Our National Dance on Market Concentration in Power….and the Resulting Monopolization, Oligopolization, and Cartelization.

David Celestra Tan, MSK

22 October 2017

The DOE and ERC have been dancing around the issue of Market Concentration in Power since the get-go of the crafting and passing of the Electric Power Industry Reform Act of 2001 that we all more  commonly  know as the Epira Law of 2001. If they have been dancing, it was the Bicam Committee of Congress that finalized the Epira Law that wrote the music.

The Epira Law of 2001 aimed to reduce power cost by creating true competition in the power market place. It was the reason the power industry was unbundled into power generation, transmission, distribution, and retail.   A truly functioning competition is a key to protecting consumers in a deregulated sector. The Epira Law is profuse in its aspiration for control of market domination,  monopolization, cartelization, and cross ownership and in its admonition against anti-competitive behavior and abuse of market power.

The good guys among the framers of the Epira Law had tried to put in safeguards to prevent too much concentration of power capacity as a way to assure there will be true competition. Economists estimate that it will take at least four (4) players to assure true market interplay of competition.  Well theoretically. The bad guys acting on the behest of the powerful vested interest put in enough ambiguity in the law to allow for “implementation flexibility” or loophole.

Why is there is need to limit market concentration?

To assure healthy competition in the market place, it is essential to limit the size of power generators so no one unduly dominates the market and assure there will be enough players competing. The Epira law recognized that anyone owning, operating, or controlling a power company would have influence in the availability and pricing of such power plant. Hence they can influence the supply or withholding of such capacity and their pricing in the market.  If there are only a few players and a cartel, they will not be truly competing with each other to the detriment of the Filipino electric consumers.

Undue concentration of capacity will also lead to collusion and manipulation in pricing. We only need to see what happened in November 2013 when WESM prices soared to P62 per kwh. The major players were found manipulating and were penalized.  The case is held up on appeal however and it is not clear when justice will be given to the consumers. In that WESM market exploitation, about P9 billion was the additional charge to the consumers. Yes P9 billion.

Comparatively, there are reports that the ERC is only imposing a total of P500 million in penalties to the guilty manipulators. Since no one is arguing for the consumers, chances are even that P500 million will eventually be forgotten on eternal appeal.

We are now gaming the rules in market concentration and have been dancing around its enforcement.

The Epira Law’s control of market domination are contained in several areas:

  1. Dance No. 1 Started in Section 45 of RA 9136 or Epira Law of June 2001

On market domination of a regional or national grid:

To promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the following safeguards:

            a) No company or related group 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.                        “Related group” includes a person’s business interests, including its                                subsidiaries, affiliates, directors or officers or any of their relatives by                              consanguinity or affinity, legitimate or common law, within the fourth civil                  degree;

(emphasis mine and you will see why)

On market domination of a distribution utility:

Distribution utilities may enter into bilateral power supply contracts subject to review by the ERC: Provided, That such review shall only be required for distribution utilities whose markets have not reached household demand level. 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 an associated firm engaged in generation but such limitation, however, shall not prejudice contracts entered into prior to the effectivity of this Act. An associated firm with respect to another entity refers to any person which, alone or together with any other person, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such entity; and

These provisions avoided the limits on cross-ownership between the generation (power supply) and distribution sector (the bulk buyers and distributors of power)

  1. Dance No. 2 – DOE

The DOE’s Dance Around the 30/25 Limits of Market Concentration under Section 45

It was the Department of Energy that was tasked with writing the Implementing Rules and Regulations (IRR) that was required to implement the RA 9136 Law. The DOE designated the then head of the PSALM to be the chairman of the IRR committee.

The DOE danced around the market concentration limits and further watered it down by providing under Rule 11 Section

                 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. 

That is right! The DOE further watered down the idea of market domination by considering only “control” in determining market concentration instead of “ownership, operation, and control” as required by the mother law that it is supposed to implement. This did not happen by accident or oversight. Clearly it was a committee’s deliberate scheme to marginalize the market domination rule.  I think this is illegal because it contradicted the Epira law itself and those who perpetuated it should be held accountable.

