Simple But Deeper Issues in Power are Part of High Power Cost Problem

David Celestra Tan, MSK
12 January 2017

Energy Writer Myrna Velasco’s two part series on power policy and high power cost that appeared in the Daily Inquirer touched on the usual issues bedeviling the power sector and the country’s search for sustainably reliable and competitive power compared with our Asian neighbors.

There are deeper issues that are actually obvious and simple that we know our government officials including the legislators should know will work to assure power supply at least cost but persuasive lobbying by the vested interests have been getting in the way. Issues are muddled and made more complicated. If only we all will look at the power sector from a patriotic heart, we will see clearly the obvious and simple solutions.

1. Creation of True Competition is the magic wand

It is true that there are many factors contributing to the Philippines high power costs but we have to start with the very basic which is the creation of true competition in the generation sector. Since deregulation and privatization under the EPIRA Law of 2001, we went from the Napocor government monopoly into a private sector oligopoly and Meralco’s monopsony. Now we have an 800lb gorilla in the distribution sector that is on its way to also becoming an 800lb gorilla in the generator sector as its twin. There is no competition in the generation sector. All sorts of evil come out of negotiated contracts. It is just unthinkable that in a country where government officials go to jail for manipulating competitive biddings, we allow the negotiation of power generation contracts that will burden consumers monthly for 20 years. The difference between negotiated and bidded contracts is P0.50 to P1.00 per kwh or 15 to 20%. That’s huge.

Creation of True Competition will also be the solution for assuring the sustainable entry of investments in power generation in an atmosphere of true competition and market access for the fittest.

Competition is likewise the solution for the conundrum in the solar and wind sector. Why is the DOE avoiding the obvious benefit of holding competitive bidding for solar power when there are so many interested investors? A 100mw solar plant in Southern California recently went on commercial operation and their rate is only $0.05865 cents or Pesos 2.93. It’s true they have fiscal incentives but so did our RE law of 2008 that gave tax free incentives for importation and income taxes for 7 years and beyond that only 10%. If P2.93 per kwh is viable in America it should be viable in the Philippines. If we add the cost of storage battery and self-regulating capabilities it can go up to $0.08 per kwh or only P4.00 per kwh and it will not require subsidies. It is still attractive for investors.

2. Reforming ERC Rate Setting methodologies

If only the ERC will find its regulatory soul, it will look at the various anti-consumer rate setting methodologies that can balance the rules between the distribution utility like Meralco and the consumers. Performance Based Rate Setting (PBR) allows Meralco to make money even on investments they have not yet incurred. The Systems Loss computation is anomalous and non-transparent. Meralco is allowed to keep the windfall profits from higher energy sales beyond the table forecast. These were put in by the 2nd and 3rd Chairmen of the ERC that effectively allowed Meralco to have unlimited return on investment when it is supposed to be a regulated distribution utility. ERC hearing processes are too strictly judicial deterring concerned consumers from being heard because they cannot afford lawyers.

3. Strategic Power Generation Capability by the Government

It is time to recognize the obvious reality that the Filipino people, despite power sector privatization, still expects the government to step up and provide solutions whenever there are shortages of power or steep rises in power costs. A new law is obviously required for government to possess strategic power generation capabilities to calibrate supply and prices whenever needed to protect the consumers. Its existing assets can be used for this strategic purpose instead of giving them away to the well-connected private sector oligarchs on the grid.

4. Least Cost Power and Economic Competitiveness as a National Policy

Ironically we only talk about these nice ideals of least cost power and economic competitiveness. But the way we implement privatization and power development is not really guided by a resolute cost competitiveness objective. Our neighbors have competitive rates because they worked for it. If we have low power cost as a national objective, we would utilize the bountiful hydro resources of Mindanao as the anchor power supply for that island at P2.50 per kwh. Now Mindanao will be coal dominated at P5.00 per kwh and the Agus complex will become a peaking and reserve plant selling power at WESM rates that they hoped will be P4.00 to P6.00 kwh just like in Luzon.

We would fast track and encourage the natural gas generation alternative as a leverage against coal. We would look at new, smaller, and safer nuclear technologies but move on from the old BNPP. Lets encourage geothermal development but make sure they charge reasonable rates. Mt. Apo geothermal in Mindanao used to sell its output at P3.80 per kwh. After privatization it became P5.30 per kwh.

We would also be circumspect in imposing taxes on energy, a primary input for economic production. The VAT tax on power services and other taxes being envisioned would be shooting the economic competitiveness of our people and country.

5. NGCP is an Unrecognized Part of the Problem

NGCP’s inadvertent acquisition of the grid and policy making power of the government owned Transco as intended by the Epira law need to be rectified. It created serious conflict of interest. The concession was awarded to the NGCP consortium because they are supposed to have the financial and technical wherewithal to develop the power grid. Now there are reports that NGCP makes the power generators finance the grid connection investments, hence deterring the power grid from keeping pace with generation development. NGCP and its investors are entitled to a security and fair return on the investments they would incur, a presumption when they got the franchise. Operating its transmission system is not the same as being the “System Operator”, a rule and policy making body tasked with insuring development and competitiveness in the grid.

As the Little Prince said, it is only through the heart that one can see clearly. If we have a true patriotic heart with true concern for the Filipino people and country, we can easily be guided in what to do in the power sector that has been made complex and labyrinth by the vested interests and their cohorts.

