Supply Chain of the Power Sector. Supply Chain of the Philippine Power Sector. Overview of the unbundled electric bill

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1 Chain of the Sector Overview of the Philippine Sector & related issues February 12, Chain of the Philippine Sector Generation Transmission NPC, Privatized GenCo s, & IPPs Distribution & Overview of the unbundled electric bill Wholesale Electricity Spot Market (WESM) Meralco Independent Producers (IPPs) Nat l Grid Corp of the Phil (NGCP) 3 4 chain is mirrored by the unbundled electric bill Generation Transmission Section 36 of RA 9136 The distribution wheeling charge shall be unbundled from the retail rate Any electric power industry participant shall functionally and structurally unbundle its rates Distribution & End-users (from an actual bill of a very large industrial customer) 5 6

2 Pass-through charges and DU/Meralco charges PASS-THROUGH Generation Charge Transmission Charge System Loss Charge Universal Charges Missionary Electrification Environmental Taxes Local Franchise Tax Value-Added Tax (VAT) Cross-subsidies DISTRIBUTION UTILITY (DU) Distribution Charge Metering Charge Charge 7 8 Generation Charge moves from month to month February 2013 Generation Charge: P5.2414/kWh PhP/kWh January 10 February 10 March 10 April 10 May 10 June 10 July 10 August 10 September 10 October 10 November 10 December 10 January 11 February 11 March 11 April 11 May 11 June 11 July 11 August 11 Billing Month September 11 October 11 November 11 December 11 January 12 February 12 March 12 April 12 May 12 June 12 July 12 August 12 September 12 October 12 November 12 December 12 January February 13 Factors affecting the Generation Charge Reduction mainly due to the cheaper PSA rates 11

3 Agreements (PSAs) GENERATING COMPANY Therma Luzon Inc. (TLI) CONTRACTED CAPACITY FUEL TERM 350 MW Coal 7 yrs., extendable upon San Miguel Energy Corporation (SMEC) MW Coal Masinloc Partners Co. Ltd. (MPPCL) SEM-Calaca Corp. (SCPC) South Premiere Corp. (SPPC) MW Coal MW Coal 1,180 MW Nat. Gas agreement of parties 7 yrs., extendable for another 3 yrs. Independent Producers (IPPs) GENERATING COMPANY Quezon Phils. Ltd. (QPPL) First Gas Corp. Sta. Rita FGP Corp. San Lorenzo CONTRACTED CAPACITY FUEL 460 MW Coal 1,000 MW Nat. Gas 500 MW Nat. Gas Transmission Sector Regulated common electricity carrier business Subject to regulation by ERC Wheeling charges are set using a ratesetting methodology called Performance- Based Regulation (PBR) 16 Components of the Transmission Charge Transmission Charge Wheeling Charges Delivery Delivery Service Service System System Operations Operations Charge Charge & Metering Metering Charges Charges Ancillary Service Charges Dispatchable Dispatchable Contingency Contingency Frequency Frequency Regulation Regulation Reactive Reactive Support Support Black Black Start Start Goes to NGCP Regulated via Performance-Based Regulation (PBR) Collected by NGCP & paid to generators Regulated via the Ancillary Services Procurement Plan (ASPP) & AS-Cost Recovery Mechanism (AS-CRM) 17 18

