Meralco’s Abuse of Market Power Corrals Generators Into a Meralco Cartel …..With Long Term Implications (Part I)

David Celestra Tan, MSK

21 September2017

Meralco’s public service franchise specifically prohibits it from engaging “ in any activity that will constitute an abuse of market power such as but not limited to, unfair trade practices, monopolistic schemes and any other activities that will hinder competitiveness of businesses and industries”.

Meralco’s electric distribution  franchise did not come with the right to also monopolize power generation. In fact they are specifically prohibited from abusing their market power.

Yet that’s exactly what Meralco and the MVP Group apparently was able to do on April 26 and 27, 2016 just in time to beat the new April 30 deadline set by the ERC.  They negotiated and signed seven (7) power supply contracts totaling 3,551mw that will corner 80% of Meralco’s energy needs with several strategic partners but all controlled by its sister company MeralcoPowerGen.

 Corralled into becoming  MeralcoPowerGen’s working minority partners  if they want access to the lucrative 6,500mw Meralcodistribution market are erstwhile giant independent generators San Miguel Corp., Aboitiz Group, DMCI, Global Business of MetroBank, and EGAT of Thailand.

 The contracts effectively evaded the new Department of Energy policy to require a Competitive Selection Process or bidding (instead of negotiating) power supply contracts whose prices and terms will be passed on to the electric consumers.  The Energy Regulatory Commission itself passed a resolution requiring that effective November 6, 2015, any new power supply agreements will be accepted for approval only if they went through a CSP.

 Meralco and the MVP group lobbied against this policy from the beginning.  Their chairman claimed that CSP is illogical and would work against consumers. At various times since 2014, they also lobbied for the delay in the implementation of the CSP policy, to make it voluntary, for them to be allowed to do swiss challenge type biddings. They also fought the requirement by DOE to have the bidding process administered by Third Party consultants. From December 2015 to February 2016 they were reported to have been unofficially lobbying to be allowed by the ERC to do swiss challenged bidding evidently to assure their favored generators win.

 Then for some inexplicable reasons, the ERC postponed in March 2016 the implementation of the CSP policy by six months to April 30, 2016 allegedly to give reasonable time to those who had signed power supply contracts as of November 6, 2015 to complete their ERC application and filing documents.

 MeralcoPowerGen’s booty of 3,551mw of 20-year power supply contracts were not signed until 171 days later on April 26 and 27 2016. ERC accepted the applications whichnow appear to be   now on the way to fast approvals. Legislator supporters of the power supply contracts even cajoled President Duterte into signing a EO30 to fast track the approvals of these “projects of national significance” within 90 days.  Consumer advocacy group Alyansa Para saBagongPilipinas filed an anti-graft case with the Ombudsman against the ERC Commissioners for abuse of discretion.

Market Power and its Abuse

 Meralco is the nation’s most dominating distribution utility with a demand of 6,500mw by 2020 72% of Luzon grid and 62% of the national demand. All the other 130 distribution utilities combined, including the Aboitiz owned Visayan Electric of Cebu and Davao Light which are the 2nd and 3rd largest, is just about half of Meralco.  That is a lot of market power to wield in buying supply.A veritable 800lb gorilla in the distribution market. The 122 electric coops nationwide only have demands of 5 to 150mw.

Soon after the MVP Group took over control of Meralco in May 2010, they already formed its own power generation company, Meralco Power Gen, with an announced goal of acquiring 3,000mw of generating capacity within a few years. Even the Lopez Group that used to own Meralco, only had a disciplined level of 1,500mw of generating capacity with an additional 500mw when Meralco’s demand grows.

The demand of these distribution utilities is the gold in the power generation business and as the “golden rule” says, he who holds the gold makes the rules. With that 6,500mw of power market, any generator who wants to build a power plant of any significant size of 300mw and larger will need to be a chosen one of Meralco and the MVP group that controls it. They are the virtual gate keeper to the generation business.  And they appear to have leveraged that market power to the hilt.

The Midnight Contracts and the resulting Meralco Cartel

 Hammered just four (4) days before the gratuitous new deadline of April 30, 2016 by ERC, Meralco parceled out 85% of its future energy needs to the following new partners and the ownerships of MeralcoPowerGen in the project companies

1) Semirara DMCI group,  400mw for 2020 (51% of St. Raphael Power)

2)  Aboitiz Group,  1,500mw for 2021 (51% of both Redondo and Atimonan One)

3) San Miguel Power, 1,056mw for 2020 and 2022 (49% of Central Luzon and Mariveles Power)

4) Global Business Power of the George Ty Group,  670mw,  (51% of North Luzon)

5) EGAT of Thailand, their partner in the 455mw Mauban coal power complex. (51% of San Buenaventura)

Meralco undoubtedly negotiated aggressively with these partners as their officials claimed but it was not only to get least cost rate for the consumers but to overpower them to agree to a 51% Meralco majority ownership. It appears only Ramon Ang of San Miguel hung tough and had a measure of negotiating victory for only a 49% Meralco ownership.

