The price of electricity

We now have to brace ourselves for an increase in our electricity bill by P3.44/kwh. That means P3.44 plus current rate of P5.66 equals P9.10/kwh just for generation cost.

As for your total bill, whatever you are paying now (varies according to classes) add an all-in increase of P4.15/kwh to cover transmission, VAT and other taxes.

An unfortunate confluence of events is blamed for the increase. The first event is the shutdown of the Malampaya system for regular maintenance. That means about 40 percent of Meralco’s contracted supply is now using alternative fuel that cost more.

The second event has to do the shutdown of a number of power plants. That set the so called market forces, demand and supply, in our Wholesale Electricity Spot Market (WESM) to zoom up. Energy Secretary Jericho Petilla is right to suspect collusion in the almost simultaneous shutdowns that brought power rates up.

WESM is the mechanism created by EPIRA or the Electric Power Industry Reform Act. Don’t laugh but EPIRA was supposed to keep power rates low, or at the very least, keep rates reasonable through competition among power producers.

Today’s all-time high load weighted average prices (LWAP) in the WESM aggravate the Meralco rate shocker attributed to Malampaya’s shutdown. The WESM-LWAP for November 2013 had gone up to about P15 per kwh… the highest since 2010 when we were suffering effects of El Nino.

Meralco earlier estimated the price difference between natural gas and the condensate fuel that the plants had shifted to following the Malampaya maintenance shutdown was already in the P3/kwh range. Add to that the WESM effect.

This P9.10/kwh rate exceeds previous record highs of P6.77 per kwh in April 2010; and P6.74 per kwh in August 2012. It will be difficult for Meralco and government to explain this rate. No amount of explanation, no matter how honest, will cushion the shock of such a rate hike.

I, myself, don’t know how to start explaining how we got to this point. Our system of determining power rates is so complicated, even mysterious that it often requires a lawyer and an economist by one’s side to explain it. But I will try to do that in a little over a thousand words.

I have been asking experts and industry stakeholders this basic question: Can we ever bring down our power rates to levels that are comparable and competitive with our regional peers? The short answer I get after hours of explanation is, “No, not likely.”

Indeed, a supposed expert in power and energy hired by Meralco to review its rate structure told me there is nothing wrong with Meralco’s rates. It is as good as it gets, according to him, because among other things… our geography. Our islands determine the scale of our grids… and the cost of power.

Then, I remember being told it is wrong to compare with regional peers like Thailand, Malaysia and Indonesia because these countries subsidize their power rates. Ours, on the other hand, are “market based” however imperfect that “market” may be.

Not only do we not subsidize, we charge VAT on top of it and the imported fuels used are also charged all sorts of taxes and duties. Even domestic geothermal and coal pay royalty.

All three countries, on the other hand, use some of their income on oil and natural gas production to subsidize power rates. We could have used Malampaya royalties to do that too but we prefer to give money from Malampaya to politicians to line their pockets and to creatures like that Napoles woman so her daughter can live in Ritz Carlton Los Angeles.

We started having serious problems with our power rates in the tail end of FVR’s watch. FVR’s boys in Napocor overbought power generating capacity. They abused a special authority Congress gave FVR to address the power shortage in the tail end of Tita Cory’s watch.

Napocor officials also signed take or pay contracts for the excess capacity they bought. Harassed consumers ended paying for electricity they did not use as demand fell. We are still paying for those mistakes tagged as universal charges in our monthly bill.

Not only did consumers have to bear the burden of Napocor’s misadventure but our country’s fiscal health was put in peril. It didn’t help when then President GMA, desperate for the public’s affection, delayed rate increases which only increased the burden the National Treasury had to bear.

Everyone figured there must be a better way to do things and that’s how EPIRA was born in June 2001 after about seven years of deliberations.

According to the DOE website, EPIRA or “RA 9136 is designed to bring down electricity rates and to improve the delivery of power supply to end-users by encouraging greater competition and efficiency in the electricity industry.”

I think EPIRA overpromised. More than a decade after, it failed to deliver low power rates. I am not even sure it can fulfill its other promise that the system will be fair by letting the “impartial” hands of the market rather than the political and personal pecuniary motives of politicians and bureaucrats determine power rates.

Indeed, there are problems with the nature of the market created by EPIRA. Theoretically, it will probably work if there are more participants on the supply side to provide for the ever increasing demand side. This has not happened. Eco 101.

EPIRA bans government from investing on the power plant side or supply side. But private sector investors are reluctant to put up power plants. Reasons can be anywhere from lack of clear regulatory framework to problems with local officials and environmental activists.

The result is a market with limited players providing supply but a fast growing economy that demands more power. Limited supply plus increased demand equals higher prices as we are now seeing. Again, Eco 101.

Supply is so tight that when a big power plant undergoes maintenance shutdown, WESM quotes go up. This shouldn’t be that significant if WESM only provides peaking power. But because of inadequate reserves (few players aggravated by shutdowns), Meralco was forced to buy more than usual from WESM at a significant increase in the generation cost passed on to consumers.

What about the promise of lower consumer rates through Open Access? That’s another promise yet to be fulfilled. Open access supposedly gives the power consumer the choice of supplier. Power plant operators are supposed to compete to win customers and that’s supposed to bring the rates down.

But the implementation of open access had been delayed for over ten years. Not only that… the limited number of generators as earlier explained, prevents real competitive behavior to happen.

What should be done to achieve the lofty goals of EPIRA that didn’t happen? There are calls to amend the law. But what’s to amend?

Is the concept viable at all in the power sector in a developing economy like ours that is prone to oligopoly control? But even in a developed country like the United States electricity supply markets have been manipulated by participants as what happened in the notorious Enron case.

Some economists want some government participation on the generation or supply side. Maybe we should review the overgenerous rate established for the National Grid that made it a money mint prior to privatization to cronies of former President Arroyo and the State Grid of China. 

Maybe some limited or directed subsidy is called for. There should probably be subsidies for investors in industries that create mass employment as well as subsidies to promote social equity. Like our neighbors, the Malampaya Fund and similar funds created through royalties on domestic energy including geothermal and coal could be used for the subsidy.

We also need a revitalized Energy Regulatory Commission free from regulatory capture. Now headed by a politician with no professional background in energy, does the ERC even have the competence to do an honest evaluation of claims made by Meralco and other utilities applying for increases under the so-called Performance Based Rate scheme?

The current state of things cannot go on indefinitely without endangering the social order. A P9.10/kwh Meralco rate is moving us closer than ever to a potential tipping point. Additionally, MRT3 is set to raise fares too.

It only took a nine-cent rise in bus and subway fares to spark widespread riots in Brazil. As reported by marketwatch.com, the seven percent fare hike in Sao Paulo was the final straw for Brazilians fed up with corruption, declining public services, social inequality. Hmm… we have the same complaints.

Marketwatch.com also noted that Brazilian President Dilma Rousseff had the highest approval rating in Brazil’s history, but from March to June it fell eight percent – the first drop since she took office in January 2011. That ominously sounds like P-Noy as well.

P-Noy must play it right so that getting to the tipping point can be avoided.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco