DOE SEC CUSI AND THE EC ASSN PHILRECA

David Celestra Tan, MSK
20 March 2019

We cannot help but notice the continuing tug of war between Department of Energy Secretary Alfonso G.Cusi and the leaders of the Philippine Electric Cooperative Association or Philreca over the chronic non-performance of many electric coops and what should be the long term solution.

Philreca’s membership and officials apparently got riled by a letter written by Secretary Cusi last January 9 to House Speaker Gloria Macapagal Arroyo endorsing the cancellation of the distribution utility franchises of 17 seriously distressed electric coops. Philreca reacted like a threatened lion.

While most EC’s listed were inarguably ailing and needed serious revamps, like Daneco, Aleco, Zamcelco,  and others, there were others that were curiously thrown in the list that though problematic with bad management and complicated political interference are nonetheless still not ailing and not even close to being distressed as defined by RA 10531, like Masbate,  Oriental Mindoro, and Mainland Palawan.

It is not clear how Secretary Cusi came to writing such a bold letter prematurely, and who did the staff work for such an important step by the Department of Energy. He may have been thrown into frustration with President Duterte himself calling out the bad performance and brownouts in Puerto Princesa and Masbate. Or he may be taking a page from President Duterte’s “shock and awe” style to get people’s attention and shape up?

Prematurity realized and recommendation reassessed

Nonetheless, within a few days Secretary Cusi evidently realized the prematurity of the letter and withdrew the recommendation for updating of data and reassessment as announced by DOE Undersecretary Wimpy Fuentebella.

It was equally a bold move for the Secretary to correct his own course once he realized the action was too early. Courage and humility are virtues of good leaders and statesmen. It is good to see them slow down when going too fast, changing direction when off-course, and going full speed towards a destination. Focus should always be on doing the right thing. No one of us should be too big to correct our mistaken directions.In these the Secretary seem to have handled it well.

Secretary Cusi took a step further and appear to have extended the right hand of peace and dialogue to the electric coops, assuring them that the performance reviews and fact finding efforts are to get to the deep-seated problems of the electric coops, that the assessments will be objective, and the Philreca leaders and members are invited to participate in the search for long term solutions. According to the DOE press statement, the EC’s were assured of due process.

Philreca’s Curious reaction

Philreca curiously seems would have none of it despite the hand of peace and dialogue clearly extended by the Secretary. They fired off a memo in defiance asking the EC’s to submit their performance reports only to the NEA….and let the DOE get it from them. A regretful and unnecessary disrespect. They apparently are treating Secretary Cusi’s letter as an irreversible shot across their bow,  a line in the sand over which they are willing to do battle. Seems perplexing and pointless.

As many observers did, we feel Philreca’s saber rattling and muscle flexing is surprising and looked like they are more interested in picking a fight against a magnified enemy a posture that some people could ascribe only to a desire to raise their profile before the coming elections where Philreca is running as a party list for Congress.

In an unfortunate “let us show you who you are messing with” gambit, Philreca saw it appropriate to wage a signature campaign to petition the removal of Secretary Cusi. Maybe Philreca is not realizing, but these uncooperative moves are starting to make them look like they don’t want to be looked into and giving the impression that they have things to hide.

Still others say the Philreca has some “hugot” in the way they are reacting to Secretary Cusi, who EC’s felt are not supportive of them when he refused to endorse some big funding for rural electrification.

Some EC’s are suspicious of a hidden game plan to “sell” the Coops with the emergence of parties who are close to Speaker GMA to be aggressive applicants to take over DU franchises after their apparent successful takeover of the Panay Electric Company in Iloilo.

Focus must be on the EC problems and how to solve them for the long term

Philreca as a national association of electric cooperatives we would think is very familiar with the long running problems not only of the 17 electric coops but for most coops in the country and should welcome this opportunity to look into their deep causes and prospects for a resolution.

Philreca does not exist for its own reason but, as the national association of electric cooperatives, should exist for their members and the pursuit of their good as electric utilities.  It should have been flexing its muscle for many years to strengthen the electric cooperatives, to address their regulatory, political, institutional, and financial problems. The kind of problems that Secretary Cusi seems trying to address now.

In many ways, the openness of the government to consider “private sector takeover” as an option is due to the failure of the EC’s to correct themselves.  They have been relying too much on NEA, looking for someone else to blame instead of looking within.

The EC’s have this wonderful culture of “cooperativism” or “bayanihan” in coming to each other’s aid whenever anyone is damaged by natural calamities. That kind of “cooperativism” should have worked wonderfully in seeking solutions for failing electric cooperatives who may have political, governance, or financial calamities, and should have been harnessed by Philreca in creating long term solutions for their members.

Secretary Cusi’s  EC initiative may have started with an initial wrong turn but is now in the right course.  In this issue, Philreca should put higher priority for the best interest of their members and not for the sake of the association as a political party.  Pasensya na mga pare ko, an uncooperative stance seems out of character for a sector that is founded on cooperation.

The EC’s should welcome this opportunity for a deep review of their problems and to participate in coming up with long term solutions. After all when was the last time this was actually done either by a DOE Secretary or Administrator of NEA or even by a Presidential Asst for Rural Electrification? We will have to go back to the time of the venerable General Pedro Dumol, the father of the electric cooperative system.

Let us hope that the parties (Secretary Cusi and Philreca) will find a mutually acceptable time and venue for a constructive dialogue. That starts with giving each other a chance and the benefit of the doubt.

The problems of electric coops are deep-seated and will actually require honest acceptance. How do we insulate it from politicalization? how do we develop competent and honest managers? How do we elect qualified directors? How do we stop corruption? how do we improve our regulatory environment and compliance? How do we collect from the LGU’s who treat their monthly electric bills as a discretionary fund?

It is also a good time to revisit the EC’s role in national development. How do we reconcile the need for cost efficiency as a utility and the high cost of missionary services?  Should they be required to operate efficiently and cost competitively as public service providers? How about separate rules and rates for their missionary responsibilities?

This website had written about the role of the various government institutions in the weakening and failures of the electric coops. And to be honest, we can right the EC’s if we right the way the government institutions deal with them.  When government officials talk about privatizing electric coops, they are actually abdicating their obligations as government officials to perform their own roles for the well being of Electric Coops. It is akin to the AFP proposing to privatize the PNP force because they cannot do their job as law enforcers.

While we are on the subject of dialogue, let us include all the Electric Cooperatives groupings that have sprouted to address their common goals. Let it be a solution of national consensus. Let us hope NEA Administrator Edgar Masongsong weighs in on this momentous occasion and be an agent of unity and dialogue.

We wish Secretary Cusi, Philreca and its leadership, and all the other electric cooperatives and their associations well in this opportune undertaking. Your members are counting on you.

 

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

 

 

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Elephants in the ERC Room…And a Flying Dumbo (Part 3)

David Celestra Tan, MSK
14 March 2019

Part 3 of 3

In addition to the skeletons in the ERC closets, there are elephants in their regulatory room, including a flying dumbo.

These are the seven (7) Meralco midnight contracts totaling 3,551mw that it negotiated under the name of project companies that turned out are all controlled by its sister company Meralco PowerGen. They are all waiting for ERC approval who in turn is waiting for the Supreme Court Decision on the issue of whether ERC had the legal right to postpone the effectivity date of the Competition Selection Policy from November 6, 2015 to April 30, 2016.

While the former ERC Commissioners were claiming that the extension (that they are calling “clarification”) were only intended to respond to the numerous requests from distribution utilities and power generators for their power supply contracts that were left hanging and could not make the November 6, 2015 ERC filing deadline, and that Meralco was not a consideration, it cannot be denied that the main beneficiary of the extension was Meralco, who just happened to be able to finalize 3,551mw of power supply with 5 partners within 40 days of extension announcement on March 15, 2016 on April 26, 2016 and was able to beat the new ERC filing deadline three days later or April 29, 2016. Neither can it be denied that Meralco’s 7 midnight contracts were not signed as of November 6, 2015.

