Power Rates Can Really Be Reduced by Implementing Better the Current EPIRA Law (Part 2)

We have a Dream.

David Celestra Tan, MSK
21 January 2023

Part 2

After more than 20 years of being told that the power sector and the EPIRA Law are so complex and difficult to shepherd towards one direction, we dreamed that one day we will wake up and find that this beast that has been terrorizing Filipinos have finally become tame, endearing, and willing to serve its master, the electric consumers. And it was not remade, given a new heart, nor even decapitated of its fangs. Its trainors just realized another way of taming it.

In the past, we had written that the power rates in the Philippines are high because truly reducing power rates have not really been a resolute government policy and goal. Low rates and least cost power seem to be just lip services, gingerly mentioned in Presidential SONA’s, staples of political campaign speeches, and convenient rhetoric to camouflage the evidently disguised intent of market domination and maximized profits…to the detriment of the consumers who have been wondering why?

Now not a few policy makers and legislators are blaming the EPIRA Law for its “imperfections and inadequacies” and they want it amended.

It has been sad letting down the Filipino people and it does not need to be this way. Going back to the true roots of the Epira Law does not mean we have to uproot the tree totally. Essentially that is what we would be doing if we try to open the Epira Law to a total revamp and try to create an EPIRA Law II.

The Singular Objective of Reducing Power Rates

We have dreamed that the key to taming our monster power generation rates is assuring true and robust competition. And thatwhat needs to be done actually are within the powers of the implementing agencies, mainly the DOE and ERC. No real need to go back to Congress and try to amend.

Reduced to its most fundamental objective, the Epira Law only wants to reduce the power costs and assure reliable power supply to the Filipinos and to the Filipino nation…..supposedly. We grant that it is easier said than done but it is actually easier than thought impossible.

Let us simplify the Epira Law and its implementation by focusing onthese basic objectives for the people and country. It can be done with enlightened implementation..truly dedicated to patriotically looking after the interest of the people.

The electric consumers do not really need to be devoured by the investors in the power generation sector, the transmission, and the distribution sectors. They can co-exist and serve each other. After all, the Users of electricity, the consumers, the commercial and industrial sectors, the institutions and public services provide the market and revenues that are needed by the power providers to also survive, be sustainable , and to earn their reasonable rewards for their investments and hard work.

We just need to be truly devoted, unwavering, and consistent in our pursuit of the EPIRA Law’s essential objectives. The DU, the power generators, and the consumers just need to be reasonable and fairly work with each other.

1. Increasing Competition in the Power Generation Sector – In the Main Grid Areas

Power generation rates to consumers can be reduced further by 10 to 15% if the power supplies contracting are subjected by the distribution utilities to truly open competitive biddings and not restricted to only its partners and affiliated generators.

Where to start?

a. Perhaps the DOE Guidelines for Contracting for Power Generation supply,or DC2018-02-0003, needs to be revisited.

To simplify, this DC2018-02-0003, and its latest permutations, gave all the powers and control of conducting the bidding for power supply contracts to the Distribution Utility and its TPBAC. The government policy makers, the supposed guardians of public interest and the assurers that the competitive selection process would be truly competitive,( the DOE, ERC, NPC, and NEA) were, for some reasons, shirt-jacketed to becoming passive “Observers” who under Section 7 of the guideline, cannot really interfere in the bidding process or to even ask questions, even when there is evident bid manipulations.

DC2018-02-0003 together with Rule 11 of the EPIRA IRR are discouraging the truly independent power generators from participating in the bidding and from offering prices and technologies that will truly reduce costs to the consumers.

b. Creating Access to the Markets

This is one of the hush hushed reasons there has not been open biddings for generation supply. Non-affiliated groups cannot participate for robust competition for prices and technologies that can only be beneficial to the consumers and the economy. The power markets, represented by the distribution utilities, are only accessible to the affiliated and sister companies of the groups owning the distribution utilities. Courtesy of Rule 11 and DC2018-02-0003.

