Viewpoint: Competitive Selection Process for Power Supply Agreements: The Supreme Court Decision and the Responses of the Energy Regulatory Commission and the Distribution Utility Companies

By David A. Tauli
President, Mindanao Coalition of Power Consumers

1. The Supreme Court issued its final decision on July 2019 which required all power supply agreements submitted to the Energy Regulatory Commission after June 30, 2015 to comply with the Competitive Selection Process as defined in the 2015 DOE Circular (DC2015-06-0008), “Mandating All Distribution Utilities to Undergo Competitive Selection Process (CSP) in Securing Power Supply Agreements (PSA).”

2. In response to the SC decision, the Energy Regulatory Commission has directed all distribution utility companies with power supply agreements that are affected by the decision to submit to the ERC by December 2019 their explanations for each PSA showing that they carried out a legitimate competitive selection process prior to entering into the PSA with the generating company that was awarded the power supply contract by the distribution utility company.

3. The majority of the current set of commissioners the Energy Regulatory Commission are untainted by the apparent corruption in the previous ERC regimes prior to the chairmanship of Agnes Vicenta S. Torres Devanadera. Only one commissioner still remains from the corrupt regimes of the ERC. So consumers can expect the current ERC to be fair in their determination of the power supply agreements that complied with the Competitive Selection Process as defined in the 2015 DOE Circular.

4. The result of the evaluations of power supply agreements by competent and honest ERC commissioners should be that the ERC will require all PSAs for which legitimate competitive selection processes were not done to be subjected to the least-cost supply provision of the EPIRA, of which the DOE-mandated CSPs are forms of compliance. (The LCS provision of the Electric Power Industry Reform Act of 2001, EPIRA, states in Rule 7, Section 4h, of the Implementing Rules and Regulations: “A Distribution Utility shall supply electricity in the least cost manner to the Captive Market within its Franchise Area, subject to the collection of Retail Rates duly approved by ERC.”)

5. But even if we assume competent and honest ERC commissioners, the consumer groups should prepare to study all the decisions that the Energy Regulatory Commission will be making in their review of the PSAs in order to ensure that all the PSAs that were not subjected to legitimate competitive selection processes will be required by the ERC to undergo honest-to-goodness CSPs. The ERC under CEO Devanadera has been making decisions that result in fair and reasonable rates, but most of the generating companies will likely try to suborn the ERC into approving PSAs that were not subjected to proper CSPs. If generating companies with illegitimate PSAs are required to go through CSPs, the result will be a great reduction in the prices of the power supplies from these generating companies. It is even possible that the contracted generating companies will not win in the CSPs carried out by the distribution utility companies. Corporate disaster, which could be avoided by bribing the ERC commissioners. The vigilance of consumer groups will discourage the ERC from yielding to the temptations of the generating companies.

6. EXAMPLES

Following below are statements from sample applications for approval of PSAs by the ERC that were submitted by distribution utility companies. It requires only an evaluation of such statements in the PSAs to determine whether a legitimate CSP or LCS was conducted by the distribution utility company that submitted the PSA application. In Example A, the DU obviously carried out an appropriate competitive selection process, and thereby complied with the least-cost supply requirement of the EPIRA. In Example B, the DU clearly did not carry out a generally-acceptable competitive selection process. Example C is a PSA application from a DU that purports to have conducted CSP, but probably carried out a moro-moro that the DU and their accomplice generating company used to fool or suborn the ERC into approving the PSA.

6.1 EXAMPLE A: Verbatim statements in the PSA application of CEPALCO concerning the CSP or LCS process that the DU supposedly carried out:
“CEPALCO solicited offers from potential power suppliers, including its affiliate MINERGY COAL. Evaluations conducted by CEPALCO on the offers received disclosed the following results (excluding Fuel Cost):

Comments:

6.1.1 Specific offers are mentioned by CEPALCO, along with the respective prices, the truth of which can be verified from other documents submitted to the ERC by CEPALCO, or by asking CEPALCO to submit confirmatory documents if these were not attached to the PSA application.

6.2 EXAMPLE B: Verbatim statements in the PSA application of MORESCO II concerning the CSP or LCS process that the EC supposedly carried out. “Given its demand growth and in order to obtain a secure and adequate supply of electricity for its member-consumers during this time, MORESCO 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 MORESCO II considered was one from FDC MISAMIS which made an offer to MORESCO II to supply its power requirements….”