Not convinced, consumer group Alyansa Para Sa Bagong Pilipinas (ABP), a group inspired by President Duterte’s call for changes for a new Philippines specially corruption, filed a complaint with the Office of the Ombudsman against the Commissioners for abuse of discretion and with the Supreme Court challenging the legality of the extension.

The Ombudsman suspended the ERC Commissioners for 90 days on the administrative case and filed a criminal case in the Pasig Court.  The Supreme Court we understand had decided that this is a matter that will be elevated to an enbanc decision.

Meanwhile, the development of new power projects to meet future demand is at a standstill. The seven (7) midnight contracts are veritable elephants in the ERC room that will have to be decided soon.

1. The major power generators who have become part of the Meralco 6 (Meralco PowerGen, Aboitiz, EGAT of Thailand, San Miguel, Global Business, DMCI-Semirara) will not develop new projects in Luzon until these seven contracts are resolved. Who will be the off-takers anyway? And who would buy from them at the same negotiated prices without undergoing a CSP?

2. The other major power generators who have similarly established track records but did not get invited to the Meralco party, could not develop major projects because they are shut out of the Meralco market which is 70% of Luzon Grid. Now outsiders looking in are the Lopez Group, Ayala Power, KEPCO of Korea, Team of Japan, AES of USA. Seeing their lack of access to the Meralco market, AES had sold a significant share to Meralco partner EGAT of Thailand and expected to Exit from the Philippines, Ayala sold its shares in GNPower to Meralco partner Aboitiz Group, Global Business sold its majority to the MVP Group that controls Meralco. Energy World of Australia is still cooling their heels waiting for a PSA.  The Philippines is not ripe for merchant plants given that the WESM is now artificially depressed by subsidized Renewable Energy resources.

3. Let us hope the Supreme Court decides soon one way or the other and not wait until there is a power crisis and a decision unfavorable to the consumers would meet less resistance from a power starving public. We predict anyway that the highest court of the land will rule that the ERC is within its authority to extend the CSP deadline legally but will not rule on whether it abused its authority. Having the legal authority is one thing. Abusing that authority is another.

4. Nonetheless, we can expect the ERC to move ahead and approve the seven contracts under the cloak of legality that the Supreme Court will provide. Whether it abused that authority the new commissioners might recognize and mitigate or the Ombudsman might determine and continue the criminal case.

5. Several things are working against the credibility of the old ERC’s contention that the extension was not intended to Benefit Meralco but to respond to those numerous generators and distribution utilities who needed more time to file the ERC application for their signed contracts.

a) The Ombudsman found out that as late as January 2016 Meralco was still petitioning to be allowed to hold a ‘swiss challenge” type bidding as their form of CSP clearly to give them procedural room to maneuver for the intended winners. The ERC denied the request but what happened in February and early March that motivated the ERC to extend the CSP deadline?

b) While there were 90 applicants who filed before the new April 30, 2016 deadline for approximately 4,000mw of power contracts, 3,551mw were from Meralco which is 88.75% of the total. And 350mw were between unrelated DU and power generators.

c) On the same day and session on March 15, 2016 that the ERC passed the resolution “clarifying” the deadline for CSP compliance, the ERC also “held in abeyance” a new rule in determining concentration of capacity limits as required by the EPIRA law to 30% of a regional grid and 25% of the national grid.

Why is suspending that rule significant and according to consumer group ABP a clear evidence that the ERC knew that Meralco would try to meet the new deadline with significant amount of contracts? The new rule adds an “ownership test” and an “operating tests” to the “control test” effectively closing the loophole that investors in “multi-owner” plants have been exploiting to avoid the ownership concentration limits of power generating capacity. The very rule that Meralco is evidently counting on in their unmitigated foray into power generation.