4 Recoverable level of distribution system losses Republic Act 7832 (Anti-Electricity Pilferage Act) Imposes stiffer penalties for electricity pilferage, but sets ceiling on system losses that can be recovered through rates System loss caps for private utilities percent up to In December 11, 2009, ERC announced a further reduction of the System Loss Cap Up to 2009 Starting 2010 Cap Private DU s 9.5% 8.5% Coops 14% 13% 19 Record system loss at 7.04%, an improvement of 0.31% vs s 7.35% 9.5% 8.5% SAVINGS TO CUSTOMER 2008: P0.36 Bn 2009: : : : 3.43 Total : P8.68 Bn (or equivalent to 5.96 /kwh) System Loss Cap 1.46% 7.04 Ang liwanag ng bukas Universal Charges, Taxes, & Lifeline Susibidies Local Franchise Tax Distribution utilities are required to pay local franchise taxes. Goes to local government units Value-Added Tax (VAT) With Republic Act 9337, VAT was imposed on the power industry, in lieu of the national franchise tax. Remitted to the national government Universal Charges A non-bypassable charge remitted to the Sector Assets and Liabilities Management Corporation (PSALM) Part of this is now in the bills as missionary electrification and environmental charges Lifeline Subsidy Section 73 of EPIRA: A socialized pricing mechanism called a lifeline rate for the marginalized end-users shall be set by the ERC, which shall be exempted from the cross subsidy phase-out under this Act for a period of ten (10) years, unless extended by law. The level of consumption and the rate shall be determined by the ERC after due notice and hearing Discounts to marginalized end-users will be subsidized by all other customers of the DU Cross-subsidization within the residential customer class (Figures are for February 2013) KWh Distribution Lifeline Rate Lifeline Consumption Charge Subsidy Discount (P/kWh) (P/kWh) (% of Charge) % % % % up Customers with low consumption simultaneously enjoy a lower distribution charge and a lifeline discount On the other hand, larger consumers are both imposed a higher distribution charge and provide a lifeline subsidy 23 24

5 Pass-through charges and Meralco charges PASS-THROUGH Generation Charge Transmission Charge System Loss Charge Universal Charges Missionary Electrification Environmental Taxes Local Franchise Tax Value-Added Tax (VAT) Cross-subsidies DISTRIBUTION UTILITY Distribution Charge Metering Charge Charge Distribution Sector Regulated common carrier business requiring a franchise Subject to regulation by ERC As of 2009, the distribution sector is composed by 120 electric cooperatives 17 private utilities 8 local government-owned utilities Source: 2009 Distribution Development Plan Widely varying in size & technical/ financial standing Different technical standards (e.g., distribution voltage levels, metering) from DU to DU 25 Under PBR, there is greater consumer involvement and transparency Rate-setting process under PBR: before each regulatory period (four regulatory years), the ERC evaluates and determines a utility s: Forecasted energy sales and demand Proposed performance standards Annual Revenue Requirement and Maximum Average Prices Market forecasts Energy & demand Exchange rates CPI (US & Phil) Performance standards Interruptions Voltage regulation Time to connect Call-center performance System loss Projections ( ) Capital expenditures Regulatory asset base Operating Expenses Taxes & fees Allowed return (WACC) PBR Annual Revenue Requirement & Maximum Average Prices ( ) Performance-Incentive Scheme (PIS) under PBR Under PBR, a Performance Incentive Scheme (PIS) is established to measure the performance of the DU according to key areas of service quality Customers are financially compensated when the DU fails to meet performance standards Two components of the PIS are in place Price-Linked Incentive Scheme. Rates Rates are are adjusted depending on on utility s actual actual performance PBR implementation ERC Final Determination: Maximum Average Prices (MAP) Guaranteed Service Levels (GSL). Customers are are directly compensated if if the the utility utility does does not not meet meet performance thresholds 29 30

6 Source: Joint Foreign Chambers forum (Oct. 28, 2010) International comparison of power prices Average Retail Electricity Tariffs (All 44 Markets Surveyed) Regional Comparison of Subsidies A comparison of true cost of supply versus average tariffs showsthat many countries in the region heavily subsidize their electricity rates. These subsidies have been mainly caused by the inability to pass through fuel price increases during that period Subsidy Mechanism Subsidized Fuel? Deferred Capex? Additional Debt?? Cash Grant? 36% 37% 51% 54% 50% Notes 1.Weighted average tariff (all customer categories) excluding VAT 2.Tariffs for US (average) and Euro countries are for Nov 11. All other countries/states (incl Hawaii & California) are for Jan Assumes tariffs in 50 US states have no Other taxes 4.Estimated subsidies are based on long-run marginal cost of supply (including fuel subsidies) calculated by IEC Implied Subsidy June, 2012 Page 33 June, 2012 Page 34 USAID preliminary study (Oct 2011) Estimated Government Subsidy in Certain Countries 2010 Subsidy (in billions of dollars) Country Oil Natural Gas Coal Electricity Total Subsidy per person ($/person) Share of GDP (%) Indonesia Thailand Malaysia Philippines Source: International Energy Agency / Institute for Energy Research 36