One generator offered to Meralco to expand its facilities with 450mw. At the end of the negotiations, the project became owned 51% by MeralcoPowerGen with the new P4.30 per kwh price reportedly higher by P0.50 per kwh than was originally proposed by the independent power generator.

 The resulting power generation cartel is the largest the country can ever have with a combined 14,000mw of power plants, P1.2 Trillion in assets, P225 Billion yearly revenue, and an estimated overcharge to consumers of P25 billion a year.

The issue is not whether the country needs more power supply. It is the way they are contracting and cornering the power generation contracts among their oligopoly at rates they negotiate among themselves and pass them on to the consumers. It is self-dealing in a grand scale at the expense of the consuming public.

 Anti- monopoly, anti-competitive, and market power abuse rules have to have delineated lines that should not be crossed by the private sector. Unfortunately when the CSP line was drawn by the DOE, the ERC that is supposed to implement it moved the line!

 Overcharge to Consumers

 The rates negotiated by Meralco with their majority owned projects would be passed on to the consumers. It is not only the official base rate generation rates published but there could be sweetheart fuel allowances, generous downtime allowance and minimum capacity payments disguised as load factors, and price escalation indices that can hit consumers further down the road.

 MSK estimates that there is at least a 10 to 15% difference in the base rate of negotiated contracts compared to true competitively bidded projects. Then there is the issue of rent seeking from the distribution franchise.

 Price Premium from Rent Seeking by Distribution Utilities

 On top of the negotiated sweetheart prices,  Meralco as the DU with control of the market and the privilege to negotiate and choose the awardee,  will most likely exact free equity for bringing the critical Power Supply Agreement to the project. It is not going to just throw that into the project without value especially when it is at premium rates. Of MeralcoPowerGen’s 51%free equity or “carried interest” will probably be in the 15 to 25% range since the MVP Group is known to be a shrewd negotiator.  Politically it is called “rent seeking”. It is a powerful negotiating leverage. No PSA no project.

 It means if Meralco is not wielding its market power and it is a true competitive bidding, the profits from the project could be up to 25% less and those, if eliminated, could result to lower rates to consumers by easily another 10%.

Imagine tough dealmakers Ramon Ang of San Miguel, EGAT of Thailand, and George Ty of GT Power squirm in their seats on the subject of MeralcoPowerGen getting 51% of the ownership with say only 30% real equity and 21% free?

Let us remember that Meralco already makes 25% return on equity AFTER tax on the distribution franchise. These super profits on the generation side would be on top of that. All those are ending up in the monthly power bill of Metro-Manilans.

 If there is free equity in the 51% shareholding of Meralco in these projects, it must be given back to the benefit of the Meralco consumers. Or the ERC must reduce its rate correspondingly.  The MVP Group is not entitled to trade on the market power of the distribution franchise granted by the government.

 The Meralco Cartel that Emerged

 In addition to the 4,011mw of 20 year power supply contracts Meralco signed with this chosen strategic partners they already own and would own 10,575mw of power generating capacity in the country by 2021,  resulting to a cartel with a total of 14,586mw of the country’s installed capacity and approximately corner 70% of the energy needs of the top three distribution utilities, Meralco, Visayan Electric, and Davao Light. Our national power demand is projected to be only 15,732 in 2020 and 20,090mw in 2025.

 The Meralco Cartel is not done. Tough industrialist George Ty of Metrobank commiserated to Meralco’s market power that it sold 56% to the MVP Group its 1,000mw Global Business which in turn also bought controlling interest in the Alcantara coal projects in Mindanao.  EGAT of Thailand bought 35% of the 460mw Masinloc plant owned by American IPP AES, which had indicated an intent to sell the rest and will be most likely bought by one of the Meralco cartel.

Aboitiz Energy Ventures thru its subsidiary Therma North Power acquired in December 2016 66.1% of the 604mw GNPowerMariveles Coal plant and 40% of the 600mw GNPowerKauswagan. GNPower is one of the most aggressive competitors in CSP’s for electric cooperatives selling at 20% lower than other coal plants. Now they have become part of the Meralco Cartel.

