Is Meralco telling whole story?

ELEVATED METERS, HIGH POWER RATES Technicians segregate burnt wires from undamaged ones following a fire in Caloocan City. JILSON SECKLER TIU

(Editor’s Note:  The Supreme Court stopped Manila Electric Co. [Meralco] on April 22 from collecting the P4.15 per kilowatt-hour increase in generation charges for December last year.  The new temporary restraining order [TRO] replaced the 60-day TRO that took effect on Dec. 23 and which the high court extended in February.

Petitioners said the rate increase had resulted from collusion among the distribution utility, its power suppliers and the Energy Regulatory Commission. Meralco denied any wrongdoing.

This article analyzes the power generation purchases of Meralco last year and the behavior of its suppliers that led to the surge in power rates. It also raises questions that could help further shed light on the record rate increase.)

By David Celestra Tan

When Manila Electric Co. (Meralco) tried to charge its customers for the 74-percent and 100-percent generation rate increases in December and January, respectively, it attempted to justify the increases by ascribing these to three things 1) the maintenance shutdown of the Malampaya gas facilities 2) the consequent use of more expensive distillate fuel by First Gas Sta. Rita, San Lorenzo and the Ilijan power plants, and 3) the increased purchases of Meralco from the Wholesale Electricity Spot Market (WESM).

It worked before but this time it did not because the price shock was almost four times the previous Malampaya shutdown. The consumers were too shell-shocked to hear the government agencies trying to mollify them by offering to “spread the pain” over a year. It took the vigilant action of party-list lawmakers of Bayan Muna to get a reprieve from the Supreme Court.

The decision of the Energy Regulatory Commission (ERC) to declare a market failure only deals with WESM, which may even be the consequence, not the cause of the price shocks. There is a need to fix the rest of the power supply system to safeguard consumers and part of that is the behavior of Meralco’s contracted independent power players (IPPs) and the way Meralco manages its bilateral contracts. Otherwise, this nightmare is going to come back to haunt the consumers again and again.

The price shocks were so severe that even WESM failed colossally. Was WESM the cause or the consequence? Is Meralco telling the whole story? Is it covering up a failure to properly manage its contracted generating companies to bring least cost power to its consumers as its obligation as a franchised distribution utility?

We analyzed the power generation purchases of Meralco for 2013 and the numbers are quite revealing.

The grid supplies of Meralco’s contracted IPPs can be grouped into summer (four months from March to June) and the Malampaya shutdown months of November and December. Their supply can be benchmarked by averaging the rest (six months) as the normal months.

What Meralco buys from WESM evidently is just the consequence of the behavior of its contracted IPPs.

Meralco’s demand, WESM

In million kilowatt-hours (mkWh), Meralco’s normal monthly demand for 2013 was 2,631 mkWh. Its demand for November actually dropped by 149 mkWh or 5.67 percent and for December by 203 mkWh or 7.72 percent. Its average generation charges, however, skyrocketed by 78 percent in November and 100.45 percent in December.

Its purchases from WESM is normally 174 mkWh a month. However, this increased by 64.4 percent to 286 mkWh for November and by 96 percent to 342 mkWh in December. (A gigawatthour [gWh] is 1 million kilowatthour. We will use million kWh or mkWh)

Numbers on faces

First the good news gencos!

Let us start with the good news on Meralco’s gencos that have been delivering consistent power at reasonable costs to the consumers.

1. San Miguel coal plant in Sual, Pangasinan

San Miguel’s comparative performance is a pleasant surprise. San Miguel is a relatively new genco player after winning the bid for the capacity of the 1,200-megawatt (MW) Sual coal plant. This plant has been delivering consistent energy of about 244 mkWh a month at an average of P3.89 per kWh. It uses imported coal from Indonesia.

During the summer of 2013 it increased delivery by 9 percent although its rate increased by 8 percent to P4.28 per kWh. For the first month of the Malampaya shutdown in November, its delivery slightly went down by 4 percent and by 7 percent in December. The rates fell 3.6 percent to P3.75 per kWh in November and 12 percent or P3.42 per kWh in December. Impressive.

2. Quezon Power coal plant in Mauban, Quezon

QPL normally delivers 234 mkWh a month at an average rate of P5.03 per kWh. During the Malampaya shutdown it stepped up and increased output by 14 percent in November and 21 percent in December.

