Accountabilities, doable solutions

(Last of three parts)

The Electric Power Industry Reform Act (Epira) will probably be amended, but it is unlikely that the amendments will cure what ails the system. The interest groups are just too powerful. The law’s imperfections are not the only reason for the soaring power rates in the country.

The others are the law’s implementation by the Energy Regulatory Commission (ERC), Department of Energy (DOE) and Wholesale Electricity Spot Market (WESM). It might be better therefore to look at more realistic and doable solutions that are within the current powers of the implementing agencies and the executive branch of government.

Before that, let us set the record straight on the accountabilities of the groups covered by the Epira.

1. Manila Electric Co. (Meralco) and distribution utilities

The Epira is clear under Section 23 about the obligation of Meralco “to provide power in the least cost manner” to its customers.

It comes hand in hand with its obligation to provide satisfactory service as public service franchise holder.

Meralco cannot blame the WESM or its bilateral supply contractors. Distribution utilities are the first line of defense of consumers from exorbitant power rates and bad service. They cannot renege on this obligation.

Investors in distribution utilities should be satisfied with the fair rate of return that the government guarantees. If they wish to make more money it should be through their operating efficiency and not by circumventing the rules and overcharging consumers and industries.

2. ERC

It is the job of the ERC that these distribution utilities (and the transmission company) remain fair to the public and provide sufficient and viable supply.

If it remains faithful to these objectives, the regulator will see clearly through the maze of seemingly complicated rules and have the discernment while under pressure from powerful lobbyists.

A regulator’s job is never done so its rules must be regularly reviewed and updated when it becomes clear that these are not serving the public interest.

In the case of the hasty approval of Meralco’s P4.15 per kilowatt hour (kWh) rate increase, the ERC was remiss in its obligations under Sections 45 and 43(k)(o)(r)(s) “to monitor and take measures … to penalize abuse of market power, cartelization, anticompetitive and discriminatory behavior by any market participant.”

At the minimum, the ERC could have demonstrated sensitivity to consumers as required by Sections 41 and 43 in the face of the 70-percent jump in generation charges.

3. DOE and WESM

The workings of the WESM are the responsibility of the DOE as defined by Section 30. When the spot market price caused a price shock to consumers, the DOE should have shown sensitivity to consumers by pointing out that the WESM prices were not reasonable.

The WESM is too complex for a new energy secretary faced with macro energy concerns. It should have been the duty of the bureau officers to watch the store.

The DOE would need to step up to the challenge. It needs a stronger bureaucracy so that incoming energy secretaries can be brought up to speed on the critical responsibilities. Its organization must be provided the needed incentives to attract and retain talent.

4. National government

The biggest challenge to the government is to be conscious of the critical roles of the energy agencies and to provide them with the right leadership who can pursue a vision. Ultimately, the people still will look up to national leaders for relief and protection from unfair charges, such as the 70-percent jump in power rates.

5. Legislature

Will it do the right thing and forget for a moment the vested interests that led to the watering down of the Epira? It is incumbent upon the Joint Congressional Power Committee (JCPC) to fulfill its proper role.

Solutions

Even if the Epira is not amended, all hope is not lost. There are doable solutions.

1. Restore true competition and open up the market for power generation supply.

It is within the power of the ERC to pass a regulation requiring the holding of competitive bidding for bilateral contracts intended to serve captive markets, which in most distribution franchise areas, including Meralco’s, comprise 65 to 85 percent of energy demand.

Section 45 (b) of the Epira allows a distribution utility to contract up to 50 percent of its power demand from affiliated companies, but is silent on how the contracting should be done.

Technically, it allows negotiation of bilateral contracts and does not prohibit bidding. Utilities like Meralco, if they are interested in providing least cost power, can call seek bids for their supply.

The ERC and the executive branch, therefore, may assert this to safeguard public interest. Captive customers in the franchise areas of utilities cannot choose suppliers under the open access regime.

This simple regulatory assertion will have the added benefit of opening up the power generation market to truly independent power generators and increasing supply.

Existing bilateral contracts, especially those negotiated between sister companies, can be subjected to vigilant oversight to prevent abuse. Independent auditing firms can be deputized to monitor the billings.

The DOE can be the lead agency in determining the country’s requirements for new capacity and in supervising the bidding for the supply needs of distribution utilities. There is a need to go beyond “tallying” the committed projects of the private sector.

The current initiatives of the new ERC commissioners to require utilities to subject bilateral contracts to competitive bidding are a step in the right direction. But to truly protect consumers, the bidding should be done under the auspices of the DOE.

2. Provide consumers prudent safeguards at the WESM while it is being revamped.

There is something terribly wrong in a market system when a power supplier would need a price of P62 per kWh to be viable at a time when there is no power shortage. The most expensive energy is diesel, which costs only P14 per kWh. For what reason should consumers be charged 500 percent of that?

It’s time to rethink the WESM. What role should it play in the country’s power grid to reduce power rates and promote system stability? The electricity spot market is intended to promote the efficient use of installed capacity. It is a place where a supplier can sell excess or uncontracted capacity, and a buyer (distribution utilities and contestable customers) can procure supply in case it faces a shortfall, presumably at prices that they can both agree on.

The problem with the current “mandatory pool” system is that the selling prices are determined only by the suppliers, who also determine supply.

And the utility (Meralco) that is supposed to be the bastion of consumer protection cops out and conveniently blames the WESM and the power generators for the spike in its rates.

For more stable low rates and supply, bilateral contracts are cost efficient and transparent because both the seller and the buyer have a say in the power rate.

Electricity pooling encourages gaming. Power suppliers must be paid only for what they bid, not the theoretical “market clearing price.” Contracted capacities should no longer be part of the trading volume. Maybe the WESM should be converted into a bilateral trading platform.

