Government and Taxes: distribution utility

Showing posts with label distribution utility. Show all posts

Friday, June 30, 2017

BWorld 141, Reducing system loss, Part 2

* This is my article in BusinessWorld last Wednesday.

This is a follow up to a previous piece entitled, “Rule of law in Distribution system loss cap (June 7).” This sequel is prompted by three recent developments: (a) “NEA seeks expanded authority over electricity distributors (BusinessWorld, June 20),” (b) “DoE official backs NEA control over power distributors (BusinessWorld, June 21),” and (c) public hearing early this month by the Energy Regulatory Commission (ERC) to reduce the system loss cap of all distribution utilities (DUs).

The ERC plans to allow higher cap (maximum rate of system loss) for electric cooperatives (ECs) compared to private DUs.

In particular, the ERC plan is to impose a technical loss cap of 3.25% to 7.0% for three clusters of ECs but only 2.75% cap for private DUs and a non-technical loss cap of 4.5% of energy input for all ECs but only 1.25% cap for private DUs.

The message is that the proposed new ERC regulation is to favor ECs, all under the supervision of the National Electrification Administration (NEA), which has the effect of allowing them to incur higher wastes that can be passed on to electricity consumers while forcing private DUs to spend more on higher capex so that their system losses are reduced to the barest minimum.

The NEA and the various provincial ECs are not exactly doing well in consistently reducing the distribution system loss and raising the overall electrification rate in the country.

As of 2013, only 87.5% of all households in the country have electricity, and not all of them have 24/7 electricity, many still suffer from frequent “Earth Hours” -- that is to say power outages -- daily. (See table.)

The Philippines’ archipelagic geography is a contributor of course for the rather low electrification rate as many households in far away islands are off-grid and rely on generation sets administered by Napocor-SPUG and small private electricity sellers. More off-grid areas are now using solar.

Still, the absence of 24/7 electricity in many areas covered by ECs as administered by NEA is a problem. When there are frequent brownouts, people use two things: candles and generation sets. Candles are among the major causes of fires in houses and communities while gensets are noisy and are running on more expensive fuel, diesel oil.

The Philippines’ low electricity generation compared to its neighbors in the region (column 4 of the table) is a result of combination of many factors, like the huge bureaucracies face by generation companies putting up new power plants, and rigidities in the electricity distribution system.

Protecting the electricity consumers via lower distribution charge, lower system loss charge, and lower incidence of brownouts can be done via the following measures.

One, both the ERC and the NEA should identify which are the most inefficient, lowest-rating ECs or DUs, push them to be corporatized (not exactly “privatized” because ECs are already private entities). These agencies, in turn, should serve notice to these ECs that if they fail to make their operations more efficient, then they will be corporatized. With these measures, these ECs will be forced to improve their systems loss, collection efficiency, employee-customer ratio, etc.

Two, the government should remove differences in caps of systems losses between DUs and ECs. The ERC has to determine the increase in rates so that DUs can comply with their systems loss cap since they need to put up more expensive equipment to decrease technical systems loss. Having a different system loss cap for ECs and DUs means the ERC will not exactly be protecting the consumers but more of protecting ECs so that their inefficient if not outright wasteful operations are tolerated and rewarded with higher profit.

Three, NEA should not aspire to supervise all DUs including private corporations. It is not exactly good at instilling financial discipline on all ECs as a number of them are inefficient and therefore lose money while charging high costs to their consumers (See “NEA offers P1.7-B loan window for distressed power cooperatives,” BusinessWorld, April 12). NEA in fact should step back and give more supervisory functions to the Securities and Exchange Commission (SEC) via ECs that were corporatized. After all, the SEC has more transparent, more universal corporate rules than NEA.

Bienvenido S. Oplas, Jr. is a Fellow of SEANET and President of Minimal Government Thinkers. Both are members of Economic Freedom Network (EFN) Asia.

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Friday, June 09, 2017

BWorld 135, On reducing the distribution system loss

* This is my article in BusinessWorld last Wednesday.

When matter changes form, there are certain “system loss” that occur. Like a one-kilo dressed chicken becomes less than one-kilo once it is cooked into adobo or tinola. Or a one-kilo green mango or banana becomes lighter than a kilo when it transforms into ripe, yellow mango or banana after a few days.

When electricity is transported or transmitted from a power generation company (genco) some 100+ kilometers away to a private distribution utility (DU) or electric cooperative (EC), there is a transmission system loss. Thus, a 1,000-MW output from a genco may become only 980 MW when it reaches the DU or EC.

