Meralco Skeletons in the ERC Closet…. and A Humble Message to the New Commissioners (Part 2)

David Celestra Tan, MSK
28 February 2019

Part 2 of 3 

3. The Unfairness of Allowing “Systems Loss” averaging and its Non-transparent monthly computation by Meralco

The ERC limits the systems loss charge to be 8.5% and Meralco had been announcing its systems loss to be 6.75%. But those are averages. Captive customers that comprise 60% of Meralco’s revenue (residential customers above the poverty line and most businesses) were charged more than 10% although industrial customers are charged only 3.5% resulting to the low average.

Despite supposedly adopting a “cost of service” factor in determining systems losses, Meralco is charging residents and businesses in the highly compact Makati and Metro-Manila, the same systems loss as those in the outlying and sparsely populated areas of Batangas, Laguna, and Quezon. ERC went along with Meralco’s argument that they are the “same class” of residential and commercial customers. But they are not. One is densely populated and cost of service is low per kwh and hence technical and non-technical losses should be very low in the not more than 5% range. Outlying and sparsely populated areas cost more to serve and real systems losses, both technical and non-technical are higher. How about a simple subclassification of Captive Market 1 and Captive Market 2?

It is our position that averaging systems loss is allowing the overcharging of captive customers by 2 to 3% which amounts to more than P2 billion a year.

But wait, didn’t the ERC reduce the systems loss average to 6.5%? Yes, but Meralco’s average is already that and captive customers are still charged more than 9%. Nothing really has changed. Was this tokenism?

This is one skeleton that is easy to resolve. Just adopt an 7.5% maximum systems loss to any customer, even higher than the 6.5% average.  If Meralco wishes to charge industrial customers 3.5% that is their business. But they should not recover the reduction from the hapless captive customers like us. If Meralco’s actual systems loss to captive customers are lower than 7.5% they can keep the difference as reward for being more efficient. This is a truer form of “performance based” rate making.

Pegging the systems loss to captive customers in the metropolitan areas at say 6% and 7.5% in the remote areas would at least legitimize Meralco’s keeping the difference and we don’t have to worry about how their finance official would compute it.

4. Procurement Guidelines for Power Supply Agreements

Just before most of the new Commissioners were appointed, the ERC tried to subject to public consultation a draft Guideline for Procurement for PSA by Distribution Utilities.

In it, it was adopting Swiss Challenge and Unsolicited proposal as legitimate forms of Competitive Selection Process. In fact about 1/3 of the guideline was about implementing unsolicited proposals.  Those were what Meralco wanted and what many electric coops who wanted to manipulate the CSP process had been attempting to do.

We don’t know if the highly experienced lawyer (but new to power regulation) Chair Agnes Devanadera just got snowed by some advisers or she was a knowing participant in trying to pass that Guideline. (we hope not)

If this is adopted by the ERC, it will signal that they are preparing to legitimize Meralco 7 mid-night contracts by subjecting them to a curative Swiss Challenge type CSP.

Passing it would be a big set-back for the consumers in its aspiration for a truly competitive power generation sector and a disappointing signal that in ERC it would be business as usual.We were constrained to seek the assistance of the Office of the President. Nananalangin po tayo na mapansin ng Pangulo.

We hope the new commissioners will see through this yet another blatant attempt at watering down the CSP policy and will not allow it.

5. Delays in approvals of EC Capex applications

This is one of the major reasons many electric coops have failed to keep up with the growing demand in their service areas.  Their capex programs have not been approved by the ERC, many taking more than five (5) years.

Let us hope the ERC can provide a focused attention from one of its Commissioners on the applications and methodologies for Electric Coops.

Why cannot they get a faster Provisional Authority as long as the NEA studies and endorses the Capex plan? Why not develop a new revenue methodology for electric coops so that they can operate as efficient utilities?

The ERC foreign consultants had brought down the systems loss allowances for Electric Coops. However, it had failed to provide mechanisms for the proper and timely provision of revenues to achieve those lowered systems loss allowance.

6. Lost in Regulation – Regulating what does not need to be regulated and not regulating what needs to be regulated.

This might surprise a lot of people because the current system of regulation has been this way for more than 10 years. The danger is the new set of Commissioners might get indoctrinated into this modus operandi and accept them as they are.

The ERC has been failing to regulate the distribution sector by misapplying a PBR rate setting methodology and have been practically regulating the power generation sector that the EPIRA Law declared to be unregulated.

Regulation at the very basic level is limiting the amount of money the investors in the sector can make out of their investments to what is fair and reasonable. 

The previous set of commissioners had admitted that effectively the profits of distribution utilities under the PBR rate methodology are no longer limited or regulated due to the adoption of PBR. And that the 12% set by the Supreme Court as the limit in annual profits is not applicable “because the economic conditions are different”. This means the economic conditions then in 2006 when the 12% limit was imposed were much worse than today that 25% return on equity is justifiable?  We did our checking and by most econometric measures, the Metro-Manila economy has been booming and much better than 10 years ago.

This is another regulatory mindset of the previous ERC’s that had it “baligtad”. The policy of the state is 12% per year return as ruled by the SC. The rate setting methodology that the ERC should adopt should be towards the achievement of that policy of the state.  It is wrong , and not in the public interest,to allow the tail to wag the dog.

The ERC instead has been regulating the profits of the power generators by using Weighted Cost of Capital (or WACC) in computing the fair and reasonableness of the rate on a table evaluation. They argue that they need to do so “to protect the public interest”. What will work better for consumers is assuring that these power generation contracts are subjected to true competitive bidding or CSP. That is why the postponement of the overdue CSP policy by ERC in March 2016 was a big let- down and betrayal of the public interest (intended or not).

Competition always beats regulation in reducing rates to consumers. As a safeguard, the ERC can establish benchmarks based on efficient existing plants as a protection against overpriced and manipulated biddings. To assure least cost power for the public, table evaluations are supposed to be complementary to open and true competitive bidding and not a substitute for it.

 

A humble message to the New Commissioners:

We realize Po that the new Commissioners are in a tough situation. Walking into this quagmire. So complex and a lot to learn and sort out in a short time. And you have that backlog of applications and petitions. It is natural for those who are in the pile to seek help to expedite their long-delayed petitions.

The danger for the consumers is the very powerful and enticing lobby of the vested interests and their political patrons for the perpetuation of anti-consumer and anti-public interest methodologies.

You probably did not realize the tough patriotic challenge an appointment to the ERC Commission would entail. This is a defining moment where you have been drafted for duty to country to bring your professional expertise, moral compass, personal integrity, and patriotism to one of the forefronts of our national battle for public interest….where the public and Filipino pride have been taking a beating for more than a decade. We hope it can be shown through your example that the Filipinos are capable of governing themselves properly and fully capable of truly looking after his countrymen. We pray that the challenges will bring the best in you.

It is in the DNA of the private sector entrepreneurs to try to maximize their profits, to push their profiteering ideas to the limit, to exploit opportunities whenever open or opened to them. That’s how they measure their self-worth and their business acumen.  They go as far as what you as the Regulators will allow.

Few of them would have the self-discipline and fear of the higher Being not to exploit the vulnerable Just because “they left their door open and the police is not around”.You are our defender and our hope. Electric consumers have been waiting for saviors and protectors.We hope it is you.

We hope you can each be a catalyst for a new dawn of a sincerely consumer-sensitive ERC. All we are asking is for you to balance things.  Consumers do not need to be sacrificed all the time. After all we are the Filipino people and taxpayers that the ERC is mandated to safeguard against abuse.

Sana po you will not allow yourselves to be swallowed by the system as they say.

The above list of skeletons is not by any means complete. There are many other skeletons in the ERC closet including the hundreds of millions of penalties on the major power generators who manipulated the WESM in December 2013.

But these are the six major skeletons that we hope, forewarned, the new ERC Commissioners can deal with and correct so the country can get a true guardian of public interest as the ERC is supposed to be under a privatized and deregulated power sector.

Pasensya na Po if sometimes we are too direct, if we bring out truth that are inconvenient. Nothing personal specially since all of you are new, which is what brings consumers hope. MSK only tries to forewarn you of these regulatory skeletons that at one point or another you as Commissioners will likely run into. We are only trying to bring the message of the electric consumers. Please don’t shoot the messenger. We are not the enemy.

We hope you will conquer the regulatory skeletons and demons for the people.

God Bless.

Next: Elephant in the ERC Room.

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

Meralco Skeletons in the ERC Closet, Elephants in the Room (Part 1)

David Celestra Tan, MSK
27 February 2019

Part 1 of 3

We have an entirely new set of ERC Commissioners except one and we hope it will be a new dawn of enlightened and balanced regulation, freed from the decade old bondage of captivity by the PDU’s, where public interest is genuinely protected and not just given lip service.  To prevent these new Commissioners from getting culture shocked by thehorror stories on how ERC handles (or mishandles) its regulatory function, we would like to forewarn them of some of the Meralco Skeletons in the ERC Closet that have accumulated from 2004 to 2018.  

1. The 4th Regulatory Reset – Ghosts of the Rate Reset Past

We might as well start with the big skeleton that the succession of old commissions could not handle and now inherited by the new one.

Regulatory rate review or “resetting” every four years is required but the ERC had struggled with doing the right thing and the evident lobbying of Meralco. Now the rate methodology is so convoluted that the 4th regulatory reset had not been done and we are supposed to start the 5th regulatory reset in July 2019.

Effect? The Meralco rates that was based on a projected energy demand in 2011 had been carried over generating revenue on the current demand that had grown 6% per year since then. That can translate to at least 20% excess revenue after seven years.

Meralco, with their usual gumption, always likes to say their distribution rates had not been increased since then. The last time in July 2015 they had to reduce it p0.1752 per kwh because their authority to recover that additional due to a previous supposed “under-recovery” had  expired and the rate we have now is an “interim” rate because ERC could not come up with a 4thregulatory reset which was supposed to start in July 2015 and end in June 2019.

We suggest that we first exorcise this ERC rate setting methodology.  The methodology the ERC adopted called PBR became very complicated and hence susceptible (as probably intended) to be easier to manipulate and negotiate.  Let us go back to basics. Follow the law.

a. Section 25 of the EPIRA Law of 2001 says, the retail rates must be based on investments INCURRED. The current rate methodology adopted by the 2nd ERC commissioner of “performance- based rate making” or PBR allows for Meralco to make money based on “projected investments”, meaning promises, and they recover in advance from the consumers. And they don’t even have to make the projected investments as long as they deliver the “performance”. Who’s to say?

They are also allowed to recover all their expenses essential to providing the service to the consumers.  It is in the interpretation of what is “essential” where the ERC looks the other way, especially if they are out touring Europe or USA.

How about allowing each Commissioner P1 million a year for study and investigation tours abroad so that they don’t have to accept sponsorships of travels from the major players.  That would be cheaper for the public as compared to when they compromise their judgement.

 b. Computing your kwh rate

From these costs of services and investments, the ERC is supposed to determine a fair return on investment and hence a total Maximum Allowed Revenue per year. To translate this into a per kwh rate that you and I will understand, they will determine an estimate of the kwh sales for the years.  I heard Meralco convinced ERC that their annual growth was only 3%.  So that was how the kwh rate you and I pay was based on.

However, with the robust growth of our economy, Meralco’s energy sales had been growing at 7% per year or more than double the 3% and hence, voila, Meralco revenues have been tens of billions a year more.

And here is what is interesting. When your organization acted as an Intervenor in 2015 when Meralco supposedly applied for a “reduction” in their rate, we had discovered something surprising and we hope the ERC can clarify it.

We asked in cross examination the Rate setting economist of Meralco, a nice and smart engineer with an MBA from UP, what Meralco does with the additional revenue due to the increase in sales. He answered under oath that “Meralco keeps it because it is allowed by the ERC rules”. Surprised, I looked at the ERC hearing officer because that was confusing. And the ERC hearing officer did not answer clearly in evident surprise.

These excess charges can be happening in the case of NGCP who is similarly on a PBR rate methodology.

Playing with the energy sales projections, the divisor in determining the kwh rate, and allowing over recoveries, could be one of the biggest inner games that the consumers had not known but is now evident. We hope the new Commissioners can look into this that involve billions in overcharges.

c. Meralco’s Excess profits (or over recovery) and Mindboggling Refund

This is a big harrowing skeleton and for the last few years compounded by the ERC quagmire, Meralco has been enjoying extra billions out of outdated and anomalous rates. Remember that Mr. MVP of Meralco likes to announce P19 billion in profits “due to increased energy sales”?

We fear that ERC’s previous set of commissioners could not finalize the 4th regulatory reset because the “excess profits or over-recovery” would be so mindboggling that Meralco cannot imagine being asked to refund it.  Let us also remember, Meralco has been announcing profits equivalent to 25% of their equity, when the Supreme Court had ruled that the legal limit for public service franchises is 12%. Now these new set of Commissioners would have to look at this pile of overcharges to the public but have to stare into the eyes of its guardian, Meralco.

With tens of billions at stake, you can imagine the kind of Meralco lobbying and enticing it would employ to manage the amount of the refund.

d. ERC’s favorite Exorcist

Normally the ERC would appoint foreign “regulatory” experts to advise them and save them from the tough tasks and being blamed for it.  That incumbent consultant is a company named Castalia whose recent works on Systems loss methodologies specially for the Electric Coops leaves one to wonder if they are right for that sensitive work.  Unfortunately, the dependence of ERC on a foreign consultant is never more profound than it is now because they are all new and groping for direction within a short time. We miss PB Associates, a very knowledgeable foreign consultant with a lot of integrity based on their work (so much so that they lost their consultancy job?).

I remember a conversation with an ERC Commissioner who was very proud to claim that they saved the government a lot of money by removing a foreign consultant in the reset process.  And cost consumers 10’s of billions a year in the process?

e. Test Case

Meralco was supposed to have been allowed to recover P20 billion in under recovery from the 2nd Regulatory Reset from the 3rd regulatory reset from July 2012 up to June 2015. But the revenue from “recovery of under recovery” must have been higher during the recovery period to June 2015 when that recovery authority expired.  How much was the “over recovery from the recovery of the under recovery”?  It sounds like a riddle but this can be easily quantified by the right thinking analysts for ERC.

f. The Good News is Rate Setting need not be so complex and confounding.

Let us get off the PBR gravy train and go back to RORB, a more transparent system or go with a Modified PBR where only returns from investments actually incurred will be allowed. And over and under recoveries due to changes in the assumed energy sales (the divisor of the rate formula) are adjusted every year and not allowed to accumulate in multi year resets. This will also end the vicious cycle of refunds and rate adjustments.

Dear Commissioners, don’t be scared. PBR is actually against the wording and spirit of the law which require that for this alternative to be adopted, it must be “in the public interest” as provided for under Section 43(f) of RA 9136.  And certainly the PBR as currently allowed by ERC is clearly NOT IN THE PUBLIC INTEREST. In addition to it being illegal as it violates the provision that“ the rates must be based on the principle of full recovery of prudent and reasonable economic costs incurred.”

2. The Good Skeleton of Finally Correcting the Treason of Rule 11 of the EPIRA IRR

In the waning days of the former ERC Chair Zenaida Ducut in 2015, the ERC surprisingly made an effort to correct one of the great illegalities in the implementation of the EPIRA Law (RA 9136 of 2001) which was Rule 11 of the EPIRA. This Rule watered down the restriction of concentration of power generation facilities to only “control” instead of “ownership, operation, or control” as required under Section 45 of the EPIRA Law. This punched a mammoth loophole that had led to the monopolization of power generation and hence avoided true competition that was expected to lower the rates.

The EPIRA Law under Section 45 tried to promote competition in power generation and avoid concentration of ownership of the power plants by limiting the ownership, operation, or control of power plants that can be owned by an entity and their affiliated companies to only 30% of the regional grid and 25% of the national grid.  Mathematically it means there would be at least four (4) generating companies that will compete in each area, thought to be sufficient to create beneficial competition for consumers.

Using Rule 11 as guideline, the ERC had been determining and announcing every year the maximum limits of installed power generating capacities and no one had been in danger of breaching the limit. We believe that at some point they also realized that by using only “control” they are not implementing the requirements of the EPIRA Law itself which clearly included three criteria which are “ownership, operation, or control”. They also noticed that power generation groups were just forming partnerships and joint ventures to circumvent the “concentration” limits.

After months of staff work, on October 13, 2015 the ERC posted its draft new guideline inviting public comments as ERC Case No. 2015-005 RM.

“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″. 

“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;
c. Control test.

The generation company and its related group, if any, should comply with all the above mentioned 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 ERC within 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.

The Salazar ERC’s Step Backward on that fateful day of March 15, 2016

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 the same day and session that they famously “extended” the CSP policy by 6 months from November 6, 2015 to April 30, 2016. According to the Alyansa para sa Bagong Pilipinas, the two actions were interrelated because the new contracts that will result from the CSP extension will run counter to the limits of the new rules on concentration of installed capacity.

We hope this is one good skeleton that the new ERC can revive.

(to be continued)

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

Why You would Want to Take Over an Off-Grid EC Franchise Area? It’s a lot of Headaches! 8 reasons why.

