ERC’s Extension of CSP Effectivity Could Be Costly for Consumers and A Big Step Back in Drive Against Monopolization of Generation Sector

David Celestra Tan and Evelyn Viray, MSK

28 March 2016

The ERC issued a new Resolution postponing the effectivity of the mandatory CSP for new power supply contracts to April 30, 2016 from November 30, 2015. What would seem an innocuous extension of a deadline actually have larger implications to consumer rates and the monopolization of the generation sector. That’s a five (5) months delay, a lot of time to allow the exemption of many bilateral contracts and deny the electric consumers the benefit of competition for the long term.

While we agree that there has to be a sane transitional process this must be consistent with always promoting the interest of electric consumers which are the right to adequate supply of power and right to least cost electricity.

MSK therefore wishes to go direct to the crux of the matter of ERC’s five (5) month postponement of the mandatory CSP. The resulting exemption of Meralco’s desired 1,200mw bilateral contract with its sister company Meralco PowerGen in Atimonan, Quezon and who knows maybe another 1,500mw for a natural gas project in Quezon or Batangas. If these long term power supply contracts are allowed by the ERC as a result of Resolution 1 postponement, then we have denied again the right of consumers to least cost power as market-determined through open competitive bidding. The CSP policy would be once again a Pyrrhic victory for the consumers.

ERC’s Resolution 1 of 2016 signed by the five Commissioners on March 15, 2016 took cognizance of the right of captive electric consumers to “least cost power” and its rationale for the postponement of the CSP mandatory date in the following:

“WHEREAS, after judicious study and due consideration of the different perspectives raised in the aforementioned letters, with the end in view of ensuring the successful implementation of the CSP for the benefit of consumers, DUs, and GenCos, the Commission has resolved to allow a period of transition the full implementation of the CSP Resolution and, as such, restates the effectivity date of the CSP Resolution to a later date;”

Once again, we are putting all these new rules supposedly to promote the interest of the consumers and now in the implementation allowing the manipulation in effectivity that will again sell down the consumers. Another case of wanting to mandate CSP but again forgetting why we are doing it?

The issue here is self-negotiated contracts with sister companies as part of a sane transitional process.

ERC’s Resolution 1 of 2016 is not clear on safeguards for protection of electric consumers against negotiated sweetheart deals. As the Epira Law clearly declares supply of electricity is imbued with public interest. And it is the legal duty of the ERC, the DOE, PEMC, and JCPC to look vigilantly after the public interest.

As we stated, a reasonable, practical, and sane transitional process must have two hallmarks to be consistent with public interest and those are:

1) it must help assure adequate supply of power and

2) it must assure least cost electricity.

We agree also that we must be as fair and reasonable to the DU and the generator. However, we must not cross the line towards sacrificing the submissive consumers. Perhaps the ERC can consider some level of safeguards for electric consumers during the transition period.

a. Pending Projects between DU’s and unrelated generators

The pending power supply contracts of DU’s with unrelated power generators may be reasonably presumed to be done on arms-length basis and hence may not be sweetheart in prices and terms. Their implementation may be needed to allow the continuation of power supply development. Yet, we have to assure the consumers rights to least cost power.

In this case, it will be reasonable to allow a CSP as a transitional process called Swiss challenge that is administered independently. This way the DU and its chosen generator caught in the transition period will have nonetheless the vested right to match the winning bidder and the consumers are nonetheless assured of a level of market tested rate. Not perfect but it is a transitional process.

b. Signed Projects of a DU and its sister company generator

The desired contracts of DU-generator groups like Meralco and Aboitiz with their own sister company generators are entirely different matters. They are NOT arms-length and hence with high probability of sweetheart prices and terms that are inimical to the public interest.

Whether or not the proposed projects must be allowed a transitional CSP must be determined by the ERC if they are critical for timely assurance of adequate supply to the particular DU. The other consideration is the public interest.

To respect the right of consumers to least cost power, it would have been appropriate to also subject these sister company contracts to CSP administered independently if Meralco wants their affiliates to participate.

c. Meralco’s 1200mw Coal Project in Atimonan, Quezon

In the case of Meralco and Metro-Pacific they have already gotten away with a total of 1,060mw of coal projects for Redondo Power in Subic and in Mauban, Quezon. The rates approved were P4.26 per kwh compared to a truly competitive bidding done by eight electric cooperatives in the North for only 125mw but got 3.76 per kwh or a difference of P0.50 per kwh.

Not satisfied because they really want 3,000mw of negotiated deals for its sister generator Meralco PowerGen. It is evident that they have been lobbying to allowed to do a CSP Swiss Challenge that would be administered by their own people for their 1,200mw coal project in Atimonan, Quezon. This will appear like they are complying with the CSP policy but not in a way that is truly competitive. They don’t even want an independent bid administrator to assure a transparent, honest to goodness, and judicious bidding.

It might be recalled that the CSP policy was adopted by the DOE nine (9) months ago on June 30, 2015. And with all the delays and deliberations the ERC was able to issue its own CSP implementing policy Resolution 13 2015. We would think that during this time period, if Meralco’s 1200mw 3rd project in Atimonan Quezon was really finalized and signed it would have been filed with the ERC during that period.

Press reports said Meralco expects the completion of the 455mw San Buenaventura Power in Mauban in 2019 and the 600mw Redondo Peninsula Energy in Subic in late 2019. These two appear to have been filed with the ERC to beat the November 2015 original deadline. The 1200mw Atimonan One Energy which is announced for completion in late 2020 and another 1500mw natural gas project being pursued by Meralco evidently did not make the already delayed implementation of CSP.

The ERC’s sweeping postponement of the CSP implementation to April 30, 2016 will work out to be even better for Meralco and for Aboitiz.

The extension of the CSP effectivity will also be a big blow to the hoped for reduction in the monopolization of the generation sector. The three projects totaling 2,260mw will corner about 40% of the energy needs of Meralco. Another 1500mw Gas project would carve out another 25%. If we add the 1500mw First Gas and the 440mw Quezon Power also cornering about 30%% that will give a total of 95% of negotiated sweetheart prices passed on to the consumers. Long term the rest of the power generation sector will battle for the minor markets.

How much will these exempted new sweetheart power supply contracts cost the consumers?

We calculate that the total of 2,060mw of coal project that Meralco PowerGen can have at 70% load factor guaranteed power supply agreement will own a minimum of 12.6 billion kwh a year in sales to Meralco. At an overprice of P0.40 per kwh, that means P5 billion a year in additional charges to electric consumers. At a minimum of 20 years, that would mean P100 billion charged to consumers. And that doesn’t count the over prices from 15 million tons a year of Indonesian coal that will be passed on to the consumers without benefit of bidding.

Let us observe how many Meralco and Aboitiz power supply contracts will be filed in April to beat the new ERC deadline.

We hope these facts will not be lost as the ERC tries to implement the CSP aspiration for the country. The larger implication of the extension of the CSP deadline to April 30, 2016 in addition to the 10’s of billions of additional charges to consumers is this could be the final blow to hopes of curtailing the monopolization of the power generation sector in Luzon. With so much market domination in power generation supply the WESM market will just be a peripheral sector.

With our past experience with the Arroyo ERC always letting down the consumers, we cannot be faulted for being suspicious and paranoid. We are willing and will be delighted to be proven wrong. It does not look good though.