Review power supply deals
Being an essential commodity, electricity has always stirred up controversy whenever its price is discussed. The complicated pricing system surrounding the power sector has not helped clarify issues among the consuming public. And there is no other aspect in this process that is more troublesome than the so-called power supply agreements (PSAs).
A PSA is a bilateral agreement between a generation company and a distribution utility for the purchase and supply of electricity. It has to be reviewed and approved by the Energy Regulatory Commission (ERC) as provided under Republic Act No. 9136 or the Electric Power Industry Reform Act of 2001 (Epira). The retail rates charged by distribution utilities for the supply of electricity in their captive market are subject to regulation by the ERC “based on the principle of full recovery of prudent and reasonable economic costs incurred” by the generation company and the distribution utility.
Here lies the problem.
Last week, militant lawmakers urged the House of Representatives to investigate what they claimed were very expensive purchases by Manila Electric Co. (Meralco) from a coal-fired power plant in Mauban, Quezon. Bayan Muna Representatives Carlos Zarate, Ferdinand Gaite, and Eufemia Cullamat filed House Resolution No. 1350 to probe the high generation rates imposed by Quezon Power Philippines Ltd. (QPPL). The highlight of their resolution was the allegation that while QPPL has been selling electricity that was 9-12 percent more expensive than other similar suppliers in the country since it started in 2000, Meralco paid QPPL 51-82 percent more this year, a huge overprice indeed that, if true, is well-deserving of congressional scrutiny.
The issue becomes more nettlesome given the fact that Meralco’s generation charge actually went down from P4.9039 a kilowatt hour (kWh) in January 2020 to P4.1241 in August 2020. The reduction was attributed to Meralco’s negotiation with independent power producers (generation companies with PSAs with Meralco) to declare a situation of force majeure during the COVID-19 pandemic. Under such a situation, the take-or-pay provisions of the PSAs are suspended. In the process, this saved Meralco consumers around P1.5 billion. Under the take-or-pay provision, Meralco is obligated to purchase a fixed amount of electricity regardless of whether there is demand or not.
Aside from this, the House resolution also cited data showing that the price of coal used by coal-fired plants went down by 28 percent from $69.66 a metric ton in January to $50.34 in August, and that the Wholesale Electricity Spot Market (WESM) price fell by 193 percent from P8.49 a kWh in January to only P2.421 in August. WESM is a venue for trading electricity as a commodity. It was created, also through the Epira, as a venue where power generators sell their excess capacities not covered by PSAs and where customers like Meralco buy additional capacities on top of their PSAs.
From January to September 2020, according to the legislators, Meralco bought 1.601 billion kWh of electricity from QPPL at an average price of P6.73 a kWh, while the average price of all other coal power suppliers to Meralco for that period was about P4.20. The lawmakers noted that this was 51 percent higher than AC Energy’s P4.55; 66 percent higher than the P4.051 of San Miguel’s Sual Power Plant; 82 percent higher than the P3.6549 of Therma Power’s Pagbilao facility; and 66 percent higher than the P4.0533 of the new 460-megawatt San Buenaventura coal-fired facility.
Perhaps the fact that QPPL’s plant is old, having been established in 2000, can partly explain the higher rates. At that time, the country was in dire need of additional capacity to meet the growing demand for electricity by an expanding economy. Thus, the government through the ERC had to approve PSAs that looked disadvantageous to consumers but were legally required by generation companies to recover the cost of putting up the power plants, plus a reasonable profit. However, the time may be right for a review of such longstanding arrangements. The question is: What can the government do now with PSAs that have actually become disadvantageous to consumers, especially in the current economically difficult environment? Congress should take a serious look at the resolution filed last week, with a view to correcting this murky situation.
