Simple But Deeper Issues in Power are Part of High Power Cost Problem

David Celestra Tan, MSK
12 January 2017

Energy Writer Myrna Velasco’s two part series on power policy and high power cost that appeared in the Daily Inquirer touched on the usual issues bedeviling the power sector and the country’s search for sustainably reliable and competitive power compared with our Asian neighbors.

There are deeper issues that are actually obvious and simple that we know our government officials including the legislators should know will work to assure power supply at least cost but persuasive lobbying by the vested interests have been getting in the way. Issues are muddled and made more complicated. If only we all will look at the power sector from a patriotic heart, we will see clearly the obvious and simple solutions.

1. Creation of True Competition is the magic wand

It is true that there are many factors contributing to the Philippines high power costs but we have to start with the very basic which is the creation of true competition in the generation sector. Since deregulation and privatization under the EPIRA Law of 2001, we went from the Napocor government monopoly into a private sector oligopoly and Meralco’s monopsony. Now we have an 800lb gorilla in the distribution sector that is on its way to also becoming an 800lb gorilla in the generator sector as its twin. There is no competition in the generation sector. All sorts of evil come out of negotiated contracts. It is just unthinkable that in a country where government officials go to jail for manipulating competitive biddings, we allow the negotiation of power generation contracts that will burden consumers monthly for 20 years. The difference between negotiated and bidded contracts is P0.50 to P1.00 per kwh or 15 to 20%. That’s huge.

Creation of True Competition will also be the solution for assuring the sustainable entry of investments in power generation in an atmosphere of true competition and market access for the fittest.

Competition is likewise the solution for the conundrum in the solar and wind sector. Why is the DOE avoiding the obvious benefit of holding competitive bidding for solar power when there are so many interested investors? A 100mw solar plant in Southern California recently went on commercial operation and their rate is only $0.05865 cents or Pesos 2.93. It’s true they have fiscal incentives but so did our RE law of 2008 that gave tax free incentives for importation and income taxes for 7 years and beyond that only 10%. If P2.93 per kwh is viable in America it should be viable in the Philippines. If we add the cost of storage battery and self-regulating capabilities it can go up to $0.08 per kwh or only P4.00 per kwh and it will not require subsidies. It is still attractive for investors.

2. Reforming ERC Rate Setting methodologies

If only the ERC will find its regulatory soul, it will look at the various anti-consumer rate setting methodologies that can balance the rules between the distribution utility like Meralco and the consumers. Performance Based Rate Setting (PBR) allows Meralco to make money even on investments they have not yet incurred. The Systems Loss computation is anomalous and non-transparent. Meralco is allowed to keep the windfall profits from higher energy sales beyond the table forecast. These were put in by the 2nd and 3rd Chairmen of the ERC that effectively allowed Meralco to have unlimited return on investment when it is supposed to be a regulated distribution utility. ERC hearing processes are too strictly judicial deterring concerned consumers from being heard because they cannot afford lawyers.

3. Strategic Power Generation Capability by the Government

It is time to recognize the obvious reality that the Filipino people, despite power sector privatization, still expects the government to step up and provide solutions whenever there are shortages of power or steep rises in power costs. A new law is obviously required for government to possess strategic power generation capabilities to calibrate supply and prices whenever needed to protect the consumers. Its existing assets can be used for this strategic purpose instead of giving them away to the well-connected private sector oligarchs on the grid.

4. Least Cost Power and Economic Competitiveness as a National Policy

Ironically we only talk about these nice ideals of least cost power and economic competitiveness. But the way we implement privatization and power development is not really guided by a resolute cost competitiveness objective. Our neighbors have competitive rates because they worked for it. If we have low power cost as a national objective, we would utilize the bountiful hydro resources of Mindanao as the anchor power supply for that island at P2.50 per kwh. Now Mindanao will be coal dominated at P5.00 per kwh and the Agus complex will become a peaking and reserve plant selling power at WESM rates that they hoped will be P4.00 to P6.00 kwh just like in Luzon.

We would fast track and encourage the natural gas generation alternative as a leverage against coal. We would look at new, smaller, and safer nuclear technologies but move on from the old BNPP. Lets encourage geothermal development but make sure they charge reasonable rates. Mt. Apo geothermal in Mindanao used to sell its output at P3.80 per kwh. After privatization it became P5.30 per kwh.

We would also be circumspect in imposing taxes on energy, a primary input for economic production. The VAT tax on power services and other taxes being envisioned would be shooting the economic competitiveness of our people and country.

5. NGCP is an Unrecognized Part of the Problem

NGCP’s inadvertent acquisition of the grid and policy making power of the government owned Transco as intended by the Epira law need to be rectified. It created serious conflict of interest. The concession was awarded to the NGCP consortium because they are supposed to have the financial and technical wherewithal to develop the power grid. Now there are reports that NGCP makes the power generators finance the grid connection investments, hence deterring the power grid from keeping pace with generation development. NGCP and its investors are entitled to a security and fair return on the investments they would incur, a presumption when they got the franchise. Operating its transmission system is not the same as being the “System Operator”, a rule and policy making body tasked with insuring development and competitiveness in the grid.

