Cutting Electricity Rates The Right Way

David Celestra Tan, MSK
9 July 2016

When the subject of reducing power rates come up, Meralco gratuitously suggests “reduce the VAT taxes”. When there was pressure to reduce generation rates, they suggested that the government should eliminate the taxes on Malampaya natural gas that First Gen is using.

This is a classic case of “NIMBY” self-interest, “Not In My BackYard” is an acronym used to refer to host communities’ position that power generation plants are okey to build as long as they are “not in my backyard”. In reducing power rates, Meralco’s wisdom seems “NIMPO”, “Not In My Pocket”.

What is worse than not cutting the country’s electricity rates? Cutting it the wrong way! The key is knowing where to look and be guided by the right conscience and motives.

Looking in the right places. Let us count the right ways.

1. Power Generation
As Meralco itself is saying, this cost component in your monthly electric bill consist of 60% of the total bill and therefore the logical place to start.

Most of Meralco’s power generation supply have been negotiated. About 60% from affiliated generators, 30% from non-affiliates and 10% from WESM and other suppliers. Among coal suppliers, the price Meralco pays to affiliates is 21 % higher than non-affiliates. In natural Gas, Meralco had been paying for many years 15 to 20% higher than the non-affiliated Ilijan power plant of Kepco although there has been parity among them lately.

In the last known comparable figures, Meralco negotiated with its affiliate Meralco PowerGen a rate of P4.35 per kwh for the 400mw Mauban coal expansion, In the same time frame, eight (8) electric coops in Northern Luzon banded together and bidded out a combined 135mw of power generation supply. They got P3.78 per kwh or 15% lower. That’s approximately P1.5 billion a year in higher pass-on charges to consumers. And that is one contract.

If we add the impact of their generous take or pay, downtime, and fuel rate provisions, the true pass on charges to Meralco consumers of these negotiated contracts are actually much higher.

And things will get worse because every single new power supply deal signed and announced by Meralco to the tune of 3,000mw are with “friends and family”, signed when the consumers were not watching during the elections.

If we truly want to reduce power rates, these negotiated sweetheart deals must stop. There is supposed to be a new DOE policy on requiring competitive selection process or CSP but it seems bedeviled in the implementation at the regulatory level.

President Duterte’s government can do something about arresting the rampaging monopolization of the generation sector. That should start with repealing Rule 11 of the Epira law IRR (implementing rules and regulations) that effectively redefined the anti-monopoly and pro-competition aspirations of the mother law that it is supposed to be implementing. It provided the cathedral sized loophole for monopolization of the generation sector. Its a farce and betrayal that had long been waiting for a champion to rectify. Someone will have to step up for the people.

There cannot be a true power cost reduction program if generation that is its largest component of the consumers bill are not reformed. Generation rates appear to be comparatively lower now that world fuel prices are low. Wait until coal and oil prices go back up and see Meralco’s rates pound the consumers. Let us not be misled. Let us act before it is too late.

Lack of a true competitive process at the bilateral contract level will not be compensated by putting wistles and bells like RCOA and RES.

2. Systems Loss Charges, P0.4273 per kwh in your July bill.
This is the cousin of the generation charge because its rise and fall depends on the generation rate. This is supposed to be limited to 8.5% and Meralco claims its average is under 8%. But the residential and commercial customers that pay 60% of the revenue of Meralco are being charged more than 10%. (Look at your bill in the back. Divide the systems loss charge per kwh by the generation charge per kwh)

Worse is that the computation is actually non-transparent under the methodology allowed by the old ERC. For many years the residential and commercial customers were being charged 13 to 15% systems loss! Now at 10% it is still higher by 1.5% than 8.5%. We estimate the difference is about P500M to P1 billion a year.

ERC’s loose methodology on systems loss computation must be revised to make it more transparent and eliminate opportunity charges. And the limit has to be 8.5% to all consumers. The devil has been in the averaging.

3. Transmission Charges, now at P0.8398 per kwh
The current national concessionaire, NGCP, and joint venture of the China Grid and SM, is entitled to a fair return on their investments. They have a big financial, technical, logistical, and operational challenge in their hands keeping up with the growth of the economy and the unwieldy power generation development.

