Are Meralco rates reasonable?

A recent study completed by the International Energy Consultant (IEC) for Meralco showed that the distribution company’s customers over the last four years have enjoyed some of the largest tariff reductions compared to other countries in the region.

As a result, Meralco’s average tariff improved from its ranking of 9th highest in 2012 to 16th this year in a survey that included 44 countries. While Meralco’s rates are still 11 percent higher than the average tariffs of the surveyed countries, this is definitely an improvement from four years ago when its charge was 24 percent higher than others.

For residential consumers, electricity charges have dropped by 25 percent since 2012 despite an increase in the consumer price index of 7.5 percent. More importantly, Filipino households within the Meralco franchise area now pay close to what other households included in the survey are charged.

It must be underscored that not all components of the electricity price charged by Meralco to its customers pertain to distribution costs, which comprises 17 percent of the total cost in its customer billings. All other charges, like the generation and transmission charges, are simply passed on by Meralco to its consumers.

Reasons

Overall, including generation costs which account for 59 percent of total charges, Meralco’s charges have likewise seen substantial decreases due to three factors.

The first was attributed to successive declines in the cost of crude oil and oil products like diesel and bunker and coal; the second was due to increased competitive supply contracts to the generation portfolio.

The third was caused by substantial decreases in Meralco’s own distribution charges and systems losses, implying an improvement in the distribution utility’s actual operations.

The study, however, pointed out the reductions in rates could have been higher if it had not been offset by higher statutory charges, particularly stranded costs under the Stranded Contract Charge, the Power Purchase Agreements (PPAs), and the subsidies for the Feed-in Tariff (FIT) scheme.

Stranded cost biggest burden

The stranded costs continue to be one of the biggest burdens of today’s electricity users since the deregulation of the power industry under the Electric Power Industry Reform Act of 2001. Fifteen years hence, consumers are still paying for the losses of the government-owned National Power Corp. (Napocor) accumulated during its pre-deregulation days.

When EPIRA took full effect, the estimated stranded cost was at $6 billion, of which was expected to be reduced with the sale of Napocor assets. The remaining losses were to be shouldered by consumers over 25 years; optimistic estimates then placed this amount to be at $1.7 billion.

Take-or-pay PPAs

The PPAs were contracted during the height of the power crisis in the 1990s, and which carry a contract term of at least 25 years. The power firms that built power plants then were enticed by a take-or-pay scheme that effectively guaranteed their revenue stream, but were priced higher than normal build-operate-transfer contracts.

Most of the PPA agreements, which comprised about 50 percent of the generation costs in the early years, are expiring, and as these higher rates drop and cheaper generating contracts come on stream, the cost of producing wholesale electricity is expected to decrease in time.

FIT charges

On the other hand, FIT springs from the government’s policy direction to support the development of new renewable energy projects through subsidized long-term contracts with approved contractors. The guaranteed fixed rates are covered by agreements ranging from 15 to 25 years.

The unit cost of solar is much higher than oil, and more than two times more than coal. On the other hand, wind power fetch a higher price generating price than coal, natural gas, and hydro. When these two sources are allowed to enter the system, the subsidies kick in and add up to the final generation cost.

Because of these three factors, generation charges, according to the IEC, are thus higher than the estimated long-run marginal cost of producing wholesale electricity.

PPA contracts may be expiring, but those of FIT agreements are just on their initial stages. However, there should be a lowering of the overall generating costs since FIT accounts for a smaller percentage of the generating mix compared to PPA plants.

Lower charges

Other than generation costs, the charges for transmission, distribution and taxes were lower compared to the average rates in the other countries included in the IEC survey. Accordingly, the average P2.76 per kwh distribution charge is lower than the average rate for markets surveyed.

Transmission charges, likewise, are slightly lower than that of the average markets surveyed. The IEC report noted the cost, an average of P1.41 per kwh, is fairly reasonable given the archipelagic nature of the country’s electricity network and the cross-subsidy given to non-Meralco consumers.

In terms of taxes, the charges comprising 16 percent of the total mix, is lower than the average 21 percent of the 44 countries surveyed. The average value-added tax, in particular, is lower than those in all countries, accounting only for 9.4 percent of the mix compared to 15.9 percent.

While lower rates can be attributed largely to decreased fuel costs in recent months, Meralco has been doing its fair share of bringing down distribution costs. By large, compared to other countries participating in the survey, the IEC believes its charges are within the bounds of fairness and reasonableness despite the lack of subsidies and higher generation price.

New investments needed to curb electricity rate hike

In the long term, especially with the threat of higher fossil fuel prices resulting from an improved global economy and the imminent unified agreements among oil producers to regulate crude production, electricity rates nationwide can be expected to rise.

The IEC, therefore, strongly recommended that regulators and legislators focus on facilitating investments in new generating plants to meet the country’s rapidly expanding demand and to promote competition at the retail level.

Facebook and Twitter

We are actively using two social networking websites to reach out more often and even interact with and engage our readers, friends and colleagues in the various areas of interest that I tackle in my column. Please like us at www.facebook.com and follow us at www.twitter.com/ReyGamboa.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.