The IRR was approved by the JCPC of Congress.

              3. Dance No. 3 – ERC

The ERC’s Texas two-step dance on Market Concentration

Section 45 designated the ERC to put in the safeguards. “To promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the safeguards:

The ERC for its part passed Resolution No. 26, Series of 2015, which was primarily based on the provisions of Section 4 of Rule 11of the Implementing Rules and Regulations (IRR) of RA9136 which provides for control as the basis for crediting the installed generating capacity of a Generation Facility to a Generation Company and its affiliates or related entities

Consequently many generators proceeded to own installed generating capacities without fear of violating the limits on market concentration even if they own the plant as long as they don’t operate or control the facility. For a while no one was at risk of breaching the limits. But now that big generators Aboitiz Power,Meralco, San Miguel, Lopez Group, and Ayala Group are on the acquisition binge, this issue became urgent and important.

The ERC’s Step Forward

The ERC apparently reacting to feedback that Rule 11 of the Epira IRR maybe illegal, took the first step forward to review the methodology and released an Issues Paper on August 19, 2015 signed by then Executive Director Atty. Saturnino Juan, calling for comment from industry stakeholders on a proposed

REVISED GUIDELINES FOR THE DETERMINATION OF INSTALLED GENERATING CAPACITY AND ENFORCEMENT, OF THE LIMITS ON CONCENTRATION OF OWNERSHIP, OPERATION OR CONTROL OF INSTALLED GENERATING CAPACITY UNDER SECTION 45 OF REPUBLIC ACT NO. 9136″.

ERC CASE NO. 2015 – 005 RM

In about October 13 2015 they released the draft new rules in determining the concentration of capacity

“The proposed amended Guidelines, on the other hand, provides that in the determination of the Generation Companies’ market shares and potential breach of the 30% and 25% market share limitation, it shall be separately determined based on three (3) separate tests, as follows:

           a. Ownership test;

          b. Operation test; and

          c. Control test.

The generation company and its related group, if any, should comply with all the abovementioned tests. In the event that the generation company exceeds the limits in either of the tests required, the ERC shall consider the same as a breach of any of the market share limitation. If a generation company and its related group exceed the limits as periodically determined and set by the ERC in accordance with the Guidelines, it is obligated to inform and report such breach and the reason therefor to the ERCwithin the prescribed period from the occurrence thereof.

Thus, the Commission seeks the comments from the various industry stakeholders on the proposed amended Guidelines pursuant to Section 4s(a) of RA 9136.”

The draft revision does not go far enough but it would have been a big step forward towards correcting the legal infirmity of Rule 11 but also the control of market concentration and domination.

  1. The ERC’s Step Backward

The ERC then quietly “held in abeyance” the rules on the determination of market concentration by passing Resolution 3 of 2016 on March 15, 2016. It was quiet only because it was unnoticed under to the pandemonium that came with the extension of the CSP policy by 6 months from November 6, 2015 to April 30, 2016 which they passed on the same day and session on March 15. The ERC effectively also “held in abeyance” the implementation of the CSP policy.

And the rest is history. Meralco took advantage of the extension that in 41 days it was able to hammer 3,551mw of PSA with 5 strategic partners who are willing to be the minority partners (and plant operators) of Meralco PowerGen.

Freed from the market concentration limits “held in abeyance” by the ERC, they also proceeded to acquire the 1,000mw Global Business Power of the George Ty group and Aboitiz for its part acquired controlling interests in erstwhile competitor 1,200mw GN Power.  Meralco partner EGAT of Thailand also bought 45% of the 800mw AES Masinloc coal plants in Zambales. GBP in turn bought controlling interest in the Alsons coal projects in Mindanao.

(see article on ERC-Meralco conspiracy, 6 October 2017 by ABP)

  1. Knight in a Shining Armour

One energy official who has been asking the right questions is Senator Sherwin Gatchalian, the Senate Energy Committee Chairman.

