Meralco’s Terms of Bidding for 2,900mw CSP – You’ve Got to be Kidding! (updated verision)

David Celestra Tan, MSK
24 July 2019

(updated)

Meralco’s previously negotiated seven (7) PSA’s have been declared illegal by the Supreme Court. They were ordered to conduct Competitive Selection Process, which the Supreme Court said is necessary to protect the public from being abused.

At the prodding of the Department of Energy, Meralco was asked to conduct the CSP’s as soon as possible to avoid power shortages. After allMeralco had not signed major power supply agreements since April 2016 evidently wanting that most of its power supply for the next 20 years go to its power generation subsidiary MeralcoPowerGen and its partners, Aboitiz, San Miguel, Global Business, DMCI, and EGAT of Thailand, their minority partner in Mauban.

Meralco recently posted the initial Terms of Reference (TOR) or terms of the bidding for a total of 2,900mw of power supply in three packages. And is fully projecting the impression that they are dutifully heeding the call of the Supreme Court for a CSP (assumed to mean truly competitive bidding that will give the public a fair deal) and the call of DOE Secretary Alfonso G. Cusifor urgent biddings because the country has not had new major power plants since 2015.

Apparently to complete an atmosphere of true competition, Meralco’s midnight partners, San Miguel, MeralcoPowerGen, and DMCI even issued press statements saying they are interested to participate. One of them was right though in saying “the published requirements carry very difficult conditions”.

But is Meralco really doing an honest to goodness bidding of its power supply contracts? And are their partners really going to compete?

Let us look at the terms of the bidding that Meralco had announced. 

A. 1,200mw (net) COD 2024. (Yes that appears to be the reference number of this bid package)

We are starting with this because this is the one that appears to have a realistic and feasible bid scope.

a. It has a realistic “Commercial Operations Date” or COD of March and September 2024 or 5 years from now. A reasonable construction period for a greenfield power plant of this 1,200mw net size.

b. The service that needs to be provided is base-load.

c. The technology will be “HELE” or high efficiency low emission (although this appears to be describing the super-criticalAtimonan One technology as previously advertised and they are referring to coal)

d. Contract Period is 20 years, the viability length for this size project

e. The tariff structure, outage allowance, and other provisions that can be handled by most prospective bidders.

These terms of the bidding seems straight forward. So where is the rub?

It is in the timetable for the bidding:

1. Cost and time to register as an “interested bidder”.

a. Meralco is giving possible bidders only one week to 29 July 2019 to register and submit their Expression of Interest and Confidentiality undertaking, and pay a non-refundable “participation fee” of P6 million in managers check. For this you get to be called an “interested bidder” and can secure a copy of the bid documents.

b. If Meralco does not get at least 2 interested bidders, the bidding will be declared a “failure”.
c. “interested bidders” also get to attend the August 9, 2019 pre-bid conference.

2. Bidding Day

All bidders are to submit their bids a month later on 10 September 2019 at 9am with their proposals in 3 envelops. 1) Qualification documents 2) Technical proposal and 3) and the Bid together with a P3.65 Billion bid security.

3. The Squeeze Bunt

This is a classic squeeze bunt strategy to limit bidders and one of the oldest tricks in the bid manipulation playbook.
It is only 41 days from the time a bidder receives his bid documents and specifications on 29 July 2019 to the bidding date of 10 September 2019. Assuming you are crazy enough to spend P6 million just to take a peek at the detailed terms of the bidding, how can you ever prepare a serious bid within 6 weeks for a 1,200mw power plant? Much less prepare the bid documentation within the same period?

This supposed CSP bidding is designed to fail at each stage. After two failures of bidding, negotiation will be allowed under the CSP rules. (we assume). And guess who it will be negotiated with? Atimonan of course. This appears to be Plan A.

Plan B is for the intended partners, again most likely Atimonan One, to register and become the lone bidder. And again leading to a negotiated contract. And prices maybe even worse for the consumers.

