*Note: This article is a reply to PECO's Letter to the Editor (posted below) that was published in the December 19, 2005 issue of The News Today www.thenewstoday.info. PECO was reacting to an earlier article in my column entitled: "Who's to suffer from PECO-PPC inefficiency?" (also posted below). As a response, I submitted this article, but due to reasons which are out of my control, it never saw print. Because PECO is clearly attempting to mislead the public, I am publishing it here.
Who’s to suffer from PECO-PPC inefficiency? Part 2
“How many rivers do we have to cross before we can talk to the boss?
All that we got seems lost… We must have really paid the cost…”
- From “Burnin’ and Lootin’” by Bob Marley
A merry Christmas to all! Well let me at least start this article with a greeting.
This holiday season, though, is definitely not a good one for consumers. Why? – Because the answer to the question above, if we ask PECO and PPC again, is always “WE”, the power consumers. Yes, the poor Ilonggo power consumers will always be the ones to carry the burden of the inefficiency of this duo.
This is an extension of my article with this same title that appeared in this column early this December. PECO sent its reaction to that article and was printed by this paper (please see December 19, 2005 issue). This is to expound on my previous piece and at the same time serve as a reply to PECO.
Now let me itemize and respond to the points raised by PECO. At face value, PECO’s letter to the editor seem reasonable but in close scrutiny it is full of fallacies, half-truths and outright lies. Keep an open mind; this column is confident that you can decide who is basing their arguments on “erroneous assumptions” that may be “mistaken for the truth.”
Word for the day: “ginbahig”
First, PECO asserts that their Power Purchase Agreement with PPC “provided adjustments for such factors as fuel cost and foreign exchange fluctuations” and that from 2004 “the cost of fuel dramatically increased on an almost weekly basis and the foreign-exchange rate between the Philippine Peso and the US Dollar was at an all-time low.” And PECO stressed that the agreement was “approved by the ERC” or the Energy Regulatory Commission.
Well those statements are skirting the real issue. PECO fails to tell us that in the same agreement in Section 7 there is a stipulation that “Throughout the term of this Agreement, SELLER’s (i.e. PPC’s) rates to PECO shall be equal to or less than the rates offered by bulk power producers in the grid, such as NPC or its successor company(ies)…” Thus while they are given the provision for adjustments, their rates should still not exceed the rates of NPC. This is precisely why they have a pending petition with the ERC to amend their contract.
Prior to the putting up and the operation of the PPC plant, it is also this assurance that they dangled for the government to give the go-signal to the project and approve their exclusive bilateral contract. The government even ended up giving handsome investment incentives to the PPC project such as tax incentives, etc. PPC, which was then partly owned by PECO, was granted to be PECO’s sole supplier as per their supply contract. Indeed it is in the interest of the consumers that the rates they committed will be less than or equal to the NPC rates.
Now this leads me to another point. In 1997, when PECO and PPC entered into an agreement, are they so stupid not to consider increases in prices of petroleum products and the depreciation of the peso to the dollar? Are successive oil price increases and peso depreciation new phenomena that they failed to factor those in their decision-making process? I’m just thinking why PECO and PPC are now using these excuses?
This simply boils down to two things – either the executives of PECO and PPC are indeed so stupid not to factor these in, or they believe that we consumers are so dumb that we wouldn’t even sound an alarm when they begin to breach their commitment. Was all their talk about “rates no higher than NPC rates” simply empty bait for the speedy approval of their application and to gain good PR among the different stakeholders in Iloilo? This I believe is arrogance on their part for believing they can easily break their commitment and simply get away with it. For they know they can simply scare the City and the consumers with a power blackout given that PPC is the only supplier of PECO.
We have a nice term for this in our language: “ginbahig”.
Government subsidies to NPC
Now let us go to PECO’s argument that NPC rates are subsidized by the government that’s why according to PECO, NPC rates does not reflect the true cost of power. PECO underscored that “unlike NPC, it does not enjoy a subsidy from the national government”. Now here comes PECO again trying to justify its very expensive rates as they have done in the ERC hearings on the unbundling of rates. Of course if you ask PPC, this will also be their justification.
Further, PECO cites the enactment of the Electric Power Industry Reform Act (R.A. 9136 or EPIRA) in “June 2000”. PECO added, “At about the same time, President Gloria Macapagal-Arroyo, heeding public clamor against rising power rates, mandated that the NPC's fuel cost and foreign currency adjustments be capped at 0.40/kwHr. These are the very same factors included in PPC/Mirant's generation charges pursuant to the formula approved by the ERC. The effect of this artificial cap on costs set in place a massive government subsidy to NPC generation rates that continues up to this day. The national government also absorbed NPC's debt of 300 Billion Pesos.”
It is interesting to note that PECO is telling us that EPIRA was enacted in “June 2000” and that Gloria Arroyo “at about the same time” lowered the PPA to P.40/kwh. This seems to be a minor error on the part of PECO but I suspect it was intentionally meant to blur the actual timeline. Fact is EPIRA was enacted in June 2001 and the lowering of the PPA as Gloria’s response to public clamor was made after another year later – May 2002. Now what is the significance of this? The way I see it, PECO would like to project that this “subsidy” to NPC was started about the same time or at least near the year it started to get its power supply exclusively from PPC, which is 1999. This way it can claim that we can’t compare NPC and PPC rates because well, “NPC enjoys government subsidy”.
I am amazed on how PECO utilized these data to support its position. First and foremost, the government has been subsidizing NPC for a long time now even before EPIRA, even before PECO and PPC entered into a contract. The national government has long been assuming the debts of NPC, a big part of which is the BNPP debt and those arising from guarantees in NPC contracts with IPPs (Independent Power Producers). These guarantees and obligations of NPC not only affect Filipinos as taxpayers but as consumers as well in the form of very high PPA charges.
Now regarding the issue of the Gloria’s intervention that led to the temporary decrease of PPA to 40 centavos, this in fact is an argument against PECO and PPC. This band-aid solution of Gloria to appease the public led to NPC’s petition in June 2004 of a rate increase of about P2 per kWh. Here in the Visayas Grid, the petition involved an increase from P2.5238 to P4.5887 per kWh. Now how much was the Generation Charge of PECO on that same month NPC filed its petition? – P6.3816 per kWh!
It means that even if we factor out the “artificial cap” and “the massive government subsidy” that PECO is whining about, and grant the full rate increase petition of NPC, NPC rates is still far lower than PPC-PECO rates by almost P2.00.
PECO would like us to believe this: “BECAUSE of government subsidy to NPC, consumers enjoy lower generation rates”. But the accurate statement would actually be: “DESPITE of government’s subsidy to NPC, consumers continue to suffer from expensive generation rates because of NPC’s onerous contracts with IPPs”. And we should even be surprised why PPC and PECO’s rates are even higher given that they are not burdened by billions of debts and contract costs to be recovered from the consumers, unlike NPC.
PPC-PECO rates vs. NPC rates
Now PECO has the guts to claim that “PPC/Mirant's charges to PECO were LOWER that that of NPC until the government intervened and subsidized NPC's generation charges.” This assertion of PECO is one pure lie laced with an alibi. Contrary to this is the reality that for a long time already even before the passage of EPIRA in 2001, we consumers under the franchise area of PECO have been charged with Generation Rates much higher than NPC rates.
In year 2000 for example, that is before EPIRA and before Gloria’s artificial cap on PPA, PECO’s Generation Charges ranged from P3.50 to P4.20 per kWh while NPC only charged P2.00 to P2.50.
PECO even supported the fact that indeed PPC charged higher than NPC rate. In May 2004, the month ERC released its decision on the unbundling of its rates, PECO said, “It (ERC) ruled that the generation aspect of PECO's rates should be pegged at NPC's rate, which was then P3.7491/kwHr. At the time, PPC/Mirant's billing of generation charges to PECO amounted to P5.7718, a difference of P2/kwHr more or less.”
And you know what more? Do you know how much PECO charged its consumers in that same billing period? P6.2181 per kWh! From P5.7718 per kWh it paid to PPC, PECO charged us P6.2181. Here’s why – PECO’s signature style of padding its rates. During that time it is pretending to operate its own generating plants in General Luna Street and claims that it is needed to augment the supply of PPC (which we know is another alibi). The cost of operating its antiquated inefficient power plants is bloated and added up to the costs it paid to PPC. Thus dividing its total expenses related to power generation among consumers, we ended up paying even higher Generation Rate.
