A 30% Reduction in Meralco’s Retail Rate is a Just and Achievable Dream. And It Is Totally within the Control of Government! (Part 2)

Part 2

David Celestra Tan, MSK
31 January 2021

No, we are not talking about the government taking control of Meralco. We are only talking about simply enforcing the law to protect the consumers by ensuring true competition in the generation market, judicious NGCP rates, and just and lawful Distribution charges.

But let us not get ahead of ourselves though.  Would a 30% reduction in Meralco’s rate be fair and make us reasonably competitive in the Asian region? Let us assume that Meralco’s average retail rate for captive customers is Ph9.10 per kwh about what is reported by the energy website Global Petrol Prices. Reducing it by 30% means bringing it down to P6.37 per kwh, or P2.73 per kwh.

Meralco’s regulatory and PR team would probably be rolling their eyes reading this. But this is not some pipedream. Debating it though is like debating ad nauseum whether Manny Pacquiao can beat big guys like Margarito and Miguel Cotto. Only way to settle this is to hold a truly open and competitive bidding to market test what would be an achievable rate. Let us hold a bidding that would be fully supervised by the DOE and ERC. Where none of the Meralco six and their affiliates can participate, would be open technology, with sufficient time for bidders to prepare and deliver, and held under rules and procedures as if we really mean to welcome all qualified bidders and wanted the best possible price for the consumers. This proof of concept bidding is something we owe our people and country.

Currently, the Meralco’s retail rate is in general par with what Singaporeans pay, a country that has 15 times more per capita income than the Filipinos. We wish we can compete with the P4.10 of Vietnam and the P4.20 per kwh of China. But those are unreachable dreams that we will give up even before we start aspiring.

Let us go for something that is actually achievable and within our control. How about the P6.35 per kwh of Thailand? Would that be within reach?

We are not picking on Meralco but they serve a contiguous and the most compact service area in the Philippines that consume 60% of the country’s energy and accounts of half of the country’s GDP. The cost of electric services in the 7,000 other islands cannot be reduced as much, maybe by 15% but that’s another story. For now let us pick on Meralco….yeah which is only fair because they have been picking on us, its captive consumers.

Certainly, reducing Meralco’s rate sufficiently to make the Philippines be competitive with Thailand will not be done voluntarily by the Meralco 6 combine. It is in the entrepreneurs DNA to exploit business opportunities, to exact as much profit as they can get away with, and never mind that these are public service businesses they got into.  The task of protecting the public interest was entrusted by the EPIRA law on the various government agencies it created.  But then when it allowed cross ownership between the distribution and generation sector under a watered down Section 45, we knew that opening would be exploited. Still all is not lost. There is enough in the EPIRA Law to protect the consumers.

What can the government do? Other than holding a benchmark rate bidding outlined above, the government can:

 1. Impose true competition in the power generation sector.

According to Meralco’s annual report, their average generation rate alone in 2019 was already P5.12 per kwh, more than the retail rates of Vietnam (P4.10), and Taiwan (P5.05).  Obviously, pruning Meralco’s retail rate will have to start with the generation rate.

a. The government just need to be steadfast in imposing true competition in the contracting for Meralco’s power supply. Don’t let Meralco get away with all their games in the CSP process. Regularly they announce in the newspapers that hordes of bidders are interested in participating in their CSP. But they won’t disclose who they really are claiming confidentiality. The ones they announced are their partners in the aborted 7 midnight contracts caper for 3,551mw. Meralco’s Competition is all illusion.

b. Opening the generation market to truly independent generators not only will bring down rates but will encourage the continuous flow of investments that are needed for a sustainable future power supply. True competition will encourage the introduction of new technologies and more efficient operations that will only benefit the consumers. The triumph of the fittest would be great for consumers.

All the government really has to do is enforce the anti-competitive restrictions of the EPIRA Law. And close the loophole of Rule 11 of the EPIRA IRR.

c. In their much publicized CSP, Meralco’s newly contracted power supply ranged from P4.04 to P4.50 per kwh. Disappearing from their generation mix were the coal power that used to be P3.50 and P3.75 per kwh. True competition will bring down Meralco’s generation rate by 15 to 20% or P0.60 to P0.90 per kwh. If LNG and nuclear put competitive pressure on coal, the reduction can be P1.00 to P1.25 per kwh.

2. Eliminate the abuses in the distribution rate setting methodology

a. Let us tighten the systems loss reduction methodology of the ERC. The current process is not sufficiently transparent and fair. Why should the consumers in the modern and compact areas like Makati, Ortigas, and Quezon City pay 9% in systems loss, the same as the residents and small businesses in the remote areas of Laguna, Quezon, and Batangas? They should be charged not more than 5%. The alibi was consumers of same class should be charged the same. A direct contradiction of the “cost of service” concept that ERC itself is using to justify the 3.5% systems loss charge to large commercial and industrial users and 9% to residential customers.