There are many financially capable and dynamic Filipino business groups who can enter the power generation sector if they are given the chance to have access to the distribution market, to fairly participate in the CSP biddings.

If we really mean to open our economy to “inclusive” growth, let us allow many capable business groups to enter the generation market….for the inclusive benefit of the millions of progressing Filipino professionals and middle class.

And let us not forget to encourage the participation of foreign power generators, like Japan and Korea, who have brought competitiveness, operating efficiency, and law-abiding behavior to serve the Filipino electric consumers and business sector.

This way there will be more players truly competing for the benefit of the Filipino consumers, a surer formula for sustainable additional investments and power supply for the long term. It would be a tremendous boost to the national economy, since we would be opening the P480 billion a year generation sector to more Filipinos businesses, not only now but for the future generations of budding entrepreneurs.

2. The EPIRA Law and Meralco and DU’s.

a. EPIRA’s generous Gift to the Distribution Utilities like Meralco

1) The EPIRA Law was actually very generous to stockholders of Meralco and other Distribution Utilities when it provided under Section 45 that DU’s can purchase up to 50% of its power needs from affiliated companies, way more than the 30% being discussed previously. That is about 3,000mw of Meralco’s 6,000mw power demand, a lucrative power generation portfolio for Meralco to own.

2) It is true that the loopholes created by Rule 11 of the EPIRA IRR made it possible for Meralco to partner with other power generators to contract, supply, and actually corner, up to 80 to 100% (4,800 to 6,000mw) of Meralco’s power needs even if it would own only 49% of the contract companies instead of 100%.

We would like to think however that owning 100% of 3,000mw would not be so bad for Meralco as owning 49% of 4,800mw or 2,352 mw attributable capacity control.

3) The regulators howevermay need to provide safeguards on the contract prices and terms, escalation indices, and fuel pass on charging etc. so that electric consumers are not overcharged in the process.

b. Market Domination and the EPIRA Law

The Epira Law of 2001 put a geographical limit on market domination. Under Section 45(a) it mandated that “No company or related group can own, operate or control more than thirty percent (30%) of the installed generating capacity of a grid and/or twenty-five percent (25%) of the national installed generating capacity”.

This however was subverted by Rule 11 when it removed “own, operate” and only retained “control” as criteria for market domination. Rule 11 was so craftily worded it could not have been inserted in the EPIRA IRR by accident or oversight.

Market domination by a group of cozy power generators does not only affect power contracts with the distribution utilities, especially by a dominating DU like Meralco that uses 70% of the energy needs of Luzon Island. It also means there will be unlikely true competition and genuine supply in the Wholesale Electricity Spot Market, which is supposed to serve as the barometer of market tested energy prices under our deregulated power sector.

c. Increased Consolidation of the Power Generation Sector

20 years after the Epira Law was passed, the same business groups have continued to dominate the power generation sector, except the disappearance of foreign IPP’s like Mirant, AES, IMPSA, and Hopewell.
The current local business groups increased their focus on highly lucrative government granted infrastructure sectors. Power, Water, Telephone, and toll roads. And similarly increased their cooperation and domination as a group, coagulated by the groups controlling the “market” which are the distribution utilities.

If we notice the above were all intended to control market domination from the “supply” side of the power sector.

3. Controlling Market Domination at the “demand” side

The Epira Law under Section 45 allowed the ability of Distribution Utilities to buy up to 50% of their power generation supply from their affiliated companies. Yet majority of the new power contracts of the biggest distribution utility in the country, go to new project companies that are owned about 50% by its own power generation subsidiary. In effect they can buy 100% of their power needs as long as the affiliated generating companies are only owned 50% by the DU or affiliates.

This crafty circumvention of Section 45 of the Epira Law has been made possible by the devious insertion of the EPIRA IRR Rule 11, which watered down the ownership and control restrictions of the main law which is Section 45.
This can be corrected by amending Rule 11 to align it with the main law and will not need to amend the main Epira Law.

