Meralco’s rate hikes and neoliberal power reform (2)

Continued from Part 1

The series of increases in generation charge that Meralco has implemented this year is made possible by deregulation under Epira. Meralco explains in its website that “the level of Generation Charge is adjusted on a monthly basis as prescribed by the ERC in its Order dated October 13, 2004 under ERC Case No. 2004-322 approving the ‘Guidelines for the Automatic Adjustment of Generation Rates  and System Loss Rates by Distribution Utilities or the AGRA’”.

Increasing rates

Section 43 (f) of Epira authorizes the ERC to “adopt alternative forms of internationally-accepted rate setting methodology that will ensure reasonable price of electricity and non-discriminatory rates”. Since power rates have been unbundled under Epira, the ERC have set different rate setting methodologies for generation, transmission, and distribution as well as system loss.

Distribution utilities (DUs) like Meralco use the Performance-Based Regulation (PBR) methodology for their distribution rates and the AGRA to reflect adjustments in generation costs charged by their suppliers. AGRA allows DUs to calculate new generation rates on the tenth day of each calendar month. In the last 12 months, generation rates “passed on” by Meralco have been on an upward trend jacking up the electricity bill of end-users. (See Chart)

According to the ERC, the AGRA was devised to ensure, among others, “transparent and reasonable prices of electric power service in a regime of free and fair competition and to achieve greater operational and economic efficiency”.

From PPA to AGRA

But is it fair and reasonable for end-consumers to shoulder the adjustments under the AGRA? The AGRA actually is the latest incarnation of the notorious, pre-Epira Purchased Power Adjustment (PPA). The PPA was an automatic cost recovery mechanism designed to attract private IPPs in power generation. Through the PPA, IPPs are assured that they will be paid for contracted capacity (even if they did not actually produce it) and they will be protected from the fluctuating costs of fuel and foreign exchange rate – all of which are shouldered by the consumers in the form of PPA.

When Epira’s unbundling of rates was implemented in May 2003, the PPA was incorporated in the generation rates charged by IPPs and passed on to end-consumers by Meralco and other DUs in the form of the Generation Rate Adjustment Mechanism (GRAM). The GRAM was a deferred recovery mechanism using a three-month test period. Napocor and DUs had to apply their quarterly GRAM before the ERC, which will review and approve it. Meralco and other DUs criticized the GRAM because it “does not represent the true cost of power for the period that it is being recovered” and that “it resulted to cash flow problems on the part of the DUs”.

Automatic adjustments

Thus, the ERC replaced the GRAM used by the DUs with the AGRA (Napocor, on the other hand, continues to use the GRAM). The main difference is the manner of recovery – the AGRA like the PPA is automatically calculated and collected by Meralco and other DUs every month (i.e. without public hearings conducted by the ERC like in the case of GRAM).

The only sort of “oversight” on AGRA that the ERC exercises is that “at least every six months, the ERC shall verify the recovery of Generation Costs by comparing the actual allowable costs incurred for the period with actual revenues for the same period generated by the generation rates and the portion of the Systems Loss Rates attributable to Generation Costs”.  But if the ERC fails to verify the generation rate within six months from the submission of calculation by a DU, “the rates shall be deemed final and confirmed”. This set up not only gives Meralco more opportunities to exploit consumers but even legitimizes such abuse.

Automatic cost recovery schemes such as AGRA are indispensable in a deregulated and privatized energy sector. They are the concrete operationalization of the neoliberal principle of making so-called market forces in a regime of presumed free and fair competition determine the cost of a commodity or service. But the problem is there is neither free nor fair competition in the power sector as giant private monopolies like Meralco have been further strengthened by Epira. Worse, a related sector that significantly affects the cost of power, the oil industry, is also deregulated and dominated by private monopolies thus doubling up the burden of consumers.

Market-based, pro-investment rates 

Aside from the AGRA, Meralco is also allowed to increase its distribution rates using another market-based mechanism – the PBR. Based on Epira’s Section 43 (f) provision, the ERC is using the PBR to determine the rates that Meralco and others can charge. The PBR, which hiked Meralco’s distribution charge by a total of 41 centavos per kWh in separate increases in April and December last year, was chosen by design.

Consistent with the neoliberal agenda of Epira, PBR makes rates setting more market-based and reduces regulatory oversight, abolishing the 8-12 percent return on rate base (RORB) that DUs were allowed to use in the past. Under an RORB formula, rates are pegged on “reasonable” return on the assets actually used in distributing electricity. The PBR, on the other hand, adheres to the principle that “good utility performance should lead to higher profits” and thus allows DUs to charge rates based on projected investments and operating expenses related to electricity distribution. Like the AGRA in the case of power generation, the PBR ensures the commercial viability of DUs by making the end-consumers shoulder the risks of future investments and operating costs of running the utility.

