Consequential

Sen. Alan Peter Cayetano filed a resolution seeking to delay the competitive selection process (CSP) to select suppliers for 1,000 MW of power for Meralco. This week, the Taguig Regional Trial Court issued a temporary restraining order (TRO) to stop the scheduled bidding.

The issues involved in this case are extremely consequential for government, our national energy policy and, most important, our consumers.

The TRO stops the bidding for two power supply contracts, 600 MW and 400 MW, respectively. If the power supply contracts are not awarded according to schedule, Meralco will almost certainly be constrained to go to the electricity spot market for the supply their customers need. The spot market is certainly pricier than the electricity acquired through power supply contracts. That means Meralco customers will be paying more for the electricity they consume in the succeeding period.

Service Contract 38 Consortium requested for the TRO. This consortium is composed of Prime Energy, UC38 LLC, PNOC Exploration Corporation and Prime Oil and Gas Inc. These are enterprises involved in exploiting the natural gas deposits at the Malampaya field.

The consortium basically argues that it is in the national interest to prioritize the use of indigenous natural gas in awarding power supply contracts. The Philippine government earns a royalty from the sale of natural gas extracted from Malampaya.

The award of power supply contracts is scheduled on the basis of an annual procurement plan submitted by distribution utilities based on their estimates of consumption. The Department of Energy approves the procurement schedule and oversees the application of the CSP in awarding supply contracts.

Because power supply contracts are awarded out through open bidding, the process is necessarily transparent. As all biddings go, the supply contracts are awarded on a single factor: price. The bidder offering power supply at the lowest price wins the contract. This is how the Electric Power Industry Reform Act (EPIRA) solved the problem of collusion in the energy industry and guarantees consumers pay the least possible price for what they consume.

It turns out, however, that the natural gas the Malampaya consortium sells to the generating plants is significantly more expensive that imported LNG – notwithstanding the cost of shipping over long distances. Because of this, generating plants would rather import gas in order to be price competitive in biddings for power supply contracts.

The generating plants using Malampaya gas, because they could not compete in the CSP for supply contracts, are compelled to sell their power to the electricity spot market and then hope that prices fluctuate higher. Should the distribution utilities choose to purchase from the spot market, this would penalize their customers who will have to pay higher prices for the energy they consume.

The respondents to the TRO petition questioned the standing of the Service Contract 38 Consortium. The petitioners are not generating companies but sellers of indigenous natural gas. They are, therefore, not part of the bidding process. Meralco points out that none of the actual bidders raised any concern regarding the bidding.

The actual counterparties of the Malampaya operators are the generation companies. Meralco buys from the generation companies. Of course, if the generating companies using more expensive Malampaya gas fail to win supply contracts awarded through competitive bidding, the consortium companies make no money. Presumably, if they lower their gas prices, they will lose money. Therefore, the Malampaya operators are in a bind.

But they should not look to the distribution utilities to rescue them.

Section 23 of the EPIRA expressly obligates the distribution utilities to supply electricity at the least cost to consumers. This is the whole purpose of the CSP. It causes supply contracts to be awarded to generating companies that offer the lowest price. Meralco will violate the law if it buys more expensive power. This will also penalize its customers.

The scheduled bidding for 1,000 MW of power is supposed to cover electricity to be consumed in September. The delay in the conduct of the bidding because of the TRO issued by the Taguig trial court guarantees electricity costs will be higher next month.

The bidding conforms with the Power Supply Procurement Plan approved by the DOE in an annual cycle. After bidding, the award of supply contracts will have to be approved by the ERC. There is no way the schedule could be met with the Taguig court’s TRO.

Only heaven knows why the petition for a TRO was filed in a Taguig court and why this court, despite the petitioners having no standing to question the bidding process, awarded them the restraining order.

All the distribution utilities nationwide are observing this case closely. Awarding supply contracts on the basis of the “nationality” of the gas used for generation will certainly upend the policy preference for the cheapest possible power for our consumers. Power generators fear that their choice of gas to use could be preempted by some policy giving preference to “indigenous” gas.

Meralco appears confident this stray TRO cannot stand beyond the initial 72 hours granted by the Taguig court. The matter of the consortium having no personality at all to intervene in the approved bidding should be determinant.

The only disappointment is that the Taguig court required the Malampaya operators to post a TRO bond of only P5 million. That is nothing compared to the great damage the TRO inflicts on consumers.