As the Little Prince said, it is only through the heart that one can see clearly. If we have a true patriotic heart with true concern for the Filipino people and country, we can easily be guided in what to do in the power sector that has been made complex and labyrinth by the vested interests and their cohorts.

These maladies in the power sector breed corruption. The high power cost solutions are simple and obvious. We only need to recognize them and find it in our hearts to do something about it.

We also wish Ms. Velasco’s writings for the Manila Bulletin on power can be balanced to also present the view of the consumers and not only those of big business generators and distributors that she invariably quotes in her articles.

Happy new year!

David Celestra Tan
Matuwid na Singil sa Kuryente Consumer Alliance Inc.
matuwid.org

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10 Good Things the ERC Can Do For Consumers in 2017 For It to Rebuild its Image

David Celestra Tan, MSK
7 January 2017

ERC’s image as an honest to goodness regulator that is true to its mandate as a guardian of public interest in power delivery services is for now tarnished. The following are some of what it might do to recover and regain public trust and respectability.

1. To recognize, and assume a regulatory mindset in handling petitions for rate approvals, that as the regulator it has its own duty to insure against market abuse, monopolization, cartelization, and anti-competitive behavior. It is the one mandated by law and does not need the participation of the consumers and advocacy groups. If any, ERC should seek out the additional input of the affected consumers.

2. To have the humility and patriotism to rectify the misjudgment of extending the CSP deadline of November 6, 2015 to April 30, 2016 that was spearheaded by Chairman Salazar that resulted in the MVP Group evading the CSP for 80% of its energy needs from 3,551mw of midnight power supply contracts signed four (4) days before the new deadline and filed just the day before on April 29, 2016 and all controlled by its sister company Meralco PowerGen.

Unless ERC resolves this mysterious deferment of the CSP, it will be forever tainted with a corrupt image. Too big, too suspicious, too obvious, too blatant. Too insulting to the intelligence of Filipinos…and of President Digong Duterte and his team.

As a minimum, to work for a feasible solution to somehow make it up to the consumers by bringing in an era of true competition in the generation sector. An option is for ERC and DOE to cause a win-win solution where Meralco PowerGen will give up equitably half of the 3,551mw of its midnight contracts. Starting with the dropping of the obviously not ready Atimonan One and half of those with multi-contracts like Global Business, San Miguel, and Semirara.

If it can order immediately the holding of competitive bidding to assure sufficient power while there is still time.

Resolve first whether the 3,551mw of contracts being applied for by Meralco and Meralco PowerGen does not violate Epira provisions on market power abuse, anti-competitive behavior, and will not result to cartelization of the power generation sector. As a condition of partial processing of applications, to elicit a long term commitment from Meralco to cooperate and commit henceforth to the true competitive bidding of power generation contracts in the future.

3. If ERC really means to encourage continued investments in the generation sector, to create a level playing field where there is an assurance to truly independent generator investors of open access to the distribution market through an honest to goodness and consistent implementation of the CSP program. (This is not the same as rules on open access for consumers under RCOA). There is no shortage of interested investors both local and foreign but the Meralco market is closed to only the chosen ones by the MVP Group, and usually to those willing to be minority partners of Meralco PowerGen. The rent-seeking component effectively becomes additional cost to the consumers.

4. To truly address the Petition of MSK for the refund of the estimated P2.39 to P5.0 Billion in overrecovery of the under recovery of the 2nd regulatory reset. Justice delayed is justice denied to consumers. Why does the ERC seem to be taking this lightly?

5. To address the Petition of MSK for rules change and review of the Performance Based Rate setting methodology that is giving Meralco undue profits from investments it had not incurred contrary to the specific provision of Section 25 of the Epira Law.

6. To review and close the loophole of the Systems Loss charge rules by setting 8.5% as the maximum that ANY customer can be charged and to impose a more transparent way of monthly computations instead of just relying on the self-serving certification of the finance officer of Meralco under the current rule.

7. To disclose the true facts of the market manipulation case against the generators/market participants who exploited the market in December 2013 that caused a 90% jump in generation rate in one month. Once again, justice delayed is justice denied.

8. To Come out clean on what corruption really caused a professional and conscience driven public servant like Atty. Jun Villa to take his own life and to truly honor his public service spirit by not demeaning him with a whitewash. To show the world that ERC is honest and is making decisions for the best interest of the consumers as it is mandated by the law that created it.

9. To Improve the efficiency of its bureaucracy by streamlining its regulatory coverage and processes. Avoid over regulating and at the same time focus on things that need regulating for the general good of consumers.

10. To be less rigidly Judicial in its processes and more of being Quasi for the interest of consumers. It should not act as an impartial judge for it has its own obligation to look after the public interest. Petitions for rate approval should not be a court trial where there is an applicant and an oppositor. ERC itself is an interested party who must be convinced by the applicant that their proposed projects will not violate market-abuse , monopolization, and cartelization rules and the rate is just and reasonable and comply with CSP rules.

Part of this is to Create a Consumers Advocacy Office that will assist concerned consumers and groups by providing legal advice and guidance, research and clerical facilities including internet access, document preparations. Provide media access so the public will know the sentiments of consumers. This is to balance ERC’s approval of the media and legal budget that is part of the regulatory compliance expenses of Meralco that run into hundreds of millions a year and paid for by the consumers.