Tightening the systems loss can reduce the rate by P0.20 to P0.25 per kwh.

b. The Performance Base Rate making (or PBR) Methodology adopted by the old ERC is allowing Meralco undeserved revenues. They are allowed to make money on investments they only projected but did not really make and charging them in advance. To the captive customers where Meralco makes 65% of its revenue, the distribution rate can be reduced at least P1.00 per kwh, from P2.98 per kwh down to P1.98 per kwh.

c. A similar review of the NGCP transmission rate which is also under PBR should bring down rates by 15% or 14 to P0.18 per kwh.

3. Make Meralco Comply with its Obligations under its Franchise to provide power in the least cost manner to the public.

Other than lip service, Meralco the electric distribution utility is evidently not in the least bit interested in looking after the public interest and working harder to deliver least cost power, as is their obligation as a public service utility. They don’t look like they believe it is their obligation to protect consumers by doing business on arms length basis.

You can see it in their body language and or lack of. It is both what they don’t do and even worse on what they do to also monopolize the generation sector in Luzon.

If they were, they would be working hard to retain SEM-Calaca as a direct supplier to Meralco because their rate of P3.50 per kwh had been very good for the consumers. Instead, SEM-Calaca’s supply is now part of the groupings that sell power to Meralco at more than P4.04 per kwh.

If they truly care, Meralco would also be seeking the tempering of Quezon Power Mauban’s most expensive rate that is passed on to the consumers. QPL had been 50% higher than the average coal suppliers to Meralco. This January 2021, Quezon Power Mauban’s rate is a horrendous P6.7125 per kwh, 50% higher than Meralco’s average generation cost for the month. They are about 50% higher than San Miguel Sual and 64% higher than AC Energy’s P4.09 per kwh.

Meralco does not even raise a hoot. Especially now that the new owners of QPL, EGAT of Thailand, is the Meralco PowerGen’s minority partner in the San Buenaventura Mauban expansion. Some energy officials told us that when QPL originally offered to Meralco the 480mw expansion of Mauban, it was at a rate P3.80 per kwh. When the project was approved by Meralco the following year, San Buenaventura was born with Meralco PowerGen as a 51% owner and a rate of P4.30 per kwh.

Meralco PowerGen’s 480mw San Buenaventura expansion in Mauban is delivering power at a decent rate of about P4.20 per kwh. But we are wondering why since this new plant started in 2020, the premium rate of sister generator Quezon Power noticeably shut up to 50% over average instead of the historical 10 to 15%?

 We wish the Congressional Franchising Committee would not be just an institution to bestow the privilege of electric service franchises but would be an instrument of seeing that its grantees are actually serving the consumers by meeting the service conditions of the franchise. A wish like we said.

Reining in Meralco alone will reduce their rate a total of P2.20 per kwh for its 6.5 million metered customers serving 30 million people, and a big boost to the competitiveness of its 540,000 commercial and industrial customers vs Thailand, China, Vietnam. This rate reduction will also be a significant improvement in the economic competitiveness of our call centers and business process service sectors against India.

4. Rationalization of Subsidies

The government will also have to do its part in reining in the rising cost of consumer subsidies from different programs administered by the government. Missionary Subsidies, Feed-In Tariff for Renewable Energy, and that mysterious stranded contract costs all of which are falling under the “Universal Charges” passed on to the consumers as authorized by law.

Missionary subsidies for off-grid islands had risen to P8 billion a year since 2016, more than half coming from the larger islands where the government is supposed to be reducing its subsidies.

The wayward Feed-In Tariff program for Renewable Energy, is probably costing consumers easily P10 billion a year in unnecessary subsidies, continuing to pay P8.60 per kwh for solar when it had become evident that solar people will be happy with P4.50 on the main grid and P6.50 in the off-grid. Why not accelerate the digression rate as allowed by the FIT rules?

The governments decision to sell this FIT solar output at the WESM rate of P2.00 per kwh is anti-consumer because every centavo of loss is absorbed as “subsidies”. Why not sell this solar output at a stable green rate of P4.50 per kwh for solar is worth the avoided cost of coal, the dirty energy that it is replacing. FIT and its subsidies are not meant to be a gamble on the WESM sport market. It is distorting the WESM market anyway.

Rationalizing these various government subsidies can bring down the Universal charge by at least P0.20 to P0.30 per kwh. That’s at least P6 billion a year in the Meralco area alone.

A lower rate for Meralco cannot be just perception, a public relations challenge to be overcome. Something that can be achieved with the ritual of an illusionary competitive selection process. It needs to be real, a meaningful reduction in the monthly power bill.

We might just have to bear it if the Philippines has no choice and can afford the high rates. Like Singapore that pays P9.25 per kwh, Japan that pays P11, and Hong Kong that pays P10 per kwh. For our country and people that cannot afford it but has the laws and options to reduce rate, to not even try is just not excusable….and anti-Filipino.

We need this to enhance the opportunities of our children and future generations to be competitive and to survive, if not thrive, in a post pandemic world.

Let us do something to remove the curse of an undisciplined Meralco rate. It has gone on too long and getting more menacing.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph