Moving Forward with the Mandatory CSP Of Power Supply Contracts

David Celestra Tan, Co-Convenor,
Matuwid na Singil sa Kuryente Consumer Alliance Inc. (MSK)

Voluntary implementation of the CSP is like junking the policy and completely abandoning the consumers.

Meralco’s Residential and Commercial electric consumers have been paying the highest rates since the passing of the Epira Law of 2001. Big parts of that are the sweetheart power supply deals that the government allowed Meralco to negotiate with sister company generators. Now 15 years later and six energy secretary’s and four ERC Chairmen, the government is finally taking steps to protect consumers from similar burden and create competition for the pass on generation charges to the captive electricity customers. Thanks to the patriotic move of recently resigned Energy Secretary Carlos Jericho Petilla who passed DOE Circular 2015-06-008 before he left on June 30, 2015.

One would think that a rule that clearly will benefit the captive electric consumers would get the full and unequivocal support of the government officials at the Energy Regulatory Commission, the Department of Energy, the JCPC, and Malacanang. And the enabling regulatory rules will be passed by the ERC without wasting time.

Yet, indications are that the Energy Regulatory Commission is now wavering on the CSP process, perhaps capitulating to the intense lobbying by the Metro Pacific and Aboitiz groups that together control 75% of the distribution utility market of the Philippines. Surprisingly even the DOE that passed the enlightened pro-consumer circular is now considering making the competitive bidding only voluntary instead of mandatory.

What a tragedy. Backing down on mandatory bidding would be a betrayal of the Filipino electric consumers. Here we are at the throes of correcting a decade long injustice and we would not have the fortitude to finally make amends to the long suffering consumers.

The Epira Law of 2001 was supposed to result to lower power rates. It provided for promotion of competition in each unbundled service of generation, transmission, distribution, and retail services. It professed to ban anti-competitive behavior and market domination. On the generation side the DOE and ERC put in place a complex Wholesale Electricity Spot Market where anti-competitive and market manipulation is prohibited with supposed severe penalties. Now it is working hard to set up a system for open access where large users called contestable customers can have a choice of generation suppliers. So why is the ERC hesitating to provide the captive consumers that provide 50% of the energy sales of Meralco their right to competitive power?

Reason for CSP and its basis in law

Right off the bat, allow us to state our position. The most important issue is that Competitive Bidding (or competitive selection process or CSP) would result to fairer and more reasonable rates. This is good for the consumers and for the country. There should be no argument on this truth and reality.

CSP is also good for the power generation investors because it will open the generation market instead of being closed to only the affiliates and majority owned projects of the DU owners. What remains to be debated only are execution and mechanisms on how best to achieve them.

The consumer benefits of CSP is supported by facts and empirical data. 1) An analysis of the Meralco generation cost in a study period early this year showed Meralco was passing on to consumers 23 to 33% higher prices to former sister company generators compared to non-affiliated and truly independent generators. This is to the tune of P13.68 billion a year. 2) Meralco’s new negotiated contract for the 460mw Mauban expansion, where Meralco PowerGen negotiated a 51% ownership with original proponent EGAT of Thailand, was for P4.30 per kwh. In contrast, a CSP conducted by eight (8) electric cooperatives in Northern Luzon last year for only 110mw got a bid of P3.78 per kwh, a P0.52 per kwh difference, or approximately P1.5 billion year more. The winning bidder was a globally established independent power producer.

“After rigorous regulatory review” by the ERC the rate of the Mauban expansion was shaved to only P4.26 per kwh which supported our organization’s position that competition beats regulation in reducing costs to consumers.

The legal duty of the Department of Energy and the Energy Regulatory Commission to enable this law is enshrined in their mandates under the EPIRA to promote the public interest. The Constitution even provides for this. Government officials and employees have similar obligations to protect the public.