That’s why PECO continues to amuse me as they conveniently highlighted: “As a distribution company, PECO cannot earn any revenue from generation charges. It only collects the generation charges and remits them to the generation company.”
While PECO is right in saying that “a distribution company cannot” and should not earn from generation charges, the fact is they were guilty of the same. PECO was only stopped from this anomalous practice when the ERC Order on the unbundling of its rate became executory last September 2005. PECO, a distribution company, have been robbing us consumers in broad daylight in this scheme of pretending to be a generation company too.
I am giving a concrete example so you may exactly know the extent of inefficiency and the greed of PECO. In 2001, PPC generated 99.83% of the total power supply at an average rate of P4.2924 per kWh. PECO on the other hand self-generated a teeny-weeny negligible 0.17% of the power supply at an anomalous average of P64.3116 per kWh! Thus it diluted the relatively lower cost of PPC, pushing Generation Rates up to an average of P5.0029 in 2001. That’s more than P0.70 per kWh added!
This column challenges PECO and PPC-Mirant to release to the media a complete historical data (from 1998) that includes the monthly Generation Rates charged by PPC to PECO, the monthly Generation Rates it charged the Ilonggo consumers with a corresponding comparison to the monthly Generation Rates of NPC.
PPC-PECO rates are expensive because…
Apart from the points already cited, what is the truth about the yawning gap between PPC-PECO and NPC generation rates? The hard fact is that the diesel-run power plants of PPC are not as cost-efficient as the geothermal plants of NPC in terms of baseload generation. Baseload plants, those that run all day long, are utilized to supply energy 24 hours daily, including off-peak periods.
Diesel plants are not designed for baseload all-day operation mainly because of the high cost of fuel. These plants are best suited for peak-hour generation to augment the baseload plants. This is elementary and the engineers of PECO and PPC know these.
Rightly, a fellow-advocate from the Responsible Ilonggos for Sustainable Energy (RISE!) has written: “The major reason why the National Power Corp. (NPC) can sell electricity at P3.20 / kWh is the use of geothermal energy from Leyte and Negros islands that the Philippine National Oil Co. (PNOC) sell at P1.50 / kWh.”
Despite of this however, PECO and PPC arranged a sort of a sweetheart’s deal in 1997. They swapped shares thus PECO owned part of PPC and PPC owned part of PECO. Then they crafted an exclusive contract stipulating PPC will be the sole supplier of PECO.
Thus, even if PPC starts to charge anomalously higher rates compared to NPC, PECO will still source its power from PPC. The hell PECO cares for it will simply pass on these costs to consumers! And the owners of PECO and PPC laughed their way to the bank as their pockets left and right are overflowing. Worse is they know pretty well that a diesel power plant can never be as cost-efficient as a geothermal plant in baseload generation and therefore will be more expensive (aside from more polluting).
And you know what, if you read the contents of the contract amendment they are currently petitioning with the ERC, you will surely puke with their sheer disregard for the consumers, sheer greed indeed!
PECO, struggling to project a good image
Notice now how PECO in its response to this column tried to project a benevolent and pro-consumer image.
“With the guarantee of reliable, secure and efficient power supply to its customers foremost in its consideration, PECO embarked on a joint-venture with the First Philippine Holdings, and Panay Power Corporation came into being,” PECO said.
If PECO is indeed true to its word that “foremost in its consideration” is “the guarantee of reliable, secure and efficient power supply to its customers”, why did it cut its sourcing from NPC and sign an exclusive supply contract with PPC. Isn’t it that “the guarantee of reliable, secure and efficient power supply to its customers” can be better achieved if PECO have more than two suppliers, PPC and NPC?
Then according to PECO, EPIRA “prohibits cross-ownership between distribution and generation companies. As a result, PECO sold its shares in PPC to Mirant.”
PECO wants us to believe that it sold its shares in PPC to Mirant to meet the requirements of the EPIRA law. The fact is, since they have signed their contract prior to the passage of EPIRA, cross ownership is not really a problem. (This actually is one of the many flaws of the law.) A portion of Section 45 paragraph (b) of EPIRA law provides “…no distribution utility shall be allowed to source from bilateral power supply contracts more than fifty percent (50%) of its total demand from an associated firm engaged in generation but such limitation, however, shall not prejudice contracts entered into prior to the effectivity of this Act.”
This is trivial but its funny how PECO wants to look good from its actions, which were purely business decisions. For sure there are other reasons that led PECO to sell its PPC shares to Mirant. For all we know, it could be an arrangement with their previous business partner, the Lopez-led First Philippine Holdings Corp (FHPC) and prospective buyer Mirant. To note, FHPC during this time was hard-pressed to sell some of its subsidiaries to pay off its maturing obligations.
Here’s more – according to PECO, it “has gone to great lengths to prevent a power crisis in Iloilo, incurring extensive legal fees to apply for reconsideration of the government's decision to impose artificial caps on real expenses.”
For the information of the public, PECO’s expenses in legal fees since time immemorial have always been charged to us consumers. They have managed to recover such expenses in their questionable practice of rate padding. Well, I just don’t know how they will manage to do that now in the unbundled format. Imagine, it is we, consumers, who paid for the lawyers hired by PECO to defend itself against our complaints! How anomalous could you get?
Supply from NPC, possible?
“What happens if PPC closes shop? Upon receipt of the ERC's initial decision in May 2004, PECO immediately conferred with NPC about the latter's capacity to supply energy to Iloilo City. NPC REPLIED IN A LETTER THAT IT DOES NOT HAVE THE CAPACITY TO SUPPLY ILOILO CITY WITH ANY POWER WHATSOEVER.” This is again a quote from PECO’s letter.
Either NPC or PECO is lying here. May we request PECO to please present to the public NPC’s letter that it indeed said that. While it may be true that NPC cannot supply the whole 78 MW demand of Iloilo City, NPC’s June 2, 2005 simulation of the Cebu-Negros-Panay (CNP Grid) Supply and Demand Profile for October to December 2005 show that it can provide 40 MW. So it is not accurate to say that NPC doesn’t have the capacity to provide any power to Iloilo City.
My colleague Melvin Purzuelo of RISE is correct in pointing out that 40 MW is enough for the baseload needs of Iloilo City. PPC’s diesel plants can then serve as peaking plants that will augment the power supply of the City during peak hours.
This is a sure way to reduce Generation Rates. Instead of getting all our power needs from an expensive source, we can get a big part of it from a cheaper alternative. Instead of buying all 10 sacks of rice at P1000 each, this will be like buying 6 sacks at P600 each and another 4 sacks at P1000. (Of course it would be best if we can purchase all 10 sacks at P600 each.)
In the future, with the uprating or the improvement of the submarine transmission cables from Negros to Panay we can even get most if not all of our needs from NPC or whoever sells at a lower rate.
Closing bow
I can provide more data to counter the hollow reaction of PECO but I think I have given enough for our readers, at least for now. Just one more thought though – who do you think is basing their arguments on “erroneous assumptions” that may be “mistaken for the truth”? As I have shown, PECO has not only utilized erroneous assumptions, but fallacies, half-truths and lies.
Monday, January 02, 2006
My first article
*Note: This is the article, published in The News Today in December 5, 2005 under my column, that elicited a reply from PECO.
Who’s to suffer from PECO-PPC inefficiency?
“One of the weaknesses of our age is our apparent inability
to distinguish our need from our greed.”
-Unknown
The answer to the question above ladies and gentlemen, if we ask PECO and PPC, are the electric consumers!
This duo has been milking the consumers dry for their inefficiency and questionable practices for several years already. Now that legal authorities corrected some of their abuses by lowering down the rate to its “proper” level, they both cry foul and threaten the public with blackouts.
PECO for its part sounded this blackout blackmail around the time the P2 reduction order became executory late September of this year. Days ago, Arman Lapus, VP of Mirant Global Philippines, which operates PPC, echoed the same veiled threat.
Lapus alleges that PECO presently owes PPC P250 million. “If this situation continues I'm afraid we would not be able to sustain our operations… If time comes that oil companies would not supply us anymore with fuel because of our outstanding debts with them everybody will be affected, our plants would shut down, there will be no more power,” he added.
What a convenient story line, indeed.
Now first question – How did Lapus come up with the P250 million figure? For only two billing cycles since the implementation of the P2 reduction, PECO has already failed to pay that much?
Historical sales of PECO show that its monthly kilowatt-hour sales since the year 2000 average at 24 to 25 million kWh. Now let us say that for two months that the reduction was implemented, the sales were at a high of 30 million kWh for a total of 60 million kWh. Now computing the foregone income of P2 per kilowatt-hour, we arrive at only P120 million.
Further the 2001 Annual Report of First Philippine Holdings Corp (FPHC), the previous owner of PPC, reveals that in 2001, PPC earned P767.4 million in revenues. In the next year, FPHC’s 2002 Annual Report discloses that PPC earned P749.23 million revenues. Data from FPHC also shows that PPC earned P369 million revenues in the first half of 2003, prior to divesting the company to Mirant. Thus, it is safe to say that PPC’s annual revenue will be around P750 million.
Now, what does Lapus mean to say, that for just two months after the reduction was implemented, almost 1/3 of its annual revenue were already lost because of PECO’s alleged non-payment?
Second question – What is the reason behind the failure of PECO to pay PPC? Is Lapus now saying that merely two months after the reduction was implemented, PECO is already on the verge of collapse?
From 2003, PECO on the average earns P180 million in monthly revenues as generation charge. Even if we deduct P50 million because of the rate reduction, there remains P130 million, that’s a total of P260 million in two months – an amount that is more than enough to pay the P250 million.
Clearly, all these is another ploy of PPC and PECO to scare the public and pressure the local government units to give in to their greed.
* * * * * * *
Let us go back to history and refresh ourselves about what really happened here.
In 1997 the Panay Electric Company (PECO) and Panay Power Corporation (PPC) signed a power supply agreement. There was actually no pressing need for the entry of PPC then since PECO was already getting low-priced electricity from NPC. But PPC, in order to get the “OK” of the DOE and ERC, highlighted that it will provide low-cost power that will be priced lower or equal to that of NPC – meaning it will not charge higher than the NPC rate. This is even stipulated in the supply agreement between PECO and PPC.
With the project’s approval, the diesel-powered PPC was constructed and by 1998 started its operations and generated electricity for PECO though the latter still gets the bulk of its power needs from NPC. In December 1998, PECO ceased to be connected to NPC. It was in 1999 that PPC started to supply the bulk of energy distributed by PECO to Iloilo City consumers.
In a short period from 1999 to 2003, PECO’s Generation Charge soared so high and so fast, which has never happened during the time that NPC provides for its electricity needs. From 1994 to 1998 the increase was only around 33% under NPC, but from 1999 to 2003, the increase was more than 80% under PPC. And we are all witness to the appalling monthly increases until recently when the P2 reduction order of ERC was implemented.
Needless to say, PPC (which partly owns PECO) with the cooperation of PECO (which partly owns of PPC too!) has reneged on its promise to the Ilonggo consumers that they will be charging less than or equal to what NPC is charging. For several years, they feasted on their gargantuan profits.
Now, during the hearings in the ERC from 2003 up to 2004 in relation to the unbundling of rates, these issues among others were articulated and debated by the counsels of PECO versus the representatives of the consumers headed by Atty. Roming Gerochi, the Freedom from Debt Coalition (FDC) and the consumers group ICAW.
Also raised by the consumers were PECO’s irrelevant assets that were used to pad the rate base including its inefficient pre-historic generation facilities and also a prime lot in Diversion Road that it presents as its stockyard of electric posts.
After the exhaustive series of hearings, a decision came out in 2004 that stipulate the reduction of PECO rates. But PECO used all the delaying tactics to hinder the implementation of the decision. But in late September this year an execution of the order was finally won.
For years we, consumers were bilked, suffering from exorbitant power rates. Now, after only two months of savoring justice -- not much but at least a breather – PECO and PPC want to dig deeper into our pockets once again.
Who’s to suffer from PECO-PPC inefficiency?
“One of the weaknesses of our age is our apparent inability
to distinguish our need from our greed.”
-Unknown
The answer to the question above ladies and gentlemen, if we ask PECO and PPC, are the electric consumers!
This duo has been milking the consumers dry for their inefficiency and questionable practices for several years already. Now that legal authorities corrected some of their abuses by lowering down the rate to its “proper” level, they both cry foul and threaten the public with blackouts.
PECO for its part sounded this blackout blackmail around the time the P2 reduction order became executory late September of this year. Days ago, Arman Lapus, VP of Mirant Global Philippines, which operates PPC, echoed the same veiled threat.