4. Clearly this bid package is a play for Atimonan One. Pwedepo bang magtanong, Meralco? Hindi pobasabininyo more than a year ago naAtimonan One is “shovel ready”? Now why will it take 5 years to construct and commission? Should it not be now 3 years or 2022?
5. Isa pa pong tanong. If you are allowing the completion to be until 2024, which is at least 1 year longer than the feasible construction time, why can you not allow enough time for bidders to truly prepare a bid and honestly encourage maximum competition for the benefit of the consumers?

B. Contract Capacity of 1,200mw net, Effective December 26, 2019!!

I had to do a triple take on this one. 1,200mw net by December 26, 2019 or 5 months from now? (You cannot buy a 24sq meter condo, apply for a loan and complete your documentation in 5 months!)

If package A above is a play for Atimonan One, it is a mystery who is this one for. I mean who in the Philippines has a portfolio of 1,200mw net that can be contracted and start delivering in 3 months after award?

This appears to be a “shake and bake” bidding manipulation strategy? Also called a Bug Zapper bid. (It looks inviting but when you get close you get zapped by its impossibility).

Let us look at the Terms of Reference:

1. Expression of Interest and payment of a Participation Fee of about P2.5 million by 26 July 2019

2. Prebid Conference on August 8, 2019

3. Bidding on September 9, 2019 with a Bid Bond of P3.3 Billion

4. Bidders must offer a minimum of 200mw.

5. Meralco must receive a minimum total of 1,000mw or the bidding is a failure.

6. Base-load service

7. Contract period of 10 years from December 26, 2019 to December 25, 2029.

8. Consortium bidders are allowed.

9. Here are the kickers

a. Meralco has the sole discretion to annually reduce contracted capacity up to 600mw between December 26, 2023 and December 25, 2025.

b. Contracted capacity shall not be more than 75% of the plant capacity factor. This means to offer 200mw, you need a 296mw plant. This seems in line with DOE’s policy pronouncement that generators can offer only 75% of their installed capacity to assure reserve. (more on this later)

10. The question is which group of power generators have these existing plants of 300mw or more who may be free to start on a new contract in 3 to 4 months? And which generators with a total of 600mw is willing to get cancelled between December 26, 2023 and December 25, 2025?

11. Assuming that they have these existing capacities, will you be able to prepare a bid by September 9, 2019, only 44 days after you have received the detailed bid documents? Unless, you have advance information or are part of the insider group defining the parameters of the bidding.

12. SemiraraCalaca? We are just curious that the 600mw SemCalaca had not been delivering energy to Meralco for the last 4 months. Did their Calaca power plant contract expire and is now a perfect fit for this new Meralco bidding?

13. Once again this terms of reference have been “shaken and baken” and designed to fail. Then maybe not, because the Meralco midnight group has the existing capacities to pull this off. You outsider bugs just got zapped!

14. On the DOE’s policy pronouncement that power generators will be limited to contracting only 75% of their plant capacity factor, we realize the good intention but this mechanism will probe very expensive for consumers. There are better mechanisms to achieve power reserves.

C. Contract Capacity of 500mw (net)

1. 500mw net firm

2. Contract period 5 years from December 26, 2019.

3. Mid-merit service

4. 100% guaranteed availability and no outage allowance.

5. Contracted Capacity can be reduced due to retail open access, RE law, or other laws and legal requirement.

6. Minimum offer of 100mw. Meralco must receive a minimum of 400mw offers or it will be a failed bidding.

7. Annual MEOT but bidders can offer only up to 45% of the plant capacity factor.

8. Expression of Interest and Participation Fee of P1.5 to P7.5 million to secure bidding documents by July 30, 2019. If less than two (2) interested bidders, bidding is declared a failure.

9. Pre-bid conference on August 8, 2019

10. Bidding by September 11, 2019

Once again the only people with this type of existing capacities would be members of the Meralco midnight group. The power plants include GN Power that was bought by Aboitiz from the Ayala group (who did not become part of the Meralco group), Aboitiz” Therma North Navotas facility, Millenium, And San MiguelsLimay plant. And maybe some expiring contracts of Meralco and of Aboitiz in Cebu.

Going by the stringent requirements of the service and fast delivery of December 26, 2019, we could also be talking about modular rental generators, a very expensive power supply for the consumers. That can cost P14 to P18 per kwh! 