The DU’s like Meralco, Davao Light, Visayan Electric themselves have the legal obligations under Section 23 of the EPIRA Law to supply power in the least cost manner, which can be had only by market-testing the price and not by arbitrarily determining the price between sister companies. It is part of their franchise obligation as a public service provider. Finally, as Filipinos, it is their patriotic and Christian duty to treat their countrymen and brethren fairly and not take advantage of them.

Meralco’s and Aboitiz’s counter arguments

What has been interesting in this debate is that Meralco and Aboitiz, other than making general statements, have not been presenting evidence that their negotiating power supply contracts with sister companies had actually resulted to the best rates to consumers.

Instead they have only been arguing that it will be difficult and raising all sorts of smokes and mirrors to scare everybody. Remember when we were kids and our parents and uncles would tell us “there is mumu there” if they don’t want us to go in a part of the house?

That is what Meralco has been doing in a desperate effort to retain their money maximizing rights and to deny the consumers their basic right to competitive and reasonable power. The DU’s privilege to self-negotiate how much generation rate Metro Pacific and the Aboitiz want to charge their customers. This is like taxation except the latter goes through more legislative debate and more oversight and audit. With due respect, historically an ERC review does not match the sharp-pencils in true competition.

At issue is the appropriate dipping into the public’s money whether it is comingled as taxes and government money or in their individual pockets. Many have gone to jail for misappropriating these public pockets. Pass-on electricity charges to consumers is no different. It is still dipping into their pockets and hence must be assured by the government to be fair and reasonable and safeguarded against those who will abuse the opportunity.

“Reasonable” rates can only come from a reasonable competitive procurement and contracting process. Even the ERC professes to want to let the interplay of market forces to determine power rates. And they do so in the WESM spot market, in the elaborate rules for aggregation, open access and right of choice. Why deny the captive consumers the benefit of true market interaction in the even more important basic generation rate that compromise 60% of electric consumers monthly bill?

So let us go down the list of objections and obstructions that the Aboitiz and Meralco group have been posing:

Concerns of the Aboitiz Group.

1. How do you set the rules so that the utility can use direct negotiations when conditions best suit that method?

Direct negotiations can be allowed if there has been a failure of bidding per procurement laws. Even in an emergency situation or urgent need, a DU can still resort to the international practice of “RFP’s” or request for proposals where the DU will invites known potential providers of the service that it needs specially existing IPP’s.

2. How could they set up a fair bid that does not favor a particular technology?

Most bids will be limited to the appropriate technologies that are feasible in the country. If you want base-load, the DU’s will bid coal, geothermal, and natural gas. Wind, solar, biomass, hydro, and even diesel have their roles in the energy mix and can be invited accordingly.

3. How to prevent strong utilities from subsidizing the weak ones?

Aggregation of power requirements should be voluntary. If Meralco and the Aboitiz group do not want other DU’s to be part of their CSP, it should be okey. If they want to share the benefits of their buying power in the name of patriotism or brotherhood, it is also okey. Joint bids can be proposed but it should not be mandatory.

4. If DU’s are under obligation to contract up to their peak demand levels, they could be saddled with excess capacities which will then punish the consumers.

The rules will need to rationalize the level of mandated contracted energy. Obviously it cannot be 100% of the peak demand. There has to be a provision for demand fluctuations especially in the face of open access. Also a level of market give should be allowed to provide liquidity to the WESM so that it can sustainably perform its market role.

For his part, Mr. Oscar Reyes, Meralco president, has these concerns:

1. Our position is it should be voluntary and co-exist with bilaterally negotiated contracts so that you can have the best of both worlds.

Voluntary means side stepping the spirit of CSP and an effective denial of the consumers rights to competitive and market determined power. CSP under Mr. Reyes proposal would be reduced to token biddings for the crumbs of Meralco’s power requirements. Palubag loob?

