Meralco Customers Paying P13.68 B a Year More To Sister Company Generators

David Celestra Tan
16 February 2015

If there is any doubt at all on whether monopolization and self-negotiated power supply agreements are bad for electric consumers and the economic competitiveness of the country, we only have to look at Meralco’s buying generation rates from its various suppliers.

An analysis of Meralco’s generation cost data for the months of October 2014 to January 2015 by consumer group Matuwid na Singil sa Kuryente Consumer Alliance.(MSK) showed that Meralco has been buying and passing on to consumers P13.68 billion more per year for the higher rates of its sister company generators compared to those of non-affiliated power generation companies.

MSK is advocating for a power rate reduction in the Meralco area by P3 per kwh from the P12.50 in July 2014. Half of the reduction or P1.50 per kwh will come from the generation rate. It has been lower because of the fortuitous drop in world oil prices but that soon will be back to reality. MSK had filed a petition with the ERC to pass a regulation requiring open competitive bidding of power supply contracts and to outlaw negotiated sweetheart deals with affiliated companies that has been resulting to high pass on generation rates to consumers.

1. Coal power generators
From October 2014 to January 2015, Meralco’s non-affiliated power generation suppliers averaged in price only at P3.4885 per kwh whereas Quezon Power in Mauban averaged P4.65 per kwh or P1.16 per kwh or 33% more.

Meralco doesn’t attempt to defend the rate disparity and argues only that QPL is not affiliated with Meralco which is technically true. But the 440mw power contract was negotiated with people close to the then controlling owners of Meralco under same sweetheart deal as the 1,500mw First Gas Power. QPL is now owned by EGAT of Thailand who is now the 49% partner of Meralco PowerGen in the 400mw expansion of the Mauban coal facility.

It is true also that the four (4) other coal suppliers, SEM-Calaca, Masinloc, SMEC Sual, and Therma Luzon Pagbilao, are negotiated contracts but they are nonetheless non-affiliated and the deals were arms-length.

In terms of financial magnitude, Meralco bought 1.01 billion kilowatthours from QPL for the four months October to January. At the higher rate of P1.16 per kwh, the higher cost to the Meralco consumers for QPL power was P1.172 billion for the period.

Meralco buys 27.8% of its energy needs from the four (4) cheaper coal suppliers, an average of 6.95%. It buys 9.4% from QPL. If it were dedicated to least cost power and dealing on arms-length basis, one would think Meralco would be buying more from these cheaper sources which now averages P3.4885 per kwh. Would they not be asking them to expand cheaper capacity.? Instead it chooses to negotiate a power supply contract with its own self for a 400mw Mauban expansion at the rate of P4.30-P5.00 per kwh.

2. Malampaya Natural Gas
Of the three (3) generators selling natural gas power to Meralco, San Miguel’s 1,200mw SPPC Ilijan is non-affiliated and supplies power at P4.4542 per kwh. The Lopez owned First Gas Power are charging P5.4151 per kwh for 1,000mw Sta.Rita and P5.5182 per kwh for the 500mw San Lorenzo, for an average of P5.466 per kwh or a full P1.01 per kwh or 23% higher. They are all using the Malampaya Natural Gas at presumably the same fuel prices and terms.

The two First Gas plants supply 35.6% of the energy purchases of Meralco, an average of 17.8%. That translates to 3.394 billion kwh in the four months. At the higher rate of P1.0124 per kwh, the higher cost to the Meralco consumers is a whopping P3.346 Billion for October to January.

All these three contracts were negotiated but again the difference is San Miguel is non-affiliated and the two First Gas contracts were sister company sweetheart deals that will continue to be an albatross on the necks of Meralco consumers for 12 more years.

In total, the Meralco consumers have paid P4.56 billion more for the higher contracted rates for Meralco’s sister company generators just for the four months from October 2014 to January 2015, or a total of P13.68 billion for 12 months.

The big price disparity and onerousness to consumers between sweetheart deals and arms-length power rates is quite clear.