Comments:

6.2.1 No mention is made of other generating companies that submitted proposals to MORESCO II, so it is certain (unless the lawyer was lazy in writing the PSA application) that MORESCO II did not send solicitations to other generating companies, nor did it post any public advertisement for its power supply requirement, thereby violating a basic requirement for acceptable CSPs and LCS processes. It can be verified, by examining the documents that were attached to the application submitted to the ERC by MORESCO II, that MORESCO II did not send solicitations to other coal generating companies (such as GNPower and the San Miguel power corporation that were marketing power supply at that time), and did not make any public advertisements. And upon such verification this PSA would be declared “null and void ab initio” for having violated the EPIRA.

6.2.2 This PSA application was submitted to the ERC before July 30, 2015, so it is not among those that will be reviewed by the ERC as a consequence of the Supreme Court decision. But it is expected that petitions will be submitted by consumers to the ERC to also review PSAs submitted before July 30, 2015 in order to verify compliance with the LCS requirement of the EPIRA.

6.3 EXAMPLE C: Verbatim statement in the PSA application of BUSECO concerning the CSP or LCS process that BUSECO supposedly carried out.

“Competitive Selection Process. BUSECO invited interested bidders to supply its 5 MW peaking power requirements for the 2nd quarter of the year 2018 pursuant to Energy Regulatory Commission Resolution No. 13, Series of 2015 directing all Distribution Utilities (DUs) to conduct a Competitive Selection Process (CSP) in the procurement of their supply to the captive market and in accordance to BUSECO’s duly approved Competitive Selection Process Guidelines through Board Resolution No. 2016-013. The public bidding was participated by two (2) interested bidders, namely, Bukidnon Power Corporation (BPC) (now assigned toNBPC with consent of BUSECO) and Solar Eagle Renewable Energy Corporation.”

Comments:

6.3.1 Based on the statement, it appears that BUSECO conducted a CSP in accordance with the ERC resolution. But, from an examination of the documents submitted to the ERC in the PSA application, it could be found that BUSECO conducted a fraudulent CSP, as evidenced by the following facts:

6.3.1.1 Other generating companies, generally known to electric cooperatives in Mindanao that could supply the particular power supply required by BUSECO, were not invited to submit proposals.

6.3.1.2 The only other generating company that submitted a proposal was a solar renewable company, which could not possibly supply the PEAKING power requirements being solicited by BUSECO. Of course, BUSECO ruled out the proposal of Solar Eagle, leaving it with the generating company that it pre-selected prior to initiating its moro-moro of a competitive selection process. (Truth be told, bidder no. 2, the solar energy company, also was pre-selected by BUSECO so that two proposals could be submitted, thereby complying with the CSP requirement for at least two bidders, without jeopardizing the proposal of the favored generating company.)

6.3.2 Verification by the ERC of either of the foregoing two facts through an examation of the documents submitted by BUSECO should result in the ERC deciding that this particular PSA did not carry out an acceptable CSP. Of course, this assumes (which is reasonable to do so at this point) that there is at least one honest and competent commissioner in the ERC who participates in the evaluation of the PSAs. Here, I reiterate this requirement for competent and honest commissioners who will carry out evaluation because the fraudulent PSA submitted by BUSECO was approved by the ERC.

6.3.3 The main intention of the Supreme Court decision, which is also the main intention of the EPIRA in requiring “least cost supply”, and also the main intention of the ERC and DOE directives on “competitive selective process”, is that competition among suppliers should prevail in the acquisition of power supply by the distribution utility companies.

6.3.4 If a distribution utility company enters into a power supply agreement but acts in an anti-competitive manner in the process (e.g., not sending requests for proposals to known power suppliers, specifications in the terms of reference that restrict competition, advertisement in newspapers with limited circulation – all of which were committed by BUSECO in this case), the ERC should not approve the PSA. If the ERC approves such PSAs, which happened in this case, the ERC commissioners are culpable and could be sued for corruption.

7. CONCLUSIONS

7.1 By objectively evaluating the power supply agreements, the Energy Regulatory Commission should be able to determine which of the PSAs did not carry out a generally-acceptable competitive selection process or least-cost supply process.

