Wednesday, December 18, 2013

Meralco rate hike’s lesson: Ordaining power utilities to be prudent (Second part)


Source: Meralco Presentation to the House committee on energy
Source: Meralco Presentation to the House committee on energy
The road to ensuring reliable electricity supply is long; more often than not, costly – and painful.
If there is a lesson the unprecedented spike in Manila Electric Company’s (Meralco) rate has been providing us, it is for us to realize that it is essential to pay attention to the entire value chain – starting with the sources of supply, the strategy of power procurement of distribution utilities (DUs) like Meralco; and the manner how these are being distributed to our homes and businesses.
At the very least, we should demand prudence from the DUs servicing our electricity needs – and that shall require decent level of supply contracting.
On government’s end, we’ve learned that if our governance structure is weak, it also renders decisions which are weak – and these could make us all losers in the end.
Time for the energy officials and regulators then to be taken to task – that they must not just treat the sector’s concerns as something akin to “small town affair” – it’s not just right. Perhaps, the noise of these “kindergarten crew” would have been tolerable if they have not been revealing too much how unlearned they are.
What the industry fears is “when there are unjustified actions affecting innocent parties (i.e. the power generators),” these they said, “may become deterrent to new investments,” – and not a very promising prospect considering forecasts of tight supply in Luzon and Visayas grid starting 2015.
In previous shutdowns of the Malampaya gas production facility, it was explained by former Meralco management that they were having roughly a year of preparation to cushion the impact on consumers and never had they attempted to implement a one-time, big-time adjustment.
“We had always been aware of probable consumer revolt, so we strived putting up a buffer fund and always stretched the pass-on of the accruing costs arising from the gas field’s shutdown. Even at P0.50 per kWh at that time, it was already difficult to explain … so at P4.15 per kWh, it will really come as a shock to consumers,” a source said.

WESM Price Gouging Probe
Energy Secretary Carlos Jericho L. Petilla said their starting point on the probe of alleged industry players’ collusion will be the high WESM offers of diesel plants. He admitted quite frankly that they have been zeroing in on the price cap level or P62 per kilowatt-hour bids of Therma Mobile Inc. (TMO) on several trading intervals. The plant is owned and operated by the Aboitiz Group but its capacity is under contract with Meralco.
“We are investigating why a contracted power plant like Therma Mobile Inc. (TMO) put up a bid of P62 in the WESM when its capacity is under contract with Meralco? “Who benefited from that?,” Petilla queried.
Unfortunately, the answer to that question goes back again to Meralco. Based on its operating agreement with the plant owner Aboitiz group, Meralco gives decision and direction as to what will be the price offers to be made for TMO in the WESM.
“Under TMO’s capacity-based contract, Meralco has full control on the use of the 100 megawatts from TMO, including pricing and volume offers to the WESM,” Aboitiz Power said, adding that “TMO is a mere implementor of Meralco’s price and volume offers to the spot market or WESM.”
Aboitiz Power president Erramon I. Aboitiz emphasized that “TMO’s capacity is fully contracted to Meralco and it is paid an agreed rate under its power supply agreement.” The supply deal secured provisional approval from the ERC prior to its implementation.
TMO has 230MW capacity. The first 100MW was made available for the utility firm’s utilization since November this year; while the balance of 130MW will be on-line middle of next year.
Meralco assistant vice president Lawrence S. Fernandez concurred that “while plants with contracts still need to submit WESM bids, they will be settled outside the WESM. To that extent, they don’t benefit due to WESM price volatility.”
Still, there’s a more extensive query as to Meralco’s contractual arrangements: has it integrated such condition to most, if not all, of its PSAs? Because if that is the case, then it has immense control as to how generating units are traded (or maybe priced) in the spot market – and that could make it the “super utility” yet to be re-introduced to the public. And if price gouging really happened, what action had been initiated by the WESM’s market surveillance committee?
The other power supply agreements of Meralco are with San Miguel Energy Corporation (SMEC) for the Sual coal-fired plant; US firm AES for the Masinloc plant; Therma Luzon Inc. for the Pagbilao facility; South Premiere Power Corporation for the Ilijan plant; and with the Consunji group for the Calaca plant.
Given soaring load weighted average prices (LWAP) in the WESM last month – with over P33 per kWh billed to Meralco – Philippine Electricity Market Corporation (PEMC) president Melinda L. Ocampo noted that the price cap is now being reviewed for possible reduction.