This Meralco CSP,whether it ends up happening or failing, have the makings of being very expensive for the consumers. Guess who will most likely get blamed for it?  DOE, who ironically can get blamed even by Meralco for insisting on fast bidding and those 75% maximum contracting limit.

Ironically again for the Department of Energy, the reality is if power supply is short or power rates skyrocket, it will be the DOE who will be blamed by the people and the legislators.  They cannot wash their hands on privatization. Sadly, its’ own circular DC2018-02-0003, that was passed in February 2018 to guide the procurement of power supply,  does not provide for its right to directly supervise the CSP and hence crippled DOE itself in its options to make truly competitive CSP happen if the private sector like Meralco is recalcitrant about “shaking and baking” the biddings.

Now we the people will suffer. Both in shortage of power and high contracted rates of Meralco.  Very frustrating.

Other Notes:

  1. We are only referring to the published Terms of Reference of the bidding. I apologize to our readers, I don’t have P6 million lying around to buy the bid documents. If the officially published bids terms are giveaways of restrictive bids, you can imagine why other tricks would be in the detailed bid specifications. More scary stuff.  And you have to pay millions to see it.
  2. Of the three bid packages, only the first one is part of the seven (7) midnight contracts of 3,551mw. That means Meralco will still be doing these CSP’s for 2,351mw more for power supply for deliveries from 2024 to 2026. If they do, let us hope that they include LNG and give sufficient time for bidders.

 

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

 

The author is a 25 year veteran of international competitive biddings under World Bank, USAID, KFW, ADB, Japan Aid and have seen all sorts of bid rigging plays, from the subtle to the blatant, in the Middle East, Asia, Latin America. He is also one of the original IPP’s in the Philippines and a founder and former President of the Philippine Independent Power Producers Assn. (PIPPA). He now devotes a fair amount of his time sharing his knowledge for consumer protection, power policy and regulatory reform advocacies.

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TAKEOVER OF ELECTRIC COOPERATIVES – DOE NEEDS TO ESTABLISH RULES…QUICKLY. (Part 2)

David Celestra Tan, MSK
19 July 2019

Part 2

There are many unclear issues that any takeover by the private sector of an electric coop would be messy. It behooves the Department of Energy to establish clear rules soonest before target areas are thrown into chaos. Some profound aspects that need clarity are the following:

1. Due process – In taking away or not renewing franchises, there has to be due process. The legislative Franchising Committee does not appear to provide for a due process for denying renewals of incumbent franchise holders much less for cancelling an existing franchise and giving it to someone else. The acrimonious state of the PECO takeover of its assets could have been less so had there been true due process in the franchise denial.

2. Valuation and Definition of Distribution Assets
As we have seen, it is not enough to rely on the power of eminent domain to force the take over. At the same time, the right of the former public utility franchise holder to hold on and value its distribution assets may not be absolute because the consequent rates to the consumers will need to be considered especially when the government is effecting a change of franchise holder. It needs to assure the consumers that it is to their better interest and that includes the rates will be better. Only Distribution lines and substations should be part of eminent domain. Expensive real estate and buildings accumulated over the years should not be part of the rate base. Allow the new franchise holder to lease from the owner to avoid disruption of operations while he is looking and setting up his own buildings and base of operations within say five (5) years. Instead of just handing out franchises, the LFC might want to include these provisions in the franchise.

3. Standards of DU Failure – When does an incumbent franchise holder deserve not to be renewed? And when does an EC’s franchise deserve to be cancelled? The term “ailing” is not clear and if we go by the definition of RA 10531, it means an EC is bankrupt and not able to operate. It is not enough for the area Congressmen, Governor, and Mayors to declare that an EC is ailing. (we have a long running joke. Before you can privatize and rehabilitate a coop, you must destroy it first!).