These actually are easy to do if ERC will be in touch with its regulatory soul, be faithful to its regulatory mandate under the law, and for it to be clear on for whom its bell tolls. It’s the consumers.

Happy New ERC Year!

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Matuwid.org
Email: david.mskorg@yahoo.com – See more at: http://matuwid.org/10-good-things-the-erc-can-do-for-consumers-in-2017-for-it-to-rebuild-its-image/#sthash.nLqW0Ol4.dpuf

Meralco’s Self-Dealing is Rent-Seeking on its Distribution Franchise. It is Abuse of Market Power and Harmful to Consumers.

David Celestra Tan, MSK
13 November 2016

Meralco has a franchise and monopoly for the distribution of electricity in the mega area of Metro-Manila and adjoining provinces. Its distribution franchise though did not come with the right to also monopolize power generation. Yet it is on its way to owning through its own generation company, Meralco PowerGen at least 90% of its energy needs. That it is able to do by rent-seeking on its distribution franchise.

Meralco, that serves the largest commercial and industrial hub of the Philippines, has a power demand of 6,000mw and energy requirement of 30 Billion kwh a year. That’s equivalent to 75% of the energy needs of Luzon and by now about 64% of the whole country. It is a lot of buying power! (pun or no pun!). A hulking 800 pound gorilla in the power sector.

Meralco is supposed to be a regulated public service monopoly operating under government fiat. As a Monopoly it is protected from many business risks. Forex and head-on competition in its service area. If it is hit by a typhoon, all repair costs are passed on to the consumers. Power is stolen from it or it loses due its own inefficiency and it is passed on to the consumers as systems loss. Its own expansion under the PBR scheme is charged to the consumers in advance. For all those market risk privileges and guaranteed legal return on investment, its government granted franchise requires that in return it serves the public interest at least cost and not abuse its market power.

Generation Gate Keeper

Its market power and domination by themselves are not evil. In fact they can be used for the public good if only Meralco would be satisfied with its guaranteed legal profits as a public service utility franchise holder and dedicate itself to providing electricity to the public in the “least cost” manner. This can be achieved only if it buys that market volume on arms length basis and transparent and competitive manner. But Meralco is a gentle giant that is not to be. Power generation is so lucrative especially if you negotiate with yourself. I guess the MVP Group cannot help itself. The Epira Law assigned the ERC regulators to protect the consumers and assure competitive and prevent market abuses and cartelization.

The Epira Law under Section 45 allowed Meralco to contract up to 50% of its energy needs with an affiliated company and the law is silent on whether competitive bidding is required although it can do so if it is faithful to its mandate for least cost power. Consequently, Meralco effectively got the power to choose who they will buy from. The veritable gatekeeper to their 6,000mw market power. And since they are the largest market in the whole country, effectively they get to choose who gets into the power generation business. That is true market power.

No Power Supply Contract, No Project. And they are rent-seeking to the fierce extent that even the Lopez Group never dared to go.

Wikipedia says Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity. In Meralco’s case it is getting unwarranted benefit in power generation projects that it awards for free as a result of its control of the Meralco market as the franchised distribution utility monopoly.

Power Generation Franchise

The foundation of any power generation project is the long term power supply contract. That’s the equivalent of a power generation franchise. In this case it is not the Congress giving the franchise but Meralco at its own discretion by its market power as the distribution utility buyer. Who is really the buyer of the generation supply, Meralco or the consumers? Technically it is really the consumers buying because they are the ones paying the negotiated rates. If something goes wrong with the contract, and if Meralco overcontracts, all the cost consequences are paid for the consumers. Meralco is only acting as buying agent for the consumers. It has serious conflict of interest in buying that power from itself.

Truly independent power generation companies take years and lots of research, pre-engineering, economic and financial packaging work, project development and marketing expenses to win a contract. In the case of Meralco, it can bring to the table the power supply contract in its back pocket because it is the distribution utility with full discretion to choose its projects and partners.

The “Carried Interest” Quid Pro Quo

In the power generation industry the party who brings to the table the power generation contract (or franchise) brings something very valuable and gets compensated either in cash or shares. Of course it has economic value. If its shares ownership of the project company, it is called “carried interest” or free equity. This can range from 15% to 25% of the project ownership. It is on higher side if the power supply contract got sweetheart terms and rates.

The MVP Group is obviously fully aware of this value. Perhaps it was one of the value propositions when the MVP group bought Meralco from the Lopez Group. It is evident that they intended all along to exploit this market power to dominate power generation since early on they already organized the not so subtly named Meralco PowerGen with an openly announced target of 3,000mw.

Given the MVP Group’s legendary “deal making” toughness, we can bet they will exact the highest free equity or economic rent from each Meralco contract they give out.

The MVP Groups ability to exact favorable and lucrative benefits from power generators seeking contracts with Meralco is rent-seeking on the public service distribution franchise that the government granted to Meralco. This is inimical to the public interest since the net result is the consumers would be paying more than what they should have without the economic rent to the MVP group.

In the case of electric coops in Mindanao, consumer groups there are complaining of their EC’s management and board of directors for negotiating high rates on generation contracts. In this case it is unlikely they will get carried interest but other benefits for their power to award the contract. Such is the evil that a serious CSP implementation will prevent.

