Rethinking the ERC plan to shift to “fixed price”generation rates…And the “30% of Project Cost” Exemption from CSP!!

David Celestra Tan, MSK
2 April 2019

The new ERC has been hard at work on a new guideline or template for the contracting of power generation supply agreements. Without exaggeration this guideline would be one of the big signals to consumers on the regulatory soul of the new ERC Commissioners as a group.

In the 3rd version, one of the new rules under Section 13.2(e) is the shifting to fixed price generation rates including fuel as opposed to the current regime of variable costs and pass on charges.

Just like other utility economists, i am shocked to my core. Whhatt! This may be well intended but we hope the ERC will rethink this.

It is true that the current pricing formula of pass on charges for changes on fuel price and forex rate variations had been resulting to a yoyo effect on generate rates and gives electric consumers reason to complain every time it happens.

And every time it goes up Meralco, ERC, and DOE have the inconvenience of explaining to the public what’s going on.

Addressing this regular complaining seems to be the only reason the new ERC is considering this fixed price regime. And if consumers no longer complain then the ERC has come up with a good solution?

But Fixed Rate pricing is not necessarily good for nor protective of the consumers. Pacifying the consumers this way is a lot like addressing the crying of a child but not really the cause of his crying. Yes poor baby, let’s give him cough syrup to induce him to sleep, pain killers for his pain, or downers!

This is eerie dejavu! During the finalization of the EPIRA Law in 2001, there were clear efforts to change Meralco’s rate setting from RORB or return on rate base on which consumer advocates became very adept and had been raising a lot of questions and inconveniences for both ERC and Meralco.  That opened the door for a change to a new rate setting methodology called PBR or performance base rate setting.  People are so confused by this PBR and no one is able to question them a lot.  Na set-up ang consumers and worse, the fruit of the pudding is Meralco started making 25% per year return on investment, double the 12% determined by the Supreme Court for the distribution monopoly. And in your organizations petition to change or modify the PBR, the previous set of commissioners were apathetic to correcting the injustice.

The current variable costing vs fixed pricing

Under our current generation rate formula, inflation indices, currency variations, and fuel price changes are factored in every month and it is resulting to the rising and falling of the generation rate. Thus the yoyo effect.

In regulatory economics this is also called “sharing of risks between generators and consumers”. And the principle has merits.

1. Generators do not need to increase their rates to cover forex and fuel fluctuation risks. And those are big financial risks. We estimate a “risk factor” can add 10 to 20% to a fixed rate. Ironically, the generators would be happily keeping the profits when fuel is down but when they have to lose a lot of money when fuel goes excessively high, they will shut down their plants for some alibi.  Consumers lose.

2. The adjustment factors of inflation, forex, fuel price are at least transparent and use independent reference prices not influenced by either party. Changes in Forex by the Central Bank published rates and fuel by MOPS of Singapore.

3. While it penalizes consumers when fuel prices go up, lower prices are also passed on when it comes down.

The bigger yoyo problems that need to be addressed by ERC are the nontransparent price adjustments that really hurt the consumers. These are the ones that warrant regulatory safeguards that can be part of ERCs new guidelines on PSAs

1. Non transparent fuel procurement.
Since the cost of fuel is a pass on charge to consumers, consumers need some safeguard. However, neither the ERC nor Meralco have Safeguards to insure that fuel prices that are passed on to consumers are truly competitive and not overpriced.

When MSK intervened in the application of Meralco for p0.90 per kwh increase due to Malampaya shutdown, it became clear that neither Meralco nor ERC bother to check if there is no manipulation. Meralco rate computation managers were taking whatever price the generators declared and pass them on.  And we were talking about p9 billion worth of distillate fuel. Similarly, the buying of coal is not truly competitive with no safeguards!

2. Equally big is the exploitive and non transparent adjustments to the generation rate or AGRA as approved by the ERC itself. (Yes it’s a reincarnation of the reviled PPA or purchased power adjustments that wrecked havoc on consumers in the 2000’s.)

Built into those adjustments were the sweetheart downtime allowances where generators are paid regardless of whether they are down or not.This range from 45 to 60 days per year.  This in effect encourages shutdowns and are the reasons Meralcos coal suppliers charge p10 to p18 per kwh on many months. Not because of coal prices but by guaranteed capacity payments during downtimes.

This “downtime allowances with guaranteed capacity payments” is a BOT era contract provision that needs to be updated…by the ERC or DOE because DUs will not do it on their own. We are now in the BOO era where the power plant will never be transferred to the DU and hence there is no reason to support the financing of the plant with guaranteed monthly revenues regardless of whether it is running or not. And when the PSA is between two sister companies, who is to check whether the plant downtime had actually exceeded the contracted limit.

Expressed another way, with generous and non-transparent downtime allowances, the consumers are actually paying 12 months of capacity payments for 10 months actual generation service. Depending on the size of the plant that means hundreds of millions and even billions a month. Anak talaga sila ng Dios!

“Downtime allowances” must only be provided to allow the generator time to do preventive or corrective maintenance during which he is excused from delivering the contracted capacity and energy. But not to guarantee him continuing capacity payments while his plant is down, or in power industry parlance “not available”.

A scary thought for consumers

What is scary in the new ERC draft is it is evident that the subtle insertions that are being made are so esoteric to the power industry to exploit the fact that newbie lawyer Commissioners will not really know the deeper implications of what is being proposed. Are foreign consultants involved in this? Or the hand of the vested interests are playing big again behind the scenes?  Pinapalusutan ba ang mga bagong commissioners.

Efforts to Trick Consumers and evade again the True CSP

The ERC’s 3rd draft provides under Article XII a section called “CIRCUMSTANCES EXEMPT OF CONDUCT OF CSP”. Under Section 42 “Exemptions” is “a” ‘The DU may be allowed to infuse internally generated funds provided that the amount shared by the DU shall not exceed 30% of the project cost” !!!!!

Pare, “30% of the project cost” is actually the full equity investment of an owner in a power project.   The 70% of the project cost is the portion financed by the banks. So kung makalusot ito, it means power projects that are wholly owned by Meralco and to a minor extent by Aboitiz by putting “30% of project cost”, WOULD BE EXEMPTED FROM UNDERGOING A CSP! Pwede na uli negotiated!

Ano ba yan, harapan! Sana naman nagkamali lang sila…o pati document encoder me agenda?

Your organization MSK actually pointed this out in our comments to the ERC on the draft and we hope the new Commissioners will look into it.

We pray for their discernment.

Matuwid na Singil sa Kuryente Consumers Alliance Inc.

For private comments send to For public comments please post below.

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