Even better, its normal P5.03 per kWh rate decreased by 10 percent and 7 percent, respectively. Due to the increased output, the 440-MW QPL reduced what Meralco needed to buy from WESM by 32 mkWh in November and 49 mkWh in December. Kudos!

3. First Gas Power in Sta. Rita, Batangas

This 1,000-MW plant that runs on Malampaya natural gas normally supplies 618 mkWh a month to Meralco at an average rate of P5.07 per kWh.

In November, it delivered 735 mkWh, an increase of 18 percent. Its rate though increased by 34 percent to P6.83 per kWh due to its use of the more expensive distillate fuel. In December, its output was 678 mkWh or only 9 percent higher than normal and the rate increased 41 percent to P7.15 per kWh.

These increases in output reduced Meralco’s WESM dependence by 116 mkWh in November and 60 mkWh in December.

It is curious, however, why First Gas Power’s rate in December of P7.15 per kWh was higher by 20 percent than the P5.95 per kWh of San Miguel and even 4 percent higher than the P6.87 per kWh of its smaller sister company, FGP Corp., that operates the 500-MW San Lorenzo plant. All of them supposedly converted to alternative distillate fuel during the Malampaya shutdown.

Now for the bad news.

4. Therma Luzon coal plant in Pagbilao, Quezon

This 700-MW plant normally delivers 177 mkWh at an average rate of P4.02 per kWh. During summer, it delivers an admirable 34 percent more energy at 238 mkWh at a rate of P3.99 per kWh. In November, it delivered at its normal level.

However, in December it dropped 52 percent to 84 mkWh. This added 92 mkWh to the power that Meralco needed to buy from the volatile WESM.

Therma Luzon would have been one of the good news gencos except for its untimely drop in output in December coinciding with the Malampaya shutdown. This merits closer scrutiny, especially with reports that other “Therma” affiliates, several of which have lucrative ancillary services agreement with the National Grid Corp. of the Philippines, would benefit from a consequent price spike at WESM.

5. Sem-Calaca coal plant of DMCI Group in Batangas

This 600-MW plant that delivers 219 mkWh normally and 251 mkWh during  summer at wonderful rates of P3.60 to P3.80 per kWh sadly dropped output by 35 percent to 142 mkWh in the critical month of November and 28 percent or 151 mkWh in December when Meralco needed the power more.

This increased by 65 mkWh what Meralco had to buy from WESM in the fateful months of November and December and aggravated the price spikes.

6. Masinloc Partners coal plant of AES in Zambales

The 440-MW plant delivered slightly lower quantities of 190 mkWh for November and 185 mkWh in December compared with its normal 197 mkWh. But what is baffling is that its rates jumped by 45 percent to P5.92 per kWh in November and 57 percent to P6.39 per kWh in December.

Masinloc is supposedly under a bilateral contract with Meralco. The only way its monthly price per kWh would spike that much is if there were upheavals in November and December in the prices of coal that it bought months before. The previous month of October, Masinloc’s generation rate was only P4.48 per kWh and before that in September it was only P3.57 per kWh.

Why would Masinloc’s coal fuel costs skyrocket in November and December? The rates for the same period of the other coal power plants of Sem-Calaca, Sual of San Miguel, Mauban of QPL and Pagbilao of Therma Luzon did not increase much.

These spikes in fuel costs contributed significantly to Meralco’s increases of P4.15 per kWh for November and P5.30 per kWh for December.

What is in the bilateral contract between Meralco and Masinloc that allowed this increase to happen?

7. Ilijan natural gas plant of San Miguel’s South Premiere Power Corp. (SPPC) in Batangas City

This 1,200-MW plant uses natural gas from Malampaya and the third of those power plants that Meralco said would shift to more expensive alternative distillate fuel during the Malampaya gas shutdown, one reason for the generation rate increases of November and December.

Its rates jumped 43 percent to P6.81 per kWh in November and 25 percent to P5.95 per kWh in December. These were expected and accepted by the consumers just like the price hikes in 2010 when Malampaya also shutdown for maintenance.

What worsened Meralco’s price spike is SPPC’s 34-percent drop in output in November and 44-percent decline in December. Consequently, Meralco had to buy the reduced 209 to 268 mkWh from WESM at P33 per kWh.

8. First Gas plant in San Lorenzo, Batangas

This 500-MW sister company of First Gas Sta. Rita normally delivers 231 mkWh at P5.12 per kWh. In the summer of 2013, it delivered 304 mkWh at P5.29 per kWh.

It is perplexing why its output for November would drop 84 percent to only 36 mkWh and 53 percent to 107 mkWh in December. These represented supply drops of 194 mkWh in November and 124 mkWh in December that Meralco then had to buy from WESM and pass on to the consumers at P33 per kWh.

Or to add insult to injury, Meralco and its customers pay First Gas the capital recovery fees and fixed costs in full even if the plant is not producing. This is the reason that its delivery of only 36 mkWh in November was paid the equivalent of P9.99 per kWh and P6.87 per kWh in December.

This plant was supposed to be in the thick of preparations for the Malampaya shutdown because it had to buy alternative distillate fuel.  There is no reason why it would choose the critical time of the Malampaya shutdown to reduce output.

As a consequence of these IPP output reductions, Meralco bought from the volatile WESM a total of 286 mkWh in November and 342 mkWh in December instead of the average 174 mkWh. Had these Meralco IPPs not dropped their output in November by a total of  274 mkWh and by 425 mkWh in December, Meralco consumers would not have been hit by a P33 per kWh WESM price shock.

Before the Metro Pacific group took over management of Meralco on May 30, 2012,  the last maintenance shutdown of Malampaya was from Feb. 10 to March 12, 2010.  The rates increased only 17 percent or P0.88 and 34 percent or P1.73 per kWh compared with 70 percent last November and 100 percent in December. In early 2010, Napocor’s generating assets and IPP contracts were still managed and dispatched by the state-owned monopoly.

Additional power supply

Another curiosity in how Meralco is purchasing its power supply is why it is not buying more and why its eight contracted IPPs not selling more when many of them have excess capacities.

The total capacity of their power plants is 6,100 MW, with an energy generating capacity of 3,554 mkWh a month. In 2013, these gencos sold only 61 percent or 2,164 mkWh to Meralco, which was 75 percent of the Luzon grid.

Why is Meralco not buying more from the gencos with lower costs, such as Sem-Calaca,  Therma Luzon Pagbilao and SPPC of San Miguel whose price for the Ilijan natural gas power is lower than the Lopez-owned First Gas?

These IPPs should be willing to sell their excess capacity even on intermediate and reserve basis, which could be higher than base-load prices but should still be 30-percent cheaper than contracting for diesel power like Therma Marine (Navotas) and 1590 Energy Corp. (Bauang).

Or are these IPPs preferring to sell their excess capacities to WESM because it is more lucrative but at the expense of the consumers?

Is Meralco refusing to sign longer-term contracts with its existing IPPs because it is reserving its market for its own Meralco Power Gen? The new power-generating company is targeting a 2,700-MW capacity like the reported 51-percent owned  460-MW coal plant project in Mauban with Thailand’s Egco, the 600-MW coal Redondo Peninsula Energy in Subic,  the 300-MW expansion of the Pagbilao plant and a 1,200-MW natural gas plant in Batangas with Shell.

These are all negotiated contracts with the sweetheart prices passed on to Meralco’s captive customers. Because of cross-ownership, the negotiated rates would most likely be in the P5.00 to 5.25 per kWh range instead of the P3.89 and 3.60 per kWh average price of San Miguel Sual and Sem-Calaca, and the reported P4.00 per kWh of GN Power.

Other Luzon gencos

Conspicuous by their absence in Meralco’s official genco lineup are the outputs of the 345-MW San Roque multipurpose dam being marketed by San Miguel’s Strategic Power Development Corp., the 600-MW coal plant of GN Power in Mariveles, Bataan, and the CBK Power Co.’s pump hydro in Laguna owned by J-Power of Japan.

How are their outputs fed into the Meralco grid for system reliability, peaking power and cost reduction? Why are they not contracted with Meralco?

Although the ERC has a duty to protect the consumers, Meralco, as the distribution utility and the contracting party to these bilateral power supply contracts, has the primary responsibility to manage and schedule its power supply to achieve reliable and least cost power to consumers.

Meralco’s inability to manage and shepherd properly its contracted power supply and make its IPPs behave responsibly during the Malampaya shutdown last November and December appear to have actually caused it to buy more from the volatile WESM, which it tried to conveniently blame for the rate hike.  It was not telling the whole story.

(David Celestra Tan, a certified public accountant, is a founder and former president of the Philippine Independent Power Producers Association. He was a power generation executive from 1993 to 2013. He can be reached at [email protected].)