These maladies in the power sector breed corruption. The high power cost solutions are simple and obvious. We only need to recognize them and find it in our hearts to do something about it.

We also wish Ms. Velasco’s writings for the Manila Bulletin on power can be balanced to also present the view of the consumers and not only those of big business generators and distributors that she invariably quotes in her articles.

Happy new year!

David Celestra Tan
Matuwid na Singil sa Kuryente Consumer Alliance Inc.


10 Good Things the ERC Can Do For Consumers in 2017 For It to Rebuild its Image

David Celestra Tan, MSK
7 January 2017

ERC’s image as an honest to goodness regulator that is true to its mandate as a guardian of public interest in power delivery services is for now tarnished. The following are some of what it might do to recover and regain public trust and respectability.

1. To recognize, and assume a regulatory mindset in handling petitions for rate approvals, that as the regulator it has its own duty to insure against market abuse, monopolization, cartelization, and anti-competitive behavior. It is the one mandated by law and does not need the participation of the consumers and advocacy groups. If any, ERC should seek out the additional input of the affected consumers.

2. To have the humility and patriotism to rectify the misjudgment of extending the CSP deadline of November 6, 2015 to April 30, 2016 that was spearheaded by Chairman Salazar that resulted in the MVP Group evading the CSP for 80% of its energy needs from 3,551mw of midnight power supply contracts signed four (4) days before the new deadline and filed just the day before on April 29, 2016 and all controlled by its sister company Meralco PowerGen.

Unless ERC resolves this mysterious deferment of the CSP, it will be forever tainted with a corrupt image. Too big, too suspicious, too obvious, too blatant. Too insulting to the intelligence of Filipinos…and of President Digong Duterte and his team.

As a minimum, to work for a feasible solution to somehow make it up to the consumers by bringing in an era of true competition in the generation sector. An option is for ERC and DOE to cause a win-win solution where Meralco PowerGen will give up equitably half of the 3,551mw of its midnight contracts. Starting with the dropping of the obviously not ready Atimonan One and half of those with multi-contracts like Global Business, San Miguel, and Semirara.

If it can order immediately the holding of competitive bidding to assure sufficient power while there is still time.

Resolve first whether the 3,551mw of contracts being applied for by Meralco and Meralco PowerGen does not violate Epira provisions on market power abuse, anti-competitive behavior, and will not result to cartelization of the power generation sector. As a condition of partial processing of applications, to elicit a long term commitment from Meralco to cooperate and commit henceforth to the true competitive bidding of power generation contracts in the future.

3. If ERC really means to encourage continued investments in the generation sector, to create a level playing field where there is an assurance to truly independent generator investors of open access to the distribution market through an honest to goodness and consistent implementation of the CSP program. (This is not the same as rules on open access for consumers under RCOA). There is no shortage of interested investors both local and foreign but the Meralco market is closed to only the chosen ones by the MVP Group, and usually to those willing to be minority partners of Meralco PowerGen. The rent-seeking component effectively becomes additional cost to the consumers.

4. To truly address the Petition of MSK for the refund of the estimated P2.39 to P5.0 Billion in overrecovery of the under recovery of the 2nd regulatory reset. Justice delayed is justice denied to consumers. Why does the ERC seem to be taking this lightly?

5. To address the Petition of MSK for rules change and review of the Performance Based Rate setting methodology that is giving Meralco undue profits from investments it had not incurred contrary to the specific provision of Section 25 of the Epira Law.

6. To review and close the loophole of the Systems Loss charge rules by setting 8.5% as the maximum that ANY customer can be charged and to impose a more transparent way of monthly computations instead of just relying on the self-serving certification of the finance officer of Meralco under the current rule.

7. To disclose the true facts of the market manipulation case against the generators/market participants who exploited the market in December 2013 that caused a 90% jump in generation rate in one month. Once again, justice delayed is justice denied.

8. To Come out clean on what corruption really caused a professional and conscience driven public servant like Atty. Jun Villa to take his own life and to truly honor his public service spirit by not demeaning him with a whitewash. To show the world that ERC is honest and is making decisions for the best interest of the consumers as it is mandated by the law that created it.

9. To Improve the efficiency of its bureaucracy by streamlining its regulatory coverage and processes. Avoid over regulating and at the same time focus on things that need regulating for the general good of consumers.

10. To be less rigidly Judicial in its processes and more of being Quasi for the interest of consumers. It should not act as an impartial judge for it has its own obligation to look after the public interest. Petitions for rate approval should not be a court trial where there is an applicant and an oppositor. ERC itself is an interested party who must be convinced by the applicant that their proposed projects will not violate market-abuse , monopolization, and cartelization rules and the rate is just and reasonable and comply with CSP rules.

Part of this is to Create a Consumers Advocacy Office that will assist concerned consumers and groups by providing legal advice and guidance, research and clerical facilities including internet access, document preparations. Provide media access so the public will know the sentiments of consumers. This is to balance ERC’s approval of the media and legal budget that is part of the regulatory compliance expenses of Meralco that run into hundreds of millions a year and paid for by the consumers.

These actually are easy to do if ERC will be in touch with its regulatory soul, be faithful to its regulatory mandate under the law, and for it to be clear on for whom its bell tolls. It’s the consumers.

Happy New ERC Year!

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
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