Lapus alleges that PECO presently owes PPC P250 million. “If this situation continues I'm afraid we would not be able to sustain our operations… If time comes that oil companies would not supply us anymore with fuel because of our outstanding debts with them everybody will be affected, our plants would shut down, there will be no more power,” he added.
What a convenient story line, indeed.
Now first question – How did Lapus come up with the P250 million figure? For only two billing cycles since the implementation of the P2 reduction, PECO has already failed to pay that much?
Historical sales of PECO show that its monthly kilowatt-hour sales since the year 2000 average at 24 to 25 million kWh. Now let us say that for two months that the reduction was implemented, the sales were at a high of 30 million kWh for a total of 60 million kWh. Now computing the foregone income of P2 per kilowatt-hour, we arrive at only P120 million.
Further the 2001 Annual Report of First Philippine Holdings Corp (FPHC), the previous owner of PPC, reveals that in 2001, PPC earned P767.4 million in revenues. In the next year, FPHC’s 2002 Annual Report discloses that PPC earned P749.23 million revenues. Data from FPHC also shows that PPC earned P369 million revenues in the first half of 2003, prior to divesting the company to Mirant. Thus, it is safe to say that PPC’s annual revenue will be around P750 million.
Now, what does Lapus mean to say, that for just two months after the reduction was implemented, almost 1/3 of its annual revenue were already lost because of PECO’s alleged non-payment?
Second question – What is the reason behind the failure of PECO to pay PPC? Is Lapus now saying that merely two months after the reduction was implemented, PECO is already on the verge of collapse?
From 2003, PECO on the average earns P180 million in monthly revenues as generation charge. Even if we deduct P50 million because of the rate reduction, there remains P130 million, that’s a total of P260 million in two months – an amount that is more than enough to pay the P250 million.
Clearly, all these is another ploy of PPC and PECO to scare the public and pressure the local government units to give in to their greed.
* * * * * * *
Let us go back to history and refresh ourselves about what really happened here.
In 1997 the Panay Electric Company (PECO) and Panay Power Corporation (PPC) signed a power supply agreement. There was actually no pressing need for the entry of PPC then since PECO was already getting low-priced electricity from NPC. But PPC, in order to get the “OK” of the DOE and ERC, highlighted that it will provide low-cost power that will be priced lower or equal to that of NPC – meaning it will not charge higher than the NPC rate. This is even stipulated in the supply agreement between PECO and PPC.
With the project’s approval, the diesel-powered PPC was constructed and by 1998 started its operations and generated electricity for PECO though the latter still gets the bulk of its power needs from NPC. In December 1998, PECO ceased to be connected to NPC. It was in 1999 that PPC started to supply the bulk of energy distributed by PECO to Iloilo City consumers.
In a short period from 1999 to 2003, PECO’s Generation Charge soared so high and so fast, which has never happened during the time that NPC provides for its electricity needs. From 1994 to 1998 the increase was only around 33% under NPC, but from 1999 to 2003, the increase was more than 80% under PPC. And we are all witness to the appalling monthly increases until recently when the P2 reduction order of ERC was implemented.
Needless to say, PPC (which partly owns PECO) with the cooperation of PECO (which partly owns of PPC too!) has reneged on its promise to the Ilonggo consumers that they will be charging less than or equal to what NPC is charging. For several years, they feasted on their gargantuan profits.
Now, during the hearings in the ERC from 2003 up to 2004 in relation to the unbundling of rates, these issues among others were articulated and debated by the counsels of PECO versus the representatives of the consumers headed by Atty. Roming Gerochi, the Freedom from Debt Coalition (FDC) and the consumers group ICAW.
Also raised by the consumers were PECO’s irrelevant assets that were used to pad the rate base including its inefficient pre-historic generation facilities and also a prime lot in Diversion Road that it presents as its stockyard of electric posts.
After the exhaustive series of hearings, a decision came out in 2004 that stipulate the reduction of PECO rates. But PECO used all the delaying tactics to hinder the implementation of the decision. But in late September this year an execution of the order was finally won.
For years we, consumers were bilked, suffering from exorbitant power rates. Now, after only two months of savoring justice -- not much but at least a breather – PECO and PPC want to dig deeper into our pockets once again.
PECO's Letter to the Editor
*Note: This is PECO's reaction to my first article entitled "Who's to suffer from PECO-PPC inefficiency?". It was published in The News Today in the December 19, 2005 issue as a Letter to the Editor.