7 Conclusions Conclusions (cont d) Meralco s average retail electricity tariff ranks 9 th among the 44 markets surveyed & 2 nd highest in the Asia region (after Japan which is 17% higher) Although Meralco s tariffs are in some cases - more than double those of its regional counterparts, the main reason (>75%) for the difference is government subsidies that are provided to customers and/or utilities in these markets so that tariffs remain well below the cost of supply. IEC believes that such subsidies are poor economic policy and unsustainable. Customers accustomed to cheap power in these subsidized markets are likely to suffer extreme price shocks when subsidies are removed which IECbelieves is likely in the short- to medium-term In contrast, Meralco s tariffs are fully cost-reflectivewhich is sound economic policy in a high growth market such as Luzon which has limited available capital The remaining 25% of the tariff differential is attributable to the higher underlying cost of supply in the Philippines. (When subsidies are added back to the tariffs in lower-priced countries, the total cost of supply in these markets is comparable with or even higher than in Luzon) The main causes of the higher underlying cost of supply in Luzoninclude imported fuel costs, high cost-of-capital, smaller grid size/volume, transmission cross-subsidies and challenging geography June, 2012 Page 37 Efforts to reduce the total cost of supply should principally focus on lowering barriers for new generation. The greatest barrier to the entry of new IPPs in Luzon is the lack of access to long-term, large-scale PPAs with creditworthy offtakers. Measures to facilitate the entry of newgeneration include certainty on the schedule of Retail Open Access and the aggregation of smaller distribution companies IEC notes that very little of the tariff is within the control of Meralco and monthly rates variations are mainly a function of global fuel and currency market fluctuations in the generation market Based on a comparison of the individual components of Meralco s tariff with the intrinsic cost of supply in Luzon and rates/costs in other markets, IEC judges that Meralco s rates are currently fair and reasonable June, 2012 Page 38 POWER SUPPLY RELIABILITY & SUPPLY COST (58% of Ave Customer Bill) What s Meralco doing? Securing new competitively priced Agreements for Building up to 2,500 MW +/- on-stream between 2015/6 to 2020 Highly reliable and fuel efficient Coal, CCGT (Nat Gas & LNG), hydro and potentially wind Joint ventures with strategic partners Seeking new more cost competitive fuel sources (coal, nat gas and LNG), local or offshore Work with industry for synchronized maintenance turnarounds of Gencos. 39 TAXES & UNIVERSAL CHARGES (10% of Ave Customer Bill) TRANSMISSION & DISTRIBUTION (T&D) RELIABILITY AND COST (26 % of Ave Customer Bill) Advocacy for reduced government take in the form of national / local taxes on electricity, royalty on nat gas, et. al. Flat Distribution charge/kwh over the next 4 years ( ) Advocacy for judicious action on any new Universal Charges About 60-65% Transmission Charge/kWh will be relatively flat until 2015, the balance of 35-40% constituting ancillary service charges which may fluctuate. Massive Capex/investments in further strengthening T & D system P45Bn for Meralco alone over 4 years Supporting drive for more effective T & D coordination / synchronization to minimize supply interruptions CONTAIN CONSUMER SPEND ON POWER Actively drive energy efficiency and consumption for Industrial, Commercial and Residential customers Energy saving campaigns / conservation-tips for households Energy advise and services for commercial and industrial customers Piloting Pre-paid Metering for residential customers as part of broader Smart Grid Actively supporting e-vehicle Programs