David Celestra Tan, MSK
23 February 2019

The 121 Electric Cooperative community is abuzz with the seeming frenzy in applying for Legislative Franchises for electric distribution utilities since the apparent success of a new franchise holder in winning the 25 year right to be the distribution utility in Iloilo City.

A company named MORE Reedbank, same group as MORE Electric for Iloilo City, apparently got their appetite wet and applied for the franchise for the mainland Palawan, the area currently served by the Palawan Electric Cooperative which still has 10 years to go on its franchise. Word in the Visayas is a Group identified with a San Carlos kingpin also has applied for a franchise for Northern Negros and another group reportedly identified with the Aboitiz Group is applying for a franchise for the whole Negros Island.

Maybe we can excuse entrepreneurs for coveting distribution utility franchises on the grid like those in Negros. And, for existing DU’s, those adjoining their franchise areas like the Batangas, Quezon, and Pampanga Coops that Meralco had been wanting to take over. The service areas tend to be more developed and the regulatory rules are non-missionary. The power suppliers tend to be the same and there is the WESM.

But Why would you want to take over an EC franchise that is in the off-grid missionary areas?

Electric consumers in these off-grid missionary areas actually have a love-hate relationship with their Coops. They hate their brownouts and services but they love that in theory they are non- profit, they can seek political help to get their areas electrified, they like electing directors, love the idea that their power generation is subsidized. More than that, they are scared of profit oriented private entities who would most likely charge more and will be ruthless in their disconnections.

If you want to take over a Coop, better be prepared for battle. If electric consumers love their Coop, the Coop employees love their Coop even more. So you will find a very uncooperative workforce.  The billing people and the collectors might not even generate the cash you need. So about the only way to have a reasonable operation is to buy out and retire everybody from the start. This will be a big burden for a new investor because the Coop might not have enough cash for their retirement obligations.

Some off-grid areas do not have the culture of paying for their electric bills so collection is a problem.  Many of those areas are non-viable and you will be relentlessly required to extend services by the local government officers.

With all these headaches why would a private investor bother to take over an off-grid EC specially a troubled one? Here are eight (8) reasons why:

1. You can make a 25% return on your investment without really trying because the ERC rules had already assured it for you!

2. You thought missionary electrification in the islands means the same thing as good old missionary position that electrified you in your bedroom! (Censored!)

3. You want to go into public service without really performing one!

4. Your family has a big luxury estate that you want to include in your rate base and make the electric consumers pay for it!

5. Once you have taken over the Distribution Business you can also go into the power generation business and can just negotiate with yourself (or your wife and children)

6. You will Feel like God sometimes when you can say“ let there be light” to your kids parties even if there is total blackout in the neighborhood. Or to the desperate people begging that their light is not cut-off. Hmmm, the ultimate power trip!

7. “Be like Manny”……Pangilinan not Pacquiao! Gotta have that money machine called a DU and patsies that you can charge any amount you want called electric consumers. Yes the best kind of customers…..captive!

8. You are a billionaire and have a multi-billionaire cousin to whom you can flip the franchise!

What is ironic is most of the problems of the off-grid electric coops specially those larger ones like Palawan, Mindoro, Masbate, can be solved by the government agencies themselves by just performing their oversight duties as provided by the current laws. The NEA, DOE, NPC, LGU, ERC, and Congress. Are they all just trying to hide their collective shortcomings by bailing out and privatizing the responsibility?

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

DISTURBING QUESTIONS ON MERALCO’S INCREASE IN POWER GENERATION CHARGES THAT WE HOPE THE ERC WILL ASK THEM TO EXPLAIN

David Celestra Tan, MSK
15 February 2019

Meralco’s average rate is increasing this month by P0.5682 from P9.8385 Per kwh to P10.4067 per kwh. Meralco says Nothing to worry, it will cost the average consumer of 200kwh “only” an additional P114 this February. Gotta tell you this public hoodwinking is a work of art!

As they say in the power industry, the devil is in the details. Let us look closer.

Meralco’s Pass On Generation Charges

Meralco’s power generation charges actually increased P0.9820 per kwh from P4.9119 to P5.8939. The last time there was this one- month level of increase happened was during the last major Malampaya shutdown.

Your organization’s volunteer analysts have been tracking the Meralco power generation rates and you can see them above in our website.  Meralco’s power suppliers using coal have mind boggling rates from September to December 2018. AES in Masinloc charged P16.4591 per kwh in September,P13.7889 in October, P10.3589 in November, P8.7697 in December, and 6.9598 in January.  Is it because Masinloc is now owned a significant minority by EGAT, Meralco PowerGen’s partner?

The Aboitiz owned Pagbilao charged P7.0179 per kwh in September, P7.04 in October, P6.7847 in November, and P7.5231 in December.

San Miguel Sual charged P7.8325 per kwh in September, P9.7960 in October, P8.0332 in December, and 7.4205 in January. Meralco PowerGen controlled Panay Energy Development charged P7.0214 per kwh in September, P7.1141 in October, P6.9722 in November, P6.5463 in December, P5.7027 in January. Similarly, Meralco PowerGen affiliate Quezon Power in Mauban charged P6.4574 per kwh in September, P6.7133 in October, P5.8392 in November, and P6.1767 in December, and P7.2023 in January.

Since Meralco claims these were rates approved by the Energy Regulatory Commission, perhaps the ERC can look into why these rates have been higher than the approximate P5.00 per kwh they approved. What’s in their contracts that is allowing them to charge this much for many months? And why is the ERC allowing such escalation and pass on mechanisms?

The exception among the coal plants is the DMCI owned Semirara Calaca with rates of only P4.1399 in September, P4.1979 in October, P4.2030 in November, and P4.1664 in December, and P4.1232 in January. They use mainly local coal from Semirara Island and is exempted from the 12% VAT.