Could the young Senator Gatchalian be the knight in a shining armor for consumers? Can he “hip-hop” and “twerk” the rules for an enlightened limit on market concentration? Can he put ERC to task for “holding in abeyance” the market concentration limits?

In a keynote speech reported by the BusinessMirror,  Sen. Sherwin T. Gatchalian said the metric used to determine the market-share limitation should be reviewed. 

The law specifies installed generating capacity as the measure in computing market shares. 

However, Gatchalian said, this is not reflective of the true market power of a company since the installed capacity is different from the power generated and the actual power injected to the grid. 

The share of coal in the country’s total installed capacity is approximately 35 percent, but its share in actual generation is 48 percent. For natural gas, its installed capacity is only 16 percent, but its actual generation is 22 percent. 

As a consequence, Gatchalian said, the use of installed generating capacity underestimates the true market share of a company, especially if its plants have comparatively higher capacity factors. 

According to the senator, almost 60 percent of the installed energy capacity is controlled by only three firms.  These are First Gen of the Lopez Group at 19.63 percent, San Miguel Corp. at 18.73 percent and AboitizPower at 17.48 percent. 

“There exists no formal monitoring of associated party contracting between generation companies and distribution utilities,” Gatchalian said.

“We have to [undertake a review]. It has to be an ERC recommendation. We will have a dialogue with ERC to look at it. We will talk to them on how to remedy this,” Gatchalian said. 

(See our article on The  Betrayal and Treason of Rule 11 of Epira IRR, 26 August 2016)

We hope you really do Sir. It will be a big step forward towards liberating the electric consumers from being captives of cartelization, oligopolization, and resulting negotiated contracts. 

It is the Line Dancing to Electric consumers Emancipation we have been waiting for.

Matuwid na Singil sa Kuryente Consumer Alliance Inc

matuwid.org

david.mskorg@yahoo.com

 

 

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Legislators Incessantly Pressuring ERC for Meralco Must Equally Show Concern for Electric Consumers

David Celestra Tan, MSK

16 October 2017

Almost everyday Legislators have been bombarding the ERC with press releases to pressure them to expedite the approval of Meralco’s seven (7) midnight power supply contracts. They subject the ERC Commissioners to hearings that are supposed to be “in aid of legislation” with distinct intent to pressure the ERC to “take action and resolve” the Meralco power supply agreements. A clear lobby for approval of the PSA’s not only of Atimonan One (1,200mw), Redondo Power, and the 700mw St. Raphael but the rest of the seven (7) midnight power supply contracts totaling 3,551mw. Never mind that the PSA’s were negotiated and denied the consumers their right to competitive least cost power. Never mind that the contracts effectively created a cartel, something harmful to the consumers and clearly prohibited by the Epira law that the Congress passed in 2001.

The pressure is borderline inappropriate because the ERC has the sole discretion on whether to approve or disapprove applications and should not be interfered by the Legislature. It is inappropriate because Congressmen are clearly lobbying for approval of these projects.

One of the most vocal lobbyists is Rep. Danilo E. Suarez of the 3rd District of Quezon where the 1200mw Atimonan One project will be located. He is reported to have claimed that the ERC had failed to act on this project’s application since 2012 and he is asking the ERC to explain the delay in the approval. Someone clearly misinformed the good congressman.

The ERC only accepts applications for approval of signed power supply agreements. The Atimonan One contract was signed only on April 26, 2016 and applied with the ERC a couple of day later on April 29, 2016. In fact it is assigned the ERC Case No. 2016-092. There is no way Atimonan One had been applied for in 2012. It may not even have been incorporated in 2012.

The Meralco applications have incited the vehement objections of consumer groups requiring ERC to address them and observe due process. Who is to blame for the longer time it will take to properly evaluate them and rule on the contracts “fair and reasonableness”?  Meralco is trying to ram through the throats of consumers these 3,551mw of 20 year contracts it negotiated with its sister company Meralco PowerGen.  Had they gone through arms-length truly competitive bidding then the ERC approval process probably would be been cut and dried and consumer groups would not be opposing.  In these anomalous midnight contracts, the Legislators are practically asking the ERC to short circuit due process and approve the contracts. This borders on the blatant.

