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.


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