The Root Cause of Power Plant Shutdowns are not Technical But Contractual and Financial

2 May 2019


MatuwidnaSingilsaKuryente Consumer Alliance Inc.

Submitted to:

The Joint Congressional Power Committee

Hon. Senator Sherwin Gatchalian

Hon. Carlos Uybarreta, Congressman, 1Care Party-list

Public Hearing May 2, 2019

Dear Sirs:

We thank the JCPC for this opportunity to contribute to the national debate on what to do to avoid power shortages that hound our country almost always before Christmas and before the summer.

The MatuwidnaSingilsaKuryente Consumer Alliance Inc or MSK is an association of Meralco consumers since 2011 dedicated to seeking regulatory and policy reforms to protect consumers from excessive electric rates that result from exploitive charges, anti-competitive behavior, monopoly, oligopoly, and contracting manipulations, and cartelization and negotiated sister company sweetheart deals.

Once or twice a year we are confronted by power shortages due to power plants supposedly shutting down due to mechanical problems and or need for preventive maintenance.
We would like the authorities to consider the following for the long term solutions to this recurring brownouts.

1. Who is responsible? Looking at the wrong alley, barking up the wrong tree.

First of all, we would like to make the observation that in the debate on who is responsible for insuring that power plants are reliably on line and do not mysteriously shutdown due to “boiler leaks”, there seems to be inordinate focus on the Department of Energy, who although the policy and rule making body and responsible for monitoring and encouraging power supply, is not the contracting party with the power generator.

In the power plants that shutdown, Meralco is not sufficiently being asked to take responsibility to assure that their contracted supply, whose negotiated costs are being passed on to its customers, are reliably providing the generating service. Meralco is the one with contract enforcement capability and obligation to the public who is ultimately the one paying for the service.

In these public hearings, Meralco seems content on sitting back and exploiting the power crisis to justify the approval of their seven midnight power supply contracts.
We appreciate the valiant willingness of the Department of Energy officials to take the heat for any power crisis. However, we will not find the long term solutions if we keep on looking at the wrong alley, and barking up the wrong tree.

2. Insufficient Reserve and Need for Additional power supply

We agree with the calls for additional power supply. But we disagree that it should mean the automatic approval of the seven (7) midnight contracts totaling 3,551mw that Meralco negotiated with its sister company Meralco Power Gen.

While it is not an ideal resolution, we call on all parties, JCPC, DOE, ERC, Meralco, the Supreme Court, the Alyansa Para saBagongPilipinas, the Bayan MunaMakabayan Group, to come together in the national interest and break this impasse for a reasonable and not exploitive solutions.

a) Let us allow the implementation of about half of those projects of 1,750mw to come on line in 2021 and 2022. But with moderation of the negotiated rates and any onerous terms. Atimonan One is now P5.65 per kwh not the P3.75 it was advertised, higher than the current Meralco coal suppliers. ERC needs to moderate this in a compromise resolution.

b) The others of 1,750mw can be subjected to a true CSP, some of them for LNG fueled power plants.

c) We also call on the JCPC and DOE to sponsor separately truly competitive biddings for supply for distribution utilities outside Meralco. Ideally One coal and one LNG even modest 300mw each for supply to non-Meralco distribution utilities. This will have the added benefit of establishing market tested price benchmarks as opposed to the negotiated rates that Meralco has been trying to justify.

d) We are asking the JCPC, DOE, and ERC, to recognize the reality that in bringing least cost power to consumers, “competition always beats regulation”.

3. True Root Cause of Plant Shutdowns are Not Technical but contractual and financial

The additional supply will however still not guarantee that there will be no power shortages resulting from the unfortunate confluent shutdowns of power plants. Technical shutdowns are only symptomatic of the true reasons for the problems which is contractual and financial.

a. Contractual and Financial causes of shutdowns
Current power supply agreements provide for allowable downtimes per year of a total of 45 to 60 days. During these period, the power generators continue to be paid their capacity fees consisting of capital recovery and fixed overhead. This contractual arrangement therefore offer no financial benefit for the power generator to avoid or minimize downtimes. In fact it is to his convenience and financial benefit to maximize his allowable downtimes. This is an outdated provision from the BOT era in which we no longer are. BOO napotayo. (build operate and own).

And when the buyer (DU) and the seller generator are sister companies or business partners, we can predict it will be the customers who will be sacrificed.

