UTILITY RATES IN FOCUS

The feed in tariff allowance controversy

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Second of three parts

Is RE development incentive an investment in the future, or just creative accounting?

ONE of the contentious issues in the debate over water rates described in Monday’s installment of this special report is a considerable amount of money—estimated to be about P6 billion—charged to customers of Manila Water and Maynilad for projects that were never completed.

This issue came to public attention a couple days after January 5, the day a water rate hike for the two suppliers according to the foreign currency differential adjustment (FCDA) took effect. In a statement on January 7 decrying the rate increase as unfairly passing business risks to consumers, Bayan Muna party-list Representatives Neri Colmenares and Carlos Isagani Zarate demanded that Manila Water and Maynilad refund their customers for the ‘pre-payment’ of aborted projects before being granted any rate increase.


Coincidentally, just the day before the two Bayan Muna congressmen made their statement, a remarkably similar complaint on behalf of electric consumers was being filed at the Supreme Court by lawyer Remigio M. Ancheta: A petition seeking an injunction against a P0.0406 per kilowatt-hour charge to be added to customer bills beginning in February for the renewable energy feed-in tariff allowance (FIT-All).

What is FIT-All?
A feed-in-tariff (FIT) is an additional tariff levied against consumers of electric power and paid to producers using renewable energy (RE) as an incentive for RE development. The logic behind the FIT is that because most forms of RE have very high development costs, an extra financial cushion is needed to ensure that RE developers can recover their costs in a reasonable amount of time.

An important feature of the FIT is that it is reduced over time, to compensate for future technical developments that result in lower costs for RE technology.

According to the Energy Regulatory Commission (ERC), “The FITs are subject to degression to encourage the developers to invest at the initial stage and hasten deployment of renewable energy and also to avoid substantial windfall from being enjoyed by developers especially in the technologies where significant cost reductions are expected in the future.”

Slow development
Section 7 of the Renewable Energy Act of 2008 (RA 9513) authorized a FIT regime to cover electricity produced from wind, solar, run-of-river hydropower, biomass, and ocean power, but the actual implementation of the FIT-All has been a slow process.

It was not until 2010 that the ERC adopted a set of basic rules for managing the FIT-All, and it would be nearly two more years, until July 2012, for the regulatory agency to produce specific rules. In late May 2013, the Department of Energy (DOE) finally produced guidelines for the application and selection of RE projects eligible to be paid the FIT-All.

Under the current scheme, the FIT-All is payable for 20 years. For wind, biomass, and run-of-river hydropower projects, the tariff is reduced by 0.5 percent per year after a two-year grace period; for solar power, which has the highest FIT rate, the tariff is reduced by 6 percent per year after the first year FIT is in effect. Capacity targets for each were set by the DOE in order to place an upper limit on the total amount of FIT-All that could be claimed: 50 MW for solar power, 200 MW for wind power, and 250 MW each for biomass and run-of-river hydropower. The initial FIT rate for solar power is P9.68 per kilowatt-hour; wind power is eligible for P8.53/kWh; biomass, P6.63/kWh; and run-of-river hydropower, P5.90/kWh. Ocean power, for which the DOE has set a 10 MW target, was excluded from the FIT calculations because, as one ERC official explained, “It was felt the technology wouldn’t actually be commercially viable within the initial 20-year time period of FIT-All.”

Exceeding the mandate?
The FIT-All charge that will appear on electric customers’ bills next month was provisionally approved in November by the ERC, who designated the National Transmission Corp. (Transco) as the agency to collect FIT-All charges from electric distributors such as Meralco. Meralco and other electric distributors are in turn obliged to collect the amount, set at P0.0406 per kilowatt-hour, from their customers.

To manage the FIT remittances and payouts, Transco was authorized by the ERC to create a “buffer fund” which would ensure the orderly, regular payment of FIT-All to eligible companies, particularly “in case some customers [i.e., the distribution utilities] default or delay in their obligations to collect and remit the FIT-All proceeds,” according to the ERC resolution.

