Dangerously tweaking the EPIRA

The Senate might be treading on tenuous, dangerous grounds when it approved yesterday on third and final reading proposed revisions to Republic Act 9136 or the Electric Power Industry Reform Act (EPIRA).

On a vote of 16 to 3, the Senate passed Senate Bill 2121 which seeks to amend two important provisions of the EPIRA. These amendments are (1) scrapping the provisions that pass on to consumers stranded debts, or unpaid financial obligations; and so-called “stranded costs”; and (2) lowering the threshold percentage level of power assets privatization to 50% from the current 70%.

What are the possible ramifications of these amendments?

Stranded contract costs refer to the excess in contracted cost of electricity agreed on between an independent power producer and the National Power Corporation (NPC), the erstwhile operator of the transmission grid, over the actual selling price in the market of contracted energy. This can arise, for example, when NPC cannot sell the contracted amount of power due to some reasons such as low actual demand or prolonged breakdown in transmission facilities.

The stranded contract cost which applies to all distribution facilities was also scrapped “in order to reflect the true cost of power and avoid additional burden to consumers.”

In other words, according to Senate President Juan Ponce Enrile, if Napocor and the distribution utilities committed errors in contracting electricity costs, they will have to answer for their lapses in judgment. Let their economics be damned. Forget their target internal rate of return or cost of money.

If only the conditions were as simple as that.

Stranded costs are not the machinations of an evil mind. Big power projects have long gestation periods and entail huge capital outlay. For such a project to be viable, there has to be some guarantee that a portion of the output at least has an assured buyer even before the project proponents lays down the first cornerstone. The form could be either a “take-or-pay” provision or a guaranteed price and adjustments.

There are also technical limitations on the amount of power that can be generated. A 20-MW rated turbine running on geothermal steam could not be operated below a minimum output threshold. In a similar way, a high transmission line cannot carry a load below some limit.

During the previous opaque and monopolistic power regime of Napocor, such guarantees could be easily built in into the contract hammered under very amicable circumstances at the expense of the final consumers.

But even if there is no explicit passing on of the costs to the consumers, the generation costs would somehow appear as operating costs. Failure of the generating company to book such costs as expenses could spell the viability (or lack of it) of the project at the outset.

The amendment may dissuade would-be investors from putting up sorely needed additional capacity in the near future.

The other amendment—lowering the privatization threshold to 50%--could have far more dangerous implications. The rationale is that, with the lower threshold, the “open access regime” wherein big consumers can actually choose their source of power would immediately kick in. This is because the actual level of privatization has already been pegged at 57%.

The fatal downside is that Napocor will no longer have to sell its remaining power assets, and thus continue to exert dominance over electricity prices. This would also fell in the hands of the Napocor insiders who seem to be consciously delaying the privatization process for reasons we can only speculate. With this scenario, the open access would ring hollow.

For the investors who have already put up money on the basis of the original EPIRA provisions, they would have to adopt with increased difficulty should the bill be passed into law. Those who are waiting in the wings would have to go back to the drawing board and their financial spreadsheets and assess the changed circumstances. They might back out altogether.

Changing rules in midstream have been the bane of investors. This is why the various foreign chambers of commerce, which represent foreign investors, have been adamant about changing the rules of engagement in the din of battle.

The world economic order is already is disarray and highly uncertain. Investors would like to see some of the uncertainly addressed to by not changing the rules of the game.

Tweaking the EPIRA this time may not deliver the benefits the law is supposed to give. On the contrary, the results could be devastating to the industry and the country.

We just hope that our esteemed senators are actually concerned at the hapless consumers and not looking misty-eyed at the forthcoming 2010 elections.

Meralco shows way in sourcing ‘clean energy’

Can you choose a ‘clean energy’ supplier for your electrical power needs? Theoretically, yes, even if you are tapping the transmission grid.

 Manila Electric Company (PSE: MER), the country’s biggest power distributor that supplies Metro Manila and environs with electricity is showing the ‘clean energy’ path by planning to source part of its electricity load from two more methane-gas recovery plants.