What should not belong to NGCP is the power to establish rules and transmission development policy. The Epira law provided that this will stay as a function of the government agency Transco and not sold as part of the concession. You cannot have one private make the rules and be the beneficiary of the rules. This was a consequence of a glitch in the wording of the NGCP Concession law that confused the right of NGCP to act as System Operator and right to operate its system. The former is a rule maker. The latter is a technical and operational function.

This conflict will result to higher transmission rates and will result to a disjointed transmission development plan. Let NGCP concentrate on being a builder and operator of the transmission system. Transco should even step up and handle the right of way issues which a government agency can do better.
The devil that is PBR.

Technically these are supposed to be the only revenues of Meralco as the electricity distributor. Everything else is pass on that Meralco likes to say they only act as collectors.

These charges are determined under a methodology called “Performance Based Rate” making or “PBR”. This methodology is actually a violation of the Epira laws provision in Section 25 that “retail rates” must be based on “full recovery of prudent and reasonable economic costs incurred”. PBR allows Meralco a return on projected investments that under the ERC rules do not even need to be actually “incurred”.

We estimate that this results to an overcharge of P0.50 per kwh on distribution wheeling rates or more than P10 billion a year.

Consumer groups’ appeals to the ERC to review this had been falling on deaf ears. This is another of those anomalous charges that any true effort at reducing rates will have to address.

5. VAT Taxes
The EPIRA law of 2001 exempted power generation from VAT taxes in evident pursuit of the law’s declared policy objective of making the Philippines globally competitive. When the GMA government went cash strapped after the 2004 elections, the EVAT law was passed where power generation is imposed a 12% VAT, increasing the electric rates by P0.67 per kwh. This made the country even more uncompetitive as a manufacturing country. May be the new government can balance this by reducing the 12% VAT to say 6% to kind of share the burden of supporting government between the electric consumers and the other sectors of society. This will reduce electricity rates by 0.33 per kwh, not small peanuts.

6. Universal Charges for Renewable Energy – FIT-ALL. Now at 0.1240 per kwh
After snowing the consumers with a “promotional rate” of 0.045 per kwh at the start of the feed-in tariff program, it jumped to the current 0.1240. Even at that level, many RE power producers are not being paid their full FIT rates. The current confusion in the RE sector and the strong lobby of the solar groups and the NREB for more subsidized solar power will easily push this to P0.25 per kwh.

This doesn’t count the extra transmission charges and NGCP’s purchase of frequency regulating reserves to manage the grid disruptions caused for the intermittent RE, solar and wind. Hopefully the leadership and patriotic grounding of new Energy Secretary Al Cusi can put a rhyme and reason in this wayward program. Clean energy is not necessarily intermittent RE.

7. Universal Charges for Stranded Contracts UC-SCC now at P0.1938 per kwh
These charges need closer scrutiny and some rationalization. The component that resulted from failed government policies of the past should not be dumped on the consumers. The component for failure of PSALM management should similarly not be passed on to the consumers. There needs to be a clear accounting of the proceeds of privatization that are supposed to pay for all these. These charges appear to have gone beyond the true stranded contract costs.

8. Universal Charges for Missionary Subsidy, now P0.1561 per kwh
The abuses in this program have been going under the radar, first because they are in the “remote” areas and secondly they wave flag of missionary. This started at 0.035 per kwh. A bidder in one island that won with a bid of P9.38 per kwh, jacked up the rate to 12.80 per kwh even before the project is started. In another island, the same bidder won with a bid of P7.15 per kwh but now currently getting P13.00 per kwh, or an increase of P5.85 per kwh in missionary subsidy. Now there are more negotiated bids through another farce called swiss challenge bidding that the DOE has been tolerating.
The place to start is the DOE itself that recently endorsed a new 25mw contract in an island that has only 40mw in demand and with existing power supply of 55mw already. Reportedly the swiss challenge bidding was held without prior DOE approval as provided for under the CSP rules, but the DOE nonetheless issued a certificate of compliance of the contract to the CSP rules.

All these things are increasing instead of decreasing the missionary subsidies that are being passed on to the national electric consumers.

9. WESM rules ,br>The WESM price is the sword of Damocles that hang over the head of Meralco consumers. This market needs to be a reduced to a market for excess supply and demand. The current rule on determining “market settling price” defined as the highest price dispatched for the day is anti-consumer. Offerors must be paid as they bid.

