• The Philippines’ power generators have an attitude problem

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    Ben D. Kritz

    Ben D. Kritz

    This past Monday, I attended a “public consultation hearing” conducted by the Energy Regulatory Commission (ERC) for the purpose of gathering comments and suggestions from concerned parties about a proposed new set of rules governing the development and approval of Power Supply Agreements (PSAs) between electricity generators and distribution utilities.

    The timing of the hearing takes on added significance because of the ongoing Manila Electric Co. (Meralco) rate hike scandal, but only coincidentally; the proposed new rules has been in the works for about a year, and Monday’s hearing was the second of what will be at least three rounds of consultations before the final version of the rules is produced.

    Although these kinds of hearings are, as they should be, “public” hearings, they tend to be dominated by the stakeholders who will be most affected by the subject matter, in this case the electricity generating companies and the distribution utilities. The average individual member of the public would likely find the affair tedious (Monday’s hearing lasted about three hours) and highly technical, but it is somewhat discouraging that the consumer point of view does not seem to be represented at all. Political and “civil society” actors who have otherwise been quick to jump into more stylish exercises like street protests and court cases are apparently not inclined to trouble themselves with the gritty everyday details of how business arrangements eventually become the rates we pay for electricity.

    In the course of the hearing, which was the third of this round of consultations conducted by the ERC (similar hearings were held in Davao and Cebu last week), it quickly emerged that the country’s power generation sector—with one admirable exception—is desperately trying to maintain its position as a monolithic, unregulated industry that can conduct business as it sees fit. In the proposed new rules, there are four hotly contested issues putting the generation sector at odds with most distributors, and to some extent, with the ERC itself, even though to its credit the agency is trying to maintain a fair balance of interests:

    *Competitive Bidding vs. ERC Assessment and Approval of proposed power supply rates—The new rules stipulate a process for distribution utilities to source power suppliers through a competitive bidding process, in keeping with the general mandate to provide power to consumers at the “least cost”—which may not necessarily mean the “lowest” cost, but the one that properly balances the price with reliability of the supply. Once the bidding process is completed, the resulting power supply agreement between the winning supplier and the distribution utility must be analyzed and approved by the ERC, which may result in the contracted rates and other terms of the PSA being modified or disallowed.

    From the point of view of the generation companies—who were strongly supported by both Meralco and the Philippine Chamber of Commerce and Industry—a negotiated contract developed from a competitive bidding process should be considered sacrosanct and should not be at risk of alteration by the ERC. The rationale is that a competitive bidding should naturally result in the “least” or “most efficient” cost, and therefore further ERC examination is unnecessary. And of course, to further support their point of view, the parties disagreeing with the proposed rule resorted to the cheap tactic favored by Meralco and its supply partners: Making a thinly veiled threat that rules they consider unfavorable would discourage investment and electric market activity, and could lead to deficiencies in electric supply for consumers.

    *Use of benchmarks in determining reasonable power rates—Although the ERC clarified that this part of the proposed new rules is still subject to a considerable amount of study and revision, generation companies are balking at the suggestion that benchmark rates might be used as guidelines for the ERC to determine the validity of rates presented in PSAs. While the ERC seems to be leaning toward a framework wherein benchmarks are not necessarily flat rates, but rather a standardized set of rate components, the generation sector naturally believes that any guidelines will restrict their freedom to determine power prices.

    *Applications for ERC approval of PSAs must be made jointly by the generators and distributors—This provision was stridently protested by the generators, who are attempting to hide behind a provision of the Electric Power Industry Reform Act (Epira) to pass the responsibility (and though unstated, the attendant costs) of managing approval requirements on to the distribution utilities alone. The reasoning is that under Epira, the generation sector is treated as an unregulated sector, that is, one that is not imbued with the same public interest as the distribution sector that delivers electricity directly to end-users, and is therefore not really under the oversight of the ERC. The position of the ERC, however, is a bit less generous toward the generators than the latter supposes. While the generators may be unregulated by the ERC as business entities, their transactions with other, regulated distributors certainly are subject to ERC examination; the implication is that, despite protests from the generating sector, the joint-application rule will be kept.

    *The proposed new rules seem to override “walk-away” provisions that are common features of supply contracts—This is one issue where the generators and distributors seem to agree, and one in which their dissent against the proposed rules might actually be valid.

    The way in which the new rules are written, a “walk-away” provision in a PSA, a perfectly ordinary and prudent condition to cover the parties in case of unforeseen, uncontrollable circumstances or the failure to perform by one of the parties, could be invalidated by ERC, in effect tying the parties to the PSA whether it is working or not. The ERC, however, made a good point in response to this; some flexibility in interpreting “walk-away” clauses must be maintained, because they can be abused. For example, a “walk-away” clause that cancels the contract in the event of the ERC altering any of the contract terms could render the entire approval process invalid, and would obviously have to be disallowed.

    The stark takeaway from the discussion on the proposed new rate-setting rules is that the Philippines generating sector has a severe attitude problem: It believes itself to be above any sort of oversight, and assumes the authority to dictate the overall cost of electricity for the country, public interest and economic benefits be damned. The one exception to this infuriating point of view is that expressed, ironically, by a company that is largely foreign-controlled: Kepco Philippines, which is the local component of Korean utility giant Kepco and which operates the Ilijan combined-cycle gas plant as well as plants in Naga and Cebu.

    Except for some minor concerns over parts of the new rules that are admittedly a little vague, Kepco seemed to disagree with most of the positions of the other generators, particularly with respect to the issue of joint applications. Once again, it seems that the natives could learn a few things from the guests about how to behave properly and still turn a nice profit.

    benkritz@outlook.com

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    6 Comments

    1. A power supply agreement or PSA is between a power generator ( i.e. AP , FGEN , etc ) and a power distributor ( i.e. Meralco , ALECO , etc ) . It is a binding contract between two parties ( power generator and power distributor ) wherein they have committed to deliver their parts in the contract. The power generator has commitment to SELL or to SUPPLY a certain volume of power in MegaWatts at an agreed price per KW while the power distributor has commitment to BUY or TAKE a certain volume of power in MegaWatts at an agreed price per KW. Therefore if the power generator will not be able to SUPPLY the agreed volume of power , it has the responsibility to source the deficit from WESM and sell it to the power distributor at an agreed price in the PSA. The generator will take the loss if it bought the power from WESM at a higher price . This way , there will be no abrupt increase in power cost to the consumers . very basic rule which which the ERC failed to incorporate in PSA which undergoes its review and approval. Useless ERC !!

    2. Only shows how bad our energy sector is. Wonder if the billions of overcharging by Meralco (during Lopez’s) were already returned to the consumers. I believe the generating companies are the reason why we have the highest power rates in Asia.

    3. Thanks for your report, Ben Kritz. Please continue giving us updates and the lowdown on the power industry.
      May Filipinos indeed appreciate the lessons in good sense and solidarity that I discern Kepco, a Korean company, is trying to share with us.
      I think, maybe, Kepco’s Filipino partners are a better breed of Filipinos than the greedy ones who wish to remain in monopolistic and monolithic control of the power industry here.

    4. Of course, these natives come from bad blood (kaya hindi umaangat ang bansa natin) while these Kepco people come from nice breeding from South Korea (generally honest and industrious).

    5. canuto dinglasan on

      “…the natives could learn a few things….” What “natives” are you talking about? Majority of those in the power generation business are of Spanish and Chinese origin: Lopez, Aboitiz, Sy, etc.