If we need more arguments to balance our energy mix with more LNG plants, let us look at their comparative generation charges. First Gas Sta Rita charged P5.2997 in September, P5.2631 in October, P5.2029 in November, P5.0935 in December, and P5.2430 in January. San Miguel Ilijan rates that also get its LNG supply from Malampaya were P5.6717 in September, P5.5097 in October, 5.2901 in November, P5.5552 in December, and  P3.3733 in January.

WESM Rates Increased? 

One of the perplexing claims in Meralco’s press statement is that “WESM rates rose P1.4141 per kwh due to tighter supply in Luzon”. According to Meralco’s own website data WESM prices were P3.4132 per kwh in October, 4.7677 in November, P3.7409 in December, and P3.7244 in January.

It appears the only reason Meralco’s generation rates have not skyrocketed to scandalous levels is the WESM rates have been low where it bought 17% of its energy needs, more than any other source. Is it a force of habit for Meralco to blame WESM even when it is actually the lowest and its’ saving grace?

Let us note that A big part of this lower WESM rates have been the entry of renewable energy projects whose rates are subsidized by the consumers under the Feed-In Tariff program of the government. We consumers are actually paying for saving the day for Meralco from its very high COAL rates.

This is something we hope the DOE and ERC will keep in mind in resolving the 3,551mw of Meralco PowerGen supply that will corner 80% of the energy purchases of Meralco starting in 2023 if Meralco gets their way.  They are all coal.

NGCP Rates

The other thing that is saving the day for Meralco is the drop in NGCP’s transmission charges by P0.4138 per kwh, a significant one.  Can we make these lower charges sustainable?

Truth in Advertising

Should there be ERC rules on truth in advertising?  ERC is already allowing Meralco to charge us consumers the high costs of these advertising and the salaries and benefits of their topnotch “public information” experts, the least they should be required is to be accurate and truthful in these numbers.  Their budget was not for public disinformation.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

The Dance Around the Truth and Reality of the Governments Role in EC Failures

David Celestra Tan, MSK
11 February 2019

We can only solve a problem if we identify, recognize and willing to face them and get to their root causes. In this posting MSK will try to help resolve the issue by bringing up the role of government agencies and offices as institutions in the deterioration of problematic electric coops, something people are not willing to talk about officially. This is not to blame specific individuals but to provide insights for all of those who are in positions to do something to address the institutional problems.

Batobatosalangit.

1. To have stronger Coops, we need a stronger NEA

NEA is first in line mainly because they are first in line in the administration, guidance, and arbitration of Electric Coop problems. In addition to PD 269 they have been mandated by the Epira Law of 2001 under Section 58 to undertake programs to strengthen the Electric Coops in the face of deregulation and privatization. Further, The Epira Law in one stroke strengthened the Coops financially by condoning all their debts. Can you imagine how rich you will be overnight if your home loan, car loan, and business loans disappear?

In 2013 the New NEA Law was passed as RA 10531 that strengthened NEA further in dealing with and rehabilitating ailing electric coops. 10531 provided NEA with a clear path towards the whole range of remedial measures starting with taking over management by putting in Project Supervisors. And all the way towards privatization under conditions spelled out under Section 20 of the 10531 IRR.

In other words all the tools and mandates have been provided for NEA to be stronger as an institution. Epira Law of 2001 even authorized it to increase its capitalization to P25 billion to enable to help Coops in the face of deregulation. So when we say we need a stronger NEA, we mean stronger Administration and implementation of its mandates.

All the management and operational problems of Coops can be addressed in manageable time if NEA acts firmly and effectively. What gets in their way are the other government institutions specially the local politicians, the CDA, and the Local judges. Of course that is not to say that NEA itself is not playing politics and favoritism.

Coop General Managers now have a lot more complex responsibilities and need more skill sets not only in technical management but also in finance, regulatory, power supply procurement, people management and even politics. We wish that in its mandate under Section 58, NEA would have a more proactive system of developing General Managers like an ” NEA Academy”. They should also allow the appointment of Asst. GM’s as we understand they are disapproving. EC’s must be infused with capabilities to operate more as utilities and not just as a Coop.

Nonetheless, as a government agency whose budget is subject to the inquisition and approval of Congress, NEA had to play ball with Congressmen on their concerns with their local cooperative.Then they become part of the problem instead of the solution.

2. The Cooperatives Development Authority or CDA

General Managers and Board of Directors and sometimes with the support of their local elected officials would use a threat of registration with the Cooperative Development Authority or CDA if they wish to keep control of the Coop and cannot get their way with NEA. The extreme case is Daneco where there is now a Daneco-NEA and a Daneco-CDA each operating parts of Daneco. Batelec II and Paleco are other cases.

For a while those who registered with the CDA for the official purpose of availing of tax exemption privileges of Cooperatives, actually got away from the administrative supervision of NEA and abused their independence. The financial tailspin of several coops can be attributed to this lack of supervision. And NEA initially reacted and ostracized these CDA registered EC’s (about 15 of them) and refused them financial assistance without assurance of management oversight.

One of the achievements of the DOE Secretary Almendras was the passing of the new NEA Law under Republic Act 10531 that reiterated NEA’s administrative supervision of all EC’s, including those registered with the CDA, which did not have the organization to provide administration and guidance for electric cooperatives to function and behave properly. Theoretically it clear the air between NEA and CDA.

The CDA as a government agency is also susceptible to political pressure and many times will issue Cooperative registration to a 2nd group even if there it is clearly an adversarial move against a NEA registered cooperative. CDA had contributed to the disruption of restructuring efforts at a problem Coop.

We wish NEA and CDA will coordinate better in registering Coops, and not allow for it to be used as a way to grab control of the Coop just because they disagree with NEA.

3. Napocor’s contributions to the brownouts and/ or high cost of missionary subsidies

A realistic look into the causes of brownouts would show that Napocor, which retained the provision of transmission services, is as much the cause of recurring brownouts as the local cooperatives management of its distribution system. Napocor is known to be slow and unsuited to create new solutions to generation and transmission services. And it is not entirely their fault. As a government agency, they are subject to strict procurement rules and to them “it is better to be legal than to be right” resulting to less than optimum equipment and service decisions. That is to avoid anti-graft cases specially their senior officers who are close to retirement. What kind of bold solutions can be expected from them?