Equally Important Concerns of Consumers

Nonetheless, Legislators have rights to use their legislative prerogatives the way they choose. It is up to their voters to judge them. We just wish that if they truly are concerned about power needs of the country, that they should equally show concern for electric consumers. And consumers equally have serious concerns.

  1.  Meralco Cartel

The 3,551mw of power supply contracts effectively creates a Meralco Cartel of six companies that combined will control almost 15,000mw of the country’s 20,000mw by 2022. ERC is specifically mandated by the EPIRA law to guard against cartelization. So it seems Legislators should have reasons to ask ERC to explain why it is not investigating the possible violation of cartelization by Meralco. This issue threatens the long term growth and competitiveness of the power generation sector.  And in fact It deserves legislative attention.

  1. CSP Vs Negotiated Contracts

Perhaps it will also be a productive use of legislative time and resources if they look into whether CSP would really result to much lower rates than negotiated contracts. Just to settle the issue once and for all.  Meralco signed a solar power supply with Solar Philippines at only P2.99 per kwh after a CSP. Just a few months before they negotiated with the same Solar Philippines at P5.39 for 50mw. This after Solar Philippines announced a few months before in June 2016 that it can sell solar at P4.00 per kwh.

The difference in the negotiated and the bidded contract with the same Solar company is a whopping P2.40 per kwh or P200 million a year for the 50mw.

Should this not raise legislative eyebrows and warrant Congressional hearings.

  1. Violation of Congressional Franchise

One area that is unquestionably right up the alley of Congress is Meralco’s violation of its Congress granted franchise and a lot of things Meralco under the MVP Group had been doing should raise logical concerns among Congressmen if due attention is being paid.

Meralco’s public service franchise granted to it on July 21, 2002 under Republic Act 9209, (called then as mega franchise bill) more succinctly defined their customer service obligations as it provided under Section 4 that “the grantee shall supply electricity to its captive market in the least cost manner….the grantee shall charge reasonable, just, and competitive rates for its services to all types of consumers located in its franchise area.”

“The grantee shall not engage 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.

Those are necessary conditions of the Meralco franchise.

The negotiation of the 3,551mw of power supply contracts and the resulting cartelization of the power generation sector seemed obvious violations of public service franchise. If these negotiated contracts with a chosen few who are willing to be minority partners of sister company Meralco PowerGen are not abuse of market power.., unfair trade practices, monopolistic schemes and …activities that will hinder competitiveness of businesses and industries” we don’t know what is.

In the least, Congress should be looking into it.  Lets hope they finally take notice.

We wish Congressmen will equally show concern for the interest of electric consumers instead of pressuring ERC for approval of questionable and anti-consumer contracts.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

 

 

Meralco Midnight Contracts an ERC-Meralco Conspiracy?

Evelyn VirayJallorina

Alyansa para sa Bagong Pilipinas

6 October 2017

Did ERC actually conspire with Meralco in making way for MeralcoPowerGen to sign the 3,551mw of new power supply agreements?

Our cause oriented group, Alyansa para saBagongPilipinas had filed a complaint with the Office of the Ombudsman against the ERC Commissioners for abuse of discretion and dereliction of duty for extending the November 6, 2015 deadline to April 30, 2016 for the requirement of competitive biddings (CSP) for the signing of Power Supply Agreements that will be charged to the consumers.

Consequently Meralco was able to fast track the negotiation of 3,551mw of power supply agreements with project companies controlled by its sister company MeralcoPowerGen that corner 100% of the base load requirement of Meralco for the next 20 years at negotiated prices. The contracts were signed on April 26 and 27 2016 and filed with the ERC a few days later a day before the extended deadline.

The ERC Commissioners claimed that the extension was not designed to favor Meralcobut in response to the request of many affected distribution utilities and IPPs who had signed contracts but were not able to apply with the ERC by the original November 6, 2015 deadline. Allegedly, ERC decided to give them time to complete their applications for those signed contracts.