Why Malaya Wasn’t Operating?
The PSALM-owned Malaya thermal power facility was widely anticipated to have helped ease supply last month, but the government decided not to run it.
“The situation for Malaya (plant) is unique because it doesn’t have a supply contract. So I asked why it can’t be run and I was told, PSALM would not be able to recover costs – even if we will bid in the WESM at P62 (per kWh) it won’t still be enough to cover our costs because we will just run for several hours,” Petilla said.
He added that the start-up process for the Malaya facility alone will take 18 hours, so if the government decides to set its capacity into the grid, it must be lined up as must-run unit. “But the price has yet to be decided,” the energy chief stressed.
Meralco qualified that in TMO’s case, it was obliged to trade in the spot market because of the WESM’s must-offer rule. The utility firm added that the P62 bid “actually signaled that it didn’t want to run…but because of supply tightness, it was called upon to generate and cleared at P62 per kWh.”
Other diesel plants, like the 225-MW Bauang and 600-MW Limay plants, also made high offers in the WESM – at prices ranging from P51 to P62 per kWh, and in many instances, they were cleared as marginal plants. Even government-run PSALM was logged among those with high WESM offers – its cleared bids reached as high as P48 per kWh.
Taking the government’s argument that Malaya did not run because it can’t recover costs even at the price cap level, why the double standard then for the privately-owned diesel plants? If the power plant owners really colluded, there’s no question that they must be punished for it, but what if the assertions had been wrong?

Pass-On Rates
Going back to the Meralco presentation, it was apparent that some of its PSAs had billed higher in the past two months – reference to October billing means pass-on to consumers in November; while November bills had been reflected this month.
Worth noting had been the P15.55 per kWh charge of SMEC-Sual in the October bills; and the P1.47 per kWh rise in the billed rate of AES for the Masinloc plant in November to P5.92 per kWh from October’s P4.45 per kWh.
Due to fuel shift from gas to liquid fuels, the pass-on charge for the Ilijan gas plant had likewise been up by P2.05 per kWh to P6.81 per kWh in November from P6.20 per kWh in October. The same goes with the Sta. Rita plant, of which billed cost climbed P1.95 per kWh to P6.83 from P4.88 per kWh; but a more electrifying cost adjustment had been with the San Lorenzo facility at P5.03 per kWh to P9.97 from P4.94 per kWh.
Meralco was quizzed on the seeming disproportionate adjustments on its contracted plants’ charges – even after factoring in fuel cost in the entire equation.
The utility firm explained that in the case of Sual and San Lorenzo plants, the sudden rise in their billed costs had been “due to low dispatch level.” On the cost uptick for Masinloc, a fraction of it had been attributed to “replacement power (that AES) purchased from the WESM during an outage that was within their outage allowance,” Meralco said.
When asked further if the contracted power generators were bound not to pass on costs beyond their contracted price, Mr. Fernandez emphasized that “if the outage is beyond their allowance, then cost of replacement power is for the genco’s (generation company) account.”
Past the allegations of power plants’ collusion, the energy department claimed that it also started raising issues on Meralco’s strategy on supply contracting.
To be fair, Meralco is one power utility which has grand plans of innovating further to serve its customers better. But there’s a need for new starting point into reinforcing that relationship and they must be quick in stepping up to the plate before their customers decide to switch when retail competition reaches their threshold level.
If Meralco really wants its “customers to be king,” then it must truly understand first their needs and it won’t hurt also to listen to their pleas during dire situations – such as rate hikes or brownouts.   source

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