Meralco PowerGen had announced that it will put up 3,000 mw of new power plants all with negotiated and sweetheart prices and terms with Meralco. All these will be majority owned by Meralco. The 600mw Redondo Power in Subic had just been liberated by the Supreme Court and the 400mw Mauban expansion is moving forward and so does the 400mw Pagbilao expansion. All are coal power plants.

If nothing is done by the government, Meralco’s 5500mw power supply will be monopolized by PowerGen at 3,000mw, First Gas at 1,500mw with another 1,000mw expansion, and Summit Group (a significant shareholder of Meralco) at 600mw. The five truly independent power generators (including SPPC-Ilijan) that currently saves consumers approximately P13.68 billion a year in lower generation rates will practically disappear.

Yet, Meralco is trying to say there is no basis for MSK’s petition that the generation rates will be lower if they are not negotiated and subjected to open bidding and monopolization by sister generators are banned. May be that is to be expected from Meralco but for the ERC, who is mandated by law to protect the public interest, to appear to be apathetic to the petition, is a great disservice to the people and country. Facts and Figures don’t lie.

When will the government pay attention to the electric consumers flight? Who is looking after us and the P13.68 billion per year in avoidable overcharge in generation rates?

David Celestra Tan is a former power generation executive and a founding director and former president of the Independent Power Producers Assn. A CPA and retired utility economist, he is a co-convener of the electricity consumer advocacy group Matuwid na Singil sa Kuryente Consumer Alliance Inc.(MSK). Email david.mskorg@yahoo.com.ph.

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Are Electric Consumers Double Charged for Ancillary Services by NGCP and its dispatch of MRU?

David Celestra Tan
January 2, 2014

In September and October 2014 Meralco’s purchases from WESM reached astonishing levels of P43.05 and P35.60 per kwh, even higher than the P33 per kwh that wrought havoc on the generation rates in Meralco’s generation rate in November and December of 2013.

It did not become an issue to the Meralco consumers because it did not increase rates to the consumers due to the low off-take of Meralco from the WESM at less than 1%.

There is more to the astronomical increase in the WESM rates than meets the eye. Consumer Kris Balitbukel pointed out that the WESM prices for those months would have been around P4.50 per kwh if not for NGCP’s decision as Systems Operator to dispatch “Must Run Units’ (MRU’s) to cover reserves which costs are passed on to the consumers. We see what appears to be double charge to consumers.

Following are the Explanations of Mr. Balitbukel:

December 26, 2014 at 8:25 am

You were too easy in just letting the high WESM prices of P 43.05/kwh for September and P 35.60/kwh for October slip by without closer scrutiny. Except for the P 36.08/kwh for the January WESM, these are the highest WESM charges this year (despite the lower primary price cap of P 32/kwh and the secondary price cap of P 6.245/kwh set by the ERC). These are price shocks that begs examination notwithstanding the impact may have been mitigated by the lesser WESM quantity bought by Meralco during those months.

Our research reveal that that these price spikes did not come from WESM trading (pure spot prices) but from MRU charges, as well as line rentals. MRU stands for Must Run Unit which in WESM operations refers to a power plant dispatched to operate by the System Operator (the “SO” or the NGCP) even after the Market Operator (the PEMC) has already established the Merit Order Table of the plants that will meet the demand at the least cost. MRUs are plants which are “out-of-the-merit-order-table” or sometimes referred to as “out-of-schedule” dispatch (the schedule being the order of the plants determined in accordance with an objective market algorithm, the Market Dispatch Optimization Model, which results in an price-ordered stack of plant capacity offers that provide the least cost to meet the demand).

Further research on the reasons why the SO/NGCP dispatched MRUs reveal that much of it are for system voltage requirements and inadequate reserve levels for which the plants dispatched for MRU were compensated by way of WESM charges. Still further research reveals that in these instances of MRU dispatch by the SO/NGCP, the plants which were made to run are the oil based plants (Malaya, Bauang, Limay, Subic) whose operating costs are quite expensive. There should not be any surprise here the corresponding MRU charges should be high. (The other instances of MRU dispatch pertain to commissioning tests by new plants which should hardly result in incremental WESM charges.)

Voltage quality and availability of reserves are the responsibility of the SO/NGCP for which they are paid their fees. However, in the above instances where MRUs are used, NGCP is solving a transmission problem with a generator solution and effectively is getting a free ride (at the expense of generators) from performing its responsibility in voltage quality and availability of reserves at a cost borne by end-users who pay the WESM charges. The SO/NGCP should solve the voltage quality problems by using its assets for which they are paid transmission charges (automatic on-load tap changers of its substations, shunt reactors and capacitors) and should address the paucity of reserves by purchasing enough of it. But when NGCP is made to get away with NOT doing its responsibilities simply because existing WESM rules allow it the expedience of simply dispatching MRUs whose cost NGCP does not have to bear, then the interests of end-users are grievously harmed when they in turn are made to pay MRU charges which in the first place are avoidable. The average load weighted WESM price, excluding MRUs and line rentals, is about P 4.50/kwh. That MRU should increase this by multiples is simply not acceptable, especially when costs are cavalierly incurred simply because an entity has the power to dispatch MRUs and such power is not subject to review or accountability.

MSK asked Mr. Balitbukel if this is resulting to a double charge considering NGCP is already charging the consumers these reserves under the Ancillary Services Purchase Agreements.

Mr. Balitbukel clarified as follows:

The P 0.36/kwh ancillary services (AS) charges collected by NGCP reflect the actual AS purchases by NGCP. However, our research shows that NGCP is able to purchase only about 45% of the required AS for Luzon and this is what is being passed on as the P 0.36/kwh AS charges to transmission users are AS. BTW, AS refer to the generating capacity deployed for regulating reserves, contingency reserves, and dispatchable reserves. It also includes purchases of KVAR for voltage support, black start capability and interruptible load in lieu of reserves. Because NGCP has not been able to purchase the required KVAR support , it has expediently used MRU for voltage regulation. However, NGCP is paid under its transmission service charge certain amounts to recover the cost of operations and capital for its voltage correction devices such as its automatic on-load transformer tap changers, its reactors, and its capacitors which if properly operated would have obviated the use of MRU for voltage requirements.

Clearly in this case. NGCP has chosen to NOT subject its assets to “wear and tear” of operations by simply running MRUs for voltage regulation. In effect, they were paid for NOT using their voltage correction devices and made users pay avoidable MRU charges for voltage regulation.

As to the inadequate AS purchases by NGCP, the lack in Luzon is in contingency and dispatchable reserves for which the ERC approved rates are lower than the approved rates for regulating reserves (which requirement NGCP is able to purchase). Arguably, if NGCP will fully purchase the AS requirements, it would not double the P 0.36/kwh currently passed on for the 45% it is able to buy. The ERC approved rates are P 2.25/kwh for regulating reserves, P 1.50/kwh for contingency reserve and P 1.25/kwh for dispatchable reserve.

In any case, there is rectitude in requiring NGCP purchase AS in any of these methods considering these are subject to regulation, transparency and competition. Today, NGCP inflicts end-users with MRU charges without any accountability in its decision to dispatch MRU plants. There are no objective standards by which NGCP’s decision to run MRUs can be reckoned with and NGCP cannot be made to pay for its mistakes and capriciousness.

Sent on Dec. 29 at 9:40 am

WESM Price Spikes in November and December 2013 due to abuse of market power or scarcity of supply?
by Mr. Kris Balitbukel

One of the most difficult task in reviewing WESM operations is the determination whether a price spike is the result of abuse of market power or merely by scarcity. Scarcity is easily explained by the law of supply and demand. On the other hand, abuse of market power in the WESM is the ability of a generator (or a firm controlling several generating plants) to increase the price and the ability to benefit from such increase. Market power may be exercised by withholding capacity (Physical Withholding) or by egregiously high price offers (Economic Withholding). To prevent Physical Withholding, the WESM has the “Must Offer Rule”, which requires generators to offer all their registered maximum capacity (the Pmax) in all trading intervals. To prevent Economic Withholding, the WESM Rules have a “Price Cap”, which requires generators to offer their capacity at a price not higher than the Price Cap.

