What is the PPA?

The PPA, or the Purchased Power Adjustment is one of the automatic cost recovery mechanisms approved by the Energy Regulatory Board (ERB), now the Energy Regulatory Commission (ERC), for utilities such as Meralco, Electric Cooperatives, and other power distributors, to recover costs of power purchased from generators such as the National Power Corporation and Independent Power Producers or IPPs, not recovered by the basic rate.

Are there other items termed "PPA" in the power industry?

Yes. These are the Power Purchased Agreements, which are also referred to as "PPAs". These are the agreements between power generators such as NPC and the IPPs, and distribution utilities such as Meralco. These bilateral agreements have a contract life of about five to 25 years, and were the result of the government opening up the power industry to private investors as a solution to the power crisis of the late 80s to the early 90s. These investors fast-tracked construction of power plants under the Build-Operate-Transfer scheme. The generation of these plants are then sold to NPC through a contract, called the PPA. These IPPs, however, also sell their output to power distributors such as Meralco and the Electric Cooperatives, also through the PPAs.

The price of electricity to be sold by the generator to the distributor, or by the IPP to the NPC, is stipulated through a formula in the PPA. Factors that affect electricity rates or tariffs, such as fuel costs, currency exchange rate movement, among others, are considered through the appropriate escalation indices and formulae, which determine the final selling rate of the generator or power producer. These are also included as part of the PPA contract.

Does NPC also charge PPA to its customers?

Yes. However, NPC's cost adjustments of this nature are referred as the Purchased Power Cost Adjustment, or PPCA, which is part of its overall cost recovery mechanism referred to as the Fuel and Purchased Power Cost Adjustment, or FPCA. This covers NPC adjustments in the price of fuels referred to as Fuel Cost Adjustment or FCA, and cost of purchased power, and are billed to its customers. And like the distributors' PPA, this is also over and above NPC's basic rate. NPC also recovers adjustments due to movements in currency exchange rates, This is referred to as FOREX or Foreign Exchange Cost Adjustment, and together with the FPCA and basic rate, comprises the effective selling rate that NPC charges its customers.

On the other hand, the distributors' PPA aims to recover additional costs incurred in the purchase of power from NPC and/or IPPs. These include all of the adjustments that NPC charges its customers, plus the cost of power purchased from IPPs that are not recovered by the distributors' basic rates.

Why are the consumers being charged the Purchased Power Adjustment (PPA)?

If we can recall during the power crisis, it was the entry of the IPPs that helped augment NPC's generating capacity, and eventually solve the crisis. NPC contracted these IPPs to augment system capacities, and utilize these capacities, together with NPC, to meet the increasing demand. This combination of NPC generation plus the IPPs' helped lessen, and eventually eradicate unnecessary brownouts and blackouts, solving the power crisis. But as mentioned before, a lot of factors affect power generation. The contracted price between the IPPs and NPC, as well as Meralco's, is not enough to cover the costs of generation and purchased power. These utilities applied for an adjustment in their respective basic rates from the ERB, however, this was not granted. NPC's automatic cost adjustment charges today are still pegged on 1993 level, while Meralco's at 1994. This means that the basic rates being charged by NPC and Meralco to their respective customers do not reflect the true costs of electricity, and is not market-based. To correct this discrepancy, and allow the utilities to recover their costs of generation and purchased power, adjustments through the PPA for Meralco and FPCA for NPC had to be applied.

Do all utilities charge the PPA?

No. However, all electric distributors that purchase their power from NPC or IPPs are allowed by the ERB to charge the PPA. As a condition these charges must be revenue-neutral. The utilities should not earn any profit from them.

Are the utilities charging the same level of PPA?

No. The PPA of the distribution utilities vary depending on when their basic rates were last adjusted, or what NPC's selling rate was when its basic rate was last reviewed. It depends on the formula being used by the distribution utility charging the PPA. Although there are similarities in the formula, they have different basic rates. These depends on when these utilities last filed for a petition to review and adjust their basic rates with the ERB. Utilities whose basic rates have not been adjusted for a long time charges bigger PPAs. Those whose basic rates have been adjusted to year 2000 levels have smaller PPAs.

Why is the PPA larger than the basic rate?

These occurs when the basic rates of the distribution utilities charging the PPA has not been adjusted for a long time.

Can the PPA be abolished?

No. The PPA is being used by the distribution utilities to recover costs of purchased power. This means that the PPA is used to pay the generators for the additional expenses incurred in producing electricity not covered by the basic rate or charge. Should the PPA be abolished, the distribution utilities swill not be able to meet payments for purchased power from the generators. This may cause IPPs to stop operation, which could result to another power crisis.

Is the government doing something to mitigate the effects of the PPA?

Yes. At present, as mandated by Republic Act 9136 or the Electric power Industry Reform Act of 2001 (EIRA), an IPP Contracts Review Committee has been formed to specifically address the issue of these IPPs. The contracts between generators, distributors and the IPPs are being reviews by this Committee. Any contract found to be disadvantageous to the government shall be recommended for renegotiation for more acceptable terms. This could include refinancing of the contract for long-term payments, which may result in a smaller PPA.

Furthermore, the long-term reforms being envisioned by EIRA for the power industry is expected to result not only to a lower PPA, but more significantly, to lower power rates and improved and better service. With the planned privatization of NPC, competition is expected to come in which could lower electricity rates and tariff. And since power rates will now be dictated by the market, it is also expected that these rates will now be more reflective of the true cost of generation.

Does the EPIRA have any effect on the increasing PPA levels?

Just as in other countries which have pursued the privatization option and instituted reforms in their power industries similar to what is being implemented in the Philippines, the benefits expected to be derived from these reforms are not yet immediately felt or experienced. This is because it will take some time for these effects to take place. However, the EPIRA has mandated the National Power Corporation to effect a P0.30 per kWh decrease in its rates to residential consumers.

In the long-run, if all of the provisions of the EPIRA are implemented, it will result in the eventual lowering of electricity rates, as well as the PPA, if not totally remove the PPA from the bills.