Meralco’s Customer Mix and the DOE’s Flexible Energy Mix

David Celestra Tan, MSK
26 December 2016

The Federation of the Philippine Industries for its part jumped on the DOE’s “flexible energy mix strategy” exclaiming “this technology-neutral power mix could “indeed promote a more competitive market and eventually lower the power costs that consumers pay”. “The move of the DOE will ensure ample supply of power for the country as it moves toward industrialization”.

Then it gets interesting. FPI says “the flexible power generation mix will encourage power players to continue developing the projects they deem to be the most competitive? “limiting the kind of technology to be developed will just unnecessarily block development of power plants and hinder more investments”. FPI sternly batted that the DOE learns to listen beyond the noise and dodge any aspiration of energy mix that would not be reflective of the power industry’s practical realities and the country’s aspiration for economic growth, to quote the article of the Manila Bulletins energy specialist writer Myrna Velasco.

“Their bid is for government not to be susceptible to an energy mix policy which is nothing but a sort of straightjacket solution that could not bring down power rates”

In FPI’s view, there is a need for government “to allow the market sort itself and realize an energy mix that gestates affordable electricity rates”. “In essence, the country needs a framework that is flexible and pragmatic rather than prescriptive and anti-competitive”. Hmmm!

Sounds good as motherhood statements. So let us look at this from other angles.

1. While both the DOE and FPI statements extend hope for a vague idea of “competition” neither of them have taken a position on the controversial postponement by the ERC of the Competitive bidding policy by five (5) months from November 6, 2016 to April 30, 2016 for generation contracts that are passed on to the consumers. And the consequent evasion by the Meralco group of 3,551mw of base-load coal contracts that will tie up Meralco’s base-load requirement for the foreseeable future.

Those 3,551mw of midnight power supply contracts would dominate 80% of Meralco’s area where FPI has a lot of member manufacturers. And those supply are without the benefit of competitive bidding.

MSK estimates that Meralco’s negotiated contracts with sister company Meralco PowerGen can be overpriced by at least P12.3 Billion a year based on comparative prices of negotiated rates and competitively bidded contracts.

2. Meralco’s customer and revenue mix

FPI in their press release referred to the power industry’s “practical realities”, “straight Jacket” solutions obviously resorting to the domination of coal, and exhortation to government “to allow the market to sort itself out and realize an energy mix that gestates affordable electricity rates”. Combined with their lack of position on the consequent evasion of the CSP policy and the market monopoly and abuse of Meralco’s 4,005mw of coal projects, these statements can only be interpreted as a subtle defense of the Meralco midnight power supply contracts.

To understand why the FPI does not seem concerned, we need to understand that in the area of the customer-mix of Meralco, the industrial sector covering most of FPI’s membership is sufficiently pampered. They represent less than 1% of Meralco’s 5.8 million customers (10,000) but takes 30% of Meralco’s energy sales at preferential rates and a low 3.5% systems loss charge.

The Commercial customers represent 8% of their customers (500,000) but take 39.5% of its energy sales. Residential customers represent 92% of Meralco customers (5.3 million) and only 29% of its revenue.

A small number of Commercial customers are big enough users to qualify for preferential rates like the industrial sector and called “contestable customers” but the rest fall under the “captive” customers category. Of the Residential customers about 40% of them fall under socialized category and are charged discounted rates. That leaves 52% as “captive” customers.

The commercial and residential “captive” customers of Meralco together are the ones charged the higher rates including the higher 10.2% systems loss charge (compared to 3.5% for industrial customers).

In other words we should understand why the industrial sector of FPI subtly supports Meralco and in this issue of CSP they don’t really care because they are already enjoying all sorts of cost saving programs and pampering by Meralco including the 3.5% systems loss. We can bet with those reduced rates, Meralco makes little of their P19 billion annual income from the industrial sector also called contestable customers.

3. We the “captive customers”

We who are captive consumers take the brunt of Meralco’s excess charges including the hefty 10.2% systems loss although Meralco likes to point out that their average is only 7%. It is clear it is the captive customers who are subsidizing the 3.5% systems loss charge of the industrial customers.

Whenever convenient, Meralco and ERC like to say that the systems loss is based on the cost of services to the particular class of customers. That means under that theory Meralco only incur 3.5% of systems loss to large industrial customers and the commercial and industrial customers a lot more.

Okey, let us give them the benefit of the doubt on the 3.5% industrial systems loss.

If it is true that systems loss must be based on the loss of services to particular customers, how do we convince the commercial establishments , the condo and elite subdivision dwellers in the highly compact and modern business centers of Makati, Ortigas, Eastwood, BGC, and Greenhills that their systems loss is 10.2%? How do you convince the residents of Forbes Park and all the affluent villages that Meralco losses 10.2% of energy in their area?

It is Meralco’s choice if they want to charge the industrial sector 3.5% but why charge the residential and commercial customers 10.2% when the legal limit on Meralco’s systems loss is 8.5%?

2. The excuse

Both Meralco and the ERC justify the 10.2% to the devil called rate averaging. They say all these “captive customers”, residential and commercial establishments are charged an average uniform systems loss rate. And these customer category includes the residential and commercial customers in outlying areas all the way to Quezon, Laguna, Bulacan, Rizal and many inner neighborhoods of Metro-Manila where Meralco’s systems loss are greater because they are farther and have lower customer density, pilferage is more prevalent, and Meralco’s distribution systems are less efficient.

But we bet that the systems loss in the modern and highly dense customer centers of Metro-Manila have systems loss in the 6% range. This is a form of cross-subsidization which is actually prohibited by the Epira law.

3. Meralco’s Profit from Excess Systems Loss

Talking about systems loss, the rate determination rules established by the ERC is actually not transparent and leave Meralco consumers susceptible to exploitation. If your generation charge is say P10,000 for the month, your systems loss would be P1,000. If that is corrected to only P600, there is a savings of P400 a month. Maybe small for each one of us but if Meralco charges this to say 3,000,000 captive customers, that’s P1.2 billion a month or P14.4 Billion a year! Whatever is the amount this is an immoral charge that Meralco should not be allowed to profit from. Very unfair to Meralco customers. We don’t know when the government and the ERC will care enough to be interested in doing something about it?

4. CSP and the Captive Customers

So let us assume that 50% of the 35 Billion kwh energy sales of Meralco are to the Captive Customers. We estimate that the difference between a negotiated power supply contract and one with true competitive bidding would be P0.40 per kwh. That’s another P14 Billion a year in over charges to the captive customers. Yes it is true All those sweetheart margin don’t go to Meralco. It goes to their other pocket, their sister generators.

5. Meralco’s Half-truth public information

Next time you see large testimonial ads in major newspapers featuring industrial companies who benefit from Meralco’s special energy efficiency programs, keep in mind that

a) they only represent 2% of the customers of Meralco and the supposed wonderful programs of Meralco are not applied to the captive customers that represent 60% of Meralco customers.

b) the expensive advertisements are paid for the Meralco customers under the public information budget approved by the ERC.

c) Meralco does not have similar programs to treat as well the captive customers. In fact they steadfastly evade giving us the respect and fairness of charging residential and commercial customers competitively market tested generation rates.

6. Meralco’s P19 Billion a year Net Income

Meralco proudly announces how much money they are making. Next time you read it, keep in mind that it is NOT the large industrial customers where Meralco makes their money. It is from the 60% residential and commercial captive customers through many questionable methodologies that unfortunately are condoned, approved, and tolerated by the ERC, past and present. In fact it is highly likely that the 10.2% systems loss you are paying partly subsidizes the very low 3.5% systems loss charged to industrial and contestable customers. (How do you average 7.2% systems loss if you are charging the industrial sector that consumes 30% of your energy sales only 3.5%? Mathematically you have to charge the other customers higher than 10%)

Life is not fair in the Meralco area. And it seems that way year in and year out.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Matuwid.org

Next: 10 Good Things the ERC Can Do for Electric Consumers in 2017.

A Rejoinder on Bulletin Writers Myrna Velasco’s 2-part article on Energy Policy and High Electricity Rates.