Atty. Ancheta’s petition to the Supreme Court argues that the collection arrangement is a violation of the provisions and intent of the Renewable Energy Act, which defines FIT as a tariff applied to electricity actually generated and delivered to the distribution grid from RE sources. The amount to be collected – Ancheta estimated FIT-All revenue at P2.7 billion for this year alone – is vastly in excess of the amount payable to RE operators who are actually generating and delivering electricity for consumer use, leading Ancheta to argue that the ERC erred in approving a scheme in which customers are paying for electricity “that has yet to be generated by power plants that have yet to be built.”

Creative accounting?
The issues raised by the Ancheta petition against the FIT-All were interpreted in a number of news reports and commentaries to mean that RE developers could collect FIT-All payments before actually building any generating facilities, but that is an apparent misconception. According to the May 2013 DOE guidelines, one of the conditions for a grant of eligibility for FIT-All is that the project has achieved at least 80 percent of “electromechanical completion,” defined as the point at which the generating facility is operational and ready to deliver electricity to the grid.
Thus, the issue raised with respect to FIT-All is not quite the same as that with the water concessionaires, although the two problems are similar in that the contention concerns customer payments for service that customers do not necessarily receive. In the case of Maynilad and Manila Water, planned capital expenditures for projects that later were “unrealized” – Bayan Muna cited P5.4 billion Angat Water Reliability initiative, and the P45.3-billion Laiban dam project as examples – were allegedly included in base water rate calculations and allowed by the MWSS. For RE projects, there are at least written guidelines specifying that projects be substantially completed before being deemed eligible to receive customer-paid FIT-All payments. And, as both the ERC and the DOE confirmed, actual payments to generators are not supposed to begin until electricity is being produced; the declaration of eligibility is not the same as an authorization to collect.

Both cases appear to be different forms of creative accounting. With respect to the FIT, the situation is perhaps unavoidable; the actual FIT rates would be the single biggest line item on customers’ bills, in many cases exceeding the total of generation, transmission, distribution, and other charges combined. In order not to burden customers with costs many of them would likely not be able to pay, the FIT rate has to be amortized in some fashion. Since electricity is a pooled resource once it reaches the distribution grid, hypothetically any customer connected to that grid could receive electricity generated by RE sources; therefore, the universal levy of FIT on all customers is justified.

Nevertheless, the amount of FIT to be collected from customers is, at least at present, many times greater than the amount of FIT-All payable to RE producers. Because the regulations governing the administration of feed-in-tariffs only address payment and not collection, critics charge that the framework as devised by the ERC is a form of risk transfer from producers to consumers; producers are, in effect, guaranteed FIT subsidies through the establishment of a pool of FIT-All funds before producing a single watt of electricity.

Another concern is the absence of guidelines for Transco’s handling of the FIT-All fund. For at least the next several years, until more RE producers make themselves eligible to collect the FIT incentive, Transco will be amassing a reserve – at a rate of about P230 million a month, according to Atty. Ancheta’s estimate—for which very little guidance apart from who is eligible to receive payouts from it has been provided. Fears that its use could be expanded to serve as a source of funding beyond FIT have been raised due to the way the provision authorizing the creation of the funding pool was written: It describes it as being available to supply “working capital requirements” of RE producers, a definition of ‘payable FIT-All proceeds’ that many critics find alarmingly broad that could lead to abuse.

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1 Comment

  1. While the RE law specifies that the Government may implement the Feed-in Tariff, there is no clear provision for the collection of Levy from renewables.

    This is a clear overreach made by DOE’s Renewable Energy Management Bureau and the ERC.

    DOE should go first to Joint Congressional Power Committe of the Congress and ask for a clearer law in the implementation of the FIT system for Renewables, including the explicit legal basis for collecting FIT allowance to the Filipinos in a form of electricity levy.