buenaventura. EGAT had bought 40.95% of Meralco supplier Masinloc Power Partners of the AES Group. EGAT owns 98% of QPL Mauban which has a 460mw coal power contract with Meralco.

In all these generation projects, Meralco PowerGen or any of the MVP group affiliates will own anywhere from 49% to 60%. Because of Rule 11 and its redefinition of “control” and how installed capacity for purpose of determining market domination and capacity concentration, NONE OF THESE 4,100MW will count against the ownership and market control of the MVP Group.

If we consider that Meralco’s various partners control an additional 5,000mw of the country’s power generating capacity, 9,100mw of the country’s 14,000mw capacity would be in the hands of one Meralco Cartel. That’s 65%, way over the limit for any affiliated group.

And we are only considering generating capacity. If we base it on the guaranteed contracted energy in kilowatthours stated in the seven (7) midnight power supply contracts, the Meralco cartelization will in run into 95% of the energy needs of Meralco. Meralco buys another 5% of energy from WESM, where the majority of the energy supplied also come from their affiliated generators.

Congress can annually conduct an investigation into suspicious simultaneous downtime of power plants, periodic spikes in power rates and the spot market prices. The ERC can issue show cause orders. They can do table evaluations of power rates negotiated between and among sister distributors and generators. If we as a people, as a nation, as a government, are incapable of stopping this market domination and conspiratorial cross-ownerships, the above actions will be nothing but exercises in futility and incapability in the face of the giants that the country allowed to grow beyond controllable. That would be oligarchy and oligopoly.

Rule 11 is a abhorrent betrayal of the Filipino consumers, nothing less than treason to the country and its industrial competitiveness.

Cross-ownership, monopolization, and cartelization of the generation sector only deal with domination of Capacity. Sweetheart negotiations of pass on charges to consumers is another and it would have been partially corrected by the CSP policy. We don’t know if the MVP group had something to do with the mysterious moving by the ERC of the CSP midnight by five (5) months. We just need to follow the trail of sweetheart financial benefits from the seven (7) midnight contracts totaling 3,551mw that the CSP extension would allow to evade the competition policy.

 

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Matuwid.org

Disclaimer

David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Was active as volunteer in finalizing the Epira Law to some key Senators. Through his blog matuwid.org in retirement he only seeks to share his expertise in power policy and strategy for the public good towards reducing the power cost in the country and eliminating abuses and monopolization. He assures the consumers and participants in the movement that he has no vested interest other than as a consumer and will not benefit financially from any of the advocacies and certainly will not participate directly or indirectly with any potential bidders in a true CSP.

IPP’s Surrender to Meralco’s Market Capture and the Rise of the Power Oligarchy

“We know we wanted to deregulate, we just forgot why we are doing it!” a USA regulator lamented. That in a nutshell is the state of the deregulated and privatized power sector in the Philippines, resulting to one of the highest electricity rates in Asia, and headed towards uncontrolled concentration, domination, and abusive rates and terms.

Concept of the EPIRA Law

The whole idea of the EPIRA law of 2001 is to reduce power costs by creating true competition in the different sectors of the Power Industry. Generation was unbundled from transmission and distribution and there was not supposed to be cross ownership among them to assure this healthy competition for the benefit of the consumers.Assuring there is a fully functioning competition especially in the generation sector, and its spot market called WESM, seems an idea that is totally lost now among the government policy makers, regulators, and legislators.

There can be a functioning competition in the generation sector only if there are enough independent players competing against each other. The private sector however will not do it on their own because alliances, market cooperation, and coordinated strategies will tend to be more convenient and lucrative. It is up to the government to create and guard an industry structure where competition among generators is assured to safeguard consumers.

Self-Contradicting Provisions

One of the most self-contradicting provisions of the Epira law is Section 45 that ironically professed to prohibit market domination and anti-competitive behavior but proceeded under its own paragraph b to allow distribution utilities like Meralco to enter into bilateral contracts with affiliated companies up to 50% of their demand and is silent on the need for competition. Hence, negotiation between affiliated companies obviously became allowed. (What the law does not prohibit, the law allows!) This is the handiwork of the powerful lobbyists to tilt the rules in their favor.

That put Meralco the largest power distributor with 5,000mw demand the ability to choose who they will contract with and 50% or 2500mw allowed to be with their affiliated generators. In essence to also choose who gets in to be major players in the generation sector. That is so much market power. Meralco serves 75% of Luzon, equivalent to 62% of the country’s energy needs.

Independent Power Producers (IPP’s)

Until a few months ago the Philippines had an appearance of a robust generation sector with sufficient independence and competition among them. Top tier Power generators San Miguel Corp, Semirara, AES of USA, EGAT of Thailand, Kepco of Korea, TeamEnergy of Japan, Therma Power of the Aboitiz Group, First Gas of the Lopez Group have power supply contracts with the new Meralco but they are nonetheless independent.

There is also Global Business Power that concentrated in the Visayas, the Ayala Energy in coal and wind in Luzon, Transasia trying to do projects in Luzon and the Visayas, the Filinvest Group of Gotianun mostly in Mindanao, the Alsons Group also in Mindanao, Salcon Power in the Visayas, GN Power in Mariveles and Mindanao. Then there are the 2nd and 3rd tier players in renewable energy mainly solar, run of river hydro, wind, biomass and pocket players in diesel plants.

New Era of an Open and Competitive Power Generation Sector

When the Department of Energy passed in June 2015 a new country policy of requiring mandatory bidding for bilateral power supply agreements specially base-load, it ushered in a new era stopping self-negotiated power supply contracts whose sweetheart rates are passed on to the consumers. It was a major boost of commitment to upright regulation when the then new ERC Chairman Jose Vicente Salazar led the issuance of the ERC Resolution 13 mandating that the DU’s conduct a CSP for the power supply contracts that they will submit to the ERC after November 6, 2015.

The CSP rules created an open and competitive power generation sector where the willing and able power generators, local and foreign, can come into the market by being competitive , efficient, and innovative with technology. No barriers to entry. No need to have special connections with the DU. Just good old fashioned competitively priced power.

While the government was promoting the CSP policy the Meralco group continued announcing its target of 3,000mw of power projects for its subsidiary Meralco PowerGen, as if telling the government “stop us if you can”.

The independent power generators were calculating their moves. Some sharpening their organizations for the open bidding that might happen. Others discussing schemes with Meralco and the MVP group, who cannot be ignored because they “control the gold” of the power generation market which is the power distribution utilities, the largest of which is Meralco. Lets remember the “golden rule”. He who controls the gold makes the rules, courtesy of Section 45 of the EPIRA law.

When independent generator, EGAT of Thailand approached Meralco for a 460mw expansion