January 16, 2014

Dirty power players

Before Christmas last year, the Manila Electric Company or Meralco, the Philippines' largest distributor of electrical power with a franchise for 22 cities and 89 municipalities, including the whole of the National Capital Region, tried to pull a fast one over its more than five million consumers.  It announced an exorbitant hike in electricity rates -- a whopping P4.15/kwh increase to residential users to be collected on a staggered basis from December 2013 until March 2014 -- after being given the go signal from the government regulatory agency, the Energy Regulatory Commission or ERC.

The ERC did so with lightning speed on the basis of a mere letter from Meralco and sans any notice to consumers much less a public hearing.  Malacanang, for its part, immediately pronounced the increase to be justified and lawful. In the same breath it averred that government was powerless to intervene in price setting as the power sector had already been denationalized and almost wholly deregulated by virtue of the Electric Power Industry Reform Act of 2001, or EPIRA.

The announcement was met with public shock, dismay and then outrage. The Makabayan bloc of progressive party lists called for legislative inquiry into the facts and circumstances behind the increase.  There were pronouncements from the leadership of the two houses of Congress of the need to review EPIRA, whether it had been properly implemented or worse, failed to deliver on its promises.  In the House public hearing, Department of Energy (DOE) officials revealed that they were investigating possible collusion among generation companies (GenCos) in simultaneous and unplanned shutdown of their power plants.

The Makabayan bloc promptly filed a petition with the Supreme Court for a temporary restraining order (TRO) on the Meralco increase because of the lack of due process in the ERC decision and because of signs of monopolistic price manipulation. A permanent injunction was prayed for by petitioners including the striking down as unconstitutional Sections 6 and 29 of EPIRA that categorized power generation and supply as not being public utilities and therefore not subject to government regulation.  Meralco and the ERC used these provisions as the basis for the increase and its automatic pass-on to consumers.

After a seeming reprieve when the High Court issued a TRO, the public is now being warned by Meralco of blackouts should the electric company not be able to collect on the basis of the new, ERC-approved rates.  This is echoed by inveterate champions of power sector deregulation and privatization. Topping it all is a numbskull proposal to give emergency powers to President Aquino for him to address and resolve the supposed impending power crisis. DOE and Malacanang prudently, or maybe just coyly, declares such a contingent measure as unnecessary at this time.

This column will attempt to explain in a two-part series, from an admittedly layman’s understanding, the issues at hand as well as their long-term implications. This attempt at sieving and seeing through a maze of highly technical and complex issues to lay bare the essentials is being done in defiance of  the continuing efforts to deliberately obfuscate the way the power sector in this country is being run to favor the greed for profit of the biggest players in the power industry to the utter detriment of the millions of ordinary household electricity consumers.

The dirty power players include not only the power companies involved in generating, transmitting and distributing electricity but also the technocrats and policy makers, the big business interests and the perennially interventionist International Monetary Fund, World Bank and the foreign chambers of commerce that constituted the overpowering lobbyists for EPIRA.

Firstly, why was there a rush by the ERC to grant the increase to Meralco without taking into consideration the hefty burden on millions of low to middle-income households not to mention the undeniably negative impact on the economy.  Why the failure to examine the suspicious circumstances of conveniently simultaneous or overlapping plant maintenance schedules and allegedly unexpected coincidental plant breakdowns.  The ERC appeared oblivious to the DOE’s investigation of possible collusion among the GenCos to artificially constrict power supply.

According to the Makabayan petition, the ERC acted “in violation of its mandate to protect the public from anti-competitive practices and abuse of market behavior of industry players and the Constitution which prohibits monopolies and combinations in restraint of trade.”

The Malampaya regular maintenance shutdown (termed “turn-around”) is announced way in advance.  Because Malampaya natural gas is a relatively cheaper source of energy to run the bigger power plants compared to more expensive, imported fuel such as diesel or crude oil, its temporary closure can and must be prepared for. But rather than be a signal for Meralco and the GenCos, under the appropriate guidance of the DOE, to prepare for this scheduled shutdown and those of several other power plants that would result to at least 2700 megawatt deficit in Meralco’s supply of electricity, it became an opportunity to unscrupulously escalate electricity prices.

Note that the breakdown of the Meralco increase points to a huge chunk of it going to electricity sourced from WESM. The P4.15/kWh added charge consists of P3.44 generation charge and the corresponding Value Added Tax (VAT).  More than two-thirds of the said generation charge is the P2.38 cost of electricity supplied through the WESM.

Why did Meralco buy at very high rates from the WESM when it had enough time to contract its power requirements elsewhere at a much lower price?  Meralco should have found a more cost-efficient solution to the anticipated deficit in its power requirements but it fell short of doing so.  It still sourced about 10 per cent of its requirements from the WESM which is always costlier on an ordinary trading day, but more so when there is a tight supply due to various causes, not excluding an orchestrated shutdown of several plants by the Gen Cos.

Here is a case of patent abuse by Meralco of the already highly questionable and even unconstitutional automatic pass-on of costs to its consumers.  This privileged business entity can lazily sit back and not bother about sourcing the cheapest power supply given foreseeable conditions of supply and demand because it can just pass on the added costs to its customers with the ERC’s imprimatur.

This historically and persistently monopolistic situation in the power distribution segment of the electricity business has apparently spoiled Meralco’s owners and managers.  They do not have to work their butts off seeking to bring down if not maintain electricity rates at a reasonably affordable level for their customers who are reeling from natural and man-made disasters and an economy that is not “trickling down” to the masses because they can simply pass on the increases.

Worse, Bayan Muna representatives have found proof that Meralco, working in tandem with an Aboitiz-owned power generation company, Therma Mobile, manipulated the market price of electricity at the WESM, particularly during November and December 2013.

Based on documents obtained from the WESM, Therma Mobile entered P62.00 bids 9 times in November and 59 times in December even if the contracted price between Meralco and Thermo Mobile is just P8.65/kWh.  The effect was to jack up the price of electricity. However, Therma Mobile declared that it was Meralco which ordered it to do so.

Now Meralco stands accused as well of driving up electricity prices to unconscionable levels via price manipulation at the WESM.  It used as cover the supposedly coincidental outages from unscheduled or off-schedule maintenance work on several other power plants at a time of the Malampaya turn-around that severely cut down the available supply of power during the contested period. The GenCos for their part are being held to account for colluding to artificially limit the power supply to take advantage of the Malampaya shutdown and lay the ground for much higher power generation costs.

How did we get to this situation wherein EPIRA, the law that was introduced supposedly to ensure a steady supply of electricity, low prices, and healthy competition among several industry players has resulted in exactly the opposite situation? The answer requires a long, hard look at EPIRA itself and the privatization and deregulation policy regime that has spawned it. #

Published in Business World
17-18 January 2014


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