Cutting Electricity Rates The Right Way

David Celestra Tan, MSK

9 July 2016

When the subject of reducing power rates come up, Meralco gratuitously suggests “reduce the VAT taxes”. When there was pressure to reduce generation rates, they suggested that the government should eliminate the taxes on Malampaya natural gas that First Gen is using.

This is a classic case of “NIMBY” self-interest, “Not In My BackYard” is an acronym used to refer to host communities’ position that power generation plants are okey to build as long as they are “not in my backyard”. In reducing power rates, Meralco’s wisdom seems “NIMPO”, “Not In My Pocket”.

What is worse than not cutting the country’s electricity rates? Cutting it the wrong way! The key is knowing where to look and be guided by the right conscience and motives.

Looking in the right places. Let us count the right ways.

1. Power Generation


As Meralco itself is saying, this cost component in your monthly electric bill consist of 60% of the total bill and therefore the logical place to start.

Most of Meralco’s power generation supply have been negotiated. About 60% from affiliated generators, 30% from non-affiliates and 10% from WESM and other suppliers.
Among coal suppliers, the price Meralco pays to affiliates is 21 % higher than non-affiliates. In natural Gas, Meralco had been paying for many years 15 to 20% higher than the non-affiliated Ilijan power plant of Kepco although there has been parity among them lately.

In the last known comparable figures, Meralco negotiated with its affiliate Meralco PowerGen a rate of P4.35 per kwh for the 400mw Mauban coal expansion, In the same time frame, eight (8) electric coops in Northern Luzon banded together and bidded out a combined 135mw of power generation supply. They got P3.78 per kwh or 15% lower. That’s approximately P1.5 billion a year in higher pass-on charges to consumers. And that is one contract.

If we add the impact of their generous take or pay, downtime, and fuel rate provisions, the true pass on charges to Meralco consumers of these negotiated contracts are actually much higher.

And things will get worse because every single new power supply deal signed and announced by Meralco to the tune of 3,000mw are with “friends and family”, signed when the consumers were not watching during the elections.

If we truly want to reduce power rates, these negotiated sweetheart deals must stop. There is supposed to be a new DOE policy on requiring competitive selection process or CSP but it seems bedeviled in the implementation at the regulatory level.

President Duterte’s government can do something about arresting the rampaging monopolization of the generation sector. That should start with repealing Rule 11 of the Epira law IRR (implementing rules and regulations) that effectively redefined the anti-monopoly and pro-competition aspirations of the mother law that it is supposed to be implementing. It provided the cathedral sized loophole for monopolization of the generation sector. Its a farce and betrayal that had long been waiting for a champion to rectify. Someone will have to step up for the people.

There cannot be a true power cost reduction program if generation that is its largest component of the consumers bill are not reformed. Generation rates appear to be comparatively lower now that world fuel prices are low. Wait until coal and oil prices go back up and see Meralco’s rates pound the consumers. Let us not be misled. Let us act before it is too late.

Lack of a true competitive process at the bilateral contract level will not be compensated by putting wistles and bells like RCOA and RES.

2. Systems Loss Charges, P0.4273 per kwh in your July bill.


This is the cousin of the generation charge because its rise and fall depends on the generation rate. This is supposed to be limited to 8.5% and Meralco claims its average is under 8%. But the residential and commercial customers that pay 60% of the revenue of Meralco are being charged more than 10%. (Look at your bill in the back. Divide the systems loss charge per kwh by the generation charge per kwh)

Worse is that the computation is actually non-transparent under the methodology allowed by the old ERC. For many years the residential and commercial customers were being charged 13 to 15% systems loss! Now at 10% it is still higher by 1.5% than 8.5%. We estimate the difference is about P500M to P1 billion a year.

ERC’s loose methodology on systems loss computation must be revised to make it more transparent and eliminate opportunity charges. And the limit has to be 8.5% to all consumers. The devil has been in the averaging.

3. Transmission Charges, now at P0.8398 per kwh


The current national concessionaire, NGCP, and joint venture of the China Grid and SM, is entitled to a fair return on their investments. They have a big financial, technical, logistical, and operational challenge in their hands keeping up with the growth of the economy and the unwieldy power generation development.

What should not belong to NGCP is the power to establish rules and transmission development policy. The Epira law provided that this will stay as a function of the government agency Transco and not sold as part of the concession. You cannot have one private make the rules and be the beneficiary of the rules. This was a consequence of a glitch in the wording of the NGCP Concession law that confused the right of NGCP to act as System Operator and right to operate its system. The former is a rule maker. The latter is a technical and operational function.