It is important that in reviewing compliance with these rules to remember that violations may have differences in degree as well as in kind. Just like when a person is killed, there is a big difference whether the death is attributable to an act murder or to an act of self defense.

It would seem to be popular to liken what happened in the WESM last November and December as simply “murder” even in the absence of clear and unequivocal findings from the investigation by the ERC Investigation Unit (IU). We need to be objective about this because we need to punish the guilty only and not call everybody a “murderer”.

The IU’s task is a forensic investigation with big data (each of the 34 Luzon generators submitted in each interval ten (10) bid blocks for each generating unit, each block progressively priced starting with the minimum unit capacity priced at zero and the last bid block to be priced at no more than the Price Cap (but not necessarily at the Price Cap). That would mean discerning a pattern of abuse of market power from at least 732,000 data points for November and December 2013. This is a daunting challenge which I am afraid is way beyond the capability, if not competence, of the ERC IU. I hope I am wrong.

There is a train of evidence which would suggest abuse of market power. The WESM monitors concentration indices and an examination of the pattern of these indices would show whether abuse of market power has been committed. There is the Herfinddahl-Hirschman Index (HHI) which shows the extent of market concentration. There is also the Residual Supply Index (RSI) which indicates the presence of a pivotal generator. Then we have records which show who are the Clearing generators, ie, the generator whose bid set the market price for the given interval. Based on these indices, the proximate cause of a high price in a trading interval would need further scrutiny if the same is the result of a clearing price set by a generator belonging to the same firm whose HHI is significant and whose plants became the pivotal generators (because of event(s) resulting in an outage of some plants belonging to the same firm) for that interval when the RSI has become less than 100%.

Sadly, we don’t know whether the ERC is capable of doing this sort of investigation. Again, I hope I am wrong.

MSK Editors Note: The Meralco consumers are entitled to an explanation from the NGCP and PEMC on these issues. We are calling on NGCP and PEMC and ERC to respond and for the DOE to shed light on the MRU rules and how it can be rationalized. Maybe this should be replaced by a Reserve Market?

Regulatory Decongestion Essential to an Effective ERC

David Celestra Tan
26 December 2014

To be fair to the ERC, the Epira dumped on it an inordinate amount of responsibilities to making the privatization and deregulation of the power sector work. In the last 13 years it has struggled under the weight of these responsibilities while also trying to find and develop itself and acquire its own soul as a regulator. While the consumers are trying to be sympathetic to their “flight”, the regulatory shortcomings have been costing all of us untold billions per year in avoidable charges and we are not seeing resolute efforts on their part to do better.

The Energy Regulatory Commission is now generally thought to be too slow in coming up with timely decisions to support power development and failing to regulate the areas that they should but regulating or overregulating where they should not be. Consumers feel their decisions tend to favor Meralco and inadequate in checking NGCP and WESM. Critics call it regulatory capture. So far “sala sa init sala sa lamig”. It has become too bureaucratic, process-centric, and too busy that it has been missing the main objectives of its existence which are to assure ample power supply at reasonable costs. The “how” became more important than the “why” and the “when”.

The ERC can become an efficient regulator, effectively safeguarding the public where they are needed, and still promoting the continued development and delivery of power supply services through timely and judicious rate regulation. There has got to be a happy balance there somewhere.

Decongesting the ERC

The ERC has been suffering from bureaucratic overload, unable to properly evaluate and hear and resolve the mountains of rate petitions and accreditation applications from the distribution utilities, electric cooperatives, power generators, transmission service providers, licensees, own-use generators, consumer groups, and rule-making decisions. It is too congested by its own making many times ignoring its own rules of practice. Every year it receives hundreds of applications and petitions, from simple COC to complex rate-resetting, Feed-in tariff rules, and capex authorizations of DU’s and electric coops. All these go through financial evaluation, public notices, public hearings both in the provinces and in the main office, the addressing of intervenor and oppositor issues, and applicant compliances, all fighting for schedules from an overwhelmed bureaucracy. They also have to deal with political pressures and powerful lobbyists and the loss of trained analysts to pirating by the big power groups.

