Embedded PPA in the New Unbundled Power Rates

Prepared by AGHAM/POWER
July 1, 2003

The giant distribution utility MERALCO with the megafranchise has began collecting from its 3.8 million customers  the new unbundled  power rates approved last May 30 by the Energy Regulatory Commission (ERC).

The new bill features the following:

·      the unjust and oppressive purchased power cost adjustment (PPA) has been distributed to four cost charges with provision for a new PPA under a different name;

·      the 16.7 centavos overcharge remains intact;

·      implementation of a socialized pricing scheme that will also earn for Meralco additional hundreds of millions annually; and

·      the stranded debts and standranded contract costs of Napocor and distribution utilities will be socialized and paid for by consumers.

The unbundled bill now consists of  14 major cost items with several more to be added in the coming months as NAPOCOR is being privatized. These are as follows:

1. Generation charge

2.  Transmission charge

3.  Distribution charge

4.  Supply charge

5.  Metering charge

6.  System loss charge

7.  Recovery of lifeline Rate Subsidy

8. Inter Class Cross Subsidy

9.  GRAM (Generation Rate Adjustment  Mechanism)

10.  ICERA (Incremental Currency    Exchange Rate  Adjustment)

11.  Ancillary service charge

12.  Power Act Reduction

13.  Franchise Tax (National and Local)

14. Universal charges:

       a. Missionary electrification fund

       b. Environmental fund

       c. NPC stranded debts (future)

       d. NPC stranded contract costs (future)

       e. DUs stranded costs (future)

       f. Equalization of taxes and royalties (future)

       g. Cross-subsidy removal (future)

Hiding the PPA

Ignoring the demand of millions of consumers that the PPA should be abolished because it is essentially a payment for electricity that they did not use, the ERC in its order of May 30 explicitly stated:

“The current PPA is allocated between the generation and transmission rates. The generation component shall be periodically updated through the Generation Rate Adjustment Mechanism (GRAM).”

Thus, the value of the PPA as of May 2003 has been incorporated in the generation and transmission charges and in two other charges – the systems loss charge and franchise tax  which were components of the old PPA. The purchased power cost adjustments for June 2003 and succeeding months will be billed under a new charge called GRAM (or, Generation Rate Adjustment Mechanism) which will be collected on a quarterly basis.

The systems loss has several componts. One is the electricity lost through pilferage. Another is electricity lost as they pass through distribution equipment and wires.  A third component bundled with the systems loss charge is electricity consumed by Meralco offices and facilities, technically called “company use”. The Meralco consumers pay for all this, and it is all legal because the government allows it.

It is clear that while the term PPA no longer appears in the June bill, consumers will still be paying for it under  five cost charges.

Collection of  the 16.7 centavos per kwh overcharge continues

The decision of the Supreme Court clearly stated that there was an overcharge in the collections of Meralco since 1994. It also ordered the company to desist from collecting the overcharge and to refund its customers the collected overcharge.

But in the unbundled rates approved by the ERC no such removal of the 16.7 centavos overcharge was done; on the contrary, the overcharge was even bundled with it.  Oppositors like BAYAN and NASECORE pointed this out in their motion for reconsideration but the ERC simply argued that there was no merit in the objection. Thus, consumers of Meralco continue to pay for the overcharge.

Socialized pricing?

ERC has approved two schemes of subsidies. One is the Lifeline Rate Subsidy and the other is the InterClass Cross Subsidy.

Under the Lifeline Rate Subsidy  scheme, Meralco gives the following discounts to consumers using  up to 100 kwh:

           01-50 kwh consumers …. 50%

           51-70 kwh consumers .… 35%

           71-100 kwh consumers … 20%

At the same time, ERC authorizes Meralco to collect 7.61centavos/kwh  from the other residential consumers, commercial and industrial consumers and government hospitals. While Meralco losses 787 million pesos by giving the discounts to the lifeline rate consumers, it collects 1.107 billion pesos from the other consumers, including from those using 101 to 400 kwh who cannot be classified as rich. In the process, Meralco will earn an additional P320 million  as shown in the table below:

Notes:

1. Data for kwh and customer statistics are taken from Meralco 2001 annual report.

2. Kwh sales in 2001: 22.289 billion kwh

3. No. of residential consumers: 3.459 millions

4. Kwh consumption of residential consumers: 8.138 billion kwh

The other scheme, the InterClass Cross Subsidy, allows Meralco to even gain additional income.

In this scheme, the following are given subsidies:

·         All residential consumers  @ 71.30 cents/kwh

·         Govt Hospitals/Metered Streetlights @ P1.0889/kwh

·         Flat Streetlighting  @ P2.5323/kwh

But to recover the discounts above, Meralco collects the InterClass Cross subsidy from all the commercial and industrial consumers in amounts ranging from 8 to 78 centavos per kwh.. On balance, Meralco will gain a net of 455 million pesos annually as the table below clearly shows:

Notes:

1. Data for the kwh and customer statistics were taken from the Meralco 2001 annual report.

2. The Inter Class Cross Subsidy rates for the commercial, industrial and others (government hospitals and street lighting) were averaged from the various categories under each class.

Such   schemes of subsidies and discounts, announced by ERC as socialized pricing, are at the expense of the consumers themselves. We see the spectacle of poor consumers also subsidizing the poorer consumers. The commercial and industrial consumers simply pass on the additional charges to their customers though they become less competitive when battling with foreign manufacturers.

Socializing the stranded debts and contract costs

You don’t see them yet in the item called universal charges but as soon as NAPOCOR and TRANSCO are privatized items such as stranded costs and stranded contract costs will appear.

It is estimated that there will be a shortfall of about P475 billion in the sale of Napocor. P200 billion will be absorbed by the government while the balance of P275 will be passed on to the consumers in the form of an item in the Universal Charge called stranded debts and constract costs, effectively socializing the payment of debts.

The overall effect of the unbundling of the power rates is that the monthly electric bill will continue to rise in the coming months. This is the most outstanding achievement so far of the 2-year old EPIRA law pushed in Congress and signed as a law by President Arroyo. The law makes the poor poorer but it makes the rich, like the giant IPP called Mirant and the Lopez IPPs and Meralco, richer.#

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Annex

Related article: Consumer Groups Urge 2004 Candidates to Take up Power Issue

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