Napocor is observed to have become unmotivated in solving transmission problems and upgrading their substations and transmission lines after their control of dispatching as Systems Operator was removed and transferred to the local EC. This is observed in Palawan where 30% of the brownouts are reportedly due to outdated transmission lines and congested power substations. In Oriental Mindoro, the North South transmission line that was damaged in 2015 and 2016 remain to be unusable after spending hundreds of millions on more than a hundred kilometers of 69kv lines, because a 5 kilometer stretch had a “right of way problem”. Observers feel that had Napocor been inspired enough to look for a solution they could have found an obvious option, saving the residents of seven towns from more than a year of brownouts up to now and the Electric Coop from using temporary generators that do not run steadily and require higher missionary subsidies.

Alarming Rise in Missionary Subsidies

On the subject of Missionary Subsidies,the alarming increase of these subsidies by more than P10 billion in five years from 2015 to 2020 had been noted by the Bayan Muna Party-List. Most of the increase is coming from islands still served by Napocor with rental generators and waiting to be privatized. This could be a case of confusion among the government agencies on which one of them will initiate privatization of power generation. The EC’s themselves seem to have lost interest in holding biddings for their power supply when the DOE under Secretary Cusi steadfastly refused to allow the use of “unsolicited proposals” and “swiss challenge” biddings, a favorite scheme for supply manipulation, as legitimate method of Competitive Selection Process. Meanwhile Napocor is paying an average missionary subsidy of P15 per kwh mostly for rental generators that are not reliable in the first place compared to an average of P5.00 per kwh for those served by private new power providers.

The unreliability of Napocor’s transmission system and their use of rental generators cause frequent power interruptions that many customers blame on the EC because they are the service provider to the customers.

4. The EPIRA Law IRR.

Part of the problem of Napocor is its confused identity. The Epira Law mandated it to be the provider of power delivery services in the off-grid areas. After the sell-off of its assets, the residual Napocor will become mainly a provider of power in the missionary areas. The Epira IRR however mandated it to privatize the power generation in the off-grid areas whenever possible without being clear on where it will privatize and where it should continue for the long term.

That put Napocor in a quandary on whether to privatize or install more efficient permanent power generation facilities. To be safe they ended up only contracting temporary rental generators that have limited operating hours and high fuel costs.

We wish the Department of Energy will initiate the clarification in the IRR that Napocor will privatize power generation in the remaining 7 of the 14 largest islands where Napocors average missionary subsidy is P15 per kwh compared to P5 per kwh for the privatized islands. Napocor should be mandated clearly to be the provider of power generation in the small and unviable areas so that it can install more efficient and permanent long term facilities, of course with safeguards and added requirement to reduce missionary subsidies. The next wave of medium sized islands can also be identified and be reviewed for privatization in say 10 years. Perhaps Senate Energy Committee Chairman Win Gatchalian can help?

5. The Energy Regulatory Commission

The inability of the ERC to handle efficiently the applications of the EC’s for capex and facilities improvements have caused significant delays in the repair and upgrading of power distribution facilities. We wish they can set up a special department and Commissioner who will specialize in Electric Coop matters. They can improve the process of applications and approvals including faster issuance of Provisional Authorities for Capex programs already reviewed and endorsed by NEA.

Many Coops are dying on the vine waiting for ERC. Meanwhile, they are crucified by their member consumers.

6. The Local Politicians

Many Coops would feel that the interference of Philippine style politics as a democratic institution in their affairs must be listed as the first contributor of Coop failures. But no one would dare talk about it for fear of reprisal. No one also seems to take seriously the prohibition in the RA 10531 that EC’s must be“ insulated from local politics.”

Many politicians appear to consider the EC in their area as a government unit that they can meddle with because EC’s structurally look like government units. Their board of directors is elected by its members, it is administered by the government through NEA, whom the Congressmen can pressure through the budget hearings, and it gets government fundings many times. But Coops are private and owned by its members.

We can understand if local politicians express concern over the bad electric services and get involve in solutions. However, it is only a matter of time before they elect their proteges to the Board of Directors and its General Manager, many times using their influence to make election opponents back out.
Actually, it should be noticed that local politicians bother to get involved in having influence in the EC and assuring that its management is in the “right hands”because they have vested interests and in areas where power generation is supposed to be privatized, that include sponsoring power generation contractors.

Worse, these sponsored power generation contractors more often than not are overpriced and not guaranteed to provide reliable service. In several islands the political protection of these non-performing power generators precluded the local Coop from requiring contract performance or contract rescission, resulting to continuing brownouts that are then blamed on the Electric Coop.

In many areas the local government officials are enticed by politically powerful entrepreneurs who view the power generation business as purely a profit making venture and not as a public service. Then the local EC is on its way to Board takeover and eventual ruin.

The provision in RA 10531 that EC’s must be “insulated from local politics”, is reciprocal meaning local politicians should not get involved in EC elections and EC’s similarly should not get involved in local elections. There are also local politicians who claim that it is the EC managers and directors who are seeking their involvement in getting Barangay support.
However it starts, the intrusion of local political influence and meddling leads to Coop mismanagement and bad decisions and eventual ruin.

7. The local justice system

When the NEA decides to replace bad and corrupt management and even directors, many of them go to the local judges and secure TRO’s specially when there is a support from the local politicians. While most of the TRO’s have merit, many Judges issue TRO’s that clearly lacked basis and obviously intended only to impede the NEA.

In one island it took a year before the unfortunate TRO was lifted and reported to have caused further losses in the tens of millions while the undesirable managers were able to keep themselves in control of the Coop.

