The numbers will tell the story

One thing is for sure: we can’t go on like this. The TRO on Meralco’s shocking rate hike will have to be resolved one way or another before the summer season sets in. Failure to do so will remove some 800 MW of oil fired power plants that have not been paid and can claim they have no money to buy fuel.

The Supreme Court is unlikely to rule on the justness of the rate increase. That is not its job. The High Court will likely rule on whether ERC abused its authority by allowing automatic pass through of charges without public hearing.

If that happens, the case goes back to ERC with an instruction to go through the due process of justifying the rate increase. The ERC hearings, unless ERC is revamped, offer little for consumers to hope for.

If ERC had been crunching spot market data, we would have known by now what happened. That is precisely what the Department of Energy hopes to find out through a forensic study it is now doing.

The numbers will tell us the real story...the equivalent of the CCTV video of a crime scene. P-Noy ordered DOE to do that study for his own guidance.

Based on what P-Noy has said so far, it seems he suspects that someone made a wrong decision that caused the rate spiral. P-Noy wants to confirm his suspicion as a basis for him to take action.

I have been talking to a lot of people knowledgeable on the matter and I get the impression that indeed P-Noy’s suspicion has basis. I am told that Meralco received offers from Limay, San Roque and Vivant for electricity supply at about P14/kwh a few months before the Malampaya outage.

If Meralco covered itself as close to 100 per cent of its needs, we the consumers would have been shielded from the WESM aberration. Indeed, that aberration may not have happened at all if Meralco was fully covered.

There is this story going around about the new guy who runs Meralco Power Gen, Meralco’s power generating unit. The guy supposedly wanted to show off how much of a hot shot he is and so rejected the offers possibly because the price offered is somewhat higher than normal at WESM. 

But the slightly higher cost protects Meralco consumers from volatility specially because of uncertainties connected with the Malampaya shutdown. Meralco officials reportedly told the generators they will take their chances on WESM providing power at a lower cost.

Unfortunately, the WESM rate went up to P62/kwh even on non peak, on a weekend and in a month when demand is down. Meralco made things worse by instructing Therma Mobile, an Aboitiz plant it contracted, to bid P62/kwh more than a dozen times during the critical period.

As I wrote here previously, one would have thought after a couple of times bidding P62 and getting dispatched, Meralco would have changed strategies because the high price was hurting Meralco and its customers too.

I still don’t have a credible answer why Meralco chose to shoot itself in the foot so many times. Could it be because Meralco didn’t care because it can pass through the cost of its mistakes to its consumers?

I get the impression from official sources P-Noy is now aware of what looks like Meralco’s mistakes. That explains why, in an ambush interview, P-Noy echoed the view I expressed in this column that the consumers must not be made to pay for bad business decisions they had nothing to do with.

This brings up the issue of whether it is wise to allow Meralco to have its own power generation plants. I know Epira allows that in a limited way, but I worry about the conflict of interest. 

Worse, mistakes made by Meralco’s generating unit will merely be passed on to consumers by the distributing unit. There ought to be a China wall between the two operations but that’s difficult to verify.

But a distribution utility owning a generating plant need not work against the consumers. A utility company in Cabanatuan is about to decrease its bills to consumers for the same period that Meralco is increasing ours to a historical level.

How Cabanatuan Electric Corp. (Celcor) did it is probably a good lesson on how to intelligently use Epira to benefit the distribution utility and its customers.

Celcor’s rate decrease was made possible because it signed a supply agreement with Therma Luzon on a fixed price, has a direct membership in WESM and put up the First Cabanatuan Ventures Corp. (FCVC) power plant, which is powered by bunker fuel.

Celcor’s direct membership in WESM enables the firm to buy or sell electricity directly in the spot market without middlemen. Because Celcor’s owners also own the FCVC power plant it has ready access to power whenever there is a surge in WESM rates or in the absence of any other source of electricity as in a Grid-wide emergency. 

According to an Inquirer report, Celcor formed a team that studies and analyzes the spot market activity on an hourly basis. This team advises Celcor to tap FCVC when prices at WESM increase.

Instead of sourcing electricity from WESM, Celcor was able to supply the market… instead of Celcor paying WESM, the Cabanatuan power firm is the one that received payment. That’s how Celcor saved its consumers from the skyrocketing power rates from September to December last year when Luzon experienced increases in WESM rates.

Of course Celcor is a small utility in a small market but what it is doing should be what Meralco and other bigger utilities should be doing. Indeed, even the ERC should be actively monitoring WESM movements and intervene when price movements are no longer normal.

I had a long conversation with Energy Secretary Ikot Petilla last week and he told me he is also going over all the bilateral supply contracts distribution utilities signed with generators and approved by ERC. Many of the contracts have provisions for replacement supply, meaning it is the obligation of the generator to look for alternative supply if it is unable to supply from their own power plants.

This means the price risk is shouldered by the generator and shields the consumers from having to bear an increase in cost if spot prices are high. Sec Ikot said he was surprised many of Meralco’s contracts do not have this provision. 

When he asked the generators why, they told him they offered it but it was Meralco’s preference not to have it. That’s fine if Meralco bears the cost of a miscalculation or bad luck. But Meralco just passes the cost of their mistakes to us.

This brings us to ERC. There is no real need to amend Epira at this point if we had a more proactive and intelligent ERC. When Epira deregulated the power industry, it provided safeguards by giving ERC enough powers to intervene when necessary.

The problem is that ERC turned out to be a rubber stamp agency. To be useful to consumers, the ERC’s head must understand economics and be meticulously honest. Someone like Winnie Monsod comes to mind.

ERC must also have a knowledgeable and dedicated staff capable of sifting through the voluminous records and numbers required to know what is going on in the industry.

Indeed, ERC must have the ability to process Big Data from the power market. This job may even be outsourced to a qualified contractor.

There is also too much secrecy. Even if the generators are not considered public utilities under Epira, what constitutes the generation cost ought to be publicly examined. Meralco cannot just say these are passed through charges. The price quoted must be defensible.

Moving forward, I have told some industry participants it is time for them to agree to practice some amount of restraint in their rate quotes. I realize that under a free market their only obligation is to their stockholders and that means maximize profits.

But there is a strong public interest side to the power business. All the political noise going on now is also bad for their business. Indeed, if the political pressure becomes too strong, government through Congress will not be able to resist calls, no matter how misguided, to re-nationalize the industry.

Unless the power industry participants moderate their greed, so to speak, they may end up losing everything they have gained so far. Even consumers are bound to lose a lot in a re-nationalization scenario because government has proven to be a bad and inefficient manager of public utilities.

In the meantime, the power sector must work to regain the public trust. But it all starts with ERC. And ERC cannot get our trust with its current Chair and composition.

The next move is really P-Noy’s. 

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