The ERC might also want to review the rules of its wholesale aggregator program to protect consumers against abuse of market power and anticompetitive behavior.

3. Limit concentration of capacity

Limits are intended to promote maximum true competition and prevent manipulation of available supply for the benefit of consumers.

Amend Rule 11 Section 4b of the Epira implementing rules and regulations (IRR) that provides for counting the capacity only for the party “controlling the capacity”—a circumvention of the limits.

Stockholders of a power plant have a say or influence on whether their plant should run. Not just the managers or capacity controllers.

Owning a power generating company (genco) is the motivation for distribution utility owners to negotiate preferential rates and terms for their own gencos.

Amending the Epira IRR needs the action of the DOE and the approval of the JCPC.

4. Strengthen safeguards for consumers at the ERC

Generation cost is not the only contributor to our rising power rates. Distribution and transmission charges have also increased mainly due to the new performance-based rate making (PBR), which allows a utility a return on investment (ROI) on installed facilities and on future investments.

a. Consider suspending the PBR

Revert to the more transparent return on rate base (RORB) which gives the distribution utility and transmission company a return on actual investments. It is true the old RORB was abused through the padding of assets that were included in the rate base but the PBR is much worse for consumers.

It makes consumers pay for future investments and gives the utilities a nice ROI that they did not make.

The result is undue exponential increases in power rates for consumers and profits for the utilities.

PBR rules are so bewilderingly complex that it is an effective denial of due process.
b. Competitive procurement of rate base

All assets acquired by the distribution utilities like Meralco and the transmission company, National Grid Corp. of the Philippines (NGCP), are added to the rate base valuation, which in turn is the basis for the ROI.

Obviously, if the procurement of assets is overpriced by 10 percent, the ROI that will become part of the rate base is padded by at least 10 percent. Perhaps, it’s about time for the ERC to require that the procurement of capital assets and services be part of the rate base of a utility and transmission company, and be subjected to transparent and competitive bidding.

c. Strengthen safeguards in pass-on charges to consumers

Generation rates are not the only pass-on charges that consumers must be protected against.

Systems loss

A utility loses a certain amount of power in its system through technical or commercial reasons before it is delivered to customers. The losses are passed on to consumers.

This is supposed to be up to 8.5 percent of a utility’s average generation charge.

In a Meralco monthly bill, this is shown as a percentage of the total bill, making it look small and compliant at 5.9 percent. If computed as it should as a percentage of the average generation charge, residential and commercial consumers are charged 12 to 15 percent.

The Epira in Section 43(f) removed the systems loss cap mandated by Section 10 of the Anti-Pilferage Act and allowed the adoption of a new rate cap to be approved by the ERC. The ERC itself set the maximum limit in Resolution 17 Series of 2008 at 8.5 percent for Meralco and other utilities. But most months it is 12 to 14 percent.

At a generation charge of P5.67 per kWh, the systems-loss charge is about 74 centavos at 13 percent instead of 48 centavos or a difference of 26 centavos. For Meralco that translates to P7.8 billion a year in undeserved revenue.

Conversely, large-volume industrial customers are charged only 29 centavos per kWh, apparently to make Meralco’s industrial rate competitive so they don’t leave under the open access scheme, and jeopardize bilateral contracts.

This is a form of interclass subsidy, something prohibited by the Epira.

Fuel pass-on of generators

In the case of replacement power, like the supposed use of distillate fuel by natural-gas generators First Gas and Ilijan Power, let’s hope that these substitute fuel was bought in a competitive way for the protection of consumers. Distillate fuel is reportedly four times more expensive than natural gas.

There are no safeguards against another sister company of the generators to be the supplier of the fuel.

Improve regulatory efficiency

The ERC can be structurally unburdened and its regulatory role rationalized so that it can focus on judiciously regulating the distribution and transmission sectors, and assuring the public that pass-on charges to consumers are fair and reasonable. There are more than 130 distribution utilities in the country and the myriad projects and petitions to charge consumers by NGCP are enough to overwhelm the agency.

The ERC can streamline operations by setting regulatory free zones. They can establish a generation rate threshold of say P4.80 per kWh and review only those generators who will charge higher and those who did not undertake competitive bidding. Any electric service provider who wish to reduce rates should be allowed to do so without tedious hearings.

Government income from energy and power services and Malampaya

If the aim is to make the country competitive and to reduce power rates, then revisiting taxes and pricing of indigenous energy should be part of the equation.

The price of indigenous energy like natural gas is indexed to foreign oil price movements. Only the government and not the people benefit from indigenous energy.
There needs to be a clear definition of the judicious use of the Malampaya Fund. It is accumulating and serves a temptation for future governments.

It is another logical funding source for a security-of-power-supply program of the country. The fund can be used to develop infrastructure for natural gas and support programs for the development of previously marginal natural gas finds that are currently capped.

Investments in generating facilities, transmission systems and distribution utilities are essential, and under the current system the assurance of fair ROI is accepted. Consumers, however, are entitled to protection from undue profits. For a sustainable system, the interests of the power service providers and the power service users need to be balanced and made equitable.

Big challenge

A big challenge the country faces in amending the Epira is whether our leaders will spring to action and rise above politics, whether the people are willing to send clear signals to Congress that they want change now, and whether those who have enjoyed a windfall from the law would see that it is to their long-term interest that consumers are served fairly and reasonably.

Can we as a nation muster the courage to face the barriers to change now and make the corrections in an Epira II? Would those of us in a position to help can turn our backs on this defining moment? If not now, when? If not us, who?

(Editor’s Note: David Celestra Tan, a CPA, is a founding director and one-time President of the Philippine Independent Power Producers Association. He was a power generation executive from 1993 to 2013.) –David Celestra Tan
Philippine Daily Inquirer

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