The distribution utility companies that entered into PSAs without legitimate CSPs should be required to carry out CSPs or LCS processes for the power supplies that were already contracted.

7.2 If a competitive selection process or least-cost supply process is carried out for an illegitimate power supply contract and the same generating company wins, then the price offered by the generating company, which probably will be much lower than the price in the original power supply agreement, will be made effective from the date when consumers started paying for the power supply from the generating company. Power consumers win.

7.3 In order to ensure that the commissioners of the Energy Regulatory Commission are not suborned into approving power supply agreements that have not gone through a legitimate competitive selection process (it can be shown that such anomalous approvals have been done many times in the last two ERC regimes), consumer groups should participate in the evaluation process if this is made public by the ERC, or study the decisions of the commissioners on the PSAs if the ERC carries out the evaluations behind closed doors. As the foregoing examples show, straightforward evaluation of the documents submitted by the distribution utility companies and simple verification of the facts need to be done in order to recognize when generally-acceptable CSP or least-cost supply process has been carried out by distribution utility companies. Legal expertise is not required to determine illegitimate power supply agreements; only due diligence.

8. IMPLICATIONS of the SC Decision for Power Supply Contracting in the Electric Cooperatives (which, with MERALCO, have been blatantly anticompetitive in their purchase of power supplies for consumers)

8.1 The SC decision on competitive supply procurement will be the start towards ensuring affordable rates for power supply for consumers of electric cooperatives, not only in Mindanao but throughout the Philippines. It means that the electric cooperatives will have to conduct honest-to-goodness competitive selection processes or least-cost supply processes for all their purchases of power supplies. And the electric cooperatives will no longer be able to pre-select the “winning” bidder for their power supply contracts.

8.2 The pre-selection of generating companies for PSAs by the electric cooperatives has been the main driver for the corruption of the officers of the electric cooperatives (the general managers and the members of the Boards of Directors, but these officers have also corrupted their upper level management employees). From the year 2012, the officers of most of the electric cooperatives in Mindanao established an S.O.P. in their power supply contracting in which the preselected generating company pays to the EC officers a minimum of one million pesos per megawatt of power supply contracted by the EC. This money goes to the officers of the electric cooperative; it has never been reflected in the books of accounts of the electric cooperatives. The SC decision has effectively eliminated this source of funds for EC officers, so there is now little inducement to spend money in order to be elected as a member of the board of directors. There is still money to be stolen from purchases of materials and equipment by the EC’s, but the amount from this is small in comparison to what was made available by the dirty generating companies. Power consumers win.

8.3 Even so, the current officers of the electric cooperatives, most (maybe 99%) of whom spent a lot of money to be elected to their positions, should be expected to continue to look for other ways of cheating their consumers in order to enrich themselves. The only way to stop corruption in the electric cooperatives is to organize and educate consumer groups in the franchise areas of the electric cooperatives to work as watchdogs over their ECs.

8.4 All power consumers should give thanks to God for the work that was done by the Alyansa Para Sa Bagong Pilipinas, Inc. (ABP), which moved the Supreme Court, against the objections of the ERC, to bring about a regime of justice in the determination of the rates that should be paid by consumers for their power supplies. In December 2016, the ABP filed the petition at the SC versus the ERC, DOE, MERALCO and a number of generating companies that were contracted by MERALCO. The petition asked that the SC should order the Energy Regulatory Commission to require the distribution utility companies to carry out competitive selection process in entering into power supply contracts with generating companies. (Why the ERC has to be ordered by the SC to do something which the EPIRA mandates as the prime responsibility of the ERC is another, long and sordid, story.) It is a result of this petition filed by the ABP that all power supply agreements submitted to the ERC after July 30, 2015 will be required to undergo CSP if the ERC determines that legitimate CSP was not done by the distribution utility companies in contracting for their power supplies.

8.5 As mention by the recently-retired Associate Justice Antonio T. Carpio, the Supreme Court is upholding the Philippine Constitution in the decision that resulted from the petition filed by the Alyansa Para Sa Bagong Pilipinas. Section 19, Article XII, The Philippine Constitution of 1987: “The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.”

David A. Tauli
November 2, 2019