Who is to Blame for the Delays of the 1,200mw Atimonan One and 600mw Redondo Power Coal Projects? Meralco, Consumer Groups, or ERC?

David Celestra Tan, MSK
4 June 2018

The country needs additional power supply specially the modern and cost efficient kinds. The 1,200mw AtimonanOne “supercritical coal plant” and the 600mw Redondo Power project would have come in nicely in 2020 and 2021 to boost the power supply to our growing economy.

Now these two plants totaling 1,800mw are in limbo and crying for approval of the rates and PSA. The ERC has been put in a bind  because they were found guilty by the Office of the Ombudsman of evidently favoring Meralco by belatedly extending the implementation of the CSP policy for bidding power supply agreements.

Meralco with the help of their congressional sympathizers have been incessantly pushing for the approval of these two projects and raising the spectre of brownouts if they are not started soon. They also raised the issue of higher project costs with the EPC contracts having expired. That means they are already angling for a rate increase even before the approval of the projects.

Who is to blame then for the Delays of the two projects? Is it the Alyansa Para sa Bagong Pilipinas Inc (ABP) a consumer group that filed the complaint to the Office of the Ombudsman and to the Supreme Court or the MVP Group that tried to short-cut the process by hastily awarding the contract to its sister company Meralco PowerGen on April 26, 2016, just 3 days before the mysterious new deadlineof April 30, 2016? Or is it the brilliant person at ERC who thought this 3,551mw caper will not be noticed, buried in the avalanche of 90 applications for PSA’s in the ensuing extension? There are elephants among the herd sirs!

The MVP Group through its subsidiaries Meralco and Meralco PowerGen had been working on these two projects for years. The 600mw Redondo Peninsula coal project in Subic had been in development for at least 5 years before the original CSP policy deadline of November 6, 2015.  Its fight with the environmental groups is well chronicled.  Why did they not have a power supply contract signed with Meralco as early as 2012 when negotiated contracts were still legal?

The 1,200mw Atimonan One in Quezon is a more recent development project but Meralco started kicking it around in 2013 yet, a good two years before the November 6, 2015 effectivity of the CSP regulatory implementation.  I mean the MVP Group and Meralco had known as early as June 2015 that a CSP policy pronouncement had been established by the Department of Energy and the ERC had 120 days to issue an implementation resolution.  They could have crafted a PSA in 90 days or months before the November 6, 2015 magic date.I mean it took them only 40 days from March 15, 2016 to April 25, 2016 to hammer seven complicated contracts with five different partners.

There are indications that Atimonan One was still in the conceptualization stage at that time and its consortium is not yet finalized. In essence the MVP group was still looking for a partner who would agree to being a minority.

According to the OMB, as late as January 2016, Meralco was still petitioning the ERC to approve their right to undertake a swiss challenge bidding as a form of CSP.  The ERC disapproved the request. What transpired in the talks between ERC and Meralco between January and the March 15, 2016 decision of ERC to postpone the CSP implementation we might never know…..but can guess.

The fact is consumer groups could not help but smell a rat at the evident fast tracking of seven (7) PSA’s totaling 3,551mw by Meralco and its sister company Meralco PowerGen on April 25 and 26 2016, just enough to prepare an ERC application and make a filing with the ERC in the early morning of April 29, 2016. Halatanamanmasyado. To their bad luck, the integrity of ERC had been put in a bad light when one of its top officials committed suicide claiming corruption in the regulatory agency.

Is consumer group ABP (and the other consumer groups Bayan Muna and Agham) to blame for the so far two years delay (2016 to 2018) in these two projects?

At the end of the day, it is still the public interest that should be primordial to everybody.  And consumer groups are willing to listen to a win-win solution to at least half of the 3,551mw in the public interest.  We tried asking the DOE to intervene. We tried asking the ERC for a dialogue on what can be a good compromise. They are not interested apparently being sore at public interest group ABP for getting them suspended. Or they have a solution that will get these short-cut projects still forced to approval.

Perhaps when a national emergency had occurred.  It will take only a “coincidental” breakdown of power plants that are also owned by the Meralco partners in these projects and widespread brownouts to bring down the Meralco population to their knees begging for electricity. Yes, damn with the CSP, give me light!

Let us be realistic. Had Meralco undertaken a CSP in 2016, they would have completed the evaluation and awarding already by early 2017 which is a year ago. Then those projects would have broken ground in early 2017 and 2 years away from completion by now.

This is the MVP Groups short-cutting at their determined effort to monopolize power generation at rates they negotiated among themselves that has backfired. And now it will be the Meralco customers eventually suffering.  Don’t look at the consumer groups sirs. We were not the ones who violated the rules.