From the independent power producers’ point of view, entering into this
Affiliation with the group owning the market or DU, is welcome because it gives them “preferred access to the DU’s market”. And they don’t have to really sharpen their pencils to win the contracts…to the detriment of Filipino consumers.

d. Limiting Cross Ownership between Power Distribution and Power Generation

Rule 11 of the Epira IRR effectively removed the limit to 50% of how much a Distribution Utility can buy from its affiliated power generator as provided in Section 45 of the Epira Law. Effectively Rule 11 removed the limits of cross ownership. A DU can now buy 100% of its power needs from affiliated companies as long as they don’t “control” the power plant. For good measure, Rule 11 also tailor made the definition of “control”.

1) An enlightened implementation of Section 45 will be a major step in assuring robust competition in the biddings for power supply and it will not require an amendment of the EPIRA Law itself. Only the long overdue correction or realignment of Rule 11 to the words and spirit of Section 45 will do the job. All it takes is for the DOE to review the EPIRA IRR, correct the Rule 11, and truly align it with Section 45.

2) The ERC itself by the simple decision of the Honorable Commission can reactivate their new formula for determining the concentration of installed capacity that tests concentration of “ownership, operations, and control” as required by the EPIRA Law. Rule 11 only limits the test through “control” which it defined as the party who is in charge of marketing the output.

This enlightened and more comprehensive test of concentration of installed capacity by ERC however was “put in abeyance” by the ERC in its March 15, 2016 Commission meeting.

e. Limiting concentration of ownership of power supply

If we are truly seeking to reduce power generation costs, we need a robust competition among unrelated generators who would be truly competing against each other with better prices, better services, and better technologies. We cannot have this if the qualified bidders, restricted by the Terms of Reference for the bidding by the DU, are interrelated and in fact affiliates of the buyer DU.
The consumers have no chance of getting the really competitive rates they deserve.
This safeguard can be achieved by better and vigilant implementation rules as identified above.

4. A Need for Tighter rules on the “Demand Side” of Power Supply

There is a similar need for tighter and directional rules on the “demand side” if we are to truly assure true competition.

a. Assuring a truly competitive bidding for Power Supply

1) CSP Biddings Exclusive for Non-Affiliates

The Section 45 of the EPIRA Law allows Distribution Utilities to contract up to 50% of its power needs from an affiliated company. To add teeth to this limit, the following safeguards might be considered:

(a) The CSP Guideline might require DU’s to hold CSP biddings for at least 50% of its energy (kwh) requirements where only non-affiliated generators can participate. This will assure better that the 50% limit allowed by the Epira law will be achieved since the other 50% will go to non-affiliated bidders.

(b) Additionally the CSP Guideline might clarify that the 50% allowed by the EPIRA Law to be contracted to affiliated companies must be up to 50% of the energy (kwh) requirements of the Distribution Utility and not its Capacity Requirements in MW.

Mathematically, if the stockholderscorner 50% of the 6,000mw capacity needs of Meralco but they are all base-load contracts, they practically will be cornering 3,000mw of its demand but the energy needs in kwh would be about 60 to 70%. The rest of its other power providers while contracting for 3,000mw, will be supplying only part-time power. The reserve, intermediate, and peaking supply services will effectively supply only 30% of the energy needs of the DU.

Further, since the Meralco service area consumes 70% of the energy needs of the Luzon grid, a 50% control of that would mean dominating 35% of the Luzon grid in terms of kwh energy, more than the 30% limit that can be provided by any generator and its affiliates set by the EPIRA Law under its Section 45 (a)

b. A need for A Comprehensive Template for Terms of Reference for the Bidding
The CSP Guideline must not only provide procedures for the CSP bidding but must include clear guidelines on the wordings and coverage of the terms of reference. An updated DC2018-02-0003 needs to provide guidance on key bidding procedures that will assure participation of enough and unrelated bidders, safeguards on collusion and bid manipulation. Contract pricing formula and the allowable indices. Clear and definitive bid evaluation methodologies. Safeguards on holding bidding for “emergency” requirements.