Revenue-neutral?

The generation charge is just one of the 20 unbundled items that can be found in a Meralco monthly bill. But it comprises 50-60 percent of what Meralco customers pay. (The distribution charge, on the other hand, accounts for 20-25 percent of the monthly bill, Meralco claims.) The utility giant repeatedly claims that as a pass through charge, generation rate is revenue-neutral or it does not add anything to Meralco’s income. This may be true, but it does not mean that certain owners of Meralco do not benefit from increased generation rates.

The Lopez family, which currently controls 13.4 percent of Meralco, for instance, also owns the IPP First Gen that in turn owns First Gas Power Corp., operator of the 1,000 megawatt (MW) Sta. Rita Power Plant, and the FGP Corp. which operates the 500-MW Sta. Lorenzo Power Plant. In May 2010, the two power plants accounted for a combined 35.7 percent of power supplied to Meralco.

Other power sources of Meralco include the Napocor, which accounted for 24.3 percent and the wholesale electricity spot market (WESM), 17.2 percent. WESM was created under Epira as a spot market for trading electricity in the Philippines. Among the power generators involved in the WESM are the Lopez-owned First Gen power plants and the First Gen Hydro Corp., which runs the 100-MW Pantabangan Hydroelectric Plant and the 12-MW Masiway hydro plant. In addition, the Lopez family also established the First Gen Energy Solutions to “sell, market, or aggregate electricity to end-users” in the WESM.

Private monopoly

Aside from not prohibiting owners of DUs to also operate generation plants, Epira also allowed the DUs themselves to own power generation plants. Meralco, for instance, is planning to get into power generation to remain “competitive” when open access is implemented next year. Open access, another restructuring under Epira that is expected to be operational as early as next year, allows customers using not less than 1 MW to choose their own suppliers.

Epira’s objective was to dismantle the monopoly of Napocor over the power industry. But by allowing cross-ownership in distribution and generation, it has simply transferred such monopoly control to a few private companies such as Meralco. Transmission is also now a private monopoly by a consortium that includes Enrique Razon’s Monte Oro.

A year after open access, Meralco’s supply contract with Napocor shall automatically lapse. Under Epira, DUs are allowed to source not more than 50 percent of its power needs from its bilateral contracts with affiliated IPPs but the cap does not cover contracts forged before Epira was passed (such as Meralco’s supply contracts with First Gen). Meanwhile, DUs are also mandated by Epira to purchase at least 10 percent of their power requirements from the WESM for the first five years of the spot market’s operation. Epira is not clear what will happen after this period. In other words, Meralco can purchase as much as 90-100 percent of its power needs from affiliated IPPs, making cost manipulation easier.

Spot market manipulation

But even if Meralco is required to buy more from the WESM, it still does not guarantee cheaper and more reasonable power rates. This is because even the spot market which is supposed to facilitate free competition among suppliers to bring down electricity costs has been used to manipulate and jack up electricity rates. In fact, the largest monthly increase in generation charge implemented by Meralco so far this year was by 93 centavos per kWh in April, which the utility giant blamed on the increase in the price of WESM.

The WESM has become a venue for speculation in the price of electricity to the detriment of consumers. At one point in February, when talks about limited power supply due to El Niño started to surface, the price of electricity in the spot market jumped to an unbelievably high P68 per kWh.

It was also observed that half the time in the first two months of the year, the maximum offered capacity in Luzon was lower than peak demand although reported dependable capacity was even higher than peak demand. During this period, some big plants like San Miguel Energy Corp.’s (SMEC) 540-MW Sual Unit 1 power plant stopped operation for one month due to “coal supply problems”. Another SMEC-owned power plant, the 620-MW Limay power plant, also went offline for about three weeks during the same period for “inspection purposes”. San Miguel also has a 34 percent stake in Meralco. The unscheduled outages in its power plants fueled talks that SMEC may have intentionally shut down the Sual and Limay plants to constrict power supply and jack up rates.  

At the mercy of “market forces”

Epira did not make power rates charged by Meralco and other DUs in the country cheaper, reasonable, or even transparent. By further strengthening the monopoly control of private utility giants like Meralco through privatization and deregulation of power rates, Epira made consumers even more vulnerable to abuse and exploitation.

The series of increases in the generation charge this year amid allegations of supply manipulation and speculation in the WESM and unresolved and fresh cases of Meralco’s overcharging has made the long-time practice by power companies of passing all the business risks associated with generation, transmission, and distribution to hapless consumers even more deplorable. For consumers, there is no other way out of this quagmire but to repeal Epira and reverse the privatization and deregulation of the power industry.

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