• Utility consumers face a summer of discontent

    Ben D. Kritz

    Ben D. Kritz

    (Part One of Two)

    If the forecasts for the next couple of months of the Philippines’ electric and water supplies are even partly correct, utility consumers may be facing a season that grimly recalls the last years of the last Aquino to sit in Malacañang.

    Spokespeople from the Department of Energy and Meralco have been riding the media carousel for more than a month with dire warnings of supply shortfalls and higher bills for April, May, and June.

    As was reported by this paper on Sunday, the level of the Angat Dam reservoir in Bulacan, which provides about 90 percent of Metro Manila’s water supply, has dropped to an alarming low of 182.79 meters and is losing about 0.30 meters per day, meaning it will reach the critical, water-emergency level of 180 meters sometime between now and next Monday.

    To make matters worse, most reliable climate forecasts are projecting an intense El Niño effect—a warming of ocean waters in the eastern Pacific that alters weather patterns to create very dry conditions in our part of the world—to appear within the next couple of months; we may in fact already be seeing its onset.

    Given that global-scale climate effects are only something everyone can react to and not control at this point, a certain amount of sacrifice must be accepted without complaint. Philippine homes and businesses need electricity and water, and if there is simply not enough to go around under circumstances where everyone involved is otherwise doing what they can to manage the resources responsibly, there is no point in bemoaning the situation.

    But when the utility distributors are not acting responsibly—and by “not acting responsibly” we actually mean “shamefully using the situation to extort the maximum profit from a helplessly captive market”—that market tends to become more than a little annoyed, and justifiably so.

    In Meralco’s case, what makes the constant (and honestly, somewhat smug) pronouncements that power rates will have to be raised—warnings which the company has already followed through on for April—is the infuriating realization that higher rates are almost entirely due to speculative “market forces” rather than physical reality.

    Even after being soundly defeated by the Supreme Court’s recent move to make permanent its injunction against Meralco’s astonishing attempt to impose 73-percent higher generation charges on its customers back in December, and even after its profiteering conspiracy through the Wholesale Electricity Spot Market (WESM) was discovered and the resulting inflated prices ordered corrected by regulators, Meralco is still referring to WESM price speculation on “tightening supply” as a valid reason for raising rates.

    Meralco, by its own admission, normally sources only 5 or 6 percent of its power supply from the WESM; the rest is supplied by bilateral contracts with generators. Each of those supply contracts contains an exacting calculation of what the electricity purchased by Meralco for distribution to its customers should cost, and each of those supply contracts contains a calculation of the allowable amount of “unavailability” of the power supply during the contract period.

    What those latter clauses do not contain, however, at least not in supply agreements approved by the present Aquino-appointed Energy Regulatory Commission (ERC), are provisions placing responsibility for failure to provide power outside of the contracted outage allowances.

    This was an issue that was revealed in examining the power supply agreement between Meralco and Aboitiz-led Therma Mobile (TMO)—the agreement that directly led to Meralco’s purchasing power at four or five times its regular cost last November and December; the ERC dismissed a provision setting a minimum availability from TMO’s Navotas facility, essentially removing TMO’s contractual obligation to provide Meralco with any power at all.

    Coupled with a collusive order to TMO to overprice its capacity under WESM’s “must offer” rule, and Meralco could, and did, substitute much higher-priced electricity for the P8 to P11/kWh supply it could have gotten from TMO.

    What makes the “tight supply, therefore, higher prices” argument impossible to swallow is that the actual cost of producing electricity does not change, except for cases where fuel costs increase (something that is also accounted for in the calculation of rates in bilateral contracts).

    The WESM is fundamentally designed, however, to allow supply price speculation, first, because of the “must offer” rule which requires every generator—whether under a supply contract or not—to bid its entire capacity (as opposed to just excess capacity) on the market, and second, because of the “price taker” relationship of distributors to suppliers in the WESM, where the suppliers are the ones dictating prices.

    In a normal market framework, sellers would only offer whatever part of their capacity they were not contractually bound to sell elsewhere, and actual sales of power would be based on a bid match between buyers’ and sellers’ offers; the resulting prices might still end up a little higher, but only marginally so.

    Meralco, of course, would answer all this by pointing out that generation charges are a “pass through” cost, that their own distribution charges have not been increased in a couple of years, and that they are, therefore, not really to blame for higher costs paid by consumers.

    That’s the way things should be, but Meralco’s way of calculating its financial statements raises just a little bit of a question whether or not that is actually the way things are.

    For example, in the company’s third-quarter investors’ briefing from September of last year (I mention this example because it is readily available on Meralco’s website to anyone who wants to check it for themselves), the company reported a 5.2-percent year-on-year increase on core net income, even though its costs had increased by about P2.3 billion and its revenues had declined by about P6.6 billion.

    For all of 2013, Meralco’s net margin was 5.76 percent. That might not sound like much of a profit, but here’s a little perspective: Back in 2012, UK energy consumers went ballistic when distributors’ profits topped 4 percent, prompting a Parliamentary inquiry and a government threat to break up British Gas.

    That threat certainly is not something Meralco has to worry about, at least not under the present government; in fact, the company’s margins took a noticeable turn for the better beginning in 2010, breaking the 5 percent barrier the same year President B.S. Aquino 3rd took office and remaining well above that figure ever since.

    At the same time, Meralco’s sister company Maynilad, the water concessionaire for half the metropolis, has done an even better job of thriving from others’ adversity; I’ll cover that in Part Two on Thursday.



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