Then when electricity is distributed from a DU or EC to houses and offices, there is also a distribution system loss. This loss is divided into (a) Technical loss, inherent in the physical delivery of electric energy including conductor loss, transformer core loss, and technical error in meters, and (b) Nontechnical Loss, energy lost due to pilferage, meter reading errors, meter tampering, others not related to the physical characteristics and functions of the electric system.

The Philippines has a relatively high degree of transmission loss + distribution loss while Singapore, South Korea and Japan have low systems losses, based on World Bank data (see Table 1).

There are several attempts to limit or cap the distribution system loss that is passed on to the consumers. One from the Energy Regulatory Commission (ERC) draft “Rules for Setting the Distribution System Loss Cap and Establishing Performance Incentive Scheme for Distribution Efficiency,” and two from the Senate. Here is a summary of their provisions.

These three measures are problematic and Sen. Pacquiao’s bill is the worst because of its populist posturing, disallowing private DUs to charge any system loss while pampering the ECs to have their system loss. Check again Table 1 above, it shows that none of the advanced countries like Singapore and Japan have zero system loss.

Sen. Gatchalian’s bill is not as bad as Sen. Pacquiao’s but like the ERC draft Rules,it suffers from some populism too, pampering the ECs with higher loss cap compared to private DUs.

Giving differentiated loss cap is favoring the ECs while penalizing private DUs and this is wrong. If the real purpose of the proposed ERC regulation and Sen. Gatchalian’s bill is to protect the consumers from high system loss charge in their monthly electricity bill, then they should slap a uniform low cap for all players, whether private DUs or ECs.

The rule of law is explicit in reminding people that the law applies equally to unequal players and people. Thus, a law against traffic counterflow should apply to all vehicles, from buses to cars, jeepneys, armored vans, tricycles and motorcycles. It should apply also to both private and public/government vehicles.

A law with penalty against non-rehabilitation of mined-out area should apply to all mining entities, whether big, medium, small and artisanal mining.

And a law or regulation on system loss cap should apply to all players, from big corporate DUs to medium or small electric cooperatives.

By slapping differentiated system loss cap, new government regulations will not be exactly protecting the consumers but more of protecting certain ECs so that their inefficient if not outright wasteful distribution system is rewarded with higher profit at the expenses of the consumers.

Ultimately, all ECs should be corporatized. They should be registered with and monitored by the Securities and Exchange Commission (SEC) and not by the National Electrification Administration because SEC has more transparent and realistic rules than NEA. But that will be another topic in the future.

For now, the rule of law, of not making exemptions and differentiation in the imposition of system loss cap, should prevail. And the loss cap that government has in mind should be realistic that DUs and ECs should not be burdened with additional high capital expenditures (CAPEX) and operating expenditures (OPEX) which ultimately will be passed to the consumers in the form of higher distribution charge.

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Saturday, February 22, 2014

Energy Econ 14: Power Rate Hike, Who Colluded?

In a fb group, Government and Taxes, Freedom andResponsibility, I had a debate with Troy ZD last February 5 this year. He posted this news report from the Inquirer, http://business.inquirer.net/163008/meralco-admits-telling-therma-mobile-to-sell-at-p62kwh-at-spot-market#ixzz2sPIrwxBR

and commented that

If this and other admissions by Meralco, the ERC etc are not an evidence of collusion that would make the SC strike down the price increase and to force the re-evaluation of EPIRA and particularly the WESM then the SC has sold us out.

I replied that an electricity distribution utility (DU) like Meralco, Batangas Electric Coop, Cagayan Electric Coop, etc., distributes electricity from two sources: (a) from bilateral contracts for its basic, non-peak electricity demand, and (b) from WESM or spot market for its peak demand period (say 5-7am, 6-8pm). In the case of Meralco-TMO bilateral contract, the contract price was P6.20/kwh in Oct 2013 and P8.65/kwh in Nov. 2013. See Table 3, Government and Taxes: Fat Free Econ 51: Ten Things About the Meralco Rate Hike

Of the 286 GWH that Meralco bought from WESM in Nov. 2013, it is not clear how much of it came from TMO at P62/kwh, how much from other diesel power plants at P25 or P40 or 50 or 62. I have not seen the numbers yet.

It is possible that Meralco told TMO and other diesel plants to bid at P62 so that not a single DU, Meralco included, would buy at that max price so that the clearing price would be at a lower amount.

