High power rates’ discontent: Long on ideas, short on cash (Part II)

By Myrna M. Velasco – December 27, 2016, 10:01 PM

from Manila Bulletin

The multi-dimensional discourse centering on assumptions that “the Philippines has one of the highest electricity rates in Asia” has so far been overplayed.  Many times, it had drawn the wrath of consumers – and for interest groups and politicians, it’s always a topic where grandstanding is easy.

For all that, this needs reiteration: There are really no easy solutions and no single “right answer” to the country’s power rates misadventures.

More than 15 years since the passage of the Electric Power Industry Reform Act (EPIRA) – but what we had seen were generally seesaw of despair and anger every time cost items in the electric bills are on uptrends. Don’t even start with the anticipated bad news of rate hikes next year that may be triggered by the fuel shift of the gas plants during the Malampaya shutdown or the forthcoming adjustment courtesy of the feed-in-tariff allowance (FIT-All) for renewable energy facilities.

What have we really accomplished when it comes to EPIRA’s cornerstone goal of lowering electricity rates for the consumers? Policy promises may have already dithered too long that consumers refuse or no longer taking notice. In fact, depending on whom you ask: The responses are varied.

To be fair though, price trends at the Wholesale Electricity Spot Market (WESM) had been reaching record lows; while the generation charge component of the electric bills (representing more than 50 percent of the entire cost chain being passed on) had been on continuous decline – not just on account of plummeting global fuel costs but also on the dictates of market-driven competition, including those on bilateral power contracting.

Yet even that relief in the generation charge component may not last long. Coal prices have started going up; and the recent decision of the Organization of the Petroleum Exporting Countries (OPEC) on output cut portends an inconvenient scenario that fuel prices will be on upticks next year – and oil-linked gas in Asian markets may also go with the trend.

The warning of Saudi Arabia, the world’s largest and swing oil producer as well as OPEC’s leading force, is prescriptive to all energy markets in these turbulent times: “Even as the global oil market has become more efficient and dynamic over the past several decades, it continues to deliver surprises. Some are welcome, some are not… volatility and overshooting – both at the top and bottom of the market – remain as key challenges.” It added “we should allow markets to work, but we must also remain vigilant. We must seek to better understand changing market dynamics, and be ready to act when market failures and extreme volatilities occur.”

Lower rates: A long way off?

A recent study consigned for the Manila Electric Company (Meralco) indicated that its rates (exclusive of value-added tax) had already been down 28 percent compared to their levels in the past 3-4 years. However, Dr. John Morris, executive director of the survey firm International Energy Consultants (IEC) which was tapped for the study, admitted that the drop in global fuel prices (coal, gas and oil) had been prime driver to the rate cut, although he also credited Meralco for exerting pressure on generation companies so it can corner cheaper-priced power supply agreements.

Extending far down, another truth serum kicks in. At the industrial end-users’ fence – especially the manufacturing sector, the sentiment still differs.

George S. Chua, president of the Federation of Philippine Industries (FPI), said “several manufacturing companies expressed real alarm that electricity expense, on the average, accounts for 3.0 percent of the total production cost incurred by manufacturing firms.” He emphasized that “the prohibitive cost of electricity and the emergence of low-wage countries such as China and Vietnam erode the competitiveness of Philippine economy in general and Philippine manufacturing exports in particular.”

Dr. Raul Fabella, professor emeritus at the University of the Philippines-School of Economics similarly stated the obvious that “it is becoming a tough sell for foreign investors to build industries in the Philippines when the cost of power in our competitors in the neighborhood – Indonesia, Thailand and Malaysia – are just a fraction of ours.”

Of course there is that issue of ‘state subsidy’ in the costs of the specified neighbor-countries, as pointed out by Dr. Morris of IEC. Still for Dr. Fabella, reality bites that investors shy away from setting up production base in the Philippines because of expensive electricity rates.

