True Competition Beats Regulation for Fair Meralco Generation Rates

David Celestra Tan, MSK

15 May 2015

Which one will give electric consumers a fairer cost of power, true competition or ERC regulation?

As long as the competition is truly open and competitive, subjecting power generation contracts to open competitive bidding will always result to lower generation rates compared to negotiated contracts between sister companies even if they are subjected to supposed “rigorous” regulatory evaluation as we are doing now.

The Epira Law of 2001 intended power generation to be deregulated. Yes, not subject to regulation. Yet we have been subjecting power generation contracts to regulatory review which not only takes so long, causes disincentives to investments, and overwhelms the ERC bureaucracy. About half of the petitions being reviewed by the ERC are for generation rates, something they are not supposed to be regulating. Such regulatory review has become a necessary evil to assure fair and reasonable rates to consumers as a way to counterbalance another evil that was allowed which is negotiating bilateral power supply contracts specially between a distribution utility and its sister company generators. And we the consumers are supposed to feel assured about that.

1. Mandating that power generation contracts should be subject to open competitive bidding.

2. Protecting the consumers by nonetheless establishing benchmarks for the fair rates of generation service to serve as the check rate against which the winning bid cannot exceed.

The key here is establishing rules that assure a truly competitive bidding and sufficient safeguards and oversight. Our consumer group, Matuwid na Singil sa Kuryente, has submitted its recommendations on the rules for bidding.

There are preponderant evidences that open competitive bidding will result to lower rates and that negotiated contracts between a distribution utility and its sister company generator result to excessive generation rates that are detrimental not only to the electric consumers but to the overall economic competitiveness of the country.

A simple arithmetical evaluation of Meralco’s generation purchases showed that its prices from sister company natural gas generators has been 21% higher than a non-affiliated company. On coal energy, the price difference was 30%. All these sweetheart prices resulted to an estimated P13.68 billion a year in higher pass-on generation charge to consumers.

It is disappointing to see Meralco as the largest electric distribution utility In the country with 62% of the country’s energy market feign ignorance or confusion on these data and facts obviously to try avoiding addressing the issue. Our fear is they may have a deal with the regulators to just sit on changing the rules of power supply contracting and require open bidding until they have already consummated their 3,000mw of self-negotiated contracts. Huli na. Can a new President step in in time?

Conversely, In a recent open bidding for a consolidated 150mw of the power requirements of electric cooperatives in Northern Luzon, the lowest bid of an American company was P3.76 per kwh compared to the reported P4.30 per kwh that Meralco negotiated with and signed with its sister company Meralco PowerGen for a 460mw expansion of the Mauban, Quezon coal power complex. We estimate an apples to apples comparison will be P3.78 per kwh for the coop bidding against 4.30 of the negotiated Mauban. Under regulatory review, the ERC reportedly is reducing the Meralco PowerGen rate to P3.99 per kwh, still higher than the lowest from the bidding at P3.78 by 5.5%. Thdavaosis difference still translates to approximately P730 Million a year to Meralco consumers. GN Power from Bataan, AES Power from Masinloc, Meralco PowerGen, and two other generators prequalified. Only AES and GN Power Submitted bids.

In the unprecedented show of cooperation among the eight (8) electric coop members of the Region 1 Electric Cooperative Assn and the Cordillera Region, they consolidated their power requirements totaling 150mw and held tMatuwid na Singil sa Kuryente Consumer Alliance Inc.he tender. The current average generation rate of the participating electric cooperatives is P5.60 per kwh or a reduction of about P1.80 per kwh as a result of the open bidding. Northern Luzon electric consumers will save P1.4 billion a year in lower generation rates.

What more convincing evidence do we need to prove the benefits to consumers of open competitive bidding over negotiated contracts between sister companies?

davaosMeralco and Meralco PowerGen negotiated a P4.30 per kwh rate for a 450mw coal power supply for 25 years and who knows what other sweetheart terms are in the contract. The best that the ERC could do to protect the consumers is bring it down to P3.99 per kwh. The open bidding of Northern Luzon electric coops for only 105mw resulted to a rate of P3.78 per kwh for only 10 years.

True competition will always beat regulation in assuring fair and reasonable rates.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.