8. The Department of Energy

The Department of Energy for its part is supposed to be the supervising authority over NEA per PD269 and Epira Law Section 58. For many years the DOE tended to keep its hands off how NEA deals with the EC’s specially in resolving turmoils in problem EC’s. Many times NEA needs a directional push and policy support in dealing with EC situations with resolve. For example, in cases where the problem in an island is the slow remedial measures from NPC in fixing transmission services, NEA’s appeal to NPC would have greater impact if the DOE is lending its moral support. After all NPC is supposed to be also under the DOE.

The DOE is known to have willingly or unknowingly participated in political intrusion into the EC in power supply contracting by approving Swiss Challenge CSP’s lobbied for by local politicians even if they know that it is a mechanism for CSP manipulation, and prescriptions for high rates and missionary subsidies.

But then, reforms can be made and the current DOE seems to have awakened to this reality and started the process of looking into deep-seated problems at the Coops that hopefully can lead to long needed solutions.

We heard that DOE Secretary Alfonso G. Cusi will push for an enlightened way to strengthen problem Electric Coops and that is not by take over of the private sector but by the take over by successful and stronger electric cooperatives. Of course, good rules still have to be made to really make it work but this would be a new and logical era for ailing coops rehabilitation.Let us hope he can make it really happen.

Then the government starts becoming part of the solutions instead of the problems.

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

POLICY ISSUES THAT THE GOVERNMENT NEEDS TO RESOLVE BEFORE THE PRIVATIZATION OF ELECTRIC COOPS

David Celestra Tan, MSK
February 6, 2019

We are getting ahead of ourselves on the issue of privatizing electric coops. None the least is whether this will be even good for the consumers. Second is whether the takeover by the private sector is actually the solution to what ails them.

1. Do we want to change policy and the law?

In cases where the Electric Coop is ailing and failing to provide the satisfactory service, the official policy of the state is outlined in RA 10531. First to rehabilitate them by NEA and where they can no longer operate to allow the entry of the private sector. So if we want to deviate from this policy, we first must change the law. Pulling their public utility franchise from under their feet without due process as defined in RA 10531 would be a subversion of our own laws and the policy of the state that is enshrined in that law. It would be an abuse of franchising authority by Congress anyway.

Either we amend the RA 10531 or establish a more transparent reevaluation process of cancelling franchises anchored on due process and mindful of disruption of public services whenever we shake the franchise tree.

2. Does the Government have a right to impose privatization to well performing EC’s specially on the grid? What is the Power of the Legislative Franchising Committee?

The irony of the private sector entrepreneurs who are coveting EC franchise areas is that they only want plum areas like Negros, Cebu, Iloilo, Batangas, Bataan, Pampanga, and some in Mindanao. And there is just no reason even for the government and the Legislative Franchising Committee to consider revoking the franchise of these performing Coops.

The main difference between the ability of a private sector operator and an EC in dealing with the brownout problem is not really money but in managing the interference of local government officials who protect their proteges and the contracts of their sponsored power generators and hence hinder the obvious solutions.

The Congressional and Senate Franchising Committees should not even entertain applications for franchises on existing areas because that is borderline immoral. It is like entertaining someone’s marriage proposal to someone who is happily married. Worse, it is like lobbying with the Priest who married the couple?

On that note, Is the Legislative Franchising Committee only blessing the own-will decision of a couple to marry (the owners and the community in compliance with the laws of the state) or do they have the power to unmarry a couple and choose a replacement spouse?

If the Legislative Franchising Committee would like the power to revoke, they at least must put in the proper due process that is consistent with RA 10531. Or at least supersede that law. At least we need clear rules with due process as a civilized and democratic country.

The role of NEA in these on-grid EC’s is to assure proper management, administration, and governance. It is not missionary unless there are unviable areas that as a government program it wants to electrify.

3. Missionary Nature of Electrification in Off-Grid areas.

Maybe we should revisit why the government is providing electric services on missionary basis in these far-flung areas in the first place. Rightly so it is the policy of the state to provide electricity to all its citizens wherever in these 7,107 islands of ours and since most of them are not “commercially viable” for the profit oriented private sector, the government will have to step up to do it. Meralco that makes 25% per year profit on their investment has not even electrified satisfactorily all the remote areas in its territory. Example Verde Island and Talim island in the middle of Laguna Lake and parts of Laguna and Quezon. Can you expect the Aboitiz group to go into Basilan, Sulu, Lanao, Tawi Tawi, and all the small islands?

The Philippine government decided to accelerate the electrification of these islands by launching the U.S. style electric cooperative system, developed and promoted through the NEA (National Electrification Administration) in early 1970’s.

Now we are in 2019 and most Electric Coops are successful (albeit not perfect, just like Meralco). Maybe 10 to 15% have failed or failing. And some 14 off-grid islands have grown in population and economy that they theoretically have sufficient scale to become Commercially viable, meaning they will no longer need missionary subsidy. These larger islands have actually been identified by the DOE as early as 2005 to be commercially viable for the private sector to take over the generation sector where the Government owned Napocor had proven to be ineffective, too slow, and too expensive. (No offense).Their average generation cost was P18 per kwh. The Transmission services remained with Napocor and the distribution operations stayed with the Electric Coop. This was supposed to be the first step towards the graduation of these islands from missionary subsidies (initially in the generation sector).

4. Privatizing Distribution when Privatizing Generation is only halfway done after 14 years

It has been 14 years since 2005, and the privatization of power generation has stalled at 7 islands since 2010 and the rest remained with Napocor. New Power Providers have taken over Palawan, Oriental Mindoro, Masbate, Catanduanes, Siquijor, Bantayan Island, and Tablas Island. And power generation subsidy has come down to an average of less than P5.00 per kwh, mainly for fuel costs.

