Outdated Anti-Consumer Terms in BOT-Type PSA Contracts Need to be Prohibited (Part 1)

David Celestra Tan, MSK
30 November 2018

Part 1/2

Part of the complex formula for the generation rates that are charged to us consumers by Meralco is something called Capital Recovery Fee or CRF. That is to allow these power plant investors to recover their capital in the power plant and gain some profits.  This CRF plus the Fixed O&M, their fixed organization salaries and expenses whether they run or not together constitute what is called “capacity fees”. Including these in their power rate charges to us consumers is fair when they are providing power and service.

But Should we consumers pay for these fixed “capacity fees” (2.50 to 3.00 per kwh) even if the power plant is down for preventive maintenance or simple breakdowns? Should we pay them even if they mismanage their operations or scrimp on their maintenance and their plant broke down? Should we pay even if they bought the wrong or cheap parts and it blew up? Or should we pay them for their allowed 60 days per year even if they could have been back in service in 30 to 45 days? In other words, should we consumers pay for these “capacity fees” if they are down and not providing any power or service for any reason at all?

These “capacity fees” are not small.

For a 300mw coal plant, this could amount to P500 million a month or P1 billion for the 60 days normal allowance for downtime.  For a 1,200mw the size of Atimonan One, this would be about P1.8 billion a month or P3.6 billion for its 60 days downtime allowance. For Meralco’s 3,551mw of midnight contracts, it would be P5.4 billion a month or P10.8 billion for its 60 days downtime allowance per year. If there are 5 million of us metered customers of Meralco, that averages to P2,160 per year. There are similar capacity payments for downtimes in Cebu, Panay, Davao.

Most people do not realize that the Power Supply Contracts being signed between a power generator and a distribution utility contain guaranteed capacity payments during downtimes and the downtimes themselves are arbitrary and not technically determined. These guaranteed capacity payments during downtimes in effect work as incentives for the IPP’s to maximize their downtimes because they are paid anyway without working. Another way of looking at it is they are paid capacity fees for 12 months even if contractually they need to operate and deliver energy only for 10 months. Is that fair to us consumers?

Hidden or Undisclosed Pass on Charges to Consumers

This should matter to the consumers because these guaranteed payments whether the power plants are running or at least ready to run if called for dispatch are passed on to the consumers. This is the reason in certain months the average per kwh rate of the coal and Malampaya plant suppliers of Meralco shoot up to P13 to 18 per kwh or even more. Remember the minimum energy off-take (MEOT) or take or pay provisions of NPC contracts that sent the reviled PPA power adjustments into the stratosphere in early 2000’s after the Epira law was passed? Guaranteed capacity payments including during downtimes were a big part of the reason.

These guaranteed payments during downtimes are common in the Meralco contracts and need to be urgently reevaluated because they are contained in the seven (7) midnight PSA’s totaling 3,551mw that   Meralco negotiated with companies that are majority controlled by sister company Meralco PowerGen. These guaranteed payments during negotiated downtime periods are onerous to the consumers and must be prohibited and disallowed by the ERC, in case they are really determined to approve some of the seven midnight contracts.

Meralco of course would like to get away with these in their negotiated contracts because it is their own power plant as a sister company and they want to assure those power plants are able to pay for their project financing and profits to stockholders. After all they can pass on the extra charges to their sacrificial lambs, us the hapless captive customers.

The exploitation is worse when the generator supplier is a sister company of the off-taker because they could be looking away even if the generator had already exceeded their downtime allowance.

Hidden True cost to consumers

Meralco and its sister generators will probably argue that they have to be paid these downtime capacity fees or they will not be able to offer the “low” per kwh rate. Actually that means their declared low per kwh rate that Meralco publishes and applies with ERC is not the true total cost to the consumers. We believe that this is deceptive pricing. We propose that for transparency, the generators should not be paid for their downtime capacity fees and only be paid for delivered energy as contracted. This is a fairer payment for performed service. Not for vested downtime allowance days that Meralco and its sister generators just negotiated among themselves, in effect paying the sister company billions for two months a year without needing to operate.

Inflation Indexing of Capital Investments

Another hidden costs that creep up on the consumers is the inflation indexing of capital recovery fees. Once they have invested there should be no inflation index on his capex. It is up to the IPP to figure out his forex risks on his project financing. Why should the consumers be the patchy all the time? Increasing the price on capital investments already purchased and installed is like increasing their profits on the investment. In this case ERC WACC formula is undervalued.

Benefit of True Competitive Bidding

It is true that the rate will be higher if the capacity fees for downtimes are added to the kwh rate. But that is what the customers are being charged anyway. And that is where subjecting these power supply contracts to true competitive bidding would come in to keep everyone honest and somehow get the captive consumers lower and more transparent generation rate.

Added Negative Impact on the electric consumers

The damage to the electric consumers does not stop there. When a  coal plant declares downtime due to whatever reason, like their favorite “boiler leaks”, their capacity reduces the supply of power in the power grid and the WESM market.  This increases the spot market prices in the WESM which are again passed on to the consumers when bought by Meralco, who had to buy from the spot market to replace the supply from the downed power plant. Consumers get screwed both ways.

To be continued…How do we protect the consumers?

MatuwidnaSingilsaKuryente Consumer Alliance
Matuwid.org

David.mskorg@yahoo.com.ph