Regulatory Capture 103 or Corruption in Government Agencies 101

By David A. Tauli, Mindanao Coalition of Power Consumers

In response to the proposal by the MCPC for member-consumers of electric cooperatives to file criminal charges at regional trial courts against their EC officers and against the ERC commissioners for carrying out illegal power supply agreements, arguments have been submitted that: (1) The electric cooperatives could have been “acting in good faith” when they entered into the PSAs with the Villanueva coal plant and with the Mt. Apo geothermal power plant; (2) The Energy Regulatory Commission could have established procedures for accepting and approving applications submitted to it for the approval of PSAs, even if the ECs did not carry out least-cost acquisition prior to entering into the PSAs; and (3) The Energy Regulatory Commission probably is no longer captured by the corporations that it is regulating because the current chairman is of proven integrity, and we could expect the ERC to correct the errors that were made under the previous chairperson.

This paper will show that all three contentions are wrong.

1. The ECs could not have been acting in good faith in entering into the power supply agreement with the Villanueva coal plant and, subsequently, with the Mt. Apo geothermal power plant.

1.1 Prior to any of the ECs entering into the power supply agreement with the coal plant (from the second half of 2012 until February 2013), the Association of Mindanao Rural Electric Cooperatives Power Supply Aggregation Group Corporation (AMRECO PSAG CORP, with 21 electric cooperatives as members) campaigned among all the electric cooperatives connected to the Mindanao grid to purchase long-term power supply from the GNP coal plant in Kauswagan at a price estimated at that time to be around 4.20 pesos per kilowatt-hour.

1.1.1 After the provisional approval by ERC of the PPAs with the GNP coal plant in April 2014 until the present, the GNPower Kauswagan Ltd. Co. (GNPK) has been offering for sale power supply from its Kauswagan coal plant at the same price approved by the ERC.

1.2 On February 2013, MORESCO I signed a power supply agreement with the FDC-Misamis coal plant at a price of 5.40 pesos per kWh. On June 2013, BUSECO signed a power supply agreement with the FDC-Misamis coal plant, at the same price of 5.40 pesos per kWh. Thereafter, fourteen other electric cooperatives in Mindanao followed the examples of MORESCO I and BUSECO of contracting for power supply from the FDC coal plant at the price of 5.40 pesos per kWh, when power supply from another coal power plant was available at a price of around 4.20 pesos per kWh. Moreover, at about the same period and until now, the San Miguel Power Corp was offering for sale at the same price of around 4.20 P/kWh power supply from its coal power plant being constructed in Malita, Davao del Sur. How can there be good faith on the part of the EC officials who chose instead to buy the more expensive power supply for their member-consumers?

1.3 Following their illegal PSAs with the coal plant, the ECs entered into PSAs (also illegally because they did not carry out not least-cost acquisition prior to entering into the contract) with FDC-Misamis for the generation of the Mt. Apo geothermal power plant at a price of 5.40 pesos per kWh, on the contention that this will be an interim power supply from FDC-Misamis while the coal power plant in Villanueva is being constructed. At the time the ECs signed a PSA with FDC-Misamis for power supply from the Mt. Apo GPP, they had a contract with the PSALM-NPC for power supply from Mt. Apo, at an effective price of 3.03 pesos per kWh for the duration of the contract. The contracts were valid until December 2016.

1.3.1 The EC officers claim that they signed a contract at the higher price so that their allocation from the Mt. Apo GPP could be increased. But FDC-Misamis was actually obligated to supply additional power to the ECs without increasing the duly approved rate of 3.03 P/kWh. That was because the ECs had agreed to an overpriced contract to purchase power supply from the FDC coal plant. Simple gratitude on the part of the FDC-Misamis would have moved them to grant to the ECs the higher allocation from the Mt. Apo GPP without increasing the dulyapproved rate (for which they had no authority to increase). That could have proven good faith on the part of the contracting parties. Where there is persistent and repeated effort on the part of the EC officers to take advantage of the ignorance and apathy of their member-consumers there can be no good faith.

1.4 The absence of good faith on the part of the EC officers (around 160 of them) is clear. What remains a mystery is the inducement that would move that number of general managers and board members of the ECs to allow the money of their member-consumers to be stolen by the gencos (to the extent of more than two pesos per kWh of generation from the Mt. Apo GPP and more than one peso per kWh of generation from the Villanueva coal plant). The mystery will be clarified when, maybe one day not too long from now, one or more of those EC officers will repent of their misdeeds and reveal to the public the reason for cheating of EC members by their officers.

2. The procedures established by the ERC for the approval of PSAs require that the electric cooperatives carry out a least-cost acquisition process prior to entering into power supply agreements with gencos.

