Why power rates shot through the roof

THIS SUMMER was unusually hot, with temperatures soaring to record highs.

What was even more unusual was the way power bills shot through the roof, particularly in April. For the first time, many customers of Manila Electric Co. (Meralco) saw their bill for the month double, even at around the same level of consumption as the previous month.

A few days after the first batch of bills were sent out to Meralco customers, a page protesting the “rate hike” was put up on the social networking site Facebook.

The “Protest Against Meralco Electricity Price Hike” page now has more than 48,000 “fans.”

According to Meralco, the increase in the April rate was due to a surge in the generation-charge component, a pass-through cost that has no revenue impact on the firm.

“The rise in generation charges springs from the high cost of electricity that Meralco buys from its suppliers. These suppliers consist of National Power Corp. (Napocor), independent power producers (IPPs) and the wholesale electricity spot market (WESM), a venue for trading electricity as a commodity,” Meralco said in an open letter to customers.

Huge jump

The generation charge in April rose by 93 centavos per kilowatt hour (kWh) to P6.77 per kWh from P5.84 per kWh in March.

For the sudden spike, Meralco mainly blamed the WESM, which registered a record effective settlement price (ESP) of P13.38 per kWh in March.

The ESP is the price customers pay for electricity sourced through the bourse.

The huge jump in the WESM rate for March caused the generation charge to soar and the April bill to drastically shoot up.

Meralco’s distribution charge also rose from 69 centavos per kWh in March to 85 centavos in April.

Even the amount that customers are paying for systems loss inched up.

Confluence of events

To make matters worse, power users nationwide had to contend with rotating outages while dealing with high electricity rates.

A number of power facilities all over the country either went down or did not run at full capacity because of lack of fuel, preventive maintenance or actual damage.

Mindanao residents bore the brunt of the outages that lasted up to 12 hours daily due to the extended El Niño.

Then Energy Secretary Jose Ibazeta blamed the ironic situation—high power rates amid daily rotational brownouts—on a “confluence of events.”

The need for ample power supply for the May elections pushed ahead the maintenance schedules of many Luzon plants, resulting in a thin supply. The lack of water in Mindanao left little or no fuel to run the grid’s hydropower facilities.

The law of supply and demand dictated that little supply amid huge demand would result in prices going up. That would partly explain why generation costs were particularly high in the summer months.

The WESM ESP jumped by almost P7 per kWh from January to February—from P4.56 to P11.28 per kWh. In March, the rate went up even more to P13.38 before dropping to P8.87 in April and to P8.47 per kWh in May. (See chart.)

WESM probe

Logical or not, some rate increases—particularly those sudden and drastic spikes in the WESM rate as early as February—prompted the Energy Regulatory Commission (ERC) to begin an inquiry.

“We have created an investigatory unit to look more closely into the behavior of the WESM participants not just in February but in the entire first quarter,” ERC spokesperson Francis Saturnino Juan announced.

Juan said the investigators had recommended that a foreign expert on competition and market abuse be brought in to help in the probe.

He said that when the ERC first conducted a similar probe, “it was predominantly [the Power Sector Assets and Liabilities Management Corp., or PSALM] that was involved.”

“Now we’re looking at the behavior of the private generating companies,” he said.

In October 2006, or a few months after the start of WESM’s commercial operations, a similar inquiry was conducted on suspicion of price manipulation that resulted in huge power price spikes.

On the third trading month, spanning Aug. 26-Sept. 25, 2006, the average price at the electricity bourse reached P4.853 per kWh, from only P2.788 per kWh and P3.079 per kWh in the first two trading months.

In the same month, the weekly average started at P3.62 per kWh, then jumped to P4.51 per kWh and then to as high as P6.80 per kWh for the week ending Sept. 25.

This prompted the market surveillance committee of WESM operator Philippine Electricity Market Corp. (PEMC) to monitor bids placed at the electricity bourse.

Likely culprit

Since no external factor seemed to have contributed to the price spikes, PSALM was the likely culprit, considering its control over some 50 percent of the total power capacity traded in the market.

PEMC found PSALM guilty of anticompetitive behavior and market power abuse, but the ERC let the government agency off the hook.

This time, with almost all Napocor plants privatized, market power had shifted from PSALM, which controlled trade for Napocor IPP contracts, to the private generators.

To drive this point home, PEMC said the price spikes at the WESM were not solely to blame for the sudden surge in Meralco bills in March and April, with Meralco itself explaining how prices from its IPPs also rose during the periods in question.

The generation rate impact of the increase in WESM prices in the February-March buying period amounted to P1.98 per kWh, or a 21-percent hike vis-à-vis the previous billing month.

Combined with power from Napocor, the impact was reduced to only 85 centavos per kWh, or 13 percent down from the month before.

Contributory

Power from Meralco IPP First Gas Power Corp., which operated the Sta. Rita and San Lorenzo natural gas-fired power plants, and Quezon Power (Philippines) Ltd. also jacked up the generation charge component of electricity bills by P1 per kWh, or 21 percent higher than the previous month.

“This shows that in addition to the impact of the WESM prices, the increase in the prices of [Meralco’s] contracted IPPs also contributed to their higher generation cost. During this period, Meralco withdrew about 17 percent of [its] demand requirements. This follows that the effect of WESM prices was limited to less than a quarter of Meralco’s total energy requirement,” PEMC said.

PEMC indirectly chided Meralco for not getting electricity from the “least cost” supplier at specific times, citing a section of the Electric Power Industry Reform Act of 2001 that states: “A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market.”

Private generators such as Meralco’s IPPs were partly to blame for escalating power rates, according to PEMC.

But PEMC itself cannot wash its hands of wrongdoing until the ERC investigatory unit lets it off the hook—again.

The government was also not entirely blameless.

In her 2002 Labor Day speech, then President Gloria Macapagal-Arroyo capped Napocor’s purchased power cost adjustment—or generation-related costs of power from IPPs that it could pass on to customers—at 40 centavos.

While this resulted in an 85-centavo cut per kWh in pass-on charges for Luzon customers and a 69-centavo average per-kWh reduction for all customers nationwide, this prevented the reflection of the true cost of power production on electricity rates.

“We’re now seeing the impact of subsidized versus market-based pricing. People don’t realize that the cost of producing electricity has been going up these past years. Because of the subsidies, people were led to believe that the costs of producing power are low,” Napocor corporate communications manager Dennis Gana said.

Power rates slightly dropped last month but are going up again. The generation charge is rising, while Meralco, Napocor and National Grid Corp. of the Philippines are seeking additional rate increases.

Is it still a cause for wonder why Meralco recently announced that it would issue dividends to its owners? -Abigail L. Ho, Philippine Daily Inquirer