In the 460mw expansion of the Mauban coal power complex, insiders is reported to have shared that the Thailand owners originally approached Meralco for a power supply contract with a price of P3.80 per kwh. By the end of the negotiations, the project became owned 51% by Meralco PowerGen with a new sweetheart price of P4.30 per kwh. The ERC approved it at P4.26 per kwh still higher than the 3.78 per kwh that the Northern Coops got for only 135mw.

The seven (7) midnight power supply contracts signed by Meralco totaling 3,551mw with five (5) partners are all controlled by Meralco PowerGen with 51% (except the 49% in the JV with Ramon Ang of San Miguel). Most of them were signed in one day on April 26, 2016 with similar language, pricing formula, and legal template.

Those 3,551mw coal plants will have a total project cost of about US$10 Billion (or Pesos 480 Billion). It will probably be financed 75% instead of the normal 70% because of its sweetheart prices and contract terms. So its equity of 25% will be equivalent to $2.5 billion. Do you think the MVP Group will invest 51% (Php 61.2 Billion) of that equity in cash as power generation investors are supposed to? They will not put that valuable power supply contract on the table for free. If they do, their vaunted deal-making shrewdness will not be legendary. Mostly like the MVP Group will only invest in the range of 26% out of the 51% it would control in the project companies. That’s a P31 Billion benefit or economic rent right off the bat.

So why does it matter to Meralco consumers?

Because rent-seeking and free equity or undue benefit will result to higher rates to the consumers. That $10 billion project will officially become $10.6375 Billion or it was a $9.3 Billion project that became $10 billion? That is equivalent to 6.375% of the project cost.

And that is only the cost to consumers of the rent-seeking privilege. Add to that the profits and overcharge due to the sweetheart relationship between Meralco and Meralco PowerGen, the total cost to the consumers is mind-boggling.

In fact even if the MVP Group does not get free equity, the fact that they choose their own power generation company to the exclusion of other non-affiliated projects to contract with Meralco and they negotiate sweetheart terms and prices is still rent-seeking according to the economists definition. Wikipedia also notes that rent-seeking is another form of corruption.

Rent-seeking is an abuse of market power and harmful to consumers.

Matuwid na Singil Sa Kuryente Consumer Alliance Inc.
Matuwid.org

David Celestra Tan is a CPA and utility economist. He was among the pioneers in the private power generation sector and a founder and former President of the Philippine Independent Power Producers Assn. (PIPPA). Towards retirement he is seeking to contribute his knowledge in power strategy and policy towards the national goal of competitive and consumer friendly power sector. His way of giving back to the community. Other than as a consumer he will not benefit financially, directly or indirectly, from any business with Meralco. Para sa Bayan lang po ito.

span style=”font-size: medium;”>Authors notes:

Rentseeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. (Investopedia)

Wikipedia says Rent-seeking is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity. The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free.[5]

Why Not Hold CSP Biddings Now to Assure Future Power Supply?

David Celestra Tan, MSK
8 November 2016

They are doing it again to electric consumers! There is a concerted effort to make the public believe that we are running short of power supply and that the current projects, specially by MVP Group and Meralco, need to be approved and permitted through the express lane. Like Scarecrows and pumpkin heads! Of course, power shortage can become a self-fulfilling prophecy.

It might be recalled that Meralco signed seven (7) midnight power supply contracts purportedly with various power generators that turned out to be all majority owned by its own subsidiary Meralco PowerGen. Not that they are bashful about announcing it. Most of the 3,551mw were signed only on April 26, 2016, five (5) months and 20 days AFTER the original CSP deadline of November 6, 2015 and filed with the ERC on April 29, 2016, just beating the new extension given by the ERC of April 30, 2016. The contracts with five different companies have similar language and pricing formula and obviously came from one template. Signed on the same day!

Meralco is claiming urgency and scaring the people about power shortages and brownouts. The truth is of the 3,551mw only 70mw (2%) is coming on line this year 2016. Meralco’s previous 440mw San Buenaventura coal project in Mauban is scheduled for 2018. That’s two years from now. And Most of about 3,500mw will come on line in 5 to 7 years yet. It takes only 3 to 4 years to build those coal power plants. We still have one year to go through an honest to goodness competitive bidding.

But no one seems to be interested in truly subjecting the power generation sector to open bidding, an essential to bringing least cost power to consumers and opening the sector to more independent investors, foreign and local. The government itself is apathetic to it. ERC moved its CSP implementation by five (5) months! If not stopped those 3,551 of midnight contracts will tie up Meralco’s captive consumers and cornering 90% of the energy needs of Meralco for the next 25 years. No real benefit of competitive generation rates.

Subjecting this to bidding will:

1) settle once and for all the least cost difference between self-negotiated and truly competitive bidding

2) self-dealing is minimized and harmful monopolization, cartelization, abuse of market power and anti-competitive behavior are controlled.

3) the generation sector will be opened to truly independent power generators and investors and thus better assuring the continued development of the power supply and the introduction of competitive approaches and emerging technologies and energy to the sector.

The true cost of the negotiated sister company power supply go beyond the initial price that is published. It is also in the fine print of the terms and the administration of contracts whose effective cost are also passed on to the consumers.

All these things will promote the public interest and would certainly be good for the country’s business competitiveness.

