Update on CSP Front, Part 2 – Games People Play in “Swiss Challenge” Biddings

Posted on: Feb 17, 2016

David Celestra Tan, MSK
14 February 2016

It is Valentines Day and it is great to read the consumer-heartwarming news about the ERC disagreeing to the requests of many electric cooperatives for exemption from the mandatory bidding or CSP of their pending power supply contracts.

The deadline set by the ERC was November 6, 2015 for filing with their applications with the ERC to be exempted from the new rule as called for in the national policy set by the Department of Energy on June 30, 2015.

Part of sensible governance is the use of an orderly transition period from an old system to a new one. In the case of the CSP rule, where competitive bidding is required, there is a need for a rational transition period to deal with those power supply contracts that have already been signed before November 6, 2015. This is both to be fair to those DU’s and generators whose contracts have been signed and close to implementation and to assure the timely development of power supply to consumers.

We have to hand it to the ERC Commission led by new ERC Chairman Jose Vicente Salazar for deciding on a sensible transition CSP method, one of which is a Swiss Challenge (or price challenge as used by Meralco recently). Happy Valentines to you too, your Honors!

“Swiss Challenge” has its basis in the BOT Law in dealing with unsolicited proposals and defined under Section 10.2. Obviously it must not be in the governments “list of priority projects”.

Should it be blindly adopted for purposes of implementing the “Competitive Selection Process” (CSP) policy on power supply contracts?

Swiss Challenge (or price challenge) favors a chosen project proponent with a “right to beat” privilege and hence is only theoretically competitive. It also discourages true competitors from bothering to bid. In fact it is not unusual for potential bidders to back out because they can see that the rules are already designed to favor one preselected bidder. One of its major flaws is the challengers can only challenge the price and not deviate from the technical and commercial aspects even if those are actually faulty and disadvantageous to the off-taker and the consumers.

The key issue is what the original proponent would have done to be entitled to the privilege of “right to beat” the other bidders?

First it must be an Innovative Proposal. This Means an infrastructure proposal submitted by a Private Sector Participant that has innovation in technology that is unique and legally owned or authorized to be used by the Proposal Initiator that could result in increased value addition; it may refer to incremental, emergent or revolutionary changes in products, services, costs, and environmental advantages.

Some private proponents claim that special circumstances dictate the necessity to sole-source some project proposals, such as the following reasons:

• A project developer possesses intellectual property rights to key approaches or technologies;

• A lack of private-sector interest due to the small scale, remote location, or political risk of the project; • Organizing a public tender may not be cost efficient for governments, bidders, or 2 both;

• The speed of project development would be more rapid through negotiations, especially during emergencies or widespread shortages. Intellectual Property Rights Many companies propose unsolicited projects claiming to use new technology. The BOT Law as revised in 2012 deals with “new technology” under Section 10.2

SECTION 10.2 – NEW TECHNOLOGY

The new technology must possess at least one of the following attributes:

a. A recognized process, design, methodology or engineering concept which has demonstrated its ability to significantly reduce implementation of Construction costs, accelerate project execution, improve safety, enhance project performance, extend economic life, reduce costs of facility maintenance and operation s, or reduce negative environ mental imp act or social/economic disturbances or disruptions either during the project implementation/Construction phase or the operation phase;

b. A process for which the Project Proponent or any member of the proponent consortium possesses exclusive rights, either world -wide or regionally; or

c. A design, methodology or engineering concept for which the proponent or a member of the proponent consortium or association possesses intellectual property rights.

The idea of “intellectual property rights” means having the exclusive or priority rights to offer the service. For power generation, this can include having the water rights to a mini-hydro project, locational rights to a wind-rich area. For the distribution utility it means deciding whether the power supply it needs can be provided from different options.

SECTION 10.3 – PROJECTS INELIGIBLE FOR UNSOLICITED PROPOSALS Projects included in the “List of Priority Projects”.

Most Power generation projects are no longer innovative and involve old and established technologies. Diesel plants, coal, natural gas, solar.

Games People Play in CSP

1. Swiss Knife

One EC had the nerve to invite for challengers without disclosing the price that is being challenged on the claim that it is “not fair” to the original offeror! (That was Swiss alright but not a Challenge!)And the DOE then certified that, for regulatory compliance,” the EC had conducted a CSP” apparently thinking (or not thinking) that it does not matter whether the CSP was manipulated and not truly competitive. This resulted to the government paying more than P100 million a year in additional subsidies or P1.0 billion over its 10 year term. (Did the PDAF scandal only involve P980 million?) It involved the old diesel plant technology.

2. Ropa Dope

In another case, the EC and the favored bidder contrived a scheme where the bid bond was required to be a cash bond of tens of millions of pesos. After the naturally scared potential bidders did not buy the tender documents, the terms of the bid were amended to allow same amount of bid bond but in surety bond not cash. By that time the potential bidders who did not buy the tender documents were no longer required to be notified. Hence competition was eliminated and there were only two bidders, and the second one, as you guessed, was a joker bid. The increase in missionary subsidy was about P20 million a year. This involved diesel technology.

3. Trojan Horse Gambit

In yet another case where there was a battle between an RE biomass project versus a coal project, the EC with the inexplicable blessing of the Arroyo ERC and the DOE’s EPIMB allowed the removal of VAT in the bid comparison thus eliminating the “true cost of generation” disadvantage of the favored Coal proponent. On top of that, the EC and DOE already knew at that time that the people of their island did not want coal to protect the islands main business which was tourism. Thus allowing coal as a bid almost guaranteed a delay in the project because of lengthy battles with the community environmentalists. As you guessed, the coal proponent won the CSP but the coal plant had been rejected by the people in three different towns. That island is now suffering from power shortages.

Another mystery was the PSA was changed to P12.80 per kwh of bunker c based power after the bidder won with a P9.50 per kwh bid offering coal. This, with the approval of both the DOE and ERC. Some companies can get away with murder.

4. Hot Dog Sandwich

In this one, the DU will call for bids that are specifically suited to the specifications, location, and timetable of the preferred proponent specially a sister company. The “hot dog” is sandwiched between specifications and delivery time that only the preferred proponent can meet. The DU waits until its preferred supplier has had an insurmountable headstart to gain an advantage and offer specifications, permits, and delivery time that other challengers will be impossible to beat. We expect the large distributor-generator groups to try this one.

Outwitting the rules is a national past time in the Philippines. Let us hope the new DOE Secretary and new ERC Chairman will not allow these CSP shenanigans to happen.

If the DOE and ERC check the records, the Swiss challenge biddings in the Spug areas and even Meralco recently, either end up with no challenging bidders, or with joker competitor bids.

Swiss or Price Challenge should not be an acceptable procedure for compliance to the words and spirit of the CSP policy of the DOE. This must be the standard policy. However, for a Transition CSP of say 90 days and in the interest of continuing direly needed power supply projects, Swiss Challenge can be tolerated…..but with well thought off safeguards to assure “true challenges” to the price.

We offer the following safeguards for the consumers:

1. The PSA must be a signed and binding and notarized contract before November 6, 2015. No exceptions. Board approvals and notice of awards are not PSA contracts.

2. It must have been awarded in accordance with the bilateral contract rules in effect at that time before November 6, 2015. If it is for the EC in the off-grid area then it must have undertaken a truly competitive bidding or CSP under the existing rules of the DOE for CSP in missionary areas. (DOE Circular 2004-01-001)

3. The contract cannot be between related DU and Genco.

4. Encourage True Bidders and Level the playing field

Swiss Challenge actually is normally intended to favor a chosen supplier. So a Swiss Challenge term of reference normally contain requirements that favor him and difficult for new bidders to challenge.

a) Sufficient time to submit a challenge bid New bidders are normally allowed about 45 days to submit their bid, hardly enough to prepare a power supply proposal especially bigger projects.

b) Sufficient time to Complete the project Since the proponent has had probably a year’s jumpstart in preparing his offer, there can be a truly competitive challenge if new bidders are given as much time as feasible for project completion.

The EC or DU must be required to prove to the satisfaction of the DOE that the intended power supply is urgently needed and proceeding with the signed contract is its best chance to meet the timetable and that the contracted capacity and technology is appropriate for its service area. If the power supply timetable has room, then the Swiss Challenge bidding must allow for a longer delivery timetable instead of the one provided for under the contract. This is one area of levelling the playing field for new bidders especially when time constraints for project completion are not really necessary.

c) Sanitizing the Terms of Reference The proposed terms of reference for the challenge must be thoroughly reviewed by a specially trained competitive bid team at the DOE that will comb through the proposed bid terms to spot provisions that tend to favor the current proponent and put the new bidders at a disadvantage or outright deterrent for new bidders.

5. DOE must adopt an Eco-Technical Swiss Challenge (of course it is possible!)

To guard against contracted but improperly conceptualized power project, the challenge shall be both economic (price) and technical.

a) A bonafide challenger can match the proponents price or lower, offer superior terms, and also be allowed to improve or revise the specs for the better.

b) An independent technical consultant hired by the DOE and ERC can evaluate whether the technical revision was an improvement over the originally offered technical specifications. Like, brand new vs refurbished engines, or 4mw engine sizes instead of 8mw.