2.1 Before the applications filed jointly by FDC-Misamis and electric cooperatives in Mindanao, all applications for approval of PSAs for power supply from conventional power plants that were submitted by the DUs complied with the EPIRA requirement to carry out least-cost acquisition prior to entering into the PSAs. All previous applications submitted to the ERC contained an explanation of the LCA process that was conducted by the ECs, in particular including a statement to the effect that the ECs placed advertisements in newspapers of general circulation requesting for proposals (RFP) to supply the long-term power supply requirements of the ECs. A published RFP for the particular power supply being sought by the DU is a necessary requirement for properly carrying out an LCA process.

2.2 Here are three examples of a statement in a PSA application submitted to the ERC that clearly shows that the EC submitting the PSA has gone through an LCA process prior to entering into the PSA with a genco:

2.2.1. “AMRECO PSAG CORP created a Bids and Awards Committee and invited suppliers to submit their respective letters of interest to participate in the Bidding. The “Invitation to Apply for Qualification” was published in newspapers of general and local circulation between November 21, 2011 and November 28, 2011;”

2.2.2 “That on January 18, 2012, Applicant MORESCO-1 published an invitation for Independent Power Producers in the Philippine Daily Inquirer, a newspaper of general circulation in the Philippines, and in the Gold Star Daily, a newspaper in general circulation in the island of Mindanao and more particularly in the franchise area of Applicant Moresco-1, copies of the publications are attached herein as Annex “C” and Annex “C-1”, respectively, for its peaking requirement which at that time was estimated at 7 MW.

“That a pre bid conference was held on February 7, 2012 with the following prospective bidders: (1) Conal-Mapalad Power Corporation; (2) Aboitiz-Therma Marine, Inc; and (3) Mindanao Energy Systems, Inc. (Minergy).”

2.2.3 “PROCUREMENT PROCESS

“In an effort to ensure the quality, reliability, security and affordability of supply within its franchise area, particularly with an increasing demand for power caused by the consistent economic rise in the province, SUKELCO undertook a Competitive Selection Process (CSP) for the selection of a new power provider that will supply a guaranteed dependable capacity of up to 3MW of peaking power. “SUKELCO published the Invitation to Bid for Three (3) MW Embedded Peaking Power Supply on 04 and 08 September 2014 issues of the Philippine Daily Inquirer.

“In response to the invitation, three power suppliers, DPC, We Lead and Paradigm expressed their intention to join the bidding. However, only DPC was able to submit the complete requirements and was qualified to join the bidding.

“In an effort to encourage more bidders who may provide better offers, SUKELCO published the Invitation to Bid for the third (3rd) time on the 26 September 2014 issue of the Philippine Daily Inquirer. Unfortunately, no other bidders expressed their intention.”

2.3 And here are two examples of a statement in a PSA, copied verbatim from documents posted in the ERC website, that clearly show that the ECs did not carry out LCA prior to entering into the PSA with FDC-Misamis.

2.3.1 “DORECO’s Procurement Process “In 2013, FDC MISAMIS conducted a series of road shows to market the 405 MW capacity of its Coal-fired Power Plant to be constructed in the PHIVIDEC Industrial Estate in Misamis Oriental. “After the said road shows, DORECO commenced negotiations with FDC MISAMIS for the execution of an EPPA in order to address the deficiency of supply upon the expiration of its CSEE with NPC/PSALM and the projected increase in the energy requirements of its member-consumers. The completion of FDC MISAMIS’ power plant will prevent the shortage of power supply in DORECO’s franchise area. In addition, being a coal-fired power plant, FDC MISASMIS’ power supply will be cheaper than the other committed projects utilizing diesel. “Thus, on May 20, 2013, DORECO and FDC MISAMIS executed the EPPA, subject of the instant application. With the Mindanao power deficit not being expected to significantly improve in the near future and considering the limited supply options available, DORECO entered into an EPPA with FDC MISAMIS to ensure security and reliability of its supply and to avoid power interruptions which will needlessly result in unrecoverable losses to its member-consumers.”

2.3.2 “After extensive negotiations with FDC MISAMIS, BUSECO signed on 31 October 2014, an Electric Power Purchase Agreement (EPPA) with FDC Misamis from the output of Mt. Apo 1&2 for a contracted demand of 10 MW for 2 years.”

2.3.2.1 Carrying out “extensive negotiations” with a genco cannot be taken as proof of carrying out an LCA process. In this application for PSA approval, there were no other statements to prove that BUSECO carried out an appropriate LCA process in contracting for power supply from the Mt. Apo geothermal power plant.