Meralco claimed that they were NOT one of those who requested which appear to be true because their contracts were not signed until April 26 and 27, 171 days after the November 6, 2015 original CSP deadline.

Meralco and the MVP group however are reported by newspapers to have lobbied against the CSP 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 challenge bidding evidently to assure their favored generators win.

Then on March 15, 2016 the ERC Commissioners under Chairman Salazar mysteriously extended the CSP deadline thus giving Meralco enough time to fast track an unheard of 3,551mw of power supply contracts with five (5) strategic partners who have apparently agreed to be the minority partners of Meralco’s power generation sister company, MeralcoPowerGen. That was a record 41 calendar days to finalize very complex power supply agreements that must have included tough negotiations and corporate approvals for the partnership with MeralcoPowerGen.

The ERC Commissioners’ claim however that the extension was not intended to favor Meralco appears to be belied by a twin resolution that they passed on the same fateful day of March 15, 2016.

We noticed that the ERC Commissioners passed an accompanying resolution no. 3 series of 2016,

 “A RESOLUTION HOLDING IN ABEYANCE THE ISSUANCE OF THE ERC RESOLUTION SETTING THE ANNUAL INSTALLED GENERATING CAPACITY PER GRID AND NATIONAL GRID AND THE MARKET SHARE LIMITATIONS PER GRID AND THENATIONAL GRID”

The ERC has this duty to assure the limitations of market share domination as established by Section 45 of the Epira Law. Power generators are limited to own, operate, or control not more than 30% of a grid and 25% of the national grid. Their Resolution recognized that

“Section 45 (a) of Republic Act No. 9136 (R.A 9136), orthe Electric Power Industry Reform Act (EPIRA), states that no company orrelated group 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;

On 14 December 2005, the Energy Regulatory Commission (ERC) adopted and promulgated Resolution No. 26, Series of 2005 entitled “A Resolution Adopting the Guidelines for the Determination of the Installed Generating Capacity in a Grid and the National Installed
Generating Capacity and Enforcement of the Limits on Concentration of Ownership, Operation or Control Installed Generating Capacity under Section 45 of Republic Act No. 9136” (Market Share Guidelines);”

For the year 2016, the ERC established the limits in its Resolution 3 of 2015 as follows:

That means in Luzon no generator should own, operate, or control more than 3,917mw, 709mw in Visayas, and 649mw in Mindanao. Nationally no one should have 4,396mw.

To determine compliance of each generator, the ERC was guided by Rule 11 which watered down the restriction to only “control” instead of the Epira Laws criteria of own, operate, or control. There is an issue of the illegality of Rule 11 since it fails to comply with the Epira Law.

The ERC under its previous Chairman ZenaidaDucut apparently was seeking to correct the error of Rule 11 and had drafted a new formula for determining the compliance of each power generator to include ownership, operation, or control instead of only control.  On August 19, 2015 the ERC published the draft changes and invited all stakeholders to submit their comments under ERC Case No. 2015-005 RM. Signing with Chair Ducut were Commissioners Asirit, Non and Taruc.

The ERC is supposed to establish the new limits for the coming year by March 15 of every year. Why did they “hold in abeyance” the limits instead of establishing one on March 15, 2016?

It appears it was to avoid highlighting limits that could be breached by the concentration of capacity.  The ERC Commissioners seemed to know in advance that the postponement of the CSP that they were passing would result to certain IPP’s to acquire significant power generating capacity.

We suspect that the two resolutions that were passed on the same day were not made independent of each other but a premeditated facilitation of the largeMeralco power supply contracts that they knew will beat the April 30, 2016 deadline.

The passing on March 15, 2016 of Resolution 3 of 2016 holding in abeyance the limits on concentration of generating capacity belies ERCs claim that the postponement of the CSP policy that was resolved on the same day of March 15, 2016 were made independently and did not favor Meralco.

We believe that there was clear conspiracy between ERC and Meralco on the CSP. ERC evidently knew that large contracts will be signed and they were preventing the violation of capacity limits.

 Will the Ombudsman listen?

 Alyansa para saBagongPilipinas