Of fixed electricity rates and lessons learned

When former energy secretary Jericho Petilla audaciously came out with the so-called competitive selection process (CSP) for power supply contracts sometime in 2014, he knew that power players and distribution utilities would scoff at him; some went into panic mode.

Not surprisingly, they did not like it. They did not want to get out of their usual practice of entering into negotiated power supply agreements because they were assured of more profits, often at the expense of consumers.

On the other hand, the CSP was meant to get the least possible electricity cost for consumers. It was also supposed to make transparent the manner in which distribution utilities buy electricity from power generators.

Petilla also wanted to avoid supply arrangements between power distributors and power generators owned by the same company or group.

Under the CSP, a distribution utility may execute a power supply agreement (PSA) with a generation company only after successfully complying with certain requirements, according to published circulars of the Energy Regulatory Commission (ERC).

For instance, a distribution company like Meralco is required to openly call for and receive at least two qualified bids from generation companies.

The CSP further requires that direct negotiations with other power suppliers are to be entered into only after at least two failed CSPs.

It was a bold move intended to help bring down electricity rates, but of course, power players did not like it.

The Meralco-San Miguel deal

Today, the CSP is in the spotlight again because of the controversial 10-year PSA between Manila Electric Co. and San Miguel Corp., which was entered into under a CSP.

The ERC last week thumbed down the joint petition for a temporary relief filed by Meralco and SMC Global Power Holdings Corp.’s (SMCGP) units-South Premiere Power Corp. (SPPC) and San Miguel Energy Corp. (SMEC).

The issue at hand was that Meralco and SMC were supposed to implement a fixed electricity rate over a period of 10 years that supposedly would result in savings for Meralco customers of P0.28 per kilowatt hour (kWh) or P9.46 billion for 10 years.

However, just three years into the 10-year power supply contracts, SMC sought for a temporary relief because of the unexpected increase in the price of coal early this year when Russia’s war against Ukraine erupted and supply restrictions from the Malampaya natural gas field.

SMC, in the petition, said their plants were only seeking partial price adjustments so they can continue supplying power to Meralco and not terminate the contracts, which would affect lower-income households who will get hit harder.

Lessons learned

What does this tell us about Petilla’s controversial CSP policy and what can be done, moving forward?

For me, what this tells us is that the CSP still needs improvement, but it doesn’t necessarily mean it can’t work.

Thus, the Department of Energy (DOE) and the ERC must review the CSP not with the goal of removing it, but to further improve it, taking into consideration what happened with the Meralco-SMC deal.

The DOE, as the highest policy making body in the energy sector, must also look into the respective mandates of both the DOE and the ERC to see which areas in the CSP may be improved.

The DOE can also issue new or additional guidelines to help make the CSP more effective.

As Energy Secretary Raphael Lotilla said, there are lessons to be learned from what happened.

“It’s a learning experience for everybody that if we provide for a fixed rate contract, then there must be other terms and conditions that will make the contract implementable, notwithstanding the highly volatile prices in the commodities market,” he said during the infrastructure forum organized by the Economic Journalists Association of the Philippines.

He also believes that moving forward, private companies that are engaged in power will now intelligently analyze the contracts they have entered into and will benefit from the lessons learned from the Meralco-SMC contract.

In any case, at the end of the day, power companies should not use this particular contract as an argument against competitive bidding and fixed rates.

Competitive bidding can still be viable and will ultimately benefit the consumers.

Finding the right balance

Private companies just need to include provisions for relief in case of extraordinary circumstances such as what happened to SMC.

However, power regulators need to ensure that these provisions are not abused.

Ultimately, the CSP’s intention is to make power price setting transparent, something consumers deserve.

After all, consumers pay a lot for electricity and surely, we deserve to know how much it really costs.

Iris Gonzales’ email address is [email protected].

Follow her on Twitter @eyesgonzales. Column archives at EyesWideOpen on FB.