If it is an improvement, the original proponent would be allowed to match or lower both the technical and price of the challenger.

6. This Transition CSP must definitely require the use of independent Third Party bid administrators.

7. Stiff Penalties

For good measure the ERC must specify stiff penalties to those who will be found to be circumventing the November 6, 2015 deadline likely falsifying and anti-dating the PSA.

We can refine international practices to suit Philippine conditions especially when it will benefit the consumers. Maybe we should call this Filipino Challenge.

This Transition CSP program is only for those DU’s who did not have any PSA’s exempted by the ERC under the normal CSP policy that came into effect on November 6, 2015.

In the case of Meralco and Meralco PowerGen, they should no longer be allowed to avail of this transition CSP because their two contracts the 480MW Mauban expansion and the 600mw Redondo Power project in Subic have already been exempted under this new CSP rule.

These safeguard ideas are by no means complete. The point is yes, Swiss challenges can be adopted as Transition CSP only for a fixed grace period with appropriate safeguards to protect consumers and assure a truly competitive challenge. And only for signed and binding PSA’s and with a 60 day deadline to submit the ERC application. Swiss Challenge should not be adopted as normal policy for CSP purposes.

Happy Valentine’s Day everyone!

Matuwid na Singil sa Kuryente Consumer Alliance

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An Open Letter to Mr. MVP

5 November 2015

Dear Mr. MVP

First of all we want to thank you on behalf of the millions of Filipino basketball fans who enjoyed the games of the Gilas Filipinas and Ateneo teams for your generosity in helping them recruit talent, get great coaches, and become competitive.

We also want to acknowledge the improvements in Meralco’s charges under your leadership, in Systems loss charges (now 10.5% instead of 14.5% a few years ago), distribution charges reduced by 0.18 per kwh recently, and the current lower generation rates of P3.99 compared to 5.60 per kwh just a year ago. These improvements are however not permanent and not enough. We would like therefore to similarly appeal for your cooperation in putting in place permanent solutions to the high Meralco power rates that, if reduced to fair and competitive level, will bring more long term joy and economic upliftment to millions of Filipinos serviced by Meralco.

Implementation of Mandatory CSP

We ask Sir that you do not stand in the way of the implementation of Mandatory CSP, (Competitive Selection Process) in accordance with DOE Circular 2015-06-008 and open the currently closed Meralco generation market to truly independent power generators.

Broader Benefits of Mandatory CSP

The macro-economic benefits of subjecting power supply contracts to Mandatory CSP go beyond just reducing generation rates by market testing them. 1) CSP will open the generation market to more investors thus insuring continued power supply development for the long term; and 2) it will provide a mechanism for the government, especially the DOE, to steer new power projects with a holistic strategy for energy mix, locational, environmental, and transmission systems and costs development. Somethings it does not have now. Meralco might want to view that it is to its long term business interest to treat their customers with respect and to assure their loyalty through superior service and competitive rates and value.

Legal and Fair Profits

We ask that you and Metro Pacific be contented with the legal profits from the distribution franchise and from the 50% of generation services that you are allowed to contract with affiliated companies. Public interest require that Meralco submit to transparent and truly competitive bidding the power generation contracts to assure it is least cost in market terms and not as self-servingly defined by Meralco We realize that the sellers of Meralco to your group may have convinced you that Meralco as the distribution utility has a right to negotiate power supply contracts with its affiliated companies as they had done during their time. Your own lawyers and analysts may have convinced you that the EPIRA Law of 2001 and its Implementing Rules have loopholes (Section 45(b) and Rule 11 respectively) that will enable you to also dominate power generation legally.

Issue is Public Interest and Fairness

The issue however is less of legality and more of public interest, morality, and the fairness of Meralco having the undue royal right to self-determine the projects and prices that it will pass on to the consumers, a privilege that even the government does not have in taxation which is subjected to lengthy debate by peoples representatives in Congress and the Senate, and further reviewed and signed by the President of the Philippines. The ERC reviews of the negotiated Meralco rates are not sufficient to assure the protection of the public. A Regulatory review of rates is to determine fair and reasonableness based on cost data submitted. A competitive bidding will be computed by the bidders for a competitive price. Competition (unless it is rigged) will always beat regulation in bringing down power costs. MSK will be working for the repeal of Rule 11 of the Epira IRR which is the one giving monopolization a semblance of legality.