We have yet to hear from the new DOE on whether it is committed to bringing true competition to the power generation sector and treat the electric consumers better.

All the contracts are for coal and so there goes any pretentions of the government to even influence the energy mix of the country, much less a true commitment to climate change.

The MVP Group is trying to argue that they are the ones who can assure least cost for consumers. And that they have “aggressively negotiated competitive power deals with power generators” without mentioning that those power companies are their own Meralco PowerGen. Can you imagine Meralco squeezing the best power price from itself? Who are we kidding?

A Challenge to Meralco and the DOE and ERC

To settle all arguments on competitive power and how that can be achieved better, by “aggressive negotiation” with sister companies or by truly open bidding, why don’t we hold even one pilot biddings now?

A decent sized of 300mw coal to be located in Luzon, administered by an independent third party, where only the truly independent power generators can participate. (Meralco’s chosen partners in the seven (7) midnight contracts have been compromised and should not be allowed to participate in this pilot project intended to show truly independent bidders can result to better rates) or the bidding can just assure there would be a minimum of three independent bidders in the mix).

There are still independent bidders that may not be hopelessly compromised. Ayala Group, TeamEnergy of Japan, AES of USA, Kepco of Korea, Filinvest of the Gotianuns, GN Power, PeakPower of the Ng Family, First Gen of the Lopez Group, Energy World of Australia, TransAsia. Other Japanese, Korean, Singaporean, French and Canadian companies looking to participate in power generation.

True Competitive Bidding not Swiss or Price Challenge

By bidding, we don’t mean the swiss or price challenge type that the MVP Group wants because that type is a sham competitive bidding. It is rigged in favor of the supposed “unsolicited proponent” specially if it is the subsidiary of Meralco and MVP Group. It doesn’t even comply with the true wordings of the BOT law that allowed such unsolicited proposals. We are just plain games with the public.

The bidding process could take a maximum 12 months. Way enough time to build plants within 4 to 5 years.

How about it sirs?

MATUWID NA SINGIL SA KURYENTE CONSUMER ALLIANCE INC.
Matuwid.org – See more at: http://matuwid.org/why-not-hold-csp-biddings-now-to-assure-future-power-supply/#sthash.AYJW53TT.dpuf

The Ugly Picture of Meralco’s Violations of Consumer Rights

David Celestra Tan, MSK
31 October 2016

Your organization Matuwid na Singil sa Kuryente Consumer Alliance Inc had been formed to fight for consumer rights in the Meralco area, more particularly abusive power rates.

Our first action was in 2011 when MSK opposed the construction of an P11.9 billion submarine cable system to connect the island of Mindoro to Luzon whose cost will be passed on to the Luzon consumers. It was close to quiet approval by the ERC until MSK asked simple questions and the applicants cannot justify it including the claim that Luzon will benefit from a 300mw coal plant in Mindoro where there are no coal mines. The expensive overhead transmission line will go all the way to San Jose Mindoro Occidental. It turned out the project was actually to enable a coal company to build a power plant on his island and only needed a shorter submarine cable line to nearby San Jose Mindoro go tap the main power market of Luzon. Very imaginative at the expense of the consumers. That project was shelved I think saving the the national electric consumers P0.04 per kwh in unnecessary transmission charges. That supposed 300mw from Mindoro is now being sourced from Luzon based generators without the need for building an P11.9 billion transmission line.

It has been a lonely fight for consumers. As a consumer advocacy group, one thing that has been surprising to MSK is the seeming apathetic attitude of government officials, the media, and the consumers themselves to consumer rights and its abuse and violations.

In our previous posting of the guest article of former Secretary Cielito F. Habito on consumer rights he asked questions that are very relevant to the Meralco consumers.

How can companies providing various goods and services that are part of our daily lives keep getting away with practices amounting to abuse and exploitation of their consumers—the very people that keep their firms alive? Why is it so hard for exploited consumers to band together, organize and collectively assert their rights to get what is due them, or at least what is promised them by the companies they patronize?” 

Meralco consumers are probably taking a double take when consumer abuses by the distribution utility monopoly is raised. For Meralco consumers are inundated by ads and testimonials from businesses that have benefited from Meralco’s various energy saving programs. Let grant that those good deeds are true. That is not where the consumer rights are being violated. It is the rights of its captive consumers who are 40% of their customer base but provide them with 60% of their profits. They are treating them like captives.

Let us start with defining the rights of Meralco’s consumers or more accurately Meralco’s obligations to its customers.

Violation of Consumer Rights under EPIRA Law or RA 9136.

1. Abuse in Generation Rates

Meralco is required by the Epira Law of 2001 under its Section 23 “to supply electricity in the least cost manner to its captive consumers”. That is not only on generation but also on their distribution charges.

The MVP Groups continued refusal to subject to true competition the power generation supply and charges that are passed on to the consumers is a blatant denial of the fundamental Consumer Right to “least cost” power. Worse to insist on negotiating them with their own sister generators. MSK submits that the only way to assure that it is least cost is to truly market test them in an honest competitive bidding for those contracts. Not “least cost” as self-servingly defined by the MVP Group and not as it incredulously claim to have “aggressively negotiated” with their majority owned generating companies under Meralco PowerGen.

