Meralco’s Lower Rate Temporary, Due to Luck Not Rate Reform
David Celestra Tan, MSK
16 October 2016
We Meralco consumers have been enjoying lower electric rates for more than a year now and it has been God-sent albeit temporary. The current reduction of P1.54 per kwh in generation rates have been due to the opportune drop in world oil prices and can change in cycles. We can achieve a more permanent and enduring P1.50 per kwh reduction through systemic reforms by banning self-negotiated contracts. The MVP Group is cartelizing 100% of Meralco’s power requirements and one day Luzon consumers will wake up with a price shock. Remember Dec 2013?
There is a concerted media campaign touting that Meralco’s rate is now low, that the Philippines is now the 3rd highest rate in Asia and no longer 2nd to Japan. Australian International Energy Consultants once again said it is because the other Asian countries are subsidizing their power. And while IEC is quoted to be saying it is due to the drop in fuel and coal prices, it also gives credit to a claim that Meralco has been aggressively negotiating competitively priced power supply agreements (PSAs) with new suppliers.
The IEC press release is evidently designed to convince President Digong, the DOE and ERC, and consumers that Meralco’s rate is fair and reasonable and that part of it is Meralco’s “aggressive negotiation of competitively priced power supply agreements”.
Let us get past the chaff and go to the grain of Meralco’s rates.
A. Generation Rate
1. It is true, as IEC studied, that between January 2012 and January 2016, Meralco’s generation rate had come down by 28%. MSK’s research showed P5.4643 per kwh in 2012 and down to only P3.9238 per kwh, a reduction of P1.5405 per kwh.
2. It is also true that the major reason is the drop in world oil prices and coal. MSK’s research showed that from 2012 to 2016 world oil prices dropped from $90.72 per barrel to only $34.13, a reduction of 62%. Indonesian Coal prices went from $105.61 per ton to $52.32 in the same period or a drop of 50%.
We dare to say that the ONLY reason for the lower Meralco rates is due to the lucky and opportune drop in world oil prices that also cause reductions in coal prices. A major columnist of Phil Star asked MSK why Meralco’s generation rate is not dropping as much as the big drop in the world oil prices. Good question but the answers were not printed.
B. Systems Loss
1. Since Meralco’s systems loss is a percentage of generation charge, it went down from P0.6594 per kwh to P0.4173. In percentage, 12% in 2012 (0.6593/5.4643) and 10.63% (0.4173/3.9238). Let us grant that the difference of 1.37% can be attributed to Meralco’s operating efficiency.
2. Is the glass half full? Meralco is supposed to have a limit of 8.5% in systems loss. The excess systems loss charge in 2012 was P0.1949 per kwh and in 2016 it is P0.0837 per kwh. Since we already have lowered expectations, yes it is an improvement. As in the generation charge, if the fuel prices go back up, systems loss will also go up. ERC needs to correct the systems loss rules by limiting it to maximum 8.5% to all consumers and by making the computation transparent.
C. Transmission Charge
This is something we are curious about in IEC’s choice of periods to compare. In January 2012, NGCP’s transmission charge was P0.9840 per kwh. In April 2016 it was P0.9549 per kwh. However, for some reason NGCP’s rate dropped unusually to P0.8361 per kwh in that month of January, a difference of 0.1188 per kwh. IEC’s study of the improvement in Meralco’s rate looked much better with its choice of January as the comparison months and this additional reduction of 0.1188 per kwh. We guess IEC serves its master. If they want to do a study in the future, it will be more helpful to see comparative April rates when supply and demand of power will show the true rates.
D. Distribution Charges Plus Supply and Metering Charges
Meralco’s distribution, supply, and metering charges came down by 7% or 0.17 per kwh as a result of the expiration in June 30, 2015 of an P0.1888 per kwh recovery of an under-recovery in 2011. Let us not forget that Meralcos distribution charges are results of the PBR rate setting methodology that we believe is irregular and must be modified. Meralco customers should not be charged profits or advance recovery until the utility actually incur the investments, not projections, not promises.
E. Universal Charges
Various universal charges for missionary subsidy, environmental, RE FIT, and PSALM Stranded Costs totaled 0.4764 in 2016, an increase of P0.36 per kwh from the P0.1188 per kwh in 2012. Watch for Renewable Energy subsidies and PSALM’s stranded costs to rise further. RE is now proposed to be 0.24 per kwh from 0.12 and PSALM has a lot of losses to recover from the people.
Back to the Issue of Meralco’s rate reductions.
1. It is clear that the reduction of P1.54 per kwh in generation rate was due to the lucky drop in world oil prices. OPEC and Iran are inching towards agreements on oil production controls and oil prices are expected to rise sooner than later. Coal and Natural gas will follow suit. Let us enjoy the current lower Meralco rates because it is only temporary.
2. Meralco’s supposed “aggressive negotiation of competitive power supply contracts with new suppliers” sounds good on the surface but since they negotiated exclusively eight (8) coal power supply contracts totaling 4,100mw with their own majority owned new generating companies, it is hardly credible to believe that they would negotiate aggressively with their own selves. (And yes, Meralco continue to claim in its public pronouncements that it does not make money on the generation charge because “it goes to the suppliers”, who will eventually be all “Meralco PowerGen”.)
3. Let us remember that the published rate of these self-negotiated contracts is only what we see now. Tucked in those negotiated contracts are escalators in various provisions that can eventually bloat the actual rate and sock it to the unsuspecting public down the road. Meralco even has the temerity to ask the ERC to make key financial information and formula confidential and not disclosed to the public. This is something that even the Lopez group never tried in their time.
4. MSK Ibaba ng P3 Campaign
On October 8, 2014 the Matuwid na Singil sa Kuryente Consumer Alliance (MSK) shared with the Department of Energy’s Multi-Sectoral Task Force to Find Ways to Reduce Electricity Prices our recommendations on how to reduce Meralco’s power rate by Php 3.00 per kwh. Nothing came out of those months of supposed multi-sectoral meetings in search of reducing rates but the then Energy Secretary Petilla bravely passed a DOE Policy mandating Competitive Selection Process.
Of MSK’s P3.00 per kwh target reduction. 87% or P2.60 will not even come from Meralco’s pockets but from various pass-on charges on which Meralco had been claiming for many years they don’t make money and only act as collectors. Generation charge, transmission charge, systems loss, VAT, universal charges. Only 13% or P0.40 per kwh will come from Meralco’s excess distribution charges due to the questionable “performance based ratemaking” or PBR.
MSK believe that by stopping the anomalous self-negotiation of power supply contracts the generation rate can be reduced at least P1.50 per kwh. Meralco generation had dropped P1.5405 per kwh but that is due to the fortuitous drop in world fuel prices and not due to changes in the regulatory system. For generation, it is the introduction of Competitive Selection Process to replace negotiations. If this were adopted, Meralco’s generation rate would have dropped by about P2.25 to P2.50 per kwh
As part of the Ibaba ng P3 campaign, MSK had filed with the ERC more than a year ago a petition for rules change to modify its Performance Based Rate making system (PBR) for distribution charges. We have yet to hear from the ERC on the public hearings to assess this very important concern of the consumers. We believe the distribution charges of Meralco can be reduced by about P0.40 per kwh by eliminating the improper profits of Meralco on forecasted investments instead of incurred investments as required by Section 25 of the Epira Law.
IEC Studies
As they have done in 2014, the Perth-based International Energy Consultants study as commissioned by their client is to show that Meralco’s generation rate is fair and reasonable. And the Meralco press release is apparently timed to sway public resistance to the seven (7) midnight contracts that the MVP Group hurriedly signed with various new generating companies all majority owned by Meralco PowerGen. So far two columnists have sung the same tune.
We wonder what IEC’s basis was for declaring that Meralco’s lower rate is partly due to Meralco’s “aggressive negotiations for competitive power with new power suppliers”. It must have been a sight to see IEC, being present in the negotiations, watching Meralco negotiate aggressively with its sister company Meralco PowerGen! IEC by the way lists among its major clients EGCO of Thailand and Quezon Power its Philippine subsidiary, EGCO is Meralco PowerGen’s strategic partner for the 460mw Mauban coal expansion called San Buenaventura.
Let us enjoy Meralco’s low power rates now while they last. Let us hope the government will do something now while it still can to stop Meralco’s monopolization, cartelization, and self-negotiated contracts. Let us correct ERC’s anti-consumer rate setting methodologies and systems loss rules. Low world oil and coal prices will not last forever.
We are just currently lucky. What we need for sustainable lower rates are systemic and regulatory reforms.
Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org
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