Pass-through

As always, the devil is in the details.

Instead of blaming each other, the public might be better served if the players in the energy sector put their heads together and find solutions to the power crisis now gripping the nation. Many of the solutions require fine-tuning procedures in critical nodes of the electricity industry, such as the wholesale electricity spot market, and refining the implementing rules and regulations of the electric power industry reform act (Epira).

In the end, of course, we need new generating capacity. The spike in power prices is, to a large extent, due to the thin reserves we have. The new generating capacity should come in the form of efficient plants so that we may eventually retire the old, costly plants that produce expensive power.

If we run the mothballed Bataan nuclear plant, we will immediately have ample and cheap electricity. Doing so, however, requires a major (and courageous) policy decision on the part of government. If we do not do that, we face power shortages in the foreseeable future.

Some irresponsible voices, trying to reap political profit from the outrage over the spike in electricity charges, want the Epira scrapped. Doing so will bring severe power shortages and economic collapse. Much of the generating capacity we now enjoy was made possible by the framework provided by Epira. If we reverse that law, investors will abandon our energy sector. We will, literally, be in the dark.

Any market-driven and competition-oriented regime (such as Epira provides) requires quality regulatory instruments. We have yet to achieve that.

The present power crisis brings a number of issues to the fore. Most of these issues require enhancement in the way things are done.

For instance, while the distribution charge that utilities collect from the final consumers is tightly regulated, the generation charge is not. Meralco, much vilified in the present episode, earns nothing more than a return on rate level defined by government. The unregulated generation charge is simply a pass-through cost from the power generators to the consumers.

When the Supreme Court issued a restraining order on Meralco’s billings, they blissfully ignored the fact that the generation charge is a pass-through cost. However, if Meralco is constrained from collecting the sharply higher generation charge, they will be unable to pay the generators. If the generators are not paid, they cannot cover their operating costs (such as the purchase of fuel).

This could cause a drop in generating capacity and, therefore, outages and power rationing. When Meralco warned of this chain reaction, the statement was immediately twisted in the realm of political propaganda. The distribution company was accused of blackmailing. That is not quite fair.

Through this emergency period of high electricity prices, Meralco’s earnings from the distribution charge remains pegged to the formula used by the regulators. The power producers, on the other hand, could enjoy a profit windfall because generation charges are unregulated.

When the Supreme Court got around to realizing this, they asked that the petition brought to it be amended to include the power producers. Since the electricity industry is composed of three major segments (generation, transmission and distribution), all the players need to explain their roles in this unbreakable industry chain.

For their part, the independent power producers have presented government a to-do list to refine procedures at the wholesale electricity spot market to simultaneously improve the investment-attractiveness of the generation sector while diminishing the sort of price volatility that now afflicts our consumers.

Papered-over

Under great political pressure to finally produce a successful bidding for a major PPP project, the DOTC now appears hell-bent to paper over glaring violations of the conflict-of-interest rule.

Article 5.6 of the rules issued for the P17.5 billion  Mactan Cebu International Airport (MCIA) project could not be clearer. It says the conflict-of-interest rule is violated when: A member of the board of directors, partner, officer, employee or agent of a Bidder, any Consortium Member, or any of their Affiliates (of either the Bidder or any of its Consortium Members), is also directly involved in any capacity related to the Bidding Process for the Project for another Bidder, any Consortium Member of any other Bidder, or any of their Affiliates (of either the Bidder or any of its Consortium Members), within a period of two (2) years prior to the publication of the Invitation to Pre-Qualify and Bid and one (1) year after award of the Project.

The penalty for violating the conflict-of-interest rule, essential to prevent collusion among the bidders, is summary disqualification.

It took a rival consortium, not the DOTC, to discover that the managing director of Malaysian Airport Holdings Berhad (foreign partner to the losing Lopez-led First Philippine International sits as director of Delhi International Airport Private Ltd., Hyderabad International Airport Ltd., Istanbul Sabiha Gokcen Inernational Airport Group and Male International Airport. All four airport corporations are owned and managed by GMR Corporation, the foreign partner of the winning consortium.

Instead of summarily disqualifying GMR and awarding the project to the second bidder as the rules say, industry insiders reports that the DOTC intends to go around the rule by simply asking the Malaysian managing director to issue something called a “certificate of non-involvement.”

If the DOTC does this, the agency will make a mockery of its own rules. It will torpedo the credibility of all the other forthcoming biddings. Investors will not take our bidding rules seriously and see future bidding exercises as farces.

If the DOTC fails to honor its own rules, the agency will undermine all other projects in the pipeline.