2.4 Here is an excerpt from a Decision by the ERC, copied verbatim from a document posted in the ERC website, which shows clearly that: (a) the ERC recognizes the EPIRA requirement for DUs to carry out LCA, and (b) the ERC recognizes that it is mandated by the EPIRA to ensure compliance of regulated entities with the EPIRA:

THE LAW EMPOWERS THE COMMISSION TO REVIEW POWER SUPPLY AGREEMENTS.

Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA) mandates the Commission to be the primary regulatory arm of the State tasked with overseeing the restructured electric power industry. Towards this end, the Commission is empowered to determine if Distribution Utilities (DUs) are supplying their captive market with electricity in the least cost manner. [6]

[6] Section 23, Republic Act No. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA). Likewise, Section 25 of the EPIRA provides that the retail rate [7] charged by DUs is subject to regulation by the Commission based on the principle of full recovery of prudent and reasonable economic costs incurred, or such other principles that will promote efficiency.

[7] Paragraph uuu, Rule 4, IRR of EPIRA, defines Retail Rate as the total price paid by end-users consisting of the charges for generation, transmission and related Ancillary Services, distribution, supply and other related charges for electric service.

2.5 Here is a statement by the ERC as to what is an acceptable LCA process conducted by a DU: “The procurement process undertaken by AEC in selecting ANDA as its power supplier is also within the standards prescribed by the Commission. The PSA entered into by AEC with ANDA provides AEC not only with the lowest submitted bid, but also with a more secure and reliable power supply since ANDA’s power plant would connect to the grid using the same node where AEC is connected.”

2.6 When the ERC accepts for hearing an application for approval of a PSA, in which no LCA process was carried out, it contravenes its established practice of accepting only applications which manifest that proper LCAs have been carried out.

3. The ERC remains captured by the corporations (gencos and DUs) that it is regulating even after the appointment of a new chairman of “proven integrity”.

3.1 The evidence for the regulatory capture of the ERC became unmistakable during the latter years of Chairperson Zenaida G. Cruz-Ducut. The strongest evidence of regulatory capture is the approval by the ERC of the PSAs entered into by ECs with FDC-Misamis for the generation of the Mt. Apo geothermal power plant. The bias of the ERC for gencos and DUs and against power consumers was clearly shown in the numerous violations by the ERC of its own rules and procedures in approving that PSA.

3.2 The acceptance by the ERC of an application for approval of a PSA that, based on the manifestations of the applicants, has not gone through an LCA process can be taken as prima facie evidence of regulatory capture of the ERC because the EPIRA explicitly mandates the DUs to carry out LCA prior to entering into PSA, and the EPIRA explicitly mandates the ERC to ensure compliance with the EPIRA by the corporations that it is regulating.

3.2.1 Here is the manifestation in a PSA application submitted to the ERC, after the appointment of Chairman Jose Vicente B. Salazar, which indicates that no LCA was done prior to the PSA, but the application was accepted by the ERC for hearing, and given provisional approval:

3.2.1.1 “Given its demand growth and in order to obtain a secure and adequate supply of electricity for its consumers during this time, SURSECO II sought out other generation companies and sources of electricity in the Mindanao Grid and solicited offers and/or expressions of interest from these power suppliers to supply its growing power requirements.

“Among the offers that SURSECO II considered was one from the FDC MISAMIS which made an offer to SURSECO II to supply its power requirements. FDC MISAMIS is committed to construct 405MW Coal Fired Power Plant in the PHIVIDEC Industrial Estate in Misamis Oriental. The power plant is scheduled to be commissioned in 2016.

“SURSECO II thoroughly evaluated all the offers/expressions of interest submitted to it and determined that the offer of FDC MISAMIS to be the one most advantageous to its consumers.”

3.2.1.2 While SURSECO II claims in its application that it carried out a search for the lowest cost power supply, there is no explicit statement in the application that the EC posted public notices or placed advertisements in newspapers requesting for the submission by gencos of proposals or expressions of interest to supply the power requirement of the EC.

3.3 The anomalies concerning the PSAs of ECs with the Villanueva coal plant and with the Mt. Apo geothermal power plant were brought to the attention of Chairman Jose Vicente B. Salazar not long after his appointment as ERC Chairman in August 2015. He has not seen fit to do anything about the allegations of anomalies. Neither has he given any response to those who brought the anomalies to his attention.

3.4 The conclusion is that even with a new chairman, supposedly of proven integrity, the ERC remains captured by the corporations it regulates. Filing petitions with the RTCs for redress of grievances is the only recourse of Mindanao power consumers to stop their EC officers from stealing their money.