1. Streamlining processes where it is over regulating
a. Methodology of Review of Generators Tariff to Assure Fair and Reasonableness
This might surprise many people.

Power Generation is supposed to be a deregulated industry where the returns on investment is not regulated. However, ERC is actually regulating the profits on generation ostensively because it is a charge that will be passed on to the consumers. Effectively, they are regulating a supposed unregulated sector. In determining fair and reasonableness of the generation contracts tariff, it evaluates and sets limits on how much should be the proponents return on investment. It uses Weighted Average Cost of Capital or WACC that is based on the declared capital cost and project finance structure of the generation project. They decide arbitrarily to disallow certain investment costs and operating costs and reduce generators applied for tariff. The approved tariffs result to very inconsistent levels depending on the prescience of the evaluator or how adept the applicants are in justifying the numbers Or how well they are connected. This is regulation.

The ERC can meet its duty to assure that the generation rates are fair and reasonable without crossing the line towards undue regulation and being consistent with the unregulated nature of the generation sector.

Focus of evaluation must be on whether the rate is fair and reasonable in comparison with other existing projects of similar service, fuel, and technology. This necessitates sensible and logical benchmarking. A determination of fair and reasonable price of service. Not a fair and reasonal return on investment.

A few years ago an island IPP got an ERC approval for power supply using refurbished equipment. A few months later, another IPP applied for a similar service to the same customer using also refurbished equipment. But the latter’s rate approved by the ERC was a full P2.00 per kwh or 25% higher than the first IPP with 5% more fuel consumption allowance to boot. It meant a higher subsidy from the government by P140 million a year or P1.4 billion over its 10 year term.

In yet another contract by the same electric coop, a competitive selection process was held and the announced bid was P9.38 per kwh. The contract however was signed at P12.80 per kwh, P3.42 per kwh higher, and it was approved by the DOE, ERC, and NEA! It caused an undue increase of P171 million a year in missionary subsidy for that contract alone. (You see these acts by government officials and you just scratch your head).

Had ERC been using price of service benchmarking as a consideration, they would have questioned this new application and maybe realigned them to the previous and lower IPP whose equipment was the same age and technology, save for justifiable adjustments for unique costs of the project which in no way will cause an increase in rate by 25%.

Similar inconsistencies in rate decisions abound in Mindanao and the Visayas. We are seeing inconsistencies in the rates Meralco is negotiating with its sister company generators and even in ancillary service purchase agreements of NGCP.

Processes are good and the ERC needs to have them. It should opt however for competitive processes and not bureaucratic processes. Allow the market to determine whether the rates are fair and reasonable. And we don’t mean the WESM market whose current rules are prone to manipulation and stacked against the consumers. WE mean the open bidding for power supply contracts, under which the ERC will nonetheless establish a benchmark price as the maximum bid price to protect the consumers.

b. Not all rate changes should be subject to review

Would you believe that if a distribution utility or generator would like to reduce their rate, they still need to apply with the ERC and justify why it is feasible for them to reduce their rate? Why waste the regulators time when reductions are good for the consumers? Why not consider the approved rates of the DU’s and Generators as the “maximum” with their right to reduce rates anytime they want. And they can always to go back to the previously approved maximum. This will not deter those who are in a position to reduce their rates temporarily.

The requirement of the Epira Law for the ERC to approve all rates that will be passed on to the consumers is being taken too literally. The higher rule should be whatever will be for the public interest, and lower rates is one, should be allowed and facilitated.

c. Certificate of Compliance

Another example of an area where it is over regulating is the issuance of Certificates of Compliance (COC’s) to owners of generating units for own-use generation. This takes 60 to 90 days and involves the site inspection and submission of voluminous financial and technical data.

The Epira Law mandated the ERC to be in charge of this COC but it was meant to be only applicable to generating facilities that will be part of the grid and intended to be a ministerial function where the only thing it needs to validate is whether the facility has all the required government permits to start operating.

