Viewpoint: Reducing Rates for Electricity in Mindanao

by David A. Tauli
Mindanao Coalition of Power Consumers

Lately, we have heard proposals, mostly foolish, coming from the Department of Energy and from the Mindanao Development Authority that supposedly will reduce the rates for electric power supply in Mindanao. Even if the proponents were wiser, none of the proposals will result in significant reduction of power rates unless the main cause for high rates in Mindanao is addressed: incompetent, if not corrupt, power supply contracting by distribution utility companies in Mindanao.

In the sordid history of baseload power supply contracting in the electric power industry in Mindanao in the past decade, the one good episode was the power supply agreement in 2013 between the Power Supply Aggregation Group Corporation (PSAGCOR) of the Association of Mindanao Rural Electric Cooperatives (AMRECO) and the GN Power Kauswagan (GNPK) of the Ayala group of companies.

All other power supply agreements for baseload power between distribution utility companies and generating companies in Mindanao have been just one form or another of moro-moro, all show and no substance.

It was only early this year 2016 (in the power supply agreements for the generation of the Malita coal power plant of the San Miguel Consolidated Power Corporation) that the electric cooperatives resumed honest-to-goodness least-cost acquisition of baseload power supply, conforming with the EPIRA requirement that “the contracting and procurement of the equipment, assets and services have been subjected to transparent and accepted industry procurement and purchasing practices to protect the public interest”.

But that was a fluke, resulting only because the electric cooperatives have become wary of continuing to flout the EPIRA requirement for least-cost acquisition of power supply, and because the SMCPC did not fear facing competition for baseload power supply for the electric cooperatives. Unless legal charges are carried out against the electric cooperatives involved in the Apo IPPA Scam and in the Coal Power Plant Scam, the errant electric cooperatives will resume their incompetent (if not corrupt) ways of “negotiating” power supply agreements without carrying out legitimate least-cost acquisition.

The power supply agreement between PSAGCOR and GNPK resulted in an effective rate of around 4.16 pesos per kilowatt-hour. All other PSAs (excepting again the Malita coal power plant of the SMCPC, but including all coal power plants embedded in the distribution systems) have an effective rate per kWh of 5.00 pesos or more. The power supply agreements for power supply from the SMCPC coal power plant in Malita also resulted in a price of around 4.16 pesos per kWh.

The Department of Energy of the government of President Rodrigo R. Duterte has placed the reduction of power rates in the Philippines as one of its key objectives. However, based on recent pronouncements of the DOE as to how they are going to attain that, there are only two chances that it will happen while PRRD is president: fat and slim. It is clear that no serious thinking has gone into the pronouncements coming from the Department of Energy concerning the electric power industry in the Philippines.

But even if the DOE seriously considered the available opportunities to reduce electric power rates, any program they will carry out will prove futile for reducing rates unless the main obstacle to having fair and reasonable prices for electricity were removed: the regulatory capture of the Energy Regulatory Commission by the corporations (mainly MERALCO and the generating companies) that it is supposed to regulate.

One day, hopefully while PRRD is still president, we may have an Energy Regulatory Commission with honest and competent commissioners. When that happens, power consumers in Mindanao can petition the ERC to bring down the rates of the power supply agreements for baseload power to the levels that could have been attained if the distribution utility companies carried out legitimate least-cost acquisition processes. Then, and only then, would we see the reduction of the rates for electricity in Mindanao. – See more at: http://matuwid.org/viewpoint-reducing-rates-for-electricity-in-mindanao/#sthash.mMqCHgmX.dpuf

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Why are power generation rates in Mindanao going up? What can consumer groups do to bring down the rates?

By David A. Tauli, Mindanao Coalition of Power Consumers

06 October 2016

The rates for bulk power generation in Mindanao from incoming coal plants will go up to 5.40 pesos per kilowatt-hour starting in 2017.

In order to bring down the rates of these coal plants to around 4.00 pesos per kWh, power consumer groups should: (a) carry out massive and persistent lobbying of the government of President Rodrigo Duterte, (b) advocate reforms in the Energy Regulatory Commission, and (c) file legal suits against the electric power generating companies and distribution utility companies in Mindanao who have conspired to generate the high rates.

This note sets out briefly the why and the what.

There are two main reasons why the rates for bulk power generation from coal plants in Mindanao are high:

1. Distribution utility companies have entered into power supply contracts without carrying out least-cost acquisition of their supply of electricity, in violation of the laws that govern the electric power industry, particularly the EPIRA, and contrary to generally accepted practice in the governance and management of distribution utility companies.

2. The Energy Regulatory Commission has been captured by the electric power corporations that it is supposed to regulate, and consequently has adopted uncritically the procedures and data of the generating companies in the determination of the rates for bulk power generation.