Would the MVP Group agree to subject half or 1,750mw to a true CSP and the other half including Atimonan One and Redondo to some fine combing by the consumer groups of their negotiated contracts to eliminate unfavorable terms to the consumers?  How about 600mw to Atimonan, 300mw to Redondo, 300mw to Semirara, and 600mw to San Miguel? Bid the rest as natural gas projects. Will the ERC see the sense in this in the public interest? Or will it be an all or nothing deal? Who will intervene? Help!

At this stage it does not matter who is to blame. Let us hope someone will lead the resolution in the public interest.  We need additional power supply by 2020 and 2021. And let us start truly bidding the new plants for 2022 and onwards. We hope we consumers are not sacrificed too much.

And how is your summer?

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

While on a brief vacation:

I was reminded I am in California when my male haircutter said “my husband works in the pharmaceutical industry”.

Advertisements

WIN WIN SOLUTION FOR MERALCO’s 3,551MW MIDNIGHT CSP CIRCUMVENTION

David Celestra Tan, MSK
11 March 2018

Things are eerily quiet on Meralco’s Midnight power supply contracts and one wonders whether we will be surprised one day soon that the seven (7) midnight contracts totaling 3,551mw of coal projects have been approved by the government and rammed through the throats of the 25 million Meralco consumers.

Another scenario is the power crisis gambit is in play that had worked many times before for the special interest groups in forcing the approval of coveted power projects and prices. There will be a strategic quiet and letting the country teeter into power shortages. Interrupt power and punish the captive market of residential and commercial establishments and make them beg for “electricity at any cost, damn with the rules and legalities”.

This can happen and will happen because most of the power generating plants in the country are controlled by the same groups that allied with Meralco in the caper of April 26, 2016. Let us remember that these are the same groups who were found engaging in power market manipulations in November and December 2013 and supposedly meted hundreds of millions in fines.  Except the final report has been frozen in the ERC.

I think the energy family led by the DOE should work for a win-win solution and not wait until there is already a power crisis. We vehemently object to the circumvention of the CSP policy but we also vehemently object to allowing a power shortage.  Both ways the consumers get screwed. We cannot allow power development of the country to be stymied by these Meralco transgressions.

And there are many pro-active options.

  1. The DOE can push for CSP biddings now for the desired capacity additions by 2021. This can be in the range of 1,000 to 1,500mw total. LNG and Coal. Meralco and the other DU’s can be the committed off-takers assuming they are sincere in bringing least cost power to the consumers.

These biddings will probably settle once and for all the debate on what is good for the consumers, an “aggressive negotiation” of Meralco with its sister company Meralco PowerGen or the true competitive bidding administered by a third party”?

These true biddings can also test in the market a more consumer friendly Power Supply Contract template that mitigates sweetheart provisions on fuel allowances, downtime allowances, and minimum off-take guarantees.  We now have to distinguish the contract terms for BOO and BOT. Pay only for delivered service and no payment for downtimes.

Most importantly this bidding will usher in for the country the long needed era of truly competitive biddings for power supply and the opening of the generation sector to all deserving and “good for the consumers and environment” generators.

  1. The DOE can also initiate a win-win solution for Meralco’s 3,551mw of midnight contracts. Perhaps a fair formula can be worked out so that about half of the 3,551mw capacity (1,750mw)  can be moved forward in a way that is fair for the consumers and the others are dropped and the proponents just participate in biddings. Also only 50% of this 1,750mw can be controlled by MeralcoPowerGen.

How about holding a run-off auction administered by a proven 3rd Party among the seven (7) contracts where they submit a more competitive bid with commercial operation of 2020 to 2022. The lowest 1,750mw get to move forward.

This is a one time compromise solution and must be considered as an exception and not the rule or precedent.

It is eerie when the Department of Energy that has the mandate to assure sufficient power supply for the future, is quiet about the subject. Let us hope the consumers and country are not hit by a power crisis hysteria again in a few months, perhaps as early as April and May when it is hot and the power needs of the country soars to the highest peak.

Is a Meralco “all or nothing” gambit in play? Will the consumers again be threatened and tortured with power shortages and be made to swallow Meralco’s 20 year sweetheart deals?

Why are we not seeing some affirmative action now? It is not too late for a win-win solution.

 

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

NEW ERC SYSTEMS LOSS LIMITS MUST BE ABSOLUTE NOT AVERAGE TO TRULY BENEFIT MERALCO and CEBU CONSUMERS

David Celestra Tan, MSK
March 1, 2018

ERC’s announcement that it is reducing the Systems Loss allowance of Distribution Utilities should be a source of joy to electric consumers, especially those in the Meralco area. It will however be of little benefit if the Systems Loss limit remain to be average not absolute.