PECO's reaction to my first article
Allow us to react to the article of Mr. Ian M. Seruelo which appeared in your newspaper ("Who's to suffer from PECO-PPC inefficiency", December 5-6, 2005 issue), lest his conclusions, based as these were on erroneous assumptions, are mistaken for the truth.
Until 1997, PECO to a great extent obtained the electric power it distributes from NPC. Knowing, however, that the City of Iloilo, being situated in Panay Island, is at the tail end of the NPC's Cebu-Negros-Panay Grid, it had correctly projected NPC's inadequacy to address the growing energy demand of its franchise area. It was at about this time that the Lopez-controlled group of companies contemplated investing in a diesel fuel-run power plant in Iloilo City. With the guarantee of reliable, secure and efficient power supply to its customers foremost in its consideration, PECO embarked on a joint-venture with the First Philippine Holdings, and Panay Power Corporation came into being.
Under their Power Purchase Agreement, PECO and PPC contracted in January 1997 for the sale and purchase of electric power, at rates no higher than NPC rates. The formula for the rates provided adjustments for such factors as fuel cost and foreign exchange fluctuations. The Power Purchase Agreement was approved by the ERC.
In June 2000, the Philippine government enacted the Electric Power Industry Reform Act or EPIRA. It mandates the unbundling of rates by distribution utilities like PECO. It also prohibits cross-ownership between distribution and generation companies. As a result, PECO sold its shares in PPC to Mirant. It also filed its Rate Unbundling Application.
At about the same time, President Gloria Macapagal-Arroyo, heeding public clamor against rising power rates, mandated that the NPC's fuel cost and foreign currency adjustments be capped at 0.40/kwHr. These are the very same factors included in PPC/Mirant's generation charges pursuant to the formula approved by the ERC. The effect of this artificial cap on costs set in place a massive government subsidy to NPC generation rates that continues up to this day. The national government also absorbed NPC's debt of 300 Billion Pesos.
ERC decided PECO'S unbundling application in May 2004. It ruled that the generation aspect of PECO's rates should be pegged at NPC's rate, which was then P3.7491/kwHr. At the time, PPC/Mirant's billing of generation charges to PECO amounted to P5.7718, a difference of P2/kwHr more or less. However, from the time the ERC decision was promulgated until it became final in October 2005, the cost of fuel dramatically increased on an almost weekly basis and the foreign-exchange rate between the Philippine Peso and the US Dollar was at an all-time low. Based on PPC/Mirant's most recent billings to PECO, the difference in rates is now more or less P4/kwHr.
As a distribution company, PECO cannot earn any revenue from generation charges. It only collects the generation charges and remits them to the generation company. As the ERC decision only allowed PECO to charge consumers P3.7491 per kilowatthour, this is the amount also remitted to Mirant. The P4/kwHr difference between the amount remitted and the actual costs of Mirant must be absorbed by Mirant as a loss, since, unlike NPC, it does not enjoy a subsidy from the national government. PECO does NOT consider this amount to be owed to Mirant, as it had previously informed that company of its intention to remit only the generation charges allowed by the ERC, of P3.7471 per kilowatt hour. The approximately P120 million loss per month of PPC is understandably difficult to sustain.
What happens if PPC closes shop? Upon receipt of the ERC's initial decision in May 2004, PECO immediately conferred with NPC about the latter's capacity to supply energy to Iloilo City. NPC REPLIED IN A LETTER THAT IT DOES NOT HAVE THE CAPACITY TO SUPPLY ILOILO CITY WITH ANY POWER WHATSOEVER. This is exactly the situation that PECO and the Lopez group sought to address with their investment in PPC in 1997. We would like to reiterate that PPC/Mirant's charges to PECO were LOWER that that of NPC until the government intervened and subsidized NPC's generation charges. PECO has gone to great lengths to prevent a power crisis in Iloilo, incurring extensive legal fees to apply for reconsideration of the government's decision to impose artificial caps on real expenses. HOWEVER, it does NOT have the power to force Mirant to operate below cost. It does NOT have the power force NPC to increase power generation in Iloilo. PECO does have the power to try to keep its own distribution charges as low as possible. This it has done, consistently maintaining one of the lowest, if not the lowest, distribution rates in the Philippines. If we are to be vilified for that, so be it.