According to data culled by Bayan Muna from the DOE MEDP 2016 to 2020, the missionary subsidies for these 7 islands amounted to P3.6 billion in 2015 and for those served by Napocor at P3.5 billion. However, from 2016 to 2020 the missionary subsidy for Napocor served islands soars to P14.133 Billion in year 2020. The subsidy for NPP served areas increased only to P4.7 billion by 2020.

On a per kwh basis, the NPP served areas has an average subsidy of P5.00 per kwh. Unfortunately Napocor served areas still has an average of P14 per kwh in missionary subsidies about the same level before the NPP’s took over those other islands with big improvements in power reliability.

One major reason the privatization on many of these islands has stopped is because the Department of Energy under current Secretary Cusi is disallowing the “swiss challenge” or unsolicited proposal types of Competitive Selection Process (bless his heart) that the EC Board of Directors have been requesting to favor their preferred power generation suppliers, no different than the way Meralco had been fighting so they can pick and choose their power generators. Now the EC’s are tailor-making the terms of the bidding to their preferred suppliers. It happens even for new PSA’s in places currently served by NPP’s.

Is power cost and subsidy reduction, which is passed on to the national consumers as a UC-ME charge, a recognized objective in missionary areas?

5. Who do you buy the assets of the Coop from? And how do you value them?

This is a matter that needs to be cleared before we embark on taking away franchises and taking the path towards privatization if we are to do it with minimum disruption of electric services.
Note that technically the value of the ownership of the member consumers have increased exponentially after the government decided to condone their debts in 2001 as part of the enticement for the Epira Law of 2001. Its probably at least 1,000 times their original membership contributions. Do they get paid via a 50% reduction in their monthly bill for 2,000 months?

Note also that in the end the consumers will also pay for the value of the assets because the new private owner will seek recovery of his buying price from the consumers?

6. In cases where the Coop franchise had to be tendered, should not the government share in the proceeds?
We had mentioned that technically the coop members own the distribution utility and should keep the benefits of selling the utility. But there is an argument to be made for the government to auction franchises and in the case of the EC’s the government continued in investing in nurturing the off-grid communities through subsidies, loans, and management development through the years, and can justifiably ask for a share in the proceeds of privatization.

7. The Disruption by Carpetbaggers and flippers

Let us face it. Theoretically, it is supposed to be to the public interest that the distribution systems and franchise is turned over to the private sector, in case that is necessary, at lower costs so that it will result to lower rates to consumers. However, there will be those opportunists who will promise to take over the public service franchise and provide least cost power then turn around and flip the asset and its valuable franchise. Will there be a deterrent against carpetbaggers and flippers? Well connected enterprising individuals who will just sell controlling interests and management of the distribution system for a fat profit. Of course, who ever bought it at a premium will try to recover that from the consumers, clearly something against the public interest that the government therefore has a duty to safeguard against. Do we put in rules against this or be fatalists and accept this as part of our capitalist system?

8. Do you continue providing missionary subsidy to the privatized island?

Of course we can make it palatable by saying it is the consumers that the government is subsidizing not the private distribution utility. But that is for the birds. We know that part of the missionary subsidy will go to the private owners. So is it legal to subsidize? Note that one of the favorite come-ons by private Franchise applicants is the government will no longer subsidize power costs. Just like Solar Para sa Bayans franchise. (and that remains to be seen.)

9. How about the existing power supply providers with long term contracts beyond the current franchise term of the EC?

Related to missionary subsidy, Will the new private franchise holder not recognize the contracts or shorten them and say they should go after the old EC? He can claim that he cannot afford those contracts since the government is no longer providing the subsidy. These New Power Providers have invested billions in 20 year contracts on the presumption that the Legislative Franchising Committee will not unduly cancel the franchises unless the EC has irreversibly failed financially. Masbate, Lanao, Albay?

These missionary subsidies for the NPP’s are covered by a missionary subsidy agreement with Napocor. Will the government do the right thing and honor the subsidy agreement but with an intensified effort for missionary cost reduction over a transition period?

10. Should the government allow the complete consolidation of the power distribution sector by allowing the two dominant players and their allies to take over and add more electric coops to their already 80% hold on the nationwide distribution market?

If we genuinely care about promoting true competition, anti-monopoly, anti-market domination, and cartelization we will not. Let us all understand that the ongoing consolidation and cartelization of the power generation sector is happening because Meralco has the market power and is exploiting it to the hilt. Will the likes of San Miguel, DMCI, Metrobank, Aboitiz commiserate to become Meralco PowerGen’s minority partner if it were not for the market power of Meralco to dispense with the utilities 5,500mw power requirement? And when the DOE and the ERC finally put in rules on CSP, somehow the regulatory “sea parted” and suddenly Meralco has a 3,551mw contract with their minority partners in tow in seeming conquests.

Do we allow the obliteration of one national pride in public service, no matter how imperfect, that the Philippine government at least has sustained over the years? And after we developed the remote areas we will turnover it to the private sector? Many Coops no longer need government money even if they are not run well. So why allow the private sector to takeover? Will this be good for the consumers?

We believe that the Department of Energy and the Legislature should focus on the 14 large islands and the technically failed EC’s as defined under Section 20 of the IRR for RA 10531.

Let us test the current laws, rules, and organizations in fixing the serious problems of Davao Del Norte, Lanao, Aleco. Let us test whether the current energy family can pay attention and do something about the burgeoning missionary subsidies in many islands.

Let us try to put things in order by creating clearer rules when privatization of an off-grid area becomes necessary. This includes establishing clearer rules at the Legislative Franchising Committee especially in the renewal or cancellation of distribution utility franchises.

We hope also that the standards of performance for retention of DU franchises will be the same for EC’s and the private Utilities like Meralco and VECO.

For now until these are clear, we are getting ahead of ourselves talking about privatizing electric coops. There is just too much at stake. Let us do it right.

Next: The Government and Government Officials role in Weakening EC’s

Matuwid na Singil sa Kuryente Consumer Alliance Inc
matuwid.org
david.mskorg@yahoo.com.ph