2. It has not been tried!

CSP may not have been tried by Meralco but it has been done by truly public service oriented and patriotic DU’s in the world. Even in the Philippines many DU’s specially customer centric Electric Coops have undertaken CSP’s with wonderful results for consumers

3. Its forced-fitting to the 150 electric cooperatives and utilities nationwide and that is not easy to carry out?

It will obviously not be one size fits all. There will be standard provisions to assure a level playing field and clear rules. There will be a template for standard and mandatory contract terms like transparent and verifiable indexing, fuel price and consumption, downtime allowances, and replacement power obligations, and performance monitoring. But each bid will be fine-tuned to adapt to the unique requirements of the power demand, service area, and even the technology that is deemed suited.

4. You have to have financing almost completed before you bid. Some Gencos may not want to participate because they have to invest in preparing for the bid?

Tenders for greenfield projects need to allow for completion time. Bidders though must have an identified location at time of bidding with a firm agreement. Completion time can be 3 to 4 years. Power supply that is needed within 2 years can be among those who are able to deliver it like the existing or expandable capacities of current IPP’s.

As to the cost and effort of preparing the feasibility of a project, we can understand Meralco has been spoiled by the fact that they only do project studies that are sure to be theirs to win. That is why they are against bidding. But the costing and feasibility of projects for bidding purposes is a standard business development and marketing costs of truly independent power generators.

5. Highly reliable and highly efficient GenCos may not participate because they don’t know who will bid against them.

Truly independent GenCos are in the business of generating power, providing a service, and making a reasonable profit in the process. They will go after this business depending on the rules of the game as long as it is fair and reasonable and objectively adjudicated.

They would know who they are bidding against because there will be a prequalification process. Open competition only means opening the DU generation market from the current clutches of its controlling stockholders.

6. Is the playing field even? Are we of the same competitive standards?

If the bidding rules are properly done, the level of service would be clearly specified, the criteria for qualification would apply to everyone, and clear methodology for determining the winning bid is established, the playing field should be even. This would be a vast improvement for the consumers from the current system at Meralco where there is NO playing field at all, let alone it being even.

7. Tapping a third party to undertake the auction of the PSAs is a cause for worry? They don’t have accountability and how do we know if they are even qualified.

The main job of the Third party is to assure the integrity of the bidding process, the objective evaluation, and the decision of the award. The DU and DOE will of course participate in the determination of the need.

This will also enable the policy making DOE to have some implementation influence in the energy mix, locational, environmental, and technological strategy of the country and not just the whim and “doable” preference of the DU that also owns the new genco projects.

The government through the DOE can even exercise eminent domain on strategic project sites and energy zones and lease them to the winning bidder. It will make way for the introduction of new technologies when they become available.

In the case of electric cooperatives, the right to negotiate power supply contracts had been resulting to bickering, corruption, and financially damaging ill-conceived power supply obligations that threatens their financial standing. Mandating a CSP will enable the DOE and NEA to provide energy contracting guidelines to protect the electric coops from themselves.

A Moving Forward Compromise

Why don’t we move forward for sake of people and country to demonstrate the benefits of competitive bidding. Let us start with mandating that at least 50% of the base-load power intended to serve the captive market of Meralco to be subjected to CSP? That is estimated to be about 1,200mw. Since Meralco already negotiated 1,060mw of base-load supply with Meralco PowerGen for the 600mw Redondo Power and 460mw Mauban Coal expansion, let us bid the next 1,060mw of Meralco’s requirements. Then we can really see which of the worlds, competitive bidding or negotiated sister company contracts, will be best for the consumers.

On the other hand, all electric cooperatives must be mandated to subject to CSP all their base-load power supply requirements. They however must be provided power planning and contracting guidelines by the DOE and NEA.

The ERC, DOE, and the DU’s should focus on giving the consumers their entitlement to competitive power and not allow us to be discombobulated by scary “mumu” tactics of the two vested interests. Let us move forward with the CSP.

David Celestra Tan is a founder and former President of the Philippine Independent Power Producers Assn. A CPA, He was a utility economist in power generation projects and a co-convenor of the Matuwid na Singil sa Kuryente Consumer Alliance Inc. an advocacy group seeking fair and reasonable rates and a reduction in the Meralco rate by P3 per kwh.
Email: david.mskorg@yahoo.com.ph, www.matuwid.org