4. Other Policy issues on the takeover of an electric coop?

a) Who makes the decision on whether the coops franchise should be defended? The Coop Board or its member-owners? If you are an owner and your business franchise is being taken away which will marginalize your business value, would you not have a right to fight for it?

b) Who makes a decision on whether the coops assets should be sold? Should it not be the member-owners?

c) If your coop management has been taken over by the NEA, can the member-owners not demand that NEA rehabilitate the coop as required by law under RA 10531? What are your options if NEA is not doing enough to address the problems of the EC under its management?

d) What happens if your EC Board is not doing enough to protect the coop franchise and assets, can the member-owners call for an emergency stockholders meeting and elect a new Board? What are the rules if the EC is registered with the CDA? Would you not remove your Board if they are not protecting the interest of the stockholders?

e) Should the DOE not establish guaranteed service level improvements as a condition for the entry of the private sector? What happens if they fail? Can they also be replaced?

f) Will the consumers in these islands still be entitled to missionary subsidies? How much time is the new private franchise holder allowed to reduce his true cost of generation and the phase out of the government subsidy?

g) What will happen to the IPP’s who have long term contracts with the EC’s? Will their power supply agreements be rescinded or renegotiated by the new franchise holder?

h) Assuming the member-owners are willing to sell, Who determines what is the fair value of their shares and the distribution assets?

i) How about the employees of the EC’s? Will they get fair retirement packages?

j) Will the DU service compliance standards to their franchises obligations be the same for the off-grid and on-grid Distribution Utilities? Will our legislators hold Meralco to the same franchise compliance standards? And will they dare to even suggest a grab of Meralco’s franchise?

DOE and NEA as White Knights

Actually at this stage only the Department of Energy appear to be trying to do something to rehabilitate Paleco through a Task Force created by Secretary Alfonso G. Cusi and had recently issued orders for Paleco, NEA, and NPC to correct the problems that have been identified. Will the provincial and City officials impede the rehabilitation? (The DOE we understand had created similar task forces also for Mindoro and Masbate)

NEA under RA 10531 is mandated to step in when there are management problems of electric coops and service is deteriorating. They then are legally obligated to rehabilitate the EC like Paleco. With the DOE Task Force showing the way for Paleco problem corrections, will NEA, and NPC whose outdated transmission facilities on the 400km long island is part of the brownout problem, step up to really solve the problems on the ground? Or will they be tacit parts of the political campaign to make poor Paleco look terrible to justify its disenfranchisement?

Meanwhile, the DOE needs to see the writing on the wall that the big conglomerates, who can fund lobby campaigns to take over EC franchises of plum areas, will continue to launch hostile takeovers of EC’s and clear rules are needed quickly, and leadership provided, to assure the service to the public does not deteriorate. Maybe all it will take it to tighten and update the rules under the IMC program. (and delete that MC option for Christ’s sake!). Will it not be a wonderful EC world if we also find a solution to the unspoken “politically ailing” coops? Just kidding.

The Epira Law under Section 37 specifically mandates the DOE to supervise the restructuring of the power sector. And the takeover of the franchise areas of Electric Coops is a major tectonic power sector restructuring affecting millions of marginalized consumers.

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

TAKEOVER OF ELECTRIC COOPERATIVES – DOE NEEDS TO ESTABLISH RULES…QUICKLY. (Part 1)

David Celestra Tan, MSK
19 July 2019

Part 1

The acquisition of the electric distribution franchises seems to have become the new frontier of the big conglomerates for insane profit growth after they have all conquered power generation, water, telephone, condo building, roads and highways, and soon airports. We are sure it has not been escaping their corporate growth strategists the 25% annual return on equity of Meralco that the ERC’s PBR rules are allowing. That acquiring the franchise for the Distribution monopoly is also the ticket to the generation monopoly.

Due to the absence of clear rules of entry and engagement, it is going to be a wild wild west. Rules of takeover have actually not been necessary although there have been attempts at take overs of electric cooperatives in the past. Until recently, the takeovers by the private sector were mostly welcome and/or necessary. Like those of troubled Pelco by Meralco, Aleco by San Miguel. Others were patient and civil – years of attempts by Aboitiz on Daneco, Meralco on Batelec I and II in Batangas. Aboitiz attempts at gaining a foothold in Ceneco in Bacolod, the 2nd largest electric coop in the country.  Meralco, as if they don’t already lord over 73% of Luzon, had announced its desire to expand its franchise area to neighboring provinces of Pampanga, Tarlac, Batangas, Mindoro, and rest of Laguna.