PECO Management
PECO's reaction to my first article
Allow us to react to the article of Mr. Ian M. Seruelo which appeared in your newspaper ("Who's to suffer from PECO-PPC inefficiency", December 5-6, 2005 issue), lest his conclusions, based as these were on erroneous assumptions, are mistaken for the truth.
Until 1997, PECO to a great extent obtained the electric power it distributes from NPC. Knowing, however, that the City of Iloilo, being situated in Panay Island, is at the tail end of the NPC's Cebu-Negros-Panay Grid, it had correctly projected NPC's inadequacy to address the growing energy demand of its franchise area. It was at about this time that the Lopez-controlled group of companies contemplated investing in a diesel fuel-run power plant in Iloilo City. With the guarantee of reliable, secure and efficient power supply to its customers foremost in its consideration, PECO embarked on a joint-venture with the First Philippine Holdings, and Panay Power Corporation came into being.
Under their Power Purchase Agreement, PECO and PPC contracted in January 1997 for the sale and purchase of electric power, at rates no higher than NPC rates. The formula for the rates provided adjustments for such factors as fuel cost and foreign exchange fluctuations. The Power Purchase Agreement was approved by the ERC.
In June 2000, the Philippine government enacted the Electric Power Industry Reform Act or EPIRA. It mandates the unbundling of rates by distribution utilities like PECO. It also prohibits cross-ownership between distribution and generation companies. As a result, PECO sold its shares in PPC to Mirant. It also filed its Rate Unbundling Application.
At about the same time, President Gloria Macapagal-Arroyo, heeding public clamor against rising power rates, mandated that the NPC's fuel cost and foreign currency adjustments be capped at 0.40/kwHr. These are the very same factors included in PPC/Mirant's generation charges pursuant to the formula approved by the ERC. The effect of this artificial cap on costs set in place a massive government subsidy to NPC generation rates that continues up to this day. The national government also absorbed NPC's debt of 300 Billion Pesos.
ERC decided PECO'S unbundling application in May 2004. It ruled that the generation aspect of PECO's rates should be pegged at NPC's rate, which was then P3.7491/kwHr. At the time, PPC/Mirant's billing of generation charges to PECO amounted to P5.7718, a difference of P2/kwHr more or less. However, from the time the ERC decision was promulgated until it became final in October 2005, the cost of fuel dramatically increased on an almost weekly basis and the foreign-exchange rate between the Philippine Peso and the US Dollar was at an all-time low. Based on PPC/Mirant's most recent billings to PECO, the difference in rates is now more or less P4/kwHr.
As a distribution company, PECO cannot earn any revenue from generation charges. It only collects the generation charges and remits them to the generation company. As the ERC decision only allowed PECO to charge consumers P3.7491 per kilowatthour, this is the amount also remitted to Mirant. The P4/kwHr difference between the amount remitted and the actual costs of Mirant must be absorbed by Mirant as a loss, since, unlike NPC, it does not enjoy a subsidy from the national government. PECO does NOT consider this amount to be owed to Mirant, as it had previously informed that company of its intention to remit only the generation charges allowed by the ERC, of P3.7471 per kilowatt hour. The approximately P120 million loss per month of PPC is understandably difficult to sustain.
What happens if PPC closes shop? Upon receipt of the ERC's initial decision in May 2004, PECO immediately conferred with NPC about the latter's capacity to supply energy to Iloilo City. NPC REPLIED IN A LETTER THAT IT DOES NOT HAVE THE CAPACITY TO SUPPLY ILOILO CITY WITH ANY POWER WHATSOEVER. This is exactly the situation that PECO and the Lopez group sought to address with their investment in PPC in 1997. We would like to reiterate that PPC/Mirant's charges to PECO were LOWER that that of NPC until the government intervened and subsidized NPC's generation charges. PECO has gone to great lengths to prevent a power crisis in Iloilo, incurring extensive legal fees to apply for reconsideration of the government's decision to impose artificial caps on real expenses. HOWEVER, it does NOT have the power to force Mirant to operate below cost. It does NOT have the power force NPC to increase power generation in Iloilo. PECO does have the power to try to keep its own distribution charges as low as possible. This it has done, consistently maintaining one of the lowest, if not the lowest, distribution rates in the Philippines. If we are to be vilified for that, so be it.
PECO Management
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