“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.
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 of the Mauban coal facilities, insiders said they only offered P3.80 per kwh. By the time the negotiation was finished, Meralco PowerGen became the 51% owner of the project and the rate became P4.35 per kwh. Within the same timeframe a group of eight (8) electric coops in the north got a bid of P3.78 per kwh for only 135mw of aggregated demand.
After November 6, 2015, Meralco had been lobbying at both DOE and ERC to be allowed to hold their own CSP bidding, for “swiss challenge” biddings where they preselect the original proponents of an unsolicited proposal which most likely will be their own affiliate, and strong lobby against an independent bid administrator to conduct a bidding as envisioned by the DOE Policy. They also threatened both DOE and ERC to take them to court on the CSP policy.
The independent generators were waiting if the government specially the ERC will be steadfast in its commitment to CSP especially when the ERC Chair was quoted to have said “we lament the failure to see the public’s clear benefit from the CSP. We will respect the legal process even as we seriously consider our own legal options to make sure we defend the public interest, as well”
Moving the Midnight and Parting the Red Sea
Things changed however when the ERC announced on March 15, 2016 that it was “restating” the effectivity of the CSP requirement to April 30, 2016. This signaled to the power generators that Meralco and the MVP group can really make things happen, like Moses parting the red sea with the wave of his wand. (Actually some of them heard weeks before March 15 that ERC will move the CSP midnight.)
Even the likes of Ramon Ang of San Miguel, who until then have been a staunch competitor of MVP, can see who is the “Moses” in the power generation landscape and will not be so impractical as not to surrender to the MVP group who obviously can make things happen, has market control, and now regulatory capture.
(As a consumer group we were rooting for Mr. Ang because he represented an entrepreneurial force that can bring consumer-beneficial competition in the cellphone sector with Telstra and the power generation sector, two hopes and dreams that banished)
After clearly one of the most frenetic periods of negotiations to finalize 3,551mw of power supply contracts in 60 days, Meralco and their new subsidiaries and allies signed the PSA’s on April 26, 2016 and filed the applications with the ERC at 7am on the 29th, a day before the April 30 midnight set by the ERC.
1. 300mw with RP Energy in Subic with Aboitiz
2. 400mw with St. Raphael in Calaca with Consunji group
3. 1,200mw with Atimonan One. With Aboitiz or Ayala?
4. 528mw with San Miguel’s Central Luzon Premiere in Pagbilao Quezon
5. 528mw with San Miguel’s Mariveles Power in Mariveles, Bataan
6. 70mw with Panay Energy Development in Iloilo with Global Business
7. 600mw with Global Business Power in La Union
While the 3,551mw of contracts represent only 59% of the projected 6,000mw power demand of Meralco, the minimum off take energy total 24.885 Billion kwh is equivalent to 75% of its energy requirement. If we add the 455mw San Buenaventura and the remaining contracts with QPL and former Affiliate First Gas, most of Meralco’s base-load power requirements for the next 25 years are tied up with these negotiated contracts.
The seven (7) power supply contracts have amazingly identical language, pricing formula, and ERC application, apparently using the 300mw RP Energy as the template that was finalized and signed on April 20, 2016. Imagine five (5) of the largest power generation groups and their lawyers in one room hammering power supply contracts that will tie up the Meralco consumers for the next 25 years in a race to beat the new 45 day opening provided by the ERC. Three of them (Ayala, MVP Group, and RSA Group) just had the competitive barrier broken down among them when they signed the Telstra frequency buy off.
If that is not enough, the new Cartel is trying to push an era of non-transparency in the regulatory approval process. Their ERC applications are asking for identical and unprecedented “motion for confidential treatment of Information”. Among the information being withheld from the public? 1) Purchase Power Rate and breakdown of rates, 2) data on operating and maintenance expenses, 3) cost analysis, and 4) operating expenses. These are critical information needed to determine whether the rates are fair and reasonable.
The Rise of the Power Oligarchy and Oligopoly
The Power generators surrender to Meralco’s imposing market (and now regulatory) power is evidenced by the spate of dizzying controlling acquisitions as everyone succumbs to MVP’s “dealmaking” legacy. Now Meralco, the largest utility supplying the energy needs of the center of commerce and industry of the Philippines with 75% market share in Luzon, is now controlled by a few inter-linked generators.
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. One wonders about the technical and economic advantage to Meralco consumers of buying power that far from the Meralco load center when there are so many other options closer to home for 70mw.
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.
Even the Visayas Grid will be dominated by four main players Meralco through GBP, Aboitiz Power, Green Core of the Lopez Group, and Kepco.
It’s all now in a family. How can there be true competition in CSP biddings and even in the WESM? If their cartel and interrelated power players get away with the seven (7) midnight contracts there would be no meaningful CSP biddings for Meralco consumers for the next 25 years, only gesture biddings for minor and shorter term contracts like peaking and reserve power. There would not be a credibly functioning power spot market. Sadly, this is happening at a time when the Philippines just passed The Philippine Competition Act (Republic Act 10667) which defines, prohibits and penalizes three types of anti–competitive conduct: anti–competitive agreements, abuse of dominant position, and anti–competitive mergers and acquisitions. If what is being done to the power generation sector is not against all these, we don’t know what is. If this is not a cartel, we also don’t know what is.
What we have is now a Power Oligarchy and Oligopoly. What chance do the consumers have of getting honestly competitive power?
Things will change only if the government recognizes this crime against consumers and country and would be willing to act to prevent it. This actually is the more productive subject of the Senate investigation on power.
Next: How is Meralco able to negotiate most of its power supply with affiliates? Who is the Culprit?
Matuwid na Singil sa Kuryente Consumer Alliance Inc.
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.