There has been no shortage of Governors and Congressmen willing to sell their electric coops to those willing to make a deal. Still the overtures remained subtle and civil….until recently.

Wake Up Call

The wake up call that maybe clear rules are necessary is the recent bold and succeeding attempt of MORE of the Razon Group to takeover private DU Panay Electric Company (PECO) that serves metro Iloilo. And after having whet their appetite, MORE is now going after the franchise for the main island of Palawan, one of the world’s most beautiful islands and hence a prestigious service area. Things however can get ugly unless rules of entry and engagement are established quickly by the government.

The Paleco electric cooperative in Puerto Princesa is under siege. Brownouts had reportedly gotten worse despite the NEA takeover. Government officials seem bent on making the coop look “ailing”. The City Government, a known ally of the Governor who is an open supporter of the disenfranchisement of Paleco,  had sued it and seeking the resignation of all the board of directors. Service will deteriorate and soon the world’s most beautiful island would also be one of its darkest….and hottest in the daytime without aircon!

The Epira Law of 2001 had tasked the Department of Energy to supervise the restructuring of the power sector. It is incumbent upon the DOE that ground rules for the entry of the private sector into the electric coops and/or the takeover of their franchises can be made in an orderly manner or in a way that serves the public interest.  After all, electric service is an essential public utility and every care should be taken by the government that they don’t fall into chaos…all in the name of a franchise takeover.

Existing Rules for Entry of the Private Sector into Troubled EC’s

Actually there are already rules for the entry of the private sector into really troubled electric coops that need private investment – This has been the Investment Management Contracts or IMC that was promulgated by the DOE with funding from the World Bank way back in 2004 a couple of years after the EPIRA law was passed in 2001.

This wonderful IMC program for an organized entry of the private investment and management sector to rehabilitate financially ailing electric coops however did not prove appealing to even troubled coops after they saw an “MC” agreement that took over Zambales Electric without an investment and collected fat fees for “management”. That deal stigmatized the IMC program. (We understand the Management Contract or MC option in the rules where there could be a management takeover without making an investment was surreptitiously inserted by a consultant and the DOE did not catch it)

One recent successful entry of a private investor under the IMC rules was the takeover of Zamboanga Electric Coop by Crown Investment Holdings and Desco in 2018. Zamcelco had been suffering from 22% systems losses and was P1.2 billion in debt. Crown-Desco pumped in P2.5 billion with P1.2 billion paying for debts and the balance of 1.3 billion for rehab and working capital. The new managers are working on reducing the systems loss down to the regulatory limit of 13% and have reportedly discovered that its power supplier WMPC has been charging it 50mw of capacity fees when its peak demand had been only half or 25mw. Now Zamcelco is seeking a P441 million refund.  Aboitiz apparently lost out in the bidding for the IMC and the Meralco group backed out early.

The Dangerous Trend Towards the Franchise Grab

It appears the IMC route is too inconvenient, too slow, or too unsure to some players. They have elected to go the “franchise grab” scheme through friendly members of the Legislative Franchising Committee.  Except they are trying to grab DU franchises that are not yet up for grabs.  One such case is More Reedbank application for the franchise for Palawan service area when the incumbent PALECO’s franchise is still valid for nine (9) more years.  And Paleco, while having solvable problems, is far from being ailing or bankrupt as defined in the applicable law which is RA 10531. The franchise application of More Reedbank is sponsored by two congressmen of Palawan.

Another case is the franchise application by a supposed farmworkers cooperative “GamboaHermanos” to provide electric service for the whole island of Negros. (Can you believe it!) Amazingly, the franchise application was approved in one reading according to the papers by the Legislative Franchising Committee.

People point at MOREs apparent success in taking over the franchise of PECO in Iloilo City by lobbying in the Legislative Franchising Committee and winning a Franchise from Congress. PECO’s case is different. First its Franchise was actually expiring, and the LFC can argue that it was just exercising its right to grant a franchise. Second difference is PECO is a private distribution utility and the rules for required rehabilitation under NEA Law 10531 do not apply.

 

Happy SONA!

 

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