Under this contractual provision, there is no reason for the power generator to make the needed investments to make his plant reliable and honestly avoid downtimes.
The result is these brownouts and it will not change unless this financial incentive and convenience is taken out.

b. We propose that the rate of the generator be restated to include compensation for downtime so that he will be paid only when his plant is available on line to provide the service. Some people will say it will increase the rate since the annual capacity fees will be spread over 10 months instead of 12. The average true cost to consumers would be the same.

c. Looking at the Meralco generation rates, customers are charged P5.40 per kwh during the operating periods of the coal plants, but are charged P7.00 to more than P10 per kwh during months with maintenance shutdowns. In the period from July to December 2018, Meralco had paid these coal plants as high as P18 per kwh which indicated that they were on maintenance shutdowns. So here we are in April and those plants are still down for maintenance? (see and Meralco website data)

d. The added capacity payments for downtimes however should only be for half of the 60 day downtime agreement because the generator and the consumers should equally share in the risks of downtimes. Why should the consumers absorb all those costs?
It will not result to higher true cost and will have the benefit of the generator being paid only when he is providing the service. No more incentives for being down.

e. Allowable downtimes should only be a legal excuse from delivering the contracted power service. However, it should not be used for guaranteeing capacity payments to the generator whose power plant is down. This is most unfair to the consumers and encourages downtimes.

We call on the DOE and ERC to consider this “no payment during downtime policy”. This is actually not being anti-generator but more like being fair to the consumers.

Until this is corrected, mysterious and confluent shutdowns will continue to hound the country.

We wish the JCPC more power in its search for solutions. We hope the JCPC, DOE, and ERC, will look into these proposed solutions.

Sincerely yours,

MatuwidnaSingilsaKuryente Consumer Alliance Inc.

David Celestra Tan

Evelyn Viray Jallorina
Executive Director

ERC’s Extension of CSP Effectivity Could Be Costly for Consumers and A Big Step Back in Drive Against Monopolization of Generation Sector

David Celestra Tan and Evelyn Viray, MSK
28 March 2016

The ERC issued a new Resolution postponing the effectivity of the mandatory CSP for new power supply contracts to April 30, 2016 from November 30, 2015. What would seem an innocuous extension of a deadline actually have larger implications to consumer rates and the monopolization of the generation sector. That’s a five (5) months delay, a lot of time to allow the exemption of many bilateral contracts and deny the electric consumers the benefit of competition for the long term.

While we agree that there has to be a sane transitional process this must be consistent with always promoting the interest of electric consumers which are the right to adequate supply of power and right to least cost electricity.

MSK therefore wishes to go direct to the crux of the matter of ERC’s five (5) month postponement of the mandatory CSP. The resulting exemption of Meralco’s desired 1,200mw bilateral contract with its sister company Meralco PowerGen in Atimonan, Quezon and who knows maybe another 1,500mw for a natural gas project in Quezon or Batangas. If these long term power supply contracts are allowed by the ERC as a result of Resolution 1 postponement, then we have denied again the right of consumers to least cost power as market-determined through open competitive bidding. The CSP policy would be once again a Pyrrhic victory for the consumers.

ERC’s Resolution 1 of 2016 signed by the five Commissioners on March 15, 2016 took cognizance of the right of captive electric consumers to “least cost power” and its rationale for the postponement of the CSP mandatory date in the following:

“WHEREAS, after judicious study and due consideration of the different perspectives raised in the aforementioned letters, with the end in view of ensuring the successful implementation of the CSP for the benefit of consumers, DUs, and GenCos, the Commission has resolved to allow a period of transition the full implementation of the CSP Resolution and, as such, restates the effectivity date of the CSP Resolution to a later date;”

Once again, we are putting all these new rules supposedly to promote the interest of the consumers and now in the implementation allowing the manipulation in effectivity that will again sell down the consumers. Another case of wanting to mandate CSP but again forgetting why we are doing it?

The issue here is self-negotiated contracts with sister companies as part of a sane transitional process.

ERC’s Resolution 1 of 2016 is not clear on safeguards for protection of electric consumers against negotiated sweetheart deals. As the Epira Law clearly declares supply of electricity is imbued with public interest. And it is the legal duty of the ERC, the DOE, PEMC, and JCPC to look vigilantly after the public interest.

As we stated, a reasonable, practical, and sane transitional process must have two hallmarks to be consistent with public interest and those are:

1) it must help assure adequate supply of power and
2) it must assure least cost electricity.

We agree also that we must be as fair and reasonable to the DU and the generator. However, we must not cross the line towards sacrificing the submissive consumers. Perhaps the ERC can consider some level of safeguards for electric consumers during the transition period.

a. Pending Projects between DU’s and unrelated generators
The pending power supply contracts of DU’s with unrelated power generators may be reasonably presumed to be done on arms-length basis and hence may not be sweetheart in prices and terms. Their implementation may be needed to allow the continuation of power supply development. Yet, we have to assure the consumers rights to least cost power.

