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