Pass through is the evil concept in this whole discussion over power rates. It is a concept from the old days when government owned the power generators. When fuel prices spike, the increase is simply passed through to Napocor customers like Meralco who passed it on to us.
When Meralco says it is not its fault because they are just passing through the cost of the generators they are telling us a half truth. The other half they are not saying has to do with the fact that there was something they could have done to keep the generation cost as low as possible. Of course that is on the assumption ERC is intelligent enough to allow them to.
We are living in a new era of a so-called free market. While Meralco is still a distribution monopoly, how it sources the electricity it sells is governed by supposedly free market rules crafted from EPIRA. This means, Meralco could have signed enough fixed contracts ahead of a predictable event like the Malampaya maintenance shutdown to protect the consumers.
Last week Miguel Aboitiz of the Independent Power Producers Association (IPPA) pointed out to me that big commercial and industrial customers have been quiet about the historic high power rate increase because they were protected from its impact. Those customers signed supply agreements with the same generators Meralco gets its power from. I guess Meralco could have covered itself 100 percent with similar contracts but Meralco chose not to.
Meralco needs about 5500 megawatts of power to satisfy its peak demand on a normal day. Meralco has supply contracts to cover most of that demand which includes that of their big industrial and commercial customers.
Meralco bought 9.5 percent of its requirements from WESM whose prices already spiked due to a shortage of supply. That means Meralco was exposed by about 520 MW ( about the size of a fairly large power plant) to the vagaries of the spot market.
Meralco had two options: 1) get short term supply contracts ahead of time (maintenance schedules are announced a year ahead) to cover eventualities during those dangerous weeks; 2) do nothing and just buy any shortfall in supply from the spot market or WESM.
Actually, if Meralco is only exposed to the more or less usual level of three percent during peak, buying from WESM even at the P62/kwh top rate would have been bearable. But not at 10 percent. Given that WESM is known to hit the set cap of P62/kwh in tight situations like that, Meralco should have covered itself.
Getting cover seems like a no-brainer. Aside from knowing the number of power plants on scheduled maintenance, Meralco also knows that most of the power plants in the Luzon grid are pretty old and prone to boiler tube leaks and similar events that make an emergency shutdown necessary.
I suspect the reason Meralco didn’t bother to “hedge†is because there is no incentive to do so. Meralco’s earnings remain the same at whatever price they buy their power supply. The rules allow Meralco to just pass the added cost on to the consumers. ERC will not ask Meralco if it had done everything in accordance with market rules to minimize the cost. Meralco will merely show a WESM bill and ERC will rubber stamp its approval to pass through.
I do realize that ERC could also be a problem because it is not used to innovative ways of using the current free market to the advantage of ordinary power consumers. There are costs to “hedging†like accepting a higher rate in exchange for more certainty in supply and price... in a couple of words, less volatility. ERC may not allow that cost.
Still, Meralco should have tried to use its massive leverage in the electricity market to get fixed contracts as close as it could to 100 percent of its needs at very good prices. But exposing its small consumers to the tender mercies of the WESM spot market is simply disappointing. I suspect Meralco shielded its industrial customers from that sharp volatility in power rates we all experienced.
As a public utility, Meralco has the obligation to seek the lowest prices for all its consumers. There are after all, 20 million of us small residential consumers in 22 cities and 89 towns in Luzon. Meralco could have done more to protect us.
I do not however think there is any sinister motive behind Meralco’s failure to properly hedge. I think it is just the calcified bureaucratic mindset in the giant monopoly at fault. Meralco bureaucrats, like their government counterparts, are victims of inertia. The pass through concept has also made them lazy.
It is easy to blame EPIRA for our problems today, but EPIRA rules can be used to bring down power rates. In the current case in the Supreme Court, the justices should look into Meralco’s responsibility and mandate as a public utility to protect its customers by taking full advantage of what could be done using the EPIRA rules.
It will be totally understandable if the Supreme Court orders Meralco to absorb the brunt of the increased cost because of its failure to take all measures to protect consumers. It can be argued that Meralco should suffer the consequences of a wrong decision to be exposed that much to WESM’s volatility. That 9.5 percent exposure to the spot market was enough to shoot power rates through the roof last month.
Properly covering itself on the price of its power supply is like taking insurance for an unfavorable event, in this case a potentially high spot market price. By keeping themselves open to the risk, Meralco effectively self insured and lost the bet. Should consumers pay the price of failure?
It really is time for the Meralco bureaucracy to wake up. Even paying our bills is so difficult because they are so set in their ways. When I was about to go on a month long foreign trip, I wanted to pay in advance by paying the equivalent of double the current month’s bill. I did that for PLDT, Smart, Globe and SkyCable. But I could not do that for Meralco.
It seems their computer system is so programmed to handle only the month’s bill to the last centavo and nothing more or less. I mentioned this to Oscar Reyes when he just assumed the Meralco presidency and he was surprised to hear it. But it seems he couldn’t do anything about it either.
Another case is Bayad Center, a Meralco subsidiary. Together with PLDT and Smart all these companies are part of the conglomerate where Manny Pangilinan is supreme. Try paying PLDT and Smart at Bayad Centers and they will insist on a service charge of P7.
Strangely enough, you don’t have to pay any service fee if you paid PLDT and Smart bills at SM. How difficult is it for one MVP company to convince another MVP company to get equal treatment with SM?
I know how customer oriented MVP is. But I guess MVP has not been successful in getting his boys to see things the way he does. I know MVP is very competitive and as a finance man who more than understands treasury functions, he will just love to use market hedging to advantage for Meralco.
Of course, government could have done something too. The Department of Energy could have ordered PSALM to run the Malaya power plant in Pililia, Rizal. Malaya could have delivered 650 MW of power. It was supposedly on extended maintenance which in truth is an excuse not to run it to escape the “must run†rule for generators. Malaya could have covered what Meralco bought at the peak of WESM rate.
Maybe the implementing rules of EPIRA are not clear even to them. All industry participants and government must agree in very clear terms what are the rules of the game. Consumers also have a right to know. Right now, it is a mess and I am not hopeful the Supreme Court can make things better soon.
NAIA taxis
I got this e-mail from Roland M. Lorilla.
You are right about the sorry state of NAIA. Last time I arrived from HK, exiting the PAL terminal to get a cab, the first guys who met me were taxi operators who charge P1,200 for a ride from the airport to Mckinley Hill where I live. The normal rate from the legit taxi operator is P450.00 which ( while on the high side) is still reasonable.
Why these overcharging taxis are allowed to operate at the airport reflects the poor management in NAIA which you earlier mentioned. Taking a cab: it’s not fun in the Philippines.
Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco