Meralco customers are in for a dark future.

The country’s biggest power utility has said that its customers should not expect electricity rate reduction in the short term.

Meralco President and Chief Executive Officer Manuel V. Pangilinan, when asked if the power utility can find a way to bring down overall rates for its customers, said such call may be achieved over time “with great difficulty.”

“This is the subject of our internal discussion, it won’t be easy. I think people would just have to be patient on how we would be able to do it. Remember that we’re just one of the three major players in the industry at the moment,” Pangilinan stressed, noting that the supply chain integrates the generation and transmission segments of the power industry.

Consumers though may expect very temporary relief with the fluctuation in generation charge component in the rates, which will likely go down this August billing because of lower prices at the Wholesale Electricity Spot Market (WESM) following the return of the cheaper hydro plants into the system. Additionally, the time-of-use rates of National Power Corporation (NPC) are lower during wet season, hence, pulling generation costs downward.

Citing the overall cost of electricity, it was emphasized that when solutions to supply will not come quick, consumers may see their bills climbing by P3 to P4 per kilowatt-hour in the next 3-5 years. That’s judging from the magnitude of cost recoveries lodged by the Power Sector Assets and Liabilities

Management Corporation (PSALM) for stranded debts and contract cost recoveries to be reflected in the universal charge; the pending final approval on NPC’s basic rate hike, the prospective higher adjustments in tariffs of distribution utilities, as well as the impending implementation of the feed-in-tariff allowance (FIT All) for renewable energy sources.

Being in the front-line of customer service, Meralco will have to carry all of these adjustments in its future bills even if the payments go to different players, such as PSALM, NPC, contracted independent power producers (IPPs) and generation companies, WESM, and transmission operator National Grid Corporation of the Philippines.

The statement of Energy Secretary Jose Rene D. Almendras on “reflecting true cost of electricity” actually heralds a scenario wherein Filipino consumers’ dangerous addiction to subsidized power rates is certainly nearing its end.

He noted such contention had been based on concerns raised to him by industry players that some rate adjustment applications “have not been acted upon,” and that the below-cost dilemmas on power rates have been holding back investments for additional capacity.

There is another deeper logic to Almendras’ statement, given that the subsidizing strategy of the past administration actually buried the energy sector in deeper quagmire of debts and also pulled this country closer to another round of power supply shortages. With tight supply, spikes in prices at the WESM is also seen a recurring scenario especially during the peak months of summer.

When the Arroyo administration decided to cap power rates at P0.85 per kilowatt-hour (kWh) in 2001 for political expediency, the Filipino people were eventually made to pay for it via the punishing expanded value-added tax (EVAT); and additional cost component to that will soon be reflected in the rates via the universal charge or in the final approval of the rate hike application of state-run NPC.

PSALM’s joint filing with NPC for the latter’s basic tariff increase has been for a total of P0.8332 per kWh for Luzon grid and may reach a price level of P4.7298 per kWh. But the provisional approval given by the ERC in February 2009 only allowed it to jack up rates by P0.4682 per kWh to P3648 per kWh, prompting industry players to expect further adjustments in the final approval.

The Visayas rates were proposed for an adjustment of P4.2694 per kWh, while Mindanao tariffs have been propounded to go up to P3.1717 per kWh. The provisionally approved rates were still lower at P4.0339 per kWh for Visayas, and P2.8177 for Mindanao.

PSALM and NPC also have several pending applications for generation charge and foreign exchange rate adjustments, which by the time of approval, may further drive Luzon generation charges higher by additional P3.3811 per kWh; Visayas grid by P4.7135 per kWh; and Mindanao by P0.1555 per kWh.

If the rates are retained at artificially low levels, investors are not likely to build new power plants because they do not want turning out as culprits when true costs of electricity are finally reflected in the bills.

For its part, Meralco noted it can inject more predictability in the charges relating to its distribution charge basing it mainly on the operational and efficiency improvements it has been targeting under its performance-based regulation (PBR) tariffs. But the more crucial rate components, it said, are actually beyond its control – primarily the generation charge which accounts for roughly 65-percent of the total costs billed.

“I think we make reference to the overall cost charged to the consumers, and I don’t think there are quick fixes in our ability to lower power rates in the short term,” Pangilinan stressed.

Meralco itself has a pending application with the ERC for the updating of its PBR tariff to P1.6464 per kWh for year 2011, higher by P0.1547 per kWh from this year’s approved rate of P1.4917 per kWh. For the power distribution firm to have its sway on pricing concerns though, the remedy it has been looking at would be to revert to its investment path to power generation.

Observers noted that the more disturbing adjustments in power rates will be the cost recoveries and increases proposed by PSALM, of which initial blow may come at a whopping P1.05 per kWh based on its June 2010 filing with the ERC for stranded debts and contract costs recovery. For the levelized UC that it has been batting for a 17-year recovery, the proposed adjustment will be P0.3049 per kWh, reflected as separate line item in the bills.

The only cost component in the bills expected to go down by 2011 would be the transmission charges, if the rate cut set by the ERC in NGCP’s draft determination will be carried through into its final approval.

The tariff set for NGCP starting next year will be reduced to an average P299.67 per kilowatt per month as compared to prevailing power delivery service rates of P355.94 per kW/month for Luzon grid; P334.51 per kW/month for Visayas grid, and P330.97 per kW/month for Mindanao grid.

For industry watchers, they noted that the lengthy duration of regulatory approvals caused NPC to incur huge losses, especially when it was ordered to refund P0.74 per kWh to customers in July 2008 in the midst of escalating fuel costs in the world market and the devaluation of the Philippine peso against the US dollar. NPC reported that this caused it P10-billion monthly losses, severely straining its cash flow from July 2008 to February 2009 that it needed to secure US$1.0 billion new loans to cover operating costs.

The mismatch in electricity rates also generated a lot of complaints from investors, including the buyers of the privatized NPC assets because the transition supply contracts (TSCs) assigned to them had been pegged to NPC’s rates. This also meant not being able to plan future investments efficiently because the power rates are not reflective of true market costs. And when investments will not flow as they are planned or needed, this will certainly trigger new round of power crisis in the country.

To rectify that electric pricing distortion, the ERC issued on August 3, 2009 its ruling instituting automatic cost recoveries for NPC on charges relating to purchased power, fuel and foreign exchange rate movements. The automatically-adjusted NPC rates started manifesting in March billing cycle this year triggering an immediate upward adjustment in its generation charge.