Power consumer groups should lobby the Duterte government to carry out the following:

1. Direct the distribution utility companies to strictly carry out least-cost acquisition procedures for the power supply of their consumers, and boot out the officers, or revoke the franchises, of the distribution utility companies who do not comply. Non-implementation of least-cost acquisition should provide adequate legal grounds for such penalties.

2. Allocate to the residential consumers the generation of the hydroelectric power plants in the Agus and Pulangui rivers. This will ensure that households will enjoy low rates (a reduction of more than one peso per kWh) for electric consumption despite the machinations of the gencos and the distcos.

3. Direct the National Grid Corporation of the Philippines to carry out economic dispatch of all generating plants in the Mindanao Grid, disregarding the power contracts between distribution utility companies and the power generating corporations (many of which were fraudulently entered into anyway).

A study of the petitions for approval of electric power supply agreements that were submitted to the ERC by electric power companies in Mindanao will show that the ERC has been uncritically following the procedures of the gencos and adopting the data provided by the gencos (with superficial revisions to show that it is being critical in using the data) in the determination of the true costs of generation. While the ERC has been following the letter of the law in the proceedings for these petitions, it is evident from the records of the proceedings that the ERC has entirely lost the spirit of fairness, reasonableness and transparency in the determination of rates for bulk power generation. This may be true also in the case of applications for rate increases in distribution and transmission, but a study of those applications still need to be carried out.

This problem is matter of the personalities in the ERC rather than the rules and procedures, so its correction could be done only through the reformation of the ERC organization.

The filing of legal suits against the gencos, distcos, and the regulators and government agencies is a last resort, mainly because of the fundamental problems (to say the least) in jurisprudence in the Philippines. And because consumer groups do not have the money to pursue legal suits all the way to the Supreme Court. Before going the way of the courts, consumer groups should work with friends in the House of Representatives and in the Senate to carry out investigations of government agencies and regulatory bodies involved in the electric power industry in Mindanao.

Money being stolen from power consumers in Mindanao as a consequence of corruption and venality in the electric power industry goes into the hundreds of billions of pesos, greater than the profits of those involved in the illegal drug industry and in gambling. Which leads to the idea that maybe we should get the Duterte government to carry out tokhang in the electric power industry in Mindanao. God forbid.

The evils of cross-ownership in power industry (2)

by Neal Cruz, republished from Philippine Daily Inquirer website, September 07, 2007

MANILA, Philippines — The previous column dwelt on proposals to amend the Electric Power Industry Reform Act, or Epira (endorsed by President Gloria Macapagal-Arroyo) because instead of reducing power rates, which was its original intent, it resulted in even higher rates and, in the future, even a worse situation. One of the major flaws of Epira was in allowing cross-ownership of corporations in the power industry.

The previous column discussed three of the five evils of cross-ownership: (1) it resulted in higher power rates; (2) it subverts the development of the power generation sector; and (3) it will cause billions of pesos in losses to the government. This column dwells on the last two evils.

Evil No. 4: It corrupts and impedes good governance. Cross-ownership breeds an enormous monopoly in both generation and distribution sectors that will overpower the regulatory agencies, energy policy, and, worst, control politics in the country.

An analysis of the present composition of the Senate is not very encouraging. Seasoned political analysts agree that the Lopez empire’s influence in the Senate is formidable. It also holds a significant sway in the House of Representatives. It owns and maintains a formidable media machinery that can make or unmake a politician seeking national office like a seat in the Senate, the vice presidency, or the presidency.

Already, even while the committee assignments in the Senate were still being worked out, Sen. Joker Arroyo publicly declared that there is no need to amend the Epira? He said only the Joint Congressional Power Council is needed to do the job?

Such a premature declaration dismissing the urgent need to amend one of the most abusive and flawed pieces of legislation ever passed by any Congress in the republic bodes ill for all consumers. To understand Arroyo better, it was during his watch as executive secretary of President Corazon Aquino that Manila Electric Co. (Meralco) was turned over to the Lopezes lock, stock and barrel with nary an audit and evaluation of what the Lopezes ought to have been given back. A franchise area far bigger than the original franchise of Meralco was given to the Lopezes. They got more than what should have been given back to them and what they did not own at all.

The evils of patronage politics and the power and influence of money and a media machine certainly aggravate the culture of corruption in the country. It also makes the task of amending Epira a daunting effort.

Evil No. 5: Electricity will continue to be overpriced and abuse of consumers will remain unchecked. The accompanying disinformation campaigns that this behemoth can launch to protect its interest or hide abuse from the unsuspecting public results in a misinformed public, very susceptible to abuse.

Today, the Philippines’ power rates are among the most uncompetitive in Asia, thus affecting our country’s industrial and commercial performance. Tens of millions of dependents of overseas Filipino workers see their hard-earned remittances eroded by the high electric rates. No matter how hard our people work, a huge amount of their income is eaten up by skyrocketing electricity rates. Now is our chance to excise an evil in our system to give our people some measure of relief from already difficult times.

Completely banning cross-ownership between power distributors and generators is not only urgent but a matter of national survival. We cannot afford its evils.

Click here for part 1

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Five evils of cross-ownership in power industry

by Neal Cruz, republished from Philippine Daily Inquirer website, September 05, 2007 

President Gloria Macapagal-Arroyo has endorsed the amendment of the Electric Power Industry Reform Act (Epira), which, contrary to its original intent of reducing power rates, has instead led to higher rates, the second highest in Asia, next only to those in Japan, a rich and highly developed country with a standard of living many times higher than ours. The Epira was copied from the California model of deregulating and privatizing the monopolistic power industry by creating competition in every sub-sector. Competition will force the players to reduce costs and be more efficient to be able to sell more electricity.

It is difficult for laymen to understand the workings of the power industry. For their benefit, therefore, here is a simplified explanation of the power sector and the Epira and its flaws:

Electricity flows from the generating plant through the transmission lines to the distribution lines of the distribution utility, like Manila Electric Co. (Meralco). The distributor connects the users’ residences, factories and business establishments to the power sources, installs meters and does monthly readings, sells the electricity and collects the monthly bills.

The Epira that was passed in June 2001 divided the industry into four sectors: generation, transmission, distribution and supply. Transmission and distribution, however, are considered natural monopolies in providing the lines through which power flows and will continue to be regulated sectors under the supervision of the Energy Regulatory Commission (ERC). The ERC’s job is to make sure that the rates of these two monopolies will always be reasonable and fair.

Accordingly, Section 36 mandated the unbundling of rates and functions of these four sectors.

The National Power Corp. (Napocor) was split into two: generation and transmission. The distribution side was also split. Each one was required to submit its own rates for the review and approval of the ERC.

For the whole thing to work for the benefit of the consumers, there has to be enough players in the generation and supply sectors that will compete with one another in serving the customers.

Section 23 states the whole purpose of the Epira: A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market. But this obligation is nullified by the evil of cross-ownership.

What is cross-ownership? It is the case of a company in one sector, say distribution, owning a sister company in another sector, say generation. There is a conflict of interest here. A distributor cannot supply electricity at the least cost if it has to buy power from a sister company selling its electricity at a high rate.

The framers of Epira knew the harmful effects of cross-ownership and prohibited it in the original version. Unfortunately, lobbying by vested interests won over patriotic integrity so that Section 45 which was supposed to ban cross-ownership was watered down, banning cross-ownership only in the transmission sector and other sectors but not cross-ownership between the distribution and generation sectors. Thus, the Lopez family, which owns Meralco, the country’s largest distributor, was allowed to own and operate generation facilities. Epira’s purpose is to make distributors like Meralco buy power from competing power generators to get the least cost. But with the loophole in the ban on cross-ownership, Meralco is now allowed to enter into negotiated bilateral contracts with sister generating companies. This loophole has led to five evils, the end result of which is still high power rates.

Evil No. 1: These bilateral contracts totaling 2,300 megawatts so far were sweetheart deals. They all have guaranteed minimum take-or-pay provisions that were the real cause of the skyrocketing Purchased Power Adjustments (PPA). Meralco contracted power at P5.20 per kilowatt-hour with its sister companies when power can be bought from Napocor and its IPPs (Independent Power Producers) at P3.97 per kWh. This would not have happened if Meralco the distributor was doing business with an unrelated generator at arm’s length. They would have held competitive biddings from generators so that they could supply power at the least cost to their captive customers.

Evil No. 2: Since Meralco represents 72 percent of the country’s power requirements, it has become a monopoly with full rights to choose who gets to supply their power requirements. The Lopezes of Meralco have then become the controller of the country’s new generation sector once Napocor is privatized as the Epira envisions. There will be no real competition as intended by the law and therefore no reduction in generation rates. Also, the future development of the generation sector on which the country depends for its future needs, will be totally dependent on the whims and caprices of one group.

Evil No. 3: There will be few bidders for the Napocor power plants because only the Lopez-anointed investors can come into the sector. The government will lose hundreds of billions of pesos in lost value-recovery from the Napocor assets. Nobody will buy the generators if it cannot sell the generated power to distributors like Meralco.

Remember, there were two failed biddings for the 600-megawatt Calaca power plant of Napocor. And Masinloc was going to be sold only for $524 million to a Malaysian group with the Lopez-owned First Gen Corp. offering only $384 million. In more recent biddings, Napocor’s Masinloc plant was sold for a whopping $930 million, even higher than the Lopez offer of $570 million.

(To be continued)

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