The Energy Regulatory Commission (ERC) has clearly stipulated that clearance shall be secured first before Manila Electric Company (Meralco) can pass on costs relating to procured supply from plants running on liquefied natural gas (LNG) – and that is primarily applied to its contracted capacities from the gas-fed generating assets of First Gen Corporation.

That being a test case in the industry, the regulatory body noted that similarly-situated distribution utilities (DUs) may also take their cue from that ERC directive to Meralco.

According to ERC Chairperson Monalisa C. Dimalanta, “pending Meralco’s validation of the basis of such charges, passing on of such costs to the consumers may be premature.”

She specified that if charges were already passed on by a DU prior to the issuance of a regulatory clearance, then the power utility will be required to refund the collected charges.

“We are constrained from giving any clearance for the recovery of such costs if Meralco itself has not completed its validation or provided the results of such validation to the Commission,” the ERC chair stressed.

The regulatory body took reference on the P0.5738 per kilowatt hour (kWh) rate hike that Meralco had reflected in its February billing – attributing the upward adjustment mainly to its sourcing of more expensive supply from contracted power producers due to shift of their fuel use to LNG.

As fleshed out by the ERC, the increased charges of P0.4552 per kWh as invoiced by Meralco’s independent power producer (IPPs) contracts and power supply agreements (PSAs) had driven up its overall generation charge to P7.1020 per kWh this February from P6.6468 per kWh last month.

Citing figures provided by Meralco, the ERC narrated that there had been P1.4764 per kWh spike in its IPP charges “due to higher fuel costs of Sta. Rita and San Lorenzo power plants of FGPC,” adding that “this resulted from the plants’ use of imported LNG, which according to Meralco, is more expensive than Malampaya’s indigenous gas.”

To recall, Meralco had sent series of correspondence to the ERC primarily inquiring if it can pass on generation charge adjustments relating to the use of LNG of its contracted First Gen plants.

Alongside that query, the power utility giant likewise sought guidance on cost adjustments pass-on that may result from the new gas sale and purchase agreement (GSPA) that First Gen had underwritten with the Malampaya consortium led by field operator Prime Energy of the Razon group.

In particular, Meralco Senior Vice President and Head of Regulatory Management Jose Ronald V. Valles conveyed in his letter to the ERC that “in keeping with Meralco’s least cost mandate, and given the tenor of ERC responses on the matter, Meralco is constrained to not implement the proposed LNG rate for the First Gen gas plants during commercial operations of LNG use – unless ERC provides clearance to do so.”

ERC, in its letter-reply to the power utility on February 12 this year, emphasized the need “to complete the validation to justify the rate adjustment that Meralco will be imposing, following the signing of a new GSPA between the Malampaya consortium and the First Gen Corporation—which operates First Gas Power Corporation (FGPC).”

The industry regulator further said “while Meralco admits that a validation of the impact of the use of LNG and the new gas supply contracts is necessary in light of the terms of its power purchase agreements (PPAs), up to this date, the ERC has not been provided with the results of Meralco’s validation.”

Dimalanta thus called on all distribution utilities “to remain diligent in validating costs being imposed by generation companies (GenCos) before passing them on to consumers.”

The generation charge, which is the amount being paid to the GenCos or power suppliers, accounts for the bulk (at 50-55%) of the cost components being passed on in the monthly electricity bills of consumers.

“All DUs are mandated to exercise prudence in passing on fuel costs to shield the Filipino consumers from bearing undue financial burdens and ensure that charges are reasonable, uninflated, fairly computed, and consistent with their obligation to supply electricity in the least cost manner,” the ERC reiterated.