With 14,586mw of power supply capacity just in one cartel, it also spells death of true competition in the WESM market whether it is Luzon, Visayas, or Mindanao.  Good luck to the new transition team at PEMC that is supposed to make the WESM truly competitive and protected from manipulation.

 Not content,  Meralco  and the Aboitiz Group are also not bashful about wanting to takeover all the electric coops they can acquire. Luzon, Visayas, Mindoro, Palawan. And there is no wanting of LGU officials willing to broker the deals.

16 years since the passing of the EPIRA law in 2001, we turned a Napocor monopoly in power generation into a private sector oligopoly.  And worse this cartel or oligopoly also dominates the distribution sector which Napocor never had.

(to be continued)

 MatuwidnaSingilsaKuryente Consumer Alliance Inc.

ERC Must be Cured Not Abolished Nor Crippled

Posted on: Sep 16, 2017

David Celestra Tan, MSK
15 September 2017

There is no question that the ERC has not been living up to its mandate to protect the consumers, to assure long term supply at fair and reasonable rates. In our book we give them a grade of 65% as an institution, failing in many measures. Our electricity rates are the highest in Asean because of this failure.

We interact with many of their Commissioners, directors, and employees and most of them are competent professionals with true dedications to public service. That’s why we are scratching our heads why this agency as an institution has been doing so badly as an electric industry regulator and seemingly cannot find its way back to true public service.

Many members of Congress, and the consumers they represent, are frustrated with the regulatory agency and it is understandable that they would use whatever congressional power (like budget approvals) they have to jolt this organization if only to make them shape up. The threat to give them only P1,000 budget is a major message. It could cripple the critical public services agency though and we lose the 65% that they do right. Further, we would be barking at the wrong tree.

The Energy Regulatory Commission badly and urgently needs to be reformed in their regulatory philosophy, rate setting methodology, transparency, honesty, and commitment to their mandate under Section 43 of the Epira Law that created it. No argument about that. The Epira Law may even have to be amended.

Things have to start with giving it proper leadership and the President of the Philippines is in a position to do so by appointing a good Chairman. One chosen for integrity, competence, and independence from major power industry players.

There is really no need to shorten the tenure of the now more experienced current four (4) Commissioners. What they need is a new clear mandate from the President. It can be as simple as a “do your job and be faithful to your mandate under Section 43 of the Epira Law. Be transparent and no corruption. Serve the public interest. Create competition and reduce rates. Do what is necessary. No sacred cows” (this last one is very important).If they are disobedient, then the President may need a new team. But first he has to find a good leader who can carry the torch for the consumers.

To be fair, most of what ails the regulatory agency were done by the previous Chairmen and Commissioners. However, the new set of officers have no excuse in not correcting the anti-consumer methodologies.

Abolishing the ERC will cause infinitely more harm and disruption than good. The options for performing the regulatory functions are much worse. Even creating a new regulatory agency will set us back and the consumers are the ones who will suffer.

So how do we gauge whether the current ERC is not beyond salvaging?

Your consumer organization has filed with the ERC several petitions to improve the methodologies and those can be used as tests of whether the current ERC can still serve the public interests or is already hopelessly compromised.

1. Petition to change the PBR Rate Making Methodology to prevent overcharging

The ERC is allowing Meralco to make money on things they have not invested. Under PBR they have effectively deregulated the profit limits of this public service utility. They took the position that the 12% limit ruled by the country’s Supreme Court does not apply because the “economic conditions” are different. Now Meralco regularly makes a 25% annual return on equity AFTER TAX. We would like ERC to be on the side of the consumers and country. Itama lang natin.

2. Systems Loss

The ERC’s own rules put a limit of 8.5% systems loss. But the captive customers that use 70% of Meralco’s energy are charged more than 10.3%. Instead they reduce the systems loss to industrial customers to only 4% and have the temerity to boast that their systems loss is only 6.5% which is the overall average. A regulatory agency with their hearts in the right place for consumers would enforce the 8.5% limit and no customer should be charged higher. It is Meralco’s option to charge certain customers lower but never higher than the 8.5% limit. Itama lang natin.

3. Guard Against Cartelization

It can be argued that the ERC Commissioners committed a misjudgment when they inexplicably extended the deadline of the CSP implementation by six months that enabled Meralco to fast track the signing of 3,551mw of midnight contracts four (4) days before the new deadline. The courts will decide whether there were improprieties.