Meralco is ramming through the ERC and Congressional JCPC the seven (7) midnight contracts totaling 3,551mw that would deny consumers competitive power for 20 years. We estimate the sweetheart overprice would amount to at least P0.50 per kwh or P12.5 billion a year.

This is more arbitrary exaction than government taxes which at least have foundations in law, go through rigorous legislative process and scrutiny, and the money, at least for the most part, goes to the people in running government and public services. Columnist and author Rigoberto Tiglao asserts with seeming irrefutable trail, that the Profits that Meralco proudly announces ironically go out of the country to Indonesian owners. For MSK, overcharges and violations are illegal and should not be allowed whether by Filipino or foreign owners.

2. Abuse in Distribution Rates

The Epira Law also requires Meralco as the distribution utility to charge fair and reasonable rates. Its use of PBR is exploitive. Its systems loss charging system is non-transparent and deceptive. They present a systems loss charge of 6% on the bill but if you compute in the back, the system charge is actually 10%, higher than the 8.5% supposed limit.

Section 43(f) of the Epira Law required distribution utilities like Meralco to adopt rate setting methodologies that are “in the public interest”. Section 25 says its returns must be based on investments “incurred”. Under PBR it is charging for projected investments not yet incurred. PBR as currently used by ERC and Meralco is contrary to law.

The recent discovery by MSK that Meralco is allowed by the ERC to keep excess profits coming from growth in energy sales over the “projected” sales shows the length and depth of rate abuse (and collusion?). Yes, 7% actual growth as announced by Meralco itself vs projections of 3.7%. Isn’t that obviously an 89% excess? In fact Meralco just announced a 9% growth in energy sales.

MSK actually had filed a petition to the ERC to order Meralco to account for the excess for the period 2011 to 2015 and refund the estimated P2.9 to P5 Billion in overrecovery. (This anomalous methodology was inherited by the new ERC Commissioners. The question is will they do something about it now to correct the sham and abuse?)

Consumer Smugness

Ironically, Meralco consumers do not show concern now, and consequently government officials don’t see a need to act, because the generation rates are temporarily low due to the lucky drop in the world old prices. And helped by a carefully crafted Meralco PR campaign to condition peoples’ minds. The increase in the ability to pay of Filipinos from the BPO and Overseas Employment and the prosperity from the rise of the property values of the lucky landed gentry, make them unconcerned about their electric bill. One day though we will all wake up when the devil of all these self-negotiated contracts will come and haunt all of us consumers and all we can do is cry. The MVP Group then will take cover and claim their constitutional right to “sanctity of contracts”.

This is like the drug problem that had been neglected for so long until it became a national epidemic.

MSK is trying to raise the alarm bells now.

Part of the eerie apathy comes from the cynicism of government officials and consumers themselves on the genuinness of the consumer groups’ agenda. For it is true that many consumer advocacy groups have come and gone, some clearly formed to only project a support for Meralco’s on going agenda and to disappear afterwards. These pseudo consumer groups are normally led by lawyers. One went as far as filing a case in the Supreme Court against Renewable Energy.

3. Government missing in action

There are any number of government agencies who can step up to defend the consumers from abuses specially in electricity. Yet most of them are quiet. The Department of Energy and the Energy Regulatory Commission whose jobs it is to provide policy and enforce regulations to protect the public interest. The JCPC of Congress whose job it is to oversee the implementation of the Epira to assure they are complying with the law, one of which is the protection of public interest. There is the Bureau of Consumer Affairs at the Department of Trade whose job it is to protect consumers under the Consumer Act. The Energy Committees of the lower and upper chamber of the legislature, their Chairmen and almost one hundred committee members, who at least should look into these abuses. The Executive Department whose job it is to look after the general welfare of consumers as taxpayers and voters, and to promote national economic competitiveness. One hopeful sign is the Philippine Competition Commission whose job it is to enforce the rules of the Competition Act and prevent abuses by businesses.

Open violation of consumer rights by Meralco has been ugly. Your organization MSK will continue its fight for regulatory reform. Maybe some of you can give a hand and let your own legislators and regulators know your concerns. Write President Digong. It is only through our collective voices that we consumers can be heard!

Evil triumphs only if good men do nothing. Otherwise it becomes ugly for us consumers.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org

Meralco’s Lower Rate Temporary, Due to Luck Not Rate Reform

David Celestra Tan, MSK
16 October 2016

We Meralco consumers have been enjoying lower electric rates for more than a year now and it has been God-sent albeit temporary. The current reduction of P1.54 per kwh in generation rates have been due to the opportune drop in world oil prices and can change in cycles. We can achieve a more permanent and enduring P1.50 per kwh reduction through systemic reforms by banning self-negotiated contracts. The MVP Group is cartelizing 100% of Meralco’s power requirements and one day Luzon consumers will wake up with a price shock. Remember Dec 2013?

There is a concerted media campaign touting that Meralco’s rate is now low, that the Philippines is now the 3rd highest rate in Asia and no longer 2nd to Japan. Australian International Energy Consultants once again said it is because the other Asian countries are subsidizing their power. And while IEC is quoted to be saying it is due to the drop in fuel and coal prices, it also gives credit to a claim that Meralco has been aggressively negotiating competitively priced power supply agreements (PSAs) with new suppliers.