Now, that’s a real dilemma for Energy Secretary Alfonso G. Cusi.  In fact, he was telling media that he had an “acid test” of such investor complaint when he was trying to invite a Japanese copper wire manufacturing firm to relocate into one of the country’s economic zones.   The company primarily raised concern about high power rates in the Philippines, so this had been the energy chief’s commitment: “I am willing to do something about power rates as well as on their concern on logistics cost;” as he emphasized that cornering this kind of investment will generate higher base of employment opportunities for the Filipinos.

There are next phases of policy reforms that can also drive down electricity rates for the big-ticket end-users (i.e. commercial establishments and the industries or those qualified in the so-called contestable customers segment) – to be concretized via the retail competition and open access (RCOA) policy that shall take off for mandatory enforcement February next year. That stage in market competition will finally give them the “power of choice” when it comes to their electricity suppliers at a cost and the quality of service that they prefer. Further, there’s also a policy push on the scrapping of VAT component in the system loss charges.

Subsidies and stranded liabilities: Mystifying details

But that’s not the end yet of the expensive electricity rates conundrum. The Duterte administration is still confronted with perplexing predicament of wiping out the stranded debts and stranded contract costs of the Power Sector Assets and Liabilities Management Corporation (PSALM) – that will be staggering residual liabilities of P245 billion until the end of the state-run firm’s corporate life in 2026.

PSALM officer-in-charge Lourdes S.  Alzona said accelerated cost recovery of these stranded liabilities could translate to a rate hike of P0.28 per kilowatt-hour (kwh) in the consumers’ electric bills. For stranded debts recovery, the pending petitions of PSALM with the Energy Regulatory Commission (ERC) had been multi-tiered: P28.4 billion for 2011;

P12.7 billion for 2012; P1.35 billion for 2014; and P27.67 billion for 2015. On top of that, PSALM has pending P35 billion aggregate application for stranded contract cost recoveries, which may have R0.03 per kwh impact on the bills – if spread over the proposed four-year recovery.

Part of these stranded liabilities, it is worth noting, may account for some “unacknowledged” mistakes of EPIRA’s implementations – primarily in the privatization of the National Power Corporation (NPC) assets. With innovative legal arguments that PSALM had leaned on, they were able to justify the disposal of some assets – even if these incurred losses for the government or had been in direct contravention of laws, regulations or good business judgment. After all, their thinking then was: Any gap in unrealized proceeds from privatization can all be recovered from the consumers via the universal charge (UC) – to be disguised as stranded contract costs or stranded debts. Maybe – just maybe, the past regulators at the ERC had slept on a job they’re supposed to do in apprehending these privatization blunders that would be distressing Filipino consumers via rate hikes for years to come.

The handy solution proposed by the Departments of Energy and Finance would be to make use of the energy resource fund (or the Malampaya fund) to retire PSALM’s remaining debts – but this can only be firmed up through legislation. That should have been an acceptable recourse, but there are some nagging questions to be answered: Had there been extensive financial forensics really carried out to re-assess PSALM’s financial liabilities and what caused them? What if there had been over-declaration of the company’s liabilities and/or financial obligations or some of them were just result of “clever accounting” – aren’t the Filipino people being taken advantage of not just once but twice – and be deprived of the money that should have been better spent for development of new energy sources or for social services (i.e. for health or education facilities)? Quite frankly, the quiz should not just have revolved on: Who pays but who also profited?

FIT on-hold and the grumbling ‘sun’

Still another line item with rate hike effect is the P0.2291 per kwh filing of the National Transmission Corporation (TransCo) for FIT-All pass-on in the bills to incentivize qualified RE installations for year 2017. TransCo is the administrator of the FIT Fund, which then remits the collections to qualified RE developers to underpin their 20-year revenue stream. The pending FIT-All application covers roughly 400MW of wind capacities; the allowable 500MW cap for solar developments as well as FIT-qualified hydro and biomass projects.

Nonetheless, there’s more intense rumbling among solar developers – if they can tug their way, they would want all 890MW of completed solar installations bestowed with FIT subsidy. The numbers crunched by the ERC reveal some pretty depressing numbers – the FIT-All adjustment can go as high as P0.27 to P0.28 per kwh if all of the solar projects will be soaked up in the subsidy scheme. The cap for FIT-incentivized installations had been set at 500MW; thus, 300 plus megawatts are still knocking on ‘FIT-forbidden doors’ for probable subsidies.