The ERC however has a clear obligation to assure that the negotiated contracts did not create a cartel and cartelization is clearly prohibited by the Epira Law. The ERC’s duty to investigate and assure that there is no cartelization cannot be disputed.

Your consumer organization MSK has filed a petition with the ERC to investigate and stop the resulting Meralco Cartel. This would be a loud indicator of for whom the ERC Commissioners bell tolls. Consumers or vested interests? Itama lang natin sana.

The ERC needs to be cured not abolished nor crippled. But let us wait to see which one they deserve. In many ways the fate of the institution is in their hands.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.

Comparing Philippine Electricity Rates vs Asean – Just the Facts

David Celestra Tan, MSK

September 8, 2017

Most Filipino consumers know that every month their electricity bill takes a significant part of his budget.  And he better pay up or his lights will be cutoff.

One side of his brain is revolting but the other side is being brainwashed into believing that it is just life and all people are paying the same.  They are also told that the reason Meralco’s rates are high is because our Asean neighbors are subsidizing their power rates.

Recently some reports are headlined that Philippine power rates are the same as Singapore as if that should be a consolation.

So let us just get to the facts. What is the truth?

The Philippines is the highest in Asean together with Singapore at P5.84 per kwh. But that is only for the Industrial Sector. Still, Thailand is lower by 8%, Malaysia by 19.35%, Indonesia by 71.58%.

For Commercial customers, the Philippine rate for 2015 was P7.49 per kwh and Singapore was only 3% lower. Thailand was lower by 28.3%, Malaysia by 33.64%, and Indonesia by a whopping 71.30%.

 For Residential customers, The Philippine rate is the highest ay P8.90 per kwh and Singapore is lower by 18.32%, Thailand by 38%, Malaysia by 32.36%, and Indonesia by a mindboggling 85.51% at only P1.29 per kwh.  That is one hell of a government subsidy.

One reason our neighbors have lower rates is because they use more natural gas generation compared to us that uses more coal.  That is right, LNG. Despite this, your beloved Meralco negotiated with its sister company MeralcoPowerGen 4,011mw of power projects, all coal! Then they are unabashedly claiming that they are looking for “least cost power”.

Let us remember that in the case of Meralco, 30% of their energy sales are from Residential customers and 40% to Commercial customers. Both of these customer class are charged by Meralco at much higher rates.

Meralco’s charge to all classes of customers for generation is uniform at P4.1299 per kwh in December 2015. One reason their rate to industrial customers is the same as Singapore is because Meralco works hard and gives better deal to these contestable customers.

For example, Meralco’s systems loss charge to industrial customers was only P0.1681 per kwh or 4%.  This is lower than the systems loss rate that Meralco has been boasting about at 6.47% which beats the government limit of 8.5%. Admirable on the surface.

However, Meralco’s systems loss charge to commercial and residential customers as of December 2015 was P0.4322 per kwh or 10.46% of the generation charge which is the right way to compute it.

(Systems loss is the amount of power that Meralco purchases but lose in its system and not able to sell.  Its amount must be based on the amount of the average generation rate.)

The systems loss of 6.47% being publicized by Meralco is the average for all its customers. It is being tolerated by the ERC.  The law says the limit should be 8.5%.  Your consumer group MSK had filed a petition asking ERC to enforce the 8.5% for all customers, not average. So far we have not heard from them.

Currently, commercial and residential customers that comprise 70% of Meralco’s sales are being charged 10.46%, much higher than the 8.5% limit.  In effect, Meralco’s rate for industrial customers is lower partly because they charge them only 4% in systems loss, less than half what they charge us, the captive customers.

We believe the numbers also show that Meralco charges industrial customers lower for distribution, metering, and supply fees.

We also estimate that our Asean neighbors have much lower generation charges than Meralco’s P4.1299 per kwh in December 2015. We are sure if Meralco’s procurement for power supply that it passes on to the consumers are done on arms length manner and honestly trying to achieve least cost power as their franchise require, our generation rate will be much lower by 10 to 20%.

As long as the government is allowing Meralco and the other private DU’s to negotiate the power supply with sister companies and our rate setting methodologies are anti-consumer,  the Philippines will always have the dubious distinction of having the highest rate in Asean.

Being the same as Singapore in 30% of the user base is not good enough. Our economic rivals are Thailand, Malaysia, Vietnam. And we are at a big disadvantage against them in the critical power production cost.  Sadly, it does not need to be this way. Someone in the government especially the ERC just need to move for the consumers.

When will that happen?  We continue to hope. That’s all we have for now.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.