The term "collusion" has been over-used and may be even abused. Who colluded? Meralco and TMO? Meralco and who else? At what volume (in GWH) at what price and when did the collusion happen?

Could it be that a DU bought from a generating company (GenCo) at the max bid price of P62/kwh but only for 2 or 3 GWH volume? If this is the case, can this still be considered as collusion considering the very small volume of electricity involved?

I will be very glad to see explicit answers from those who endlessly suggest there was collusion, like Troy, Bayan Muna, other groups and individuals.

The average clearing price for November 2013 at WESM was P33.22/kwh. Answer the 4 questions above.
1. Who colluded?
2. At what volume (in GWH),
3. At what price the collusion happened?
4. At what days and hours the collusion happened?

Troy replied that it’s what they are trying to find out in the senate and in the SC

Can you beat that? People have been using that term “collusion” since 3 months ago, and until now there is zero proof of collusion? Puro allegation and ngaw ngaw lang? Hoping that endless allegation becomes an accepted "truth"?

If people are honest, they should shut their mouth from endless accusations because they have zero proof. If they are dishonest, they will retain the accusation even if proof is zero.

Troy posted this quote, no source given:

the assertions from both Meralco and TMO that only 100 MW of capacity have been provided are quite odd. At the beginning of June, Aboitiz Power announced it had completed the rehabilitation of the four power barges, and that they were fully operational at their 242-MW rating. Even as early as September, 2012 TMO informed the ERC that rehabilitation of two of the units had been completed. The claim that only 100 MW has been provided so far (100 MW is, coincidentally, roughly the effective net capacity of the two smallest barges, rated at 57 MW and 52 MW, respectively) begs the question whether the TMO facility may have been another of those supposedly “unplanned” plant outages that forced Meralco to buy higher-priced power from the spot market.

Malaya 1 has been on technical shutdown since July 2013. Even if one DU will beg at P100 or P200/kwh, that plant will never be able to produce electricity. Malaya 2 has been on scheduled maintenance shutdown since late October 2013. See chart 4, http://funwithgovernment.blogspot.com/.../fat-free-econ...

And even assuming that NPC or PSALM (whoever operates Malaya power plant) could produce magic last November and make it run, its generation cost that will be passed to consumers would be something that will make the activists curse and howl. It is an inefficient, costly government power plant that can save us more money if it is not running than it is operating.

So people really point at Meralco-TMO collusion, somehow question #1 is answered, fine. Questions 2 to 4 must be answered to substantiate that there was indeed Meralco-TMO collusion.

People were so hooked on their conspiracy theory. Even if a power plant is 100% incapable of producing electricity, they will say that there is magic somewhere (by Batman? Superman? Spiderman?...) to make it run and save us from the Meralco-TMO-other GenCos collusion conspiracy theory.

I think this is a good explanation why a DU like Meralco with an existing contract to a GenCo like TMO told the latter to bid at the max rate of P62/kwh -- because it does not intend to buy significant volume at that price on non-peak hours. It turnedout that Meralco did buy from TMO at P62 -- at a monster volume of 0.5 kwh! Total purchase of Meralco from WESM in Nov 2013 was 286,000,000 kwh, 0.5 kwh of which was purchased at a "collusion" price of P62/kwh. Nice joke on collusion.

http://www.interaksyon.com/article/80150/power-rate-hike--justices-say-root-of-problem-lies-with-must-offer-rule-regulators

There are at least two lessons here. (1) Remove the "must offer" rule for all GenCos. If they do not want to be dispatched at particular hours because its power supply is already fully contracted, or it wants to do emergency repair on a minor mechanical problem that can become a big problem if not acted upon, then ERC should not compel them to offer.

Or (2) Retain the "must offer" rule but remove the P62/kwh max bid price. Make it indefinite. So that a GenCo that does not want to be dispatched for a particular hour can price its power at P1,000/kwh or P5,000 or higher, precisely so that NO ONE will buy from it.

Nice quote. People will always think the problem is with electricity distribution and the monopoly DUs, when the clear problem facing them is the lack of power generation.

Government is a major contributor to high electricity prices in this country. Aside from VAT and other taxes, it also slaps various mandatory fees under "universal charges."

Malaya power plant can greatly help in this power rate hike debate if it is privatized soon, two benefits: (a) money from privatization proceeds be used to pay back some of the stranded cost so that universal charges will decline. And (b) private operator can make it run more efficiently, more frequently, add to more power supply, while paying taxes to the government. A seldom-operating, government-owned Malaya plant is a costly elephant that adds to more costs than benefits to electricity consumers.

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