It is not intended to require COC’s for own use generation unless that facility intended to supply to the grid or part of the ILP (interruptible load program). Can you imagine that this own-use generation is being processed through the ERC bureaucracy and go up to the Commission for approval? Its cost of generation and technical suitability is the outlook of the owner and the ERC should have no role in it. Nothing is passed on to the public or to the government.

d. Enforcement and Follow through is where ERC should make more effort to protect consumers…..That and properly regulating the regulated sectors.

If the ERC is to become true to its mandate as a protector of the consumers for fair and reasonable charges, they have to go beyond issuing rules and resolutions.

1. The downtime limits and fuel cost consumption and cost limits of power generators specially the sister companies of DU’s need to be monitored and audited. ERC can deputize independent CPA firms, who are not saddled by conflict of interests, to do these consumers audit.

2. ERC can improve the transparency in the downtimes and capacity charges of Meralco and the DU’s by requiring them to post the information in their websites so the public would have a chance to monitor their compliance to their power supply agreements specially those of sister power producers.

3. The WESM that reeks of manipulation and exploitation needs to be policed because PEMC is not able to police its own rule-making “market participants”.

(By the way, why have they not disclosed the WESM trading behavior of the IPP’s in the fateful months of November and December 2013? We just read that ERC’s investigation unit is not done yet. They say it involves 1,440 transactions in November and December of 2013. Don’t we think a whole investigation unit can analyze easily ten (10) transaction flows per day of who offered what and the behavior of their related generators contracted with Meralco? It means the 1,440 could have been analyzed in 144 days or just 6 working months.)

e. Properly Regulating the regulated Sectors…Distribution Utilities and Transmission Co.

1. The ERC needs to look deeper into the rate setting decisions it made on Performance Base Rate Setting and Systems loss allowances.

The Epira law gave them the leeway to adopt alternative methodologies. But they forgot that the law premised those to be “in the public interest”. Section 25 specifically provides that retail rates must be based on investments INCURRED. Period. No leeway for planned and projected and promised investments.

PBR is a farce and must be discontinued. It surprised us when a rep of the Philippine Institute of Development Studies told MSK reps that our proposal to discontinue PBR is too radical. Our answer? PBR is a radical injustice to consumers so if the solution is perceived to be radical, so be it!

All we need is a change in methodologies. More on this in our petition to ERC.

2. Systems Loss

We reiterate our call for tighter rules and more transparent methodologies on how much systems loss should be charged to the consumers. The consumers might be happy with an absolute maximum to anyone of 8.5% and anything lower than 7% average systems loss, the DU or Meralco can keep. This is a better form of performance based rate setting.

For electric coops, systems loss improvement programs must be set over the next five (5) years by similarly giving them performance based methods. Over time the larger coops of 25mw and up demand, can be limited to 13% with a system cap of 11.5%. anything lower than they can keep as performance bonus.

These areas for regulatory decongestion and refocusing are by no means complete. The main point is the ERC needs to review its regulatory mind-set, search for and get in touch with its regulatory soul, and decongest itself from areas where they should not be regulating or spending too much time and focusing on where its regulatory power will serve best the interest of the public. Through its rate approvals it sends profound price signals to the investors in the power industry. As gatekeeper of retail rates to consumers, it should not lose sight of its main reasons for existence which are to promote ample supply of power at fair and reasonable rates. Many times it only focuses on the former…..and their bureaucratic process.

All of ERC’s decisions must pass the ultimate test which is “does it serve the public interest”? That is key to its regulatory soul. The wise and judicious use of their time, resources, and powers must serve the greater good.

There are signs that the ERC is getting better at looking after the consumer and working towards reducing rates. The net metering system for 100kw of solar and wind is a big leap for the consumer mankind. And the secondary cap it steadfastly imposed on the WESM appear to be a make up to consumers for previously and routinely approving a shocking 85% (P4.15 per kwh) increase in generation rate in December 2013. ERC can be judicious if they want to be.

For now, the ERC must decongest itself. Service delayed is service denied.

Matuwid na Singil sa Kuryente Consumer Alliance
Email: david.mskorg@yahoo.com.ph