CSP Rules Too Late for Many Mindanao DUs

by David A. Tauli

President, Mindanao Coalition of Power Consumers (MCPC)

EARLY in his term, the new chairman of the Energy Regulatory Commission, Jose Vicente B. Salazar has demonstrated that he will pursue regulatory reforms that will result in fair and reasonable rates of electricity.

This is a far cry from the ERC under the previous chairperson, during which proposals for reforms beneficial to power consumers were either blocked or not acted upon.

The ERC issued a press release on November 4, 2015, stating that it passed Resolution No. 13, Series of 2015, which is entitled “A resolution directing all distribution utilities (DUs) to conduct a competitive selection process (CSP) in the procurement of their supply to the captive market.”

The Resolution is an implementation by the ERC of the provision in the Electric Power Industry Reform Act of 2001 (Epira) which states that: “A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market, subject to the collection of retail rate duly approved by the ERC.”

The need for such a directive was brought to the ERC many years ago, but it was only in February 2013 that the ERC issued a notice for rulemaking for power supply agreements (PSA) entered into by the DUs. A number of public hearings were conducted by the ERC on this issue, but in a hearing in Cagayan De Oro the ERC commissioner presiding over the public hearing clearly proved in his statements and his demeanor that the ERC (or maybe only this commissioner) was not in favor of issuing a directive requiring the DUs to conduct a least-cost acquisition process for power supply, and that the ERC was inclined instead towards the direct regulation of the power generation sector, which the ERC has been doing since its establishment by the EPIRA.

In December 2014, the Matuwid na Singil sa Kuryente Consumer Alliance, Inc. (MSK), with David Celestra Tan carrying the cudgels, filed a petition with the ERC to require the DUs to conduct CSPs prior to entering into PSAs. (Hello, DCT. You can now tell the old ERC: “I told you so!”)

In the hearing that followed the petition of the MSK, the ERC again showed that it was not inclined to require the DUs to do so. The reason cited during the hearing was that it is not the responsibility of the ERC to look into the process of selection by the DUs of their power suppliers.

I believe that the old ERC did not act on the need to require CSP simply because the commissioners were biased in favor of the power suppliers (rather than for the power consumers, which the ERC is mandated to protect). Requiring the DUs to conduct CSPs would be disadvantageous to the power suppliers because the suppliers would be forced to offer lower prices than they would otherwise get without the competitive process. Hence, jeers to the old ERC.

One result, grievously harmful to power consumers, of the failure of the old ERC to require CSPs is that, in the second half of 2014 and early this year, about a dozen electric cooperatives in Mindanao entered into PSAs with a 405-MW coal plant to be located at the Phividec Industrial Estate in Misamis Oriental, in which the price for electricity from this Misamis coal plant was the highest being offered by coal power suppliers at that time.

The ECs contracted for power from this coal plant at a price of 5.40 pesos per kilowatt-hour to be delivered starting in 2018. At that time there were at least three other power suppliers who were offering electric power supply from coal-fueled power plants at prices ranging from about 4 to 5 pesos per kWh.

When the Mindanao Coalition of Power Consumers (MCPC) heard about the ECs contracting for their power supplies at the highest price being offered, we were certain that the PSAs would not be approved by the ERC, precisely because the ECs did not carry out CSP. It came as a shock to us when the ERC gave provisional approval to all the PSAs, despite submission by the MCPC of an objection to the PSAs because the ECs did not carry out least-cost acquisition (LCA) process prior to entering into the PSAs. The reason given by the ERC for disregarding the objection of the MCPC is that the ECs submitted statements to the effect that they conducted competitive procurement prior to entering into the PSAs with the Misamis coal plant.

The impact on Mindanao power consumers of the inequitable PSAs of the ECs with the Misamis coal plant, which was given provisional approval by the old ERC, is that the consumers will be paying an extra 1.40 pesos per kWh (compared with the ECs contracting with the least-cost supplier at that time, priced at 4.00 pesos per kWh) for their power supply starting upon commercial operation in 2018.

This means a total amount of around 4.22 billion pesos every year extracted from the pockets of Mindanao power consumers, or around 105 billion pesos over a period of 25 years. This is much more money than was stolen from Filipino taxpayers by elected government officials through the PDAF. And this was done much more subtly than was the case for the PDAF. All because the old ERC did not require the DUs to carry out CSPs.

It still boggles my mind why general managers and directors of electric cooperatives – not only one or two but a dozen – would decide to contract for the highest priced electric power supply on offer. I cannot imagine what inducement would get them to impose on their member-consumers, and on themselves, an extra payment of 1.40 pesos per kWh for their electricity for a period of 15 to 25 years. Bribery of EC officers has been bruited. But scads of money would have to be offered to get EC people to trade honor for mammon. I cannot see where any serious investor would risk such amounts to obtain patently illegal PSAs. But we did not believe either that the PSAs would be approved by the ERC.

According to the new ERC, this requirement for CSPs will not be retroactive to PSAs already approved by, or submitted to, the ERC prior to the issuance of the Resolution. So it would appear that Mindanao power consumers would not be able to avoid paying for the overpriced PSAs that the ECs entered into with the Misamis coal plant. However, the lawyers say that there are at least two legal remedies that could be pursued by the MCPC or other power consumer groups towards the cancelation of those onerous PSAs:

1. Submit petitions to regional trial courts to rescind the PSAs (assuming final approval by the ERC) because the ECs did not carry out least-cost acquisition prior to entering into the PSAs, which is required by the EPIRA. The prima facie evidence that the ECs did not do LCA is that, at about the same period that they contracted for coal power at 5.40 pesos per kWh, other DUs contracted for coal power at prices ranging from 4.00 to 5.00 pesos per kWh.

We could also consider filing charges of abuse of authority versus the ERC, or at least negligence of responsibility for consumer protection, for approving PSAs that did not comply with legal requirements.

2. Petition the ERC for the final disapproval of the PSAs because the ECs committed perjury in the applications that they submitted to the ERC for the approval of the PSAs.

The standard statement made in the applications by the ECs to show their compliance with the least-cost acquisition requirement goes: “[Mindanao EC] sought out other generation companies and sources of electricity in the Mindanao Grid and solicited offers and/or expressions of interest from these power suppliers to supply its growing power requirements.” That no such search or solicitation was actually conducted by the ECs is proven by the fact that they selected the highest priced coal generation among the several proposals from coal power plants that was being offered at that time.
On this issue of perjury, the ECs may be able to submit offers or expressions of interest that they received from other coal power plants before entering into the PSA with the Misamis coal plant. In which case, the ECs will have to justify contracting for power supply with the highest-priced offer that they received.

Let us give thanks to ERC chair Salazar for ensuring with the issuance of the CSP Resolution that no such miscarriage of justice will recur in the in the electric power industry. (The issuance of the Resolution probably was done over the objections of some of the present commissioners.) The difficult legal work of rescinding the onerous PSAs of the ECs with the Misamis coal plant, and penalizing the miscreant general managers and members of the boards of directors of the ECs, would not be necessary if the resolution requiring CSPs were enacted by the old unlamented ERC.