The IEC press release is evidently designed to convince President Digong, the DOE and ERC, and consumers that Meralco’s rate is fair and reasonable and that part of it is Meralco’s “aggressive negotiation of competitively priced power supply agreements”.

Let us get past the chaff and go to the grain of Meralco’s rates.

A. Generation Rate

1. It is true, as IEC studied, that between January 2012 and January 2016, Meralco’s generation rate had come down by 28%. MSK’s research showed P5.4643 per kwh in 2012 and down to only P3.9238 per kwh, a reduction of P1.5405 per kwh.

2. It is also true that the major reason is the drop in world oil prices and coal. MSK’s research showed that from 2012 to 2016 world oil prices dropped from $90.72 per barrel to only $34.13, a reduction of 62%. Indonesian Coal prices went from $105.61 per ton to $52.32 in the same period or a drop of 50%.

We dare to say that the ONLY reason for the lower Meralco rates is due to the lucky and opportune drop in world oil prices that also cause reductions in coal prices. A major columnist of Phil Star asked MSK why Meralco’s generation rate is not dropping as much as the big drop in the world oil prices. Good question but the answers were not printed.

B. Systems Loss

1. Since Meralco’s systems loss is a percentage of generation charge, it went down from P0.6594 per kwh to P0.4173. In percentage, 12% in 2012 (0.6593/5.4643) and 10.63% (0.4173/3.9238). Let us grant that the difference of 1.37% can be attributed to Meralco’s operating efficiency.

2. Is the glass half full? Meralco is supposed to have a limit of 8.5% in systems loss. The excess systems loss charge in 2012 was P0.1949 per kwh and in 2016 it is P0.0837 per kwh. Since we already have lowered expectations, yes it is an improvement. As in the generation charge, if the fuel prices go back up, systems loss will also go up. ERC needs to correct the systems loss rules by limiting it to maximum 8.5% to all consumers and by making the computation transparent.

C. Transmission Charge

This is something we are curious about in IEC’s choice of periods to compare. In January 2012, NGCP’s transmission charge was P0.9840 per kwh. In April 2016 it was P0.9549 per kwh. However, for some reason NGCP’s rate dropped unusually to P0.8361 per kwh in that month of January, a difference of 0.1188 per kwh. IEC’s study of the improvement in Meralco’s rate looked much better with its choice of January as the comparison months and this additional reduction of 0.1188 per kwh. We guess IEC serves its master. If they want to do a study in the future, it will be more helpful to see comparative April rates when supply and demand of power will show the true rates.

D. Distribution Charges Plus Supply and Metering Charges

Meralco’s distribution, supply, and metering charges came down by 7% or 0.17 per kwh as a result of the expiration in June 30, 2015 of an P0.1888 per kwh recovery of an under-recovery in 2011. Let us not forget that Meralcos distribution charges are results of the PBR rate setting methodology that we believe is irregular and must be modified. Meralco customers should not be charged profits or advance recovery until the utility actually incur the investments, not projections, not promises.

E. Universal Charges

Various universal charges for missionary subsidy, environmental, RE FIT, and PSALM Stranded Costs totaled 0.4764 in 2016, an increase of P0.36 per kwh from the P0.1188 per kwh in 2012. Watch for Renewable Energy subsidies and PSALM’s stranded costs to rise further. RE is now proposed to be 0.24 per kwh from 0.12 and PSALM has a lot of losses to recover from the people.

Back to the Issue of Meralco’s rate reductions.

1. It is clear that the reduction of P1.54 per kwh in generation rate was due to the lucky drop in world oil prices. OPEC and Iran are inching towards agreements on oil production controls and oil prices are expected to rise sooner than later. Coal and Natural gas will follow suit. Let us enjoy the current lower Meralco rates because it is only temporary.

2. Meralco’s supposed “aggressive negotiation of competitive power supply contracts with new suppliers” sounds good on the surface but since they negotiated exclusively eight (8) coal power supply contracts totaling 4,100mw with their own majority owned new generating companies, it is hardly credible to believe that they would negotiate aggressively with their own selves. (And yes, Meralco continue to claim in its public pronouncements that it does not make money on the generation charge because “it goes to the suppliers”, who will eventually be all “Meralco PowerGen”.)

3. Let us remember that the published rate of these self-negotiated contracts is only what we see now. Tucked in those negotiated contracts are escalators in various provisions that can eventually bloat the actual rate and sock it to the unsuspecting public down the road. Meralco even has the temerity to ask the ERC to make key financial information and formula confidential and not disclosed to the public. This is something that even the Lopez group never tried in their time.

4. MSK Ibaba ng P3 Campaign

On October 8, 2014 the Matuwid na Singil sa Kuryente Consumer Alliance (MSK) shared with the Department of Energy’s Multi-Sectoral Task Force to Find Ways to Reduce Electricity Prices our recommendations on how to reduce Meralco’s power rate by Php 3.00 per kwh. Nothing came out of those months of supposed multi-sectoral meetings in search of reducing rates but the then Energy Secretary Petilla bravely passed a DOE Policy mandating Competitive Selection Process.