 In a recent press briefing, Meralco president Jose P. De Jesus said the distribution company will source electricity from the methane gas fired plants to be owned and constructed by Montalban Methane Power Corp. (MMPC) which already owns the pioneering plant at the Montalban (Rodriguez) dump site. The new plants will be situated in Malabon and Sta. Rosa, Laguna.

 Recently, Meralco has already signed a contract with MMPC for the latter to supply it with up to 8 MW of power. The supply arrangement would allow Meralco to source relatively cheaper electricity from MMPC as the generated power would be tapped directly into sub-transmission lines already owned by the firm, thereby bypassing the wheeling charges imposed by the grid operator.

 What is more significant though, is that it allows Meralco “to increase its capacity and alleviate global warming through the reduction of carbon emissions during electricity generation.” Part of the statement may be public relations efforts, but the step it is taking would be a prototype of what steps distribution firms should be taking in the future.

 Sourcing from renewable energy sources is now actually embodied in the recently passed Renewable Energy Law under the heading renewable portfolio standards (RPS). Under this concept, a distribution company is compelled to source a percentage of its electricity supply from renewable energy generators (solar, wind, geothermal, biomass) by a given time, say after ten years.

 Our own renewable energy law do not have specific guidelines on how this is to be achieved as the implementing rules and regulations (IRR) have yet to be hammered out. Of course, these rules are not straightforward to craft.

 Some questions that need to be answered are: (1) what is the appropriate percentage? (2) What would be the timeline for the distribution company to achieve the target percentage? (3) Are there available sources for the distributors to reasonably meet the law’s requirements? (4)Will the prices be competitive enough against traditional sources? (5) Would these renewable energy sources be in the “right places?” And so on.

 These questions are inextricably intertwined and need to be addressed to the satisfaction of all the stakeholders from the government, the generator, the distributor and the consuming public.

 Now that Meralco has actually conscientiously contracted a portion of its distribution needs from a renewable energy source, it would be interesting to watch how this arrangement would pan out. Our energy regulatory bodies, especially the recently-convened National Renewable Energy Board which is tasked to oversee the implementation of the renewable energy law, should study in detail the nuances of this experiment—as well as of others, including that of the Bangui Bay wind farm and the biomass projects in the Visayas—to come up with a sound and equitable renewable portfolio standards.

The success of this particular provision could determine whether we would be getting cleaner power or more of the polluting energy sources we already have in the future.

PSALM finds success—in selling decommissioned plants

The Power Sector Assets and Liabilities Management Corporation (PSALM) which is tasked to privatize the government’s power assets under the Electric Power Industry Reform Act (EPIRA)has apparently honed its skills in selling...decommissioned power plants.

On April 17, PSALM announced it has sold the decommissioned 225-MW Bataan Thermal Power Plant in Limay, Bataan through a negotiated sale to Rubenori Inc., a local scrap metals trading firm, for $2.859 million. The amount was reportedly above the reserve price set by the PSALM board.

The sale is for the structures, the plant or whatever is left of it, unusable auxiliary equipment and accessories and dilapidated parts but excluding the underlying lot.

This was the third successful disposal of decommissioned plants after the 200-MW Manila Thermal and the 54-MW Cebu II power plants were sold off on April 25, 2009 and January 22, 2009, respectively, to scrap dealers.

Scheduled to be sold off this year are other decommissioned power assets including the 104-MW Aplaya, the 22.3 MW General Santos diesel and the 850-MW Sucat thermal power plants.

If PSALM follows the same tack it employed in disposing of the Bataan plant, it should find no difficulty in attracting potential buyers. However, the sale of these essentially heaps of scrap metal does not count as part of the power asset disposal required by EPIRA for the power industry open access regime to kick in.

What are more problematic to dispose are those power assets that are still operation—or can still be theoretically rehabilitated to its peak output. These include the 600-MW Calaca coal-fired power plants and the Bacman I and one of the Bacman II modular plants.

For the case of Calaca, we have noted previously that the sale was stymied by PSALM’s insistence that the potential investors meet its reserve price which may not be realistic. Our estimated reserve price based on published accounts for this plant would even approximate the cost of putting up a new plant from scratch so that any level-headed investor would simple balk at the bidding requirements.

The last “winning” bidder simply walked away and forfeited some $14 million bond, when it realized that the plant was in far more sorry condition than expected, and would stand to lose more going forward if it has to operate the plant.