In this case, it will be reasonable to allow a CSP as a transitional process called Swiss challenge that is administered independently. This way the DU and its chosen generator caught in the transition period will have nonetheless the vested right to match the winning bidder and the consumers are nonetheless assured of a level of market tested rate. Not perfect but it is a transitional process.

b. Signed Projects of a DU and its sister company generator
The desired contracts of DU-generator groups like Meralco and Aboitiz with their own sister company generators are entirely different matters. They are NOT arms-length and hence with high probability of sweetheart prices and terms that are inimical to the public interest.

Whether or not the proposed projects must be allowed a transitional CSP must be determined by the ERC if they are critical for timely assurance of adequate supply to the particular DU. The other consideration is the public interest.

To respect the right of consumers to least cost power, it would have been appropriate to also subject these sister company contracts to CSP administered independently if Meralco wants their affiliates to participate.

c. Meralco’s 1200mw Coal Project in Atimonan, Quezon
In the case of Meralco and Metro-Pacific they have already gotten away with a total of 1,060mw of coal projects for Redondo Power in Subic and in Mauban, Quezon. The rates approved were P4.26 per kwh compared to a truly competitive bidding done by eight electric cooperatives in the North for only 125mw but got 3.76 per kwh or a difference of P0.50 per kwh. Not satisfied because they really want 3,000mw of negotiated deals for its sister generator Meralco PowerGen. It is evident that they have been lobbying to allowed to do a CSP Swiss Challenge that would be administered by their own people for their 1,200mw coal project in Atimonan, Quezon. This will appear like they are complying with the CSP policy but not in a way that is truly competitive. They don’t even want an independent bid administrator to assure a transparent, honest to goodness, and judicious bidding.

It might be recalled that the CSP policy was adopted by the DOE nine (9) months ago on June 30, 2015. And with all the delays and deliberations the ERC was able to issue its own CSP implementing policy Resolution 13 2015. We would think that during this time period, if Meralco’s 1200mw 3rd project in Atimonan Quezon was really finalized and signed it would have been filed with the ERC during that period.

Press reports said Meralco expects the completion of the 455mw San Buenaventura Power in Mauban in 2019 and the 600mw Redondo Peninsula Energy in Subic in late 2019. These two appear to have been filed with the ERC to beat the November 2015 original deadline. The 1200mw Atimonan One Energy which is announced for completion in late 2020 and another 1500mw natural gas project being pursued by Meralco evidently did not make the already delayed implementation of CSP.

The ERC’s sweeping postponement of the CSP implementation to April 30, 2016 will work out to be even better for Meralco and for Aboitiz.

The extension of the CSP effectivity will also be a big blow to the hoped for reduction in the monopolization of the generation sector. The three projects totaling 2,260mw will corner about 40% of the energy needs of Meralco. Another 1500mw Gas project would carve out another 25%. If we add the 1500mw First Gas and the 440mw Quezon Power also cornering about 30%% that will give a total of 95% of negotiated sweetheart prices passed on to the consumers. Long term the rest of the power generation sector will battle for the minor markets.

How much will these exempted new sweetheart power supply contracts cost the consumers?

We calculate that the total of 2,060mw of coal project that Meralco PowerGen can have at 70% load factor guaranteed power supply agreement will own a minimum of 12.6 billion kwh a year in sales to Meralco. At an overprice of P0.40 per kwh, that means P5 billion a year in additional charges to electric consumers. At a minimum of 20 years, that would mean P100 billion charged to consumers. And that doesn’t count the over prices from 15 million tons a year of Indonesian coal that will be passed on to the consumers without benefit of bidding.

Let us observe how many Meralco and Aboitiz power supply contracts will be filed in April to beat the new ERC deadline.

We hope these facts will not be lost as the ERC tries to implement the CSP aspiration for the country. The larger implication of the extension of the CSP deadline to April 30, 2016 in addition to the 10’s of billions of additional charges to consumers is this could be the final blow to hopes of curtailing the monopolization of the power generation sector in Luzon. With so much market domination in power generation supply the WESM market will just be a peripheral sector.

With our past experience with the Arroyo ERC always letting down the consumers, we cannot be faulted for being suspicious and paranoid. We are willing and will be delighted to be proven wrong. It does not look good though.

We hope the Pnoy ERC Commissioners led by new Chair Salazar would have a wonderful trick up their sleeves that will benefit the consumers. Perhaps the captive consumers of Meralco can somehow be protected by subjecting these Meralco PowerGen projects to a truly competitive CSP administered by a truly independent party if Meralco really wants their sister company to participate.

Author’s notes: This has been edited from yesterday’s draft. We are sorry for the errors in facts.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.