This conflict will result to higher transmission rates and will result to a disjointed transmission development plan. Let NGCP concentrate on being a builder and operator of the transmission system. Transco should even step up and handle the right of way issues which a government agency can do better.

The devil that is PBR.

Technically these are supposed to be the only revenues of Meralco as the electricity distributor. Everything else is pass on that Meralco likes to say they only act as collectors.

These charges are determined under a methodology called “Performance Based Rate” making or “PBR”. This methodology is actually a violation of the Epira laws provision in Section 25 that “retail rates” must be based on “full recovery of prudent and reasonable economic costs incurred”. PBR allows Meralco a return on projected investments that under the ERC rules do not even need to be actually “incurred”.

We estimate that this results to an overcharge of P0.50 per kwh on distribution wheeling rates or more than P10 billion a year.

Consumer groups’ appeals to the ERC to review this had been falling on deaf ears. This is another of those anomalous charges that any true effort at reducing rates will have to address.

5. VAT Taxes

The EPIRA law of 2001 exempted power generation from VAT taxes in evident pursuit of the law’s declared policy objective of making the Philippines globally competitive. When the GMA government went cash strapped after the 2004 elections, the EVAT law was passed where power generation is imposed a 12% VAT, increasing the electric rates by P0.67 per kwh. This made the country even more uncompetitive as a manufacturing country.
May be the new government can balance this by reducing the 12% VAT to say 6% to kind of share the burden of supporting government between the electric consumers and the other sectors of society. This will reduce electricity rates by 0.33 per kwh, not small peanuts.

6. Universal Charges for Renewable Energy – FIT-ALL. Now at 0.1240 per kwh

After snowing the consumers with a “promotional rate” of 0.045 per kwh at the start of the feed-in tariff program, it jumped to the current 0.1240. Even at that level, many RE power producers are not being paid their full FIT rates. The current confusion in the RE sector and the strong lobby of the solar groups and the NREB for more subsidized solar power will easily push this to P0.25 per kwh.

This doesn’t count the extra transmission charges and NGCP’s purchase of frequency regulating reserves to manage the grid disruptions caused for the intermittent RE, solar and wind.
Hopefully the leadership and patriotic grounding of new Energy Secretary Al Cusi can put a rhyme and reason in this wayward program. Clean energy is not necessarily intermittent RE.

7. Universal Charges for Stranded Contracts UC-SCC now at P0.1938 per kwh

These charges need closer scrutiny and some rationalization. The component that resulted from failed government policies of the past should not be dumped on the consumers. The component for failure of PSALM management should similarly not be passed on to the consumers. There needs to be a clear accounting of the proceeds of privatization that are supposed to pay for all these. These charges appear to have gone beyond the true stranded contract costs.

8. Universal Charges for Missionary Subsidy, now P0.1561 per kwh


The abuses in this program have been going under the radar, first because they are in the “remote” areas and secondly they wave flag of missionary. This started at 0.035 per kwh.
A bidder in one island that won with a bid of P9.38 per kwh, jacked up the rate to 12.80 per kwh even before the project is started. In another island, the same bidder won with a bid of P7.15 per kwh but now currently getting P13.00 per kwh, or an increase of P5.85 per kwh in missionary subsidy. Now there are more negotiated bids through another farce called swiss challenge bidding that the DOE has been tolerating.

9. WESM rules

The WESM price is the sword of Damocles that hang over the head of Meralco consumers. This market needs to be a reduced to a market for excess supply and demand. The current rule on determining “market settling price” defined as the highest price dispatched for the day is anti-consumer. Offerors must be paid as they bid.

Unless reformed, this can periodically harass the consumers with high market rates.

10. Line Rental Charges

This is one of those charges that are passed on to the consumers but kind of mysterious. This appears to be line congestion costs. Deserves close scrutiny and rationalization.

Cause oriented members of the Matuwid na Singil sa Kuryente Consumer Alliance actually has a P3 Campaign seeking to reduce Meralco’s rate by P3 per kwh. At that time, Meralcos rate was P12 per kwh. The organization hoped to reduce generation rate by P1.50 per kwh and the other P1.50 to come from the other charges to consumers.

The current reduction in the generation charge by more than P1.50 is not a result of making the sector competitive but by the lucky drop in the world oil and fuel prices. In other words, when world oil normalizes, we will see the generation rates of Meralco to go back up.

Let us cut the power costs in the country in the right way!

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Matuwid.org