The 110-MW Bacman I geothermal power plant has been operating at very low loads while the 20-MW Cawayan plant, one of the two modular plants of Bacman II, has been shut since 2005 reportedly owing to poor maintenance and lack of funds for critical spare parts. Any engineer would tell you that equipment that is not used and maintained properly for some time rapidly deteriorates in performance and condition.

We have been insisting time and again that it would be in the best interest of PSALM and the power industry if these assets are sold immediately. The benefits that would be realized in privatizing the power assets according to EPIRA far outstrips whatever any short-term loss PSALM incurs by pricing these asset attractively to investors.

The recent sale of the Bataan decommissioned plant should point the way to the right direction in privatizing the remaining power assets of the government.

Electricity prices to go up again

Here we go again.

Expect to receive electric shock from your power bill starting as early as your next bill when the Energy Regulatory Commission has reportedly given the National Power Corporation (NPC) a go signal to increase its generation rates.

Reports said that the increase in NPC’s basic charge would be 46.82 centavos per kilowatt hour for Luzon, P1.15 /kwh for the Visayas and 71.47 centavos for Mindanao.

Part of that cost will be automatically passed on to the ultimate consumers. That’s you and me.

As usual, there will be howls of protest, and the electricity distributors like Meralco, VECO and Davao Light and Power would bear the brunt of consumer anger since these agencies are the one sending us the dreaded bills. For sure, inefficiencies of these distributors—not mentioning the poorly run electric cooperatives—add to the final bill and any improvement to their operations might help lower that.

But if you look closely at your Meralco (or VECO) bill, the generation cost eats up about 50 % of the total while the distribution cost accounts for about 25%. Any significant reduction to the power bill can only be realized if the generation component of the whole power train can be lowered.

It has been pointed time and again that the Philippines has the highest power generation cost in Asia and one of the highest in the world. Any effort at reducing power costs should start at dissecting the causes of high power generation costs.

As to be expected, the loudest reaction to the impending rate increases comes from the business community which is already reeling from the effects of the worldwide financial crisis which is fast becoming into a severe economic downturn.

The Philippine Chamber of Commerce and Industry together with most foreign chambers are in unison in its clamor for lower power rates to make their business globally competitive. Specifically, the business community wants something to be done about the extended value added tax (E-VAT) on power and the royalty on natural gas.

To be sure, our financial managers will be reluctant to roll back the E-VAT rates as the fund generated from this measure has generally kept up the country afloat in the midst of crisis. Tinkering of the E-VAT would have more damaging effects financially in the long run. Value-added taxes are progressive; the more you consume, the more taxes you pay.

And if you reduce the E-VAT on power—who would prevent you from arguing that the taxes on basic telecommunications, water, basic goods, etc., should also be lowered? Think of the catastrophic consequences on basic services if government revenues are suddenly reduced.

Lest it would be misconstrued, this corner is against high and unreasonable taxes. But putting the blame mainly on E-VAT for power sidesteps the issue. The main issue is the inherent cause of generating power here is just too high.

Yes, the royalty tax on natural gas should go. This would be in line with the practice of many countries to encourage the development of their own natural resources. Don’t also forget the various local taxes (the LGU share for example) that add up to cost. What about realty taxes which could add up to millions?

But what really holds up the power generation cost is the uncompetitive industry structure we still have. Despite the EPIRA, the government through the NPC still controls some 70% of generation.

It also helps if our planners understand why out neighbours like Vietnam, China and Malaysia could generate power at a fraction of the cost we need.

We have passed the Renewable Energy Law which ought to foster more investment in the power sector—but where is the set of implementing rules and regulations to guide investors?

To really foster real competition, the government through the Power Sector Assets and Liabilities Management Corporation (PSALM) should fast-track the privatization of power assets. With the given conditions of its remaining power assets like the coal and geothermal power plants, PSALM should not expect investors to bid on them at the price PSALM wants. It can even do away with an unreasonable base price and just let the market dictates the price of these assets.

Disposing of these assets now at a “loss” may in fact augur well for the country moving forward.

And, who knows, the price of power generation might actually come down due to the natural market forces.