Unless reformed, this can periodically harass the consumers with high market rates.

10. Line Rental Charges
This is one of those charges that are passed on to the consumers but kind of mysterious. This appears to be line congestion costs. Deserves close scrutiny and rationalization.

Cause oriented members of the Matuwid na Singil sa Kuryente Consumer Alliance actually has a P3 Campaign seeking to reduce Meralco’s rate by P3 per kwh. At that time, Meralcos rate was P12 per kwh. The organization hoped to reduce generation rate by P1.50 per kwh and the other P1.50 to come from the other charges to consumers.

The current reduction in the generation charge by more than P1.50 is not a result of making the sector competitive but by the lucky drop in the world oil and fuel prices. In other words, when world oil normalizes, we will see the generation rates of Meralco to go back up.

Let us cut the power costs in the country in the right way!

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Ball on Sec. Petilla’s Court in Reducing Electricity Rates

David Celestra Tan
16 December 2014

It was a wonderful show of consumer sensitivity on the part of current Energy Secretary Carlos Jericho Petilla to have called for a multi-sectoral task force to look for ways to reduce electricity prices.

That task force, meeting only once a month, for six months have finally come up with a consolidated recommendations done by the Philippine Institute of Developmental Studies, a supposed Academme think tank, to be turned over to the Honorable Secretary Petilla last November 20, 2014. It was however cancelled I heard because Sec. Petilla had other more urgent things to attend to, perhaps the emergency powers.

The ideas and proposals for power cost reduction were submitted by Meralco, the IPP Association, PIDS, Government Watch, the Philippine Chamber of Commerce, NEA, ERC and Matuwid na Singil sa Kuryente Consumer Alliance which made a detailed and definitive reduction target of P3 per kwh from Meralco’s rate of P12.37 in July 2014.

Now the ball is on the court of Secretary Petilla. Is reducing power cost really high on the priority of his tenure as Energy Secretary and by the administration of President Aquino? Is putting our beloved country on the road to more competitive power a legacy that they are aspiring to leave for millions of Filipinos?

Secretary Petilla has done more in pursuing reforms for competitive power than the last three energy secretaries combined. He is at least pursuing them. An open bidding for bilateral power supply contracts called DASAP. An auctioning of RE projects. And hopefully deeper and meaningful reforms of the trading rules of the WESM of which the DOE is in charge.

I am sure at some point Sec. Petilla will be available for the hand-over of the adopted recommendations to reduce power costs in the country. He might even be able to fit it in during this busy Christmas seasons of parties and holidays.

The real issue will be what will he do with it. Will the DOE’s focus in the coming months in the use of the Presidential Emergency Power that was recently passed by the legislature? We just have to give the good Secretary the benefit of the doubt that the reason he formed the task force is so he can have some input to work with. The consumers and the commercial and manufacturing sector will be waiting.

The ball is on Secretary Petilla’s court.

But that is on the government side. MSK would like to assure its members and all Meralco consumers that it will be pursuing its own advocacies for the reduction of the rates. We will be filing a series of Petitions for changes in regulatory rules with the appropriate government agencies mainly the Energy Regulatory Commission and the Department of Energy.

Keeping our fingers crossed.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

14 Years After Epira

The Epira Law, 14 years after it was passed, is still one of the most talked about topics within the Philippine power industry. The looming power crisis which our very own Department of Energy forecasts to occur sometime in early 2015 intensifies the argument if the law indeed brought benefits to the consumers.

14 Years After Epira: What Happened?

14 Years After Epira: What Happened?

Strong calls from the civic society groups and other NGOs echo as loud as the bells for the government to made reforms in it. Some groups are even lobbying for its total abolition.

Is there really something wrong with EPIRA? Is it such an imperfect law which is imperfectly implemented? The article EPIRA: an imperfect law imperfectly implemented answers the question.

Meralco Can Be a Gentle Giant of a Utility

David Celestra Tan
14 September 2014

Electricity Consumers of Metro-Manila and the Calabarzon area will have to reconcile with the reality that we have a distribution utility that dominates 74% of the Luzon electricity use and 62% of the national consumption.

This size and domination by itself is not necessarily bad for the consumers. In fact the 800lb giant can use its market size and power to serve the best interest of consumers.

Meralco can be a giant of a utility that is gentle to its customers in a true pursuit of its obligation as a public service utility franchise holder to provide power in the least cost manner.

  1. It can use its tremendous market power by exacting the best generation pass-on cost for its customers by doing the following:

a.  Subjecting to open competitive bidding its power supply contracts. This will open the market for more independent private investments in power generation, more competitive technologies, and more competitive rates.

b.  Proactively strategizing its power supply and energy mix with focus on a continuing search for lower cost solutions for its customers. They should strategize base-load, intermediate, peaking, and reserve power. They would be working hard to integrate the approximately 2,000mw of existing cheaper and cleaner hydro power facilities in Luzon in their energy mix and would push for development of all feasible hydro resources. Meralco would be working hand in hand with the DOE in the search for “best for the country and consumers” power development.

c.  Meralco would be diligently administering its power supply contracts to avoid undue costs to the consumers. They would be monitoring downtime compliances and make the IPP’s responsible for replacement power. They would be paying them only for actual energy delivered and not when they are not operating. They would be involved in fuel procurement and assure adherence to fuel efficiencies.

In November and December 2013 the generation rate of one of its coal generators spiked by 20% when there was no evident upheaval in the international prices of coal. And Meralco did not even raise a hoot. They would be using their market power to insure that their coal IPP’s would step up generation and capacity availability during the Malampaya natural gas shutdown. They would be insuring that the procurement of the replacement distillate fuel by its three natural gas power suppliers were at truly competitive manners.

d.  By doing all these, the giant Meralco can actually reduce its average generation cost from the current P5.50 per kwh to P4.00 per kwh within 3 to 4 years.

They would be reducing their true systems loss charges to residential and commercial consumers which is their biggest market segment, down to 8.5% instead of the current 12 to 14%.

  1. Meralco would be judicious in their distribution charges starting with a fair accounting of rate base and would ask for rates only on investment incurred, as opposed to the current PBR practice where their rate counts promised investments not yet made and may not actually be made.
  2. Meralco investors would recognize that its business is a public service utility that has been granted a government market protection as an electricity distribution business monopoly in its franchise area. Cost of power is critical to the standard of living of its customers and the business competitiveness of the country. In return for such protected market monopoly, it must be satisfied with the fair and reasonable return on its investments incurred with straight forward accounting of assets base.
  3. Overall it must conduct business on arms-length basis, devoid of conflict of interest, with singular focus to insuring the best service and least cost for its captive customers.

The new owners of Meralco may have a different profitability expectation from the business model of the previous owners and hence have valued their purchase price of Meralco at those lofty levels. Maybe they can rework their investment economics on the distribution side if they are allowed a level of investment in the generation side to say a compromise limit of 25% of price competitive generation.

Actually, Meralco is not alien to doing what it takes to win customers, help them reduce their energy costs, and overall treating them well. They have been showing an impressive amount of ingenuity and innovation in taking care of their industrial customers, who are now charged a rate of P9 per kwh with a systems loss charge of only 3.5%, compared to P12.00 for its captive residential and commercial customers and a systems loss of 12% instead of 8.5% even in the highly concentrated areas of Makati, Manila, and Ortigas.

Of course by being a straight forward public service utility that is dedicated to serving the customers in the least cost manner and doing business on arms length basis, the stockholders of Meralco may not exact as much profit at the expense of the consumers. As a protected franchiser with monopoly in power distribution, they are nonetheless guaranteed a fair and reasonable return on investment, the moderation of which those investing in Meralco will have to accept as a business model coming in.

Investment here however can be viewed two ways. Is it the investment in the utility itself by the stockholders or it is the amount of money they agreed to buy their control of Meralco which most likely factored in a premium for projected opportunity profits in rate base and power generation sweetheart contracts. Somewhere there is a balance where investments in the utility itself can be allowed a regulated fair and reasonable returns without abusing the customers. As DU, Meralco should get its returns from the distribution services and incurred investments and should not be from making money in power generation where their self-negotiated contracts would be in conflict with their obligation to the customers to supply power in the least cost manner.

The opportunity to make money is as sacred a right as democracy and religion. It is actually an engine that is a critical part of what makes civilizations and societies dynamic. However, we must make our money the old fashioned way, by earning it, especially for those who elect to be in the public services sector where the customers are captive and do not have a choice. In my book, “earning it” in the distribution utility business means making money while providing a very good service at a truly competitive price, something that can be assured only if its subjected to open competitive bidding in the market place.

Meralco can be a gentle giant of a utility if it wants to. Let’s hope we can see a transformation in our lifetime.

MSK clarifies

by Elinando B. Cinco as it appeared on Manila Bulletin, September 1, 2014\
Link to original:

(This is a rejoinder sent by Matuwid na Singil sa Kuryente Consumer Alliance, Inc. (MSK) in reaction to my piece – The need for legitimate NGOs – last April 15, 2014.)

MSK is duly registered with the Securities and Exchange Commission as a non-profit organization and has made annual reportorial requirements since its organization in 2011. “For financial reporting purposes we have been declaring that the organization is “non-operational” because we have not been soliciting and receiving donations from private donors.  Most of our research and work have been donated time of volunteers who also pay for their own expenses,” David Celestra Tan said.

Tan, an early practitioner in the power industry, is  co-convenor of  MSK. He said  his    consumer group has deep knowledge in power deregulation and is pushing for reforms to reduce power costs in the Meralco area that everyone is complaining about. Its  members are legitimate Meralco consumers who have rights to voice out their concerns on power costs and propose solutions.  “We are not seeking to do work on behalf of the government,” Tan said.

Tan   said he is aware that there is a need to obtain “done certification” from the Philippine Center for NGO Certification (PCNC).  He, however, said  the group will do so when they  see the need to receive donations from local and foreign cause oriented sources.

He said MSK does not see itself seeking government funding because this is not the organization’s  agenda, and MSK does not wish to compromise its  objectivity in pushing for reforms that will involve government action.  Neither does it have any aspiration to become a party-list group.

MSK is proud of its contribution in 2011 when it acted as Intervenor in  ERC Case No. 2011-108RC (in the Matter of the Application for Approval of the Batangas-Mindoro Interconnection Project (BMIP). This involves a  deeper review by the ERC of a P11.9 billion transmission line project that would have cost Luzon consumers P0.025 to P0.04 per kwh. Instead of an easy approval, the Energy Regulatory Commission is now still evaluating the cost-benefit of this added burden to the Luzon Consumers.

Tan revealed the purity of the advocacy of MSK for the electricity consumers would be evident from the group’s proposed changes in the rules and their implementation.  According to Tan, at the DOE Multi Sectoral Task Force To Find Ways to Reduce Electricity Prices, MSK has so far been the only consumer group that has submitted concrete and precise proposals for power cost reduction. “We have reached out to the other consumer groups and offered to educate them on the workings of the power sector so that their groups can make informed decision on their own position papers.”

Tan said there are groups with  vested interests that would be affected by the pro-consumer reforms MSK is pushing for at the DOE Task Force and running a campaign to stigmatize MSK and get the DOE to remove MSK’s  participation in the national debate for ways to reduce power costs.

Tan said his group, composed of a lawyer, a seasoned advocacy campaigner,  and legitimate Meralco consumers– only wants reforms in rules and industry practices so that the electricity consumers will be charged only fair and reasonable rates and will be pursuing its power cost reduction advocacies through various legal avenues available to it.

“We will be true to our name Matuwid na Singil sa Kuryente,” Tan  affirmed.

Of WESM Price Caps and Market Settling Prices

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

The DOE and ERC are incessantly being pressured by pro-IPP lobby groups MAP and ECCP to lift the secondary price cap in the WESM market. They claim “this deters the entry of new and existing peaking plants by effectively disallowing them from recovering fuel costs”.  They are referring to diesel power plants running on bunker c fuel whose fuel and lubes costs alone is P8.50 per kwh in Luzon.

The Secondary Market Cap of P6.245 per kwh was installed by the Energy Regulation Commission, in a welcome flash of regulatory reawakening, “to prevent market power abuse and other anti-competitive practices which affect prices in WESM to the detriment of the consumers”.  This was triggered by the public outcry and Bayan Muna’s Supreme Court petition, over the 74% and 100% upsurge in power generation costs of Meralco in December and January when the WESM prices spiked to P62 per kwh (the old offer price cap in the spot market)  and averaged P23 and P33 per kwh for those months.

The WESM system is clearly broken and needs fixing. It is very vulnerable to manipulation under the rules that were installed by the market participants themselves and obviously did not have informed input from the consumers. MAP and ECCP are among those organizations that came out with a full page advertisement lobbying for the retention of the status quo in WESM rules and many of their obvious media supporters sang the same tune. ECCP is reported to refer to the ERC’s Secondary Market Cap as an “artificial market manipulation (that) is a disincentive for the private sector to invest in future power generation development”.  Really? artificial market manipulation? Tell us about it!

The ERC’s steadfast imposition of the P6.245 per kwh Secondary Market Cap “will remain until the establishment of a permanent pre-emptive mitigating measure in the WESM is established”.

Reforming the WESM rules is however the territory of the Department of Energy and it needs to do so urgently. Perhaps its Multi-Sectoral Task Force to Find Ways to Reduce Electricity Prices must focus first on re-writing the WESM trading rules to better protect the consumers instead of a catchall dragnet for solutions that will probably not come out until the end of the year if at all. This may be too late to have an impact in the coming summer.

The DOE had come out with its first step of reforming the WESM by trying to turn it over to a more independent market operator instead of PEMC. They however proposed that the rule making recommendations will be done by a “market participants group” (MPG), the same people who wrote the initial rules that have been disaster for the consumers. We are wondering why the DOE is not willing to take the lead itself in making a provisional consumer protective rule changes now and ask the new IMO to determine whether they will make it permanent.

The fallacy of Market Clearing Price

The Basic problem of the WESM is the concept of market clearing price which is “the highest offered price that was dispatched” for the trading hour.  This means even if hydro power is offered at P3.00 and coal is offered as P6.00, they will still be paid P32 per kwh if a diesel plant offered that price since it is the current market price cap.  This is a prescription for overpriced power prices in the spot market and so anti-consumer.

If we look at the origins of the P62 per kwh market cap, we will find that there is really no econometric reason for it other than that was the number wished by the Hopewell Navotas facility to run emergency power in case of shortage. It did not make sense even then because the facility had its basic capacity fees covered by its contract with Napocor and the number should have been based on its variable cost for incremental running. Even if we double their variable cost, it will not be anywhere near P62 per kwh.

The Secondary Market Cap is an enlightened  preventive mechanism by the ERC but temporary.  It is the Market Clearing Price methodology that needs thorough rethinking. Adopting the highest price for the trading interval as the Market Clearing Price was patterned after the Chicago spot market for commodities where buyers of wheat and corn decide on whether to buy or not and therefore determines the market price of the commodity. This should not apply to power because the buyers do not have a choice of whether to buy or not and therefore the highest price of capacity dispatched is not a determinant of “market value” of the power.  There is no free interplay of “supply and demand” market forces.

Market Clearing Price being the highest price for the period only benefits the generator suppliers and a sure overcharging of the consumers to whom it is passed on.

Paying Offerors their offered Price

What would be fair to both energy suppliers and the consumers (as represented supposedly by their distribution utility) is for them to be paid at their offered price only. Then we will really see the true value of the power at any given time. Distribution utilities can also be given a say on whether to buy at high prices or elect to have short term brownouts to avoid price spikes in their service area or put a limit on such high prices.

Reserve Market

The diesel power plants whose roles are peaking and reserve can be covered by the proposed “reserve market” where there is a predetermined viable dispatchable price. They can even have assured revenue for being on standby covering their fixed costs and the variable costs if they are dispatched. Overall this will result to more stable and reasonable cost contribution to the energy mix.

The ERC might consider applying the current secondary market cap of P6.245 per kwh only to the base-load plants like coal and natural gas. This should also be applied to hydro power. Diesel plants can have an interim rate cap of P12.50 per kwh. This can be a step towards “technology based” spot market pricing.

The reform of the WESM trading rules to better protect consumers from wayward pass on charges and eliminate market manipulation and excessive generator profits is very urgent and timely. It may need its own task force by the DOE.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
1 September 2014