One of the most controversial issues that emerged in the energy sector in the last decade is the multi-billion peso settlement agreement between the National Power Corporation (NPC) and the Manila Electric Company (Meralco) which we, in the Freedom from Debt Coalition (FDC), believe is grossly disadvantageous to the government and to electricity consumers.

In mid-February this year, reports have come out that the Court of Appeals has issued a writ of preliminary injunction which indefinitely stopped the implementation of the P14-billion NPC-Meralco settlement agreement which would cost Meralco costumers an additional P0.12 per kilowatt-hour over five to six years. A week after, energy officials have revealed in a Congressional inquiry that the country now has the highest residential electricity rates in the world.

The CA’s First Division granted the petition seeking to bar the Pasig City regional trial court from implementing its order affirming the validity of the settlement claim inked in 2003 and in further proceeding in connection with Meralco’s civil suit. The petition was filed by the state represented by the Office of the Solicitor General.

The case stemmed from Meralco’s failure to fully take out its contracted power purchases from NPC from 2003 to 2004 and from the agreement’s possible injurious effects to consumers and to the government.

The contract

On 21 November 1994, it is recalled that Meralco entered into a 10-year Contract for the Sale of Electricity (CSE) with NPC, beginning 01 January 1995 to 31 December 2004. Under the contract, Meralco is to purchase a total of 60,092 GWh covering the years 2002, 2003, and 2004.

Meralco also entered into Power Purchase Agreements with its own independent power producers (IPPs) – Quezon Power Plant Limited (QPPL), First Gas Sta. Rita, and First Gas San Lorenzo – to supply other electricity requirements. Until 2000, of Meralco’s total monthly electricity requirement, 3,600 MW was supplied by NPC and the rest by its three IPPs – Duracom, QPPL, and First Gas Sta. Rita and San Lorenzo.

However, beginning 2001, Meralco began reducing the amount of electricity it was getting from NPC as the First Gas Sta. Rita and San Lorenzo plants became fully operational.

In January 2002, based on what was provided for in the CSE, NPC started billing Meralco for the cost of the minimum contracted electricity. However, a month later, instead of paying its contractual obligation to NPC, Meralco served NPC a formal notice to terminate the CSE.

The amount

Originally, the total contractual obligation of Meralco to debt-saddled NPC was P42 billion. However, on 15 July 2003, when they executed the settlement agreement, Meralco agreed to pay NPC the amount of P27.515 billion which is the equivalent of 18,222 GWh valued at P1.51/kWh (representing the value of the difference between the aggregate contracted energy for the years 2002, 2003, and 2004 and the total energy Meralco has already bought from January 2002 until 30 April 2003 and scheduled to purchase thereafter until 31 December 2004).

Moreover, NPC agreed to give credit to Meralco for the delayed completion of transmission facilities as well as for energy corresponding to NPC’s sales to directly connected customers located in Meralco’s existing franchise area valued at P7.465 billion.

Based on the joint application filed by the two parties before the Energy Regulatory Commission in 2004, the net amount payable by Meralco to NPC was worth P20.05 billion. This amount will be paid by Meralco to NPC over a period of five to six years, starting on the first billing month immediately following the approval of the agreement by the ERC and ending sixty months after the last billing month of CSE (December 2004), or in December 2009 or 2010. Said net amount would cost consumers an additional P0.12/kWh in their electricity bills. The application was immediately opposed by different consumer groups such as the Freedom from Debt Coalition.

However, when the application was withdrawn and re-filed before the ERC in 2006, the amount again dwindled to P14.3 billion.

Grossly disadvantageous

FDC would like to reiterate its position on this very urgent matter. We believe that the NPC-Meralco Settlement Agreement is grossly disadvantageous to the government and to electricity consumers for the following reasons:

1. Meralco’s unilateral decision in 2002 to reduce the volume of energy it was taking from NPC resulted in the increase in NPC’s Purchased Power Cost Adjustment (PPCA). This resulted in a parallel increase in purchased power adjustment (PPA) collected from all consumers.

NPC’s records reflect that for the first quarter of 2002 alone, energy sales by NPC reached a level of 7,324.7 GWh, declining by 18.6 percent relative to the 2001 level. In Luzon, the reduction in sales reached almost 25 percent yearly as Meralco’s independent power producer First Gas-Sta. Rita started commercial operation. The reduction in NPC’s sales to Meralco during that quarter relative to the 2001 level totaled to 1,743.8 GWh – equivalent to a decline of 32.9 percent.

With First Gas-San Lorenzo power plant now on-stream, NPC’s sales have further decreased, thus, resulting in further increased PPCA of NPC.

The considerable decline in NPC’s energy sales has put pressure on government-owned corporation to increase its effective selling rate, particularly on its PPCA and foreign exchange. In effect, this would mean a lower volume of energy sales of NPC, the higher the PPA – simply because it has a billion peso guaranteed obligations from other IPP’s.

2. By allowing Meralco to dispatch its IPPs at their respective contracted Minimum Electrical Quantity (MEQ), equivalent to “take-or-pay,” the agreement tolerates the high cost of electricity rates of Meralco’s IPPs.

Sec. 2.1. of the agreement states: “NPC shall allow MERALCO to dispatch its Independent Power Producers, namely, Quezon Power, Sta. Rita and San Lorenzo, at their respective contracted MEQ levels in order to minimize its (Meralco) Power Purchase Adjustments (or its equivalent) to its customers.”

This recognizes, in effect, the fact that Meralco’s IPPs have bigger PPAs.

The agreement does not push Meralco to reduce the electricity rates it had contracted from its expensive IPP contracts. Instead of compelling Meralco to reduce its electricity rates by either scaling down its contracted energy or by reducing the electricity rates of its IPPs, the agreement has legitimized these burdensome power agreements. Majority of these power agreements are with Meralco’s sister companies.

3. Consumers (currently) continue to face a series of NPC petitions to increase electricity rates filed with the ERC, as Meralco’s cancellation of its CSE with NPC has contributed to additional losses to NPC.

The P1.51/kWh rate for the undrawn electricity is P0.95/kWh lower than the P2.46/kWh rates that ERC allowed NPC to charge Meralco in 2001 until September 2004.  At this rate alone, this would already result in an estimated loss of P17.3 billion for the unconsumed electricity amounting to 18,222 GWh. The losses to NPC are even higher as its basic generation charge increased to almost P4/kWh in the last quarter of 2004.

4. Even taxpayers and electricity consumers stand to suffer from this agreement.

Since NPC has incurred additional losses, its capacity to pay its financial obligations to its creditors is further diminished.  To address this, it will have to acquire additional loans guaranteed by the government. This move will result in an additional burden for the consumers who will pay the stranded debts and contract costs of NPC, a proposal of which has been filed with the ERC.

Finally, we should also take notice of how the original P42-billion obligation of Meralco to NPC mysteriously dwindled to only P14.3 billion. Is this a product of “dubious mathematics” or a loophole engineered by Meralco's “battery of lawyers”? Or both?

No wonder that as of December 2010, based on the submitted documents to the Power Sector Assets and Liabilities Management Corporation (PSALM), NPC continually incurred an estimated $16.5 billion outstanding debts (P709 billion, $1 = P43) because of so many repeated anomalies as well as other kinds of mismanagement that led to a dysfunctional government power utilities in the past.

In order for us to move forward, now is the time to revoke this agreement and to compel Meralco to pay the billions it owed NPC, and consequently, electricity consumers. (30)

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