The last major policy pronouncement was already given by the energy secretary – on the contrary, he pulled the plug on the solar sector’s bid for added round of FIT incentives. For failing to get ahead in the FIT contest, he reminded them: “when you joined the race, if you lose, you knew what have been your options…and your options are: either the spot market or bilateral contract. It is not for our people to be burdened for this, RE developers shall be motivated to do something or try something.”

When the RE Law was just at its infancy of implementation, players in the sector have the highest level of confidence that they can help solve the power sector’s serious hurdles: the supply crisis and even to bring down power rates – in fact, the projection was for emerging RE technologies like wind and solar to reach grid parity (or be at a cost that would level an avoided technology like coal) by year 2016.

History, to an extent, can now tangibly teach us what we can’t promise and what we don’t hold in our hands. Let’s not kid ourselves anymore, because in reality and given the uncertainties in this ‘green bubble’ transition – and if we factor in even those Schweinshaxe-filled trips of energy officials in Germany, there’s a price to pay for underestimating the targets and blindsiding business signals. It is true that renewables or clean energy options are needed to sustain planetary health, but the world is already moving on outside of the realm of subsidies, while the Philippines is getting stuck with it for stretch of two decades.

Policies that are still ‘curiously absent’

For this administration, the real work lies ahead.  Coffee-fueled meetings would still require a lot of discussions on policies and regulatory frameworks needing immediate focus and action. Paramount at this point is for the energy leadership to think of a strategy and for them to have a genuine sense of what’s feasible.

Market reforms leading to consumer-beneficial competition through the RCOA is among the priorities. Without doubt, it will bring benefits to the qualified customers (as reckoned on the prescribed thresholds of initially 1.0-megawatt then to 750 kilowatts). Navigating the transition to mandatory competition would be very hard – but essential, and the affected end-users must truly understand the phase of power supply sourcing or contracting that they will be entering – if it will be too complex to understand and difficult to satisfy, things could end up in a failure.

To bring technological innovations (i.e. smart grids, intelligent metering systems or electric vehicles) to the fore or pave the way for their commercial scale rollout and to truly help improve services for consumers, incentive schemes are also being sought from policy framers and regulators. And for the much-anticipated issuance of the Renewable Portfolio Standards (RPS) for RE, that will entail additional cost for consumers, so how is this being calibrated at the policy-crafting level of the DOE as well as with the National Renewable Energy Board? We have yet to see a technical study on Grid Reliability and Stability relative to the RPS. At this juncture, it must be remembered that the grid operates based on physics — and physics does not necessarily go along with policies, regulations and financial considerations.

In the physical infrastructure track of the power system, the major problem raised by industry players had been on mismatch of transmission facility developments – that in recent years, this caused power project delays even for much-needed capacities in the generation sector.

Antonio R. Moraza, president and chief operating officer of Aboitiz Power Corporation, bluntly articulated the lament of many generation companies when he said that: “as a generator, I am already taking a lot of risks, so don’t ask me to add to my risks by asking me to build the transmission line too. Frankly, that is not fair! That has to change.”

He reckoned that the interest of all relevant players in the power industry must be aligned, “so that way, they can move. If projects are not in the five-year plan, then you must still be able to include them, because who makes a perfect projection? Nobody!” The toughest challenge, Mr Moraza stressed, is in the rules governing NGCP’s “ability to build or not to build,” hence, he indicated that the ERC-sanctioned rules under the performance regulation (PBR) rate-setting must be adjusted with more desirable outcomes for business.

Mr. Cusi has already ordered a review of NGCP’s investment plans and timelines (under the Transmission Development Plan) along with a comprehensive audit of its performance as the system operator of the country’s transmission network and assets.

The much-needed policies and actions are not just bold-sounding goals, but all items in the sector’s to-do list have major basis confronting practical realities of an industry badly needing improvements to secure a country’s energy future.