It would be hard to argue and convince consumers that it is only Meralco who can bring least cost power by negotiating with its sister generators. As long as Meralco continues to deny the captive consumers the benefit of market-tested rates, it will sound insincere whenever Meralco claims it is “promoting consumer welfare”. The sooner Meralco realizes this the better for the country and everyone.

Distribution Franchise Did Not Include Monopoly of Power Generation

It is our position that Meralco’s electric distribution franchise did not come with a royal right to also monopolize its power generation supply, two sectors that the EPIRA is supposed to be unbundling (separating) and reforming to create true competition. There is inherent conflict of interest if the two are at the control of the same ownership and financial interest. Such conflict is inimical to public interest. Illogical Power to Price Recently you were quoted by Ms Myrna Velasco of the Manila Bulletin, a consistently anti-CSP writer, to be saying that the “CSP is illogical because it is shifting the power to price from Meralco to the generators”. That being a pass on charge, “Meralco does not make money on it and that least cost power is a fiduciary trust….that is why market power should reside with the DU”

Meralco consumers have not had much luck relying on Meralco for least cost power. It does not buy power on arms-length basis. What has been illogical is allowing the power to price to Meralco and its sister generators who are both owned and controlled by Meralco and its parent Metro Pacific. Meralco has formed its own power generation subsidiary Meralco PowerGen. It cannot be ignored that Sweetheart deals of the past continue to overcharge consumers to the tune of P6.1 billion in 2013, P10.3 billion in 2014, and so far P5.5 billion in 2015. Our generation cannot consign our children to similar burden for the next 25 years.

Meralco consumers deserve some respect for its intelligence and should be spared from continuously hearing that “Meralco does not make money on it”. We hope we can stop kidding ourselves. So far Meralco had signed with sister company Meralco PowerGen 460mw for Mauban and 600mw for Redondo Power in Subic. Meralco wants to get it to 3,000mw which is a clear monopolization of the generation sector.

You were quoted as referring to the mess in power pricing in the November December 2013 fiasco as justification for Meralco’s right to self-negotiate power supply. Your assistants may have neglected to show you our analysis of what happened in Meralco’s contracted generators during those fateful months. This is contained in our article “Is Meralco Telling Whole Story?” published by the Daily Inquirer on May 11, 2014. It might be enlightening for it to be read by Meralco.

Violation of Fiduciary Trust

It is a blatant violation by Meralco of its fiduciary trust as a franchised public service electric distribution utility by its continued obstruction of the implementation of the CSP and insisting on Meralco’s right to self-negotiate its power supply with its sister companies. There cannot be least cost power unless it is market-tested in a truly competitive, transparent, and judiciously administered and evaluated CSP. Meralco owes it to its customers.

Suing to Deny Consumers of right to Mandatory CSP

We have no doubt that you and Meralco have the force to take this CSP matter to the Supreme Court in what would be a classic Meralco and PowerGen versus Meralco consumers battle where we assume you will try to fight for your groups right to self-negotiate and monopolize power generation under the guise of “consumer welfare”. That would be reverse CSR. The resolve of the consumer volunteers nonetheless should not be underestimated.

Consumers do not begrudge your groups success and the billions you are making in the telecom sector because at least there is a semblance of competition, although we wish the government did not allow the purchase of Sun. Distribution of Electricity is a regulated monopoly. It is wrong and anti-consumer to allow that monopoly to extend to generation. Metro Pacifics choice is whether to monopolize distribution or generation, but not both. 50% of Meralco’s generation, as unfortunately allowed by the current Epira Law, is already a significant profit benefit of its control of the distribution market.

We appeal to your kind heart and sense of fairness.

True human greatness comes from judicious and kind use of power, otherwise it is just brute force. We pray that you may properly discern the judicious use of your pre-eminent position in Philippines business and energy infrastructure.

In basketball what you had generously shared was to make the Gilas and Ateneo teams competitive and give them fair chances to win. Meralco’s electric consumers are asking to have a similar competitive environment where they have an equal opportunity to win. Metro Pacific already has the guaranteed returns in its distribution franchise and the opportunity to have 50% of the energy needs of Meralco on the generation side. What we are appealing to you is not unfair.

Please allow the immediate implementation of the Mandatory CSP and schedule the competitive bidding of the next 1060mw of Meralco’s base load contracts since it already negotiated 1,060mw of coal power projects in Mauban and Subic.

We appeal to your kind heart, generosity, Filipino patriotism, and sense of fairness. In the unending pursuit of that essential part of nation building that is competitive power costs, we ask that you be our teammate.

Sincerely yours and God Bless,

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
David Celestra Tan, Co-Convenor
Aya Jallorina, Executive Director
P3Movement
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