RCOA AND THE ERC’s MANDATE TO CREATE COMPETITION IN THE POWER SECTOR
David Celestra Tan, MSK
25 February 2017
The ERC meant well in its pursuit of implementing retail competition and open access or RCOA. It is all part of the regulators general mandate to create competition in the power sector, which in turn is supposed to be the key to the EPIRA laws pursuit of least cost power for consumers.
In fact OPEN ACCESS is the holy grail of the EPIRA law. It is in its pursuit that the government gave away many of its valuable power generating assets to comply with the EPIRA laws prerequisites for the advent of OPEN ACCESS under Section 31 of that power deregulation law. ERC’s lead commissioner on the RCOA rules is Commissioner Alfredo Non who also meant well. Except the Commission did not get it in a basic aspect of providing consumer choice.
The ERC made the consumer choice or open access mandatory, thus depriving consumers true freedom of choice. They forgot that giving consumers the choice of their suppliers include the choice to stay with their current distribution utility.. In addition to the consumers constitutional right there are practical reasons why consumers must have a choice and not be forced to go into the RCOA game. It is like forcing them to play in the casino.
Affected Contestable Customers
First of all, the supposed beneficiaries of competition of the RCOA are the large power consumers starting with those with one (1) megawatt of power demand. Soon enough these large power consumers, who are also referred to as contestable customers, will include those who consume 750kw and later on down to 500kw. The logic is the benefits of competitive open access should filter down to the residential level of 50kw. Eventually.
It should be realized that these large power customers are industrial and commercial users whose main business is running their own businesses. That is where their core competencies are. While it is true that they can theoretically save on their power costs, seeking other electric service suppliers entail other costs and risks associated with RCOA. The rules are complex and it will require the industrial customers to secure the right expertise either in-house or outside. Either way it costs money. And there are risks that if it doesn’t work out they are relegated back to the DU but this time as a 2nd priority customer under supplier of last resort. Are they willing to take the risk of disruption in their power supply to their main business in a chase for some savings in power costs? This must be an individual decision and they must not be forced to play the RCOA game.
Realistic Savings from RCOA
It should also be realized that the component of their total power costs that can be reduced is only the generation charge which at Meralco’s current rate is P4.00 per kwh. Note that this is on as needed and 24 hour basis. Theoretically an alternate generation supplier can offer say 10% lower on a sustainable basis. And probably less if done on apples to apples service level comparison. Note that RES suppliers are also for profit businesses so they have overhead and profit needs. Large users still need to pay the transmission and distribution wheeling charges.
Lets say the potential savings is P0.40 per kwh. If the commercial user consumes say 400,000 kwh a month that would be P160,000 a month in “savings”. Deduct from that the cost of administering the RCOA of say P60,000 not counting the executive time of the owners and top managers in dealing with the vagaries of RCOA. The real net savings are less. An industrial customer will weigh the cost benefit of that and decide whether RCOA is worth it for him. There is an upside and a downside.
The only reason the ERC will make it mandatory is to force that creation of a new RES industry and towards that they must really believe that disruptive effect of RCOA on businesses is worth all its drawbacks. But that choice must be left with the business owner based on his unique sensible economics.
That the creation of an RCOA infrastructure is needed as part of the overall creation of competition is granted. RCOA though is a means to an end and not the end itself. What is wrong is why the ERC wants to make it mandatory and take away the customer choice of staying with the comfort of a DU?
The ERC must create only the infrastructure and market mechanisms but they must allow the forces of market, the supply, the demand, and the calculation of the business owner to determine whether the large users will be drawn to it. They will if the RES offers real value. Otherwise the business model fails and the ERC should not keep it alive.
Better Consumer Benefit from Regulatory Enforcement
- True and Resolute CSP Policy
Instead of forcing the potentially disruptive RCOA, the ERC can cause significant least cost benefits to the consumers, large and small, contestable and captive, if they create a true and open generation market at the DU contracting level by honestly implementing the Competitive Selection Process policy instead of playing games with it.
In the above example, had they required Meralco to subject their power generation supply to true competitive bidding and not allow them to negotiate with sister companies, the savings can also be 10% or more. And not only the estimated 1,000 large users can benefit but the 5.79 million residential and commercial users.
- Regulatory loopholes
The purpose of creating competition including RCOA is to bring about least cost power to consumers. This can also be achieved by improving the porous regulatory rules that granting were put in place by the previous set of politico commissioners. MSK estimates that by closing the loopholes and abuses in PBR and Systems Loss alone can result to lower distribution charges by P0.60 to 0.75 per kwh, more than what can be achieved by a mandatory RCOA without the disruption.
Lack of Enlightened Empathy of RCOA rules a deterrent to its widespread adoption
Assuming that ERC really want it mandatory, the RCOA rules should be at least attuned to the need of private industry to try something first specially since they already manage risks in their own businesses. Make them walk before you make them run. RCOA might have been less intimidating had the RCOA rules provided for a trial period after which the contestable customer, if not convinced of its benefits, can revert back to its regular status as a customer of the DU. If it is really beneficial most of them will stay.
Other Costs of Mandatory RCOA to the Consumers
A mandatory RCOA will cause a major reduction in the generation market of the DU who had contracted long term contracts with minimum off-take and guaranteed capacity payments to their generators. In Meralco’s case in the future, it will be Meralco PowerGen.
There will a consequent cost to failure to off-take and those will be passed on by Meralco to their consumers as part of their total and average generation charge. It is again the captive residential and commercial consumers who will absorb this cost. To suit concerns, Meralco had claimed that their new contracts provide for a “carve out” scheme to reduce their contracted power in case of significant migration of contestable customers to the RCOA. It is not clear how that will work.
And when the DU applies for the authority to recover this unused capacity or energy from the consumers, ERC is locked in because they were the ones who mandated the forced migration and hence the reduction in power demand of the DU.
Somehow the consumers always get screwed.
Hayyy!
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