Under the old ERC formula, owners and operators of power plants can avoid the concentration limits as long as they don’t “control” the capacity which means appointing someone else to market or price the output as defined by Rule 11 of the Epira IRR.

Without removing this new formula that adds ownership and operating tests to the capacity concentration limits, Meralco would not have been able to consolidate their initial 4,011mw generating business under its sister company Meralco PowerGen.  I am one of those who wanted to give the Commissioners the benefit of the doubt but the two resolutions passed on the same day and session both point to a Meralco benefit.

The MVP group as owners of Meralco is theoretically allowed under Section 45 of the EPIRA to own, operate, and control up to 50% of the demand and energy needs of Meralco. That means about 3,000mw by 2022. Clearly their ambitions are beyond that. By partnering with those who are willing to be their minority partners in exchange for access to the huge 6,000mw Meralco market, their power generating portfolio can be unlimited as long as they don’t “control” the capacity.

Notice that no one builds a major power project without either Meralco or Aboitiz as a partner?

6. Having said all these, it is one thing for the ERC to approve the Meralco seven (7) midnight contracts and another to assure that the rates are fair and reasonable. The ERC could only base their assessment on table and WACC evaluation and for political reasons can shave off a token reduction of P0.25 per kwh “to protect the public”, which can go the other way and be unfair to those with truly fair and reasonable applied for rates.

That is the problem with negotiated contracts. There is just no way to know what is fair and reasonable. Only a truly competitive bidding can determine that with benchmarking safeguards.

In the past we had compared a negotiated contract and a competitive one and the difference was anywhere from P0.50 to P1.00 per kwh. A Coop Group in the Visayas said the difference was P1.00 per kwh.

At the contracted 28 billion kwh a year, that is an overprice of anywhere from P14 billion to P28 billion a year to the Meralco consumers.

7. The new ERC Commissioners are caught between a rock and a hard place.

Lawyers we asked said that the new for Commissioners can be liable for abuse of discretion if they go ahead and approve the questionable contracts even if they were not the ones who extended the CSP deadline. There needs to be a legal mitigation, a compromise where the interest of the public is served and the violation of the law is addressed. Perhaps a curative CSP can be undertaken for 50% of the 3,551mw and the other half given up and tendered for Natural Gas plants. To be fair, each of the Meralco partners can give up half of what was allotted to them and they can still participate in a new open CSP that would be administered by a Third Party.

The ERC went out of the box by “clarifying” the date of the CSP. Meralco went out of the box for their doggoned determination to use their market power and secure negotiated contracts for Meralco PowerGen. The two had resulted to an impasse in power development that never happened before.  We need an out of the Box solution.

The Department of Energy had issued to 1,200mw Atimonan One a Certificate of project of national significance in recognition of the need for more power in the future. Those they qualified were for permitting purposes. The evaluation of the fair and reasonableness of the rate is up to the ERC.

8. Power Crisis Gambit

Are we seeing a power crisis gambit in play here? The Supreme Court, Meralco, and ERC will just stand still and wait until there is a power crisis that can come as early as 2021. Then the power- starved consumers will be on their knees begging to be saved from brownouts and will not be able to care whether the CSP law was violated and their rates are high.  Just give me power please!

These are the seven (7) elephants in the ERC’s room. Do they wait until the right power crisis time and perpetuate what Meralco wanted? Or do they proactively act now and engineer a compromise agreement that serves the public interest? How do they make sure the rates are fair and reasonable?

The Supreme Court is not doing anyone a favor by taking time on the decision. We hope they can decide one way or the other.  The waiting is now part of the problem instead of the solution.

Meanwhile, one of the seven, a little Dumbo of 70mw had already flown away and been approved for a coal power plant in far away Iloilo that turned out is owned by the MVP Group through their acquisition of the Business Power Group of the Metrobank group. Ahh the power of self-dealing.

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