It is a little tricky on how the Meralco consumers have been confused and overcharged, so please follow closely.

Meralco’s systems loss allowance had been 8.5% but the captive consumers comprising 75% of Meralco’s customer base, are charged from 9.5% to as much as 12% 5 years ago. Cebuanos appear to be paying even higher at 14% based on electric bills we saw. How is that possible and how is that legal?

That is through the magic of systems loss averaging that the ERC, in their infinite wisdom, allowed as the methodology in computing systems loss charges. Meralco had been charging industrial and large commercial establishments only about 3.5% in systems loss and charging the captive consumers comprised mainly of residential and commercial customers up to 12%. Last month my systems loss charge is 9.5% not the legal limit of 8.5%. The very low systems charge on the industrial customers pulls down the average to 6.5% which is what Meralco likes to brag about.

In fact in an act of subtle trickery, Meralco’s bill likes to show in the front page that our systems loss is only 4.4% of the total bill which makes many consumers believe that Meralco systems loss charge is only 4.4% compared to the limit of 8.5%. (Our systems loss is a percentage of Meralco’s generation charge).

Meralco and ERC like to say that the systems loss must be based on the cost of service to particular groups of customers.  They claim that the systems loss from technical and pilferage of power from industrial customers are lower and the cost of service and systems losses to residential customers are much higher. Comparatively three (3) times higher than industrial.

Even this “cost of service” philosophy is inconsistent with reality.  Everyone knows that the bigger pilferage of power comes from the industrial and larger consumers. Because they consume more, the incentive for pilferage is bigger.  What is harder to explain is why in the modern and highly dense service areas of Makati, Ortigas, Quezon City where Meralco’s power systems are supposed to be modern and where the customer base is dense and high energy consumers, the systems loss charge is 9.5 to 12%, much higher than the supposed limit of 8.5%.

At an average consumption of 1,200 kwh a month and a P5.25 per kwh generation charge, the systems loss overcharge is p0.05 to 0.18 per kwh. If that is P0.10 per kwh, it is P120 per month overcharge.

Meralco sells approximately 30 billion kwh a year, 60% to these captive consumers. The systems loss overcharge is about P2 billion a year, about 10% of its announced annual profits of P20 billion.

We had a chance to ask some ERC commissioners why Makati consumers and businesses are being charged the same systems loss as those in rural Quezon and Laguna provinces. Their answer?   Because they are the same class of customers. But they are not. One is rural and the other one is highly dense and modern cities. I mean if they are going to be true to the philosophy of cost of service, ERC must distinguish rural and highly modern metropolis.

ERC announced that it is reducing the systems loss allowance of private distribution utilities like Meralco and Veco to 6.5% from 8.5% and to 5.5% within 4 years. If that limit remains to be average, the ERC reduction will not benefit Meralco consumers because Meralco’s average systems loss is already at 6.5%. And since it is averaging, those of us captive consumers will remain to be paying 9.5% to 12%. It will make us feel worse because this time, we are being overcharged 3% (9.5 minus 6.5%) or about P0.1575 per kwh!

How to cure?  ERC must establish the new 6.5% systems loss limit as the absolute limit which means NO ELECTRIC CONSUMER SHOULD BE CHARGED HIGHER ABSOLUTELY THAN 6.5%.  If Meralco wants to charge the contestable customers like industrial lower systems losses then it is their right. But they should not be allowed to effectively recover that from residential and commercial customers by charging them higher than the systems loss allowance.

This could even be a form of inter-class subsidy, something prohibited by the EPIRA Law of 2001. There are legitimate systems losses like technical losses and a level of non-technical, mainly pilferage. The problem is not that there are systems loss charges. It is the excessive charge that the current ERC methodologies are not comprehensive enough to protect consumers from abuse.

Our fast modernizing country demand that ERC differentiate captive customers in the rural areas and captive customers in the modern cities. The systems losses in the modern cities should be much less, unless Meralco is admitting that with all their propaganda of modern facilities and big investments, that they are still losing 10% in Makati, Forbes Park, BGC, Ortigas where the losses should not be more than 3.5%.

On top of these, the ERC systems loss rules allow Meralco to only certify that the charges are accurate. It is like fox swearing that he is not attacking the chicken house!

Your association, MatuwidnaSingilsaKuryente Consumer Alliance, had actually filed a petition with the ERC a year ago to correct these anomalous rules. The petition had fallen on deaf ears.

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

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

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