5. Other areas that can better be Implemented.

a. Should the Government be allowed back into power generation?

Many people believe that the government should be allowed to go into strategic power generation facilities with specific functions to provide reserves and protect the consumers in case the private sector is letting them down.
The general idea of privatizing and deregulating the pow1er industry is good but there is evidently a need for the government to be able to step up in case the private sector is not providing enough power or charging too much. Some kind of strategic calibrator of supply to protect the consumers.
A superseding law allowing this might take 1 to 2 years but the consumers can wait.

b. Rationalizing the other pass on charges to the consumers

1) So far we have covered mostly the generation rates. If it is reduced, the systems loss on transmission charged by NGCP and the systems loss charged by the Distribution Utility should also come down to benefit the consumers.

2) The distribution wheeling charges of the DU is not discussed often enough by the consumers. It is actually the true income of the DU for distribution of electricity. For Meralco and National Transmission, the charges are determined under the “PBR” rate setting methodology. Fully called “Performance Base Rate Setting”, it replaced the old “RORB” which set the electric rates based on the installed “rate base”. In short, the value of the facilities and services used to provide power to the consumers.

3) PBR on the other hand, allows the DU to estimate the kind of capex investments and expenses that it will need supposedly deliver the required level and quality of service. The projected costs are allowed to be charged to the consumers in advance. One former official of the ERC admitted that under PBR rules the DU does not need to prove that they made the investments as long as they deliver the satisfactory service quality. This in our opinion is contrary to the provision of Section 25 of the Epira law on Retail rates. It said the Retail rates need to be based on investments “incurred”. The advance charging of projected investments are not yet “incurred” and hence is contrary to law and should not be allowed.

4) On rate-setting rules, it is true that under Section 43 (f) of the Epira law it provided that “ In the public interest, establish and enforce a methodology for setting transmission and distribution wheeling rates and retail rates for the captive market of a distribution utility, taking intro account all relevant considerations, including the efficiency or inefficiency of the regulated entities. The rates must be such as to allow the recovery of just and reasonable costs and a reasonable return on rate base (RORB) to enable the entity to operate viably. The ERC may adopt alternative forms of internationally-accepted rate-setting methodology as it may deem appropriate. The rate-setting methodology so adopted and applied must ensure a reasonable price of electricity.

This provision was used as the apparent basis for adopting a new rate setting methodology, a nicely worded “Performance Based Rate” setting method or PBR to replace the old “RORB” method. In the process, it was overlooked that the Epira Law premised the adoption of a new rate setting methodology to be “in the public interest”.

How can the adoption of PBR be “in the public interest” when it resulted to higher rates of electricity for the people. For one it allowed for charging consumers for projected expenses that were not yet “incurred” as provided by Section 25? And the DU does not even need to make the investment. In simple words, PBR is allowing the DU to charge the consumers for investments that it does not really “Incur”.

This article is intended only to show that the EPIRA Law of June 2001 or Republic Act 9136, while may be imperfect in words has actually sufficiently enunciated the spirit of privatization and deregulation. It is good enough to achieve its objectives of reducing power rates and assuring ample supply of power and does not need Congressional amendments.

The wordings of the Epira Law is not the problem. What it needs is better and more honest to goodness implementation. And better guided implementation is within the powers of the implementing agencies including the correction of Rule 11 and the rewriting of DC2018-02-0003.

We just need sincere hearts for the good of the Filipinos and a genuine pursuit of making our nation “globally competitive”. As the Little Prince said, it is only through the heart that we can see clearly.

We hope we are able to contribute to the continuing search for a solution and the ways to achieve the goals of this seemingly perplexing law called the Electric Power Industry Reform Act passed twenty-two (22) years ago.

We hope our dream will become a reality sooner than later. It is not impossible. We have reason to hope.

MatuwidnaSingilsaKuryente Consumer Alliance
matuwid.org@yahoo.com