Of MSK’s P3.00 per kwh target reduction. 87% or P2.60 will not even come from Meralco’s pockets but from various pass-on charges on which Meralco had been claiming for many years they don’t make money and only act as collectors. Generation charge, transmission charge, systems loss, VAT, universal charges. Only 13% or P0.40 per kwh will come from Meralco’s excess distribution charges due to the questionable “performance based ratemaking” or PBR.

MSK believe that by stopping the anomalous self-negotiation of power supply contracts the generation rate can be reduced at least P1.50 per kwh. Meralco generation had dropped P1.5405 per kwh but that is due to the fortuitous drop in world fuel prices and not due to changes in the regulatory system. For generation, it is the introduction of Competitive Selection Process to replace negotiations. If this were adopted, Meralco’s generation rate would have dropped by about P2.25 to P2.50 per kwh

As part of the Ibaba ng P3 campaign, MSK had filed with the ERC more than a year ago a petition for rules change to modify its Performance Based Rate making system (PBR) for distribution charges. We have yet to hear from the ERC on the public hearings to assess this very important concern of the consumers. We believe the distribution charges of Meralco can be reduced by about P0.40 per kwh by eliminating the improper profits of Meralco on forecasted investments instead of incurred investments as required by Section 25 of the Epira Law.

IEC Studies

As they have done in 2014, the Perth-based International Energy Consultants study as commissioned by their client is to show that Meralco’s generation rate is fair and reasonable.And the Meralco press release is apparently timed to sway public resistance to the seven (7) midnight contracts that the MVP Group hurriedly signed with various new generating companies all majority owned by Meralco PowerGen. So far two columnists have sung the same tune.

We wonder what IEC’s basis was for declaring that Meralco’s lower rate is partly due to Meralco’s “aggressive negotiations for competitive power with new power suppliers”. It must have been a sight to see IEC, being present in the negotiations, watching Meralco negotiateaggressively with its sister company Meralco PowerGen! IEC by the way lists among its major clients EGCO of Thailand and Quezon Power its Philippine subsidiary, EGCO is Meralco PowerGen’s strategic partner for the 460mw Mauban coal expansion called San Buenaventura.

Let us enjoy Meralco’s low power rates now while they last. Let us hope the government will do something now while it still can to stop Meralco’s monopolization, cartelization, and self-negotiated contracts. Let us correct ERC’s anti-consumer rate setting methodologies and systems loss rules. Low world oil and coal prices will not last forever.

We are just currently lucky. What we need for sustainable lower rates are systemic and regulatory reforms.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Matuwid.org

Congratulations to the Philippine Daily Inquirer for its impressive and updated new layout. Tasteful and effective in delivering and emphasizing news. Kudos.

MSK Petitions ERC for Meralco Refund of P2.39 Billion Overrecovery

David Celestra Tan, MSK
3 October 2016

Your consumer advocacy group, Matuwid na Singil sa Kuryente Consumer Alliance had filed a petition with the Energy Regulatory Commission to compel to Meralco to refund to the consumers an estimated overrecovery of at least P2.39 billion.

The overrecovery can actually be as high as P5 billion and was discovered by MSK during its crossexamination of Meralco’s rate setting experts on the computation of the recovery from 2011 to 2015 of an underrecovery from 2007 to 2011.

It might be recalled that Meralco offered to reduce its distribution charge in July 2015 from P1.59 per kwh by P0.188 which was the component of the rate intended to allow them to recover an under recovery from a previous regulatory period. Actually Meralco’s authority to charge that extra P0.188 expired on June 30, 2015 and it would have been illegal for them to continue charging that beyond that date. Nice media spin on their part to announce it as a voluntary reduction.

The P0.188 per kwh was computed by assuming an energy sales level in kwh for the years 2011 to 2015. That forecasted energy sales was based on an annual growth rate of 3%. Meralco itself had been announcing that its energy sales growth actually has been 6 to 7% per year.

MSK had filed for intervention to determine that the P0.188 per kwh reduction that Meralco volunteered and publicized was actually correct and sufficient.

Evidently Meralco had recovered almost double the amount it was authorized to recover. We believe that Meralco should not be allowed to profit from recovering an under recovery that was authorized by the ERC. It could be as high as P5 billion.

MSK had petitioned the ERC to compel Meralco to submit the true figures for the amount of the authorized underrecovery for 2007 to 2011, the amount they have recovered in 2011 to 2015, and to submit a refund schedule for the excess recovery plus interest.

During MSK’s cross examination, Meralco’s rate setting expert said that if Meralco’s, actual sales are higher, like when its sales grew 6% instead of 3.7% per year, that ERC rules allow them to keep the difference as profit.

This if true is a very dangerous rate setting methodology and exposes the Meralco consumers to rate abuse and manipulation. This also means Meralco, as a regulated distribution monopoly is effectively no longer regulated in its net profit as most people still believed. Is this really now the policy? The more we learn about the schemes between the ERC and Meralco the more we see the abuse of the consumers and the total lack of safeguards.

Meralco’s lawyers responded to the ERC that MSK’s request is irrelevant to the petition and that these issues must be included in the rate setting for the Fourth Regulatory Period of July 2015 to June 2019.

With these kind of rate methodologies, Meralco consumers continue to be overcharged and abused.

Let us hope the new ERC will demonstrate more caring for the electric consumers. Let us see if they will act to correct this overcharge immediately by ordering a refund.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org