High Meralco rates: Elite capture of the legislature

(Second of two parts)

The total failure—and why—of the so-called Wholesale Electricity Spot Market (WESM), which was created to bring down the cost of electricity for both ordinary consumers and industries, is a classic instance of the Philippine corporate elite’s capture of lawmaking in our country.

The Electricity Power Industry Reform Act of 2001 stirringly declares as one of its main goals, “to ensure transparent and reasonable prices of electricity in a regime of free and fair competition . . .”

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Its section 45 even specifies limits to the corporate elite’s participation in the industry in order “to promote true market competition and prevent harmful monopoly and market power abuse.”

Yet that section’s second paragraph also specifies:
“Distribution utilities may enter into bilateral power supply contracts subject to review by Energy Regulatory Commission.”

Innocuous as that provision seems, those sixteen words are enough to make all of the 20,000 words that made up the Epira not worth the paper it is written on in terms of reforming the power industry and bringing electricity prices down through a competitive market.

How so?

It subverts the goal idea of creating a competitive market for the trade in electricity. Such a market could have brought prices down. Instead of a participating in a spot market, generators and distributors—and many of them have cross-ownerships—simply went into bilateral contracts, since the cost of electricity purchased by a distributor, such as Meralco, would anyway be passed on to consumers.

The Wholesale Electricity Spot Market is therefore a misnomer, a huge farce: More than 90 percent of its transactions aren’t spot trading transactions at all. They are bilateral deals contracts, with the price and quantity not having anything to do with market conditions at any given time.

“But Epira has a must-offer rule, which requires generators to offer their output in the WESM,” representatives of the industry claim.

Right. But check out WESM’s own reports in the past six years.

Generators in effect have been mocking the market by routinely offering to sell for an astronomical P62 per kilowatt hour, which no distributor in his right mind would buy since costs of generation, even by the expensive diesel-turbine “peaking plants,” do not exceed P6/kwH.

(Senator Sergio Osmeña, chairman of the Senate Committee on Energy, seems ecstatic that the Energy Regulatory Commission recently issued a price cap of P32/kwH, claiming this will stabilize prices.

What? Generators will simply decide now to bid at that price. Osmeña seems oblivious to the fact that Meralco’s huge December rate hike—which makes ours the most expensive in Asia and among the top five most expensive in the world—was because of Meralco’s purchase from the WESM at P33/kwh.)

Since the Epira allows bilateral contracts indefinitely, generators and distributors instead made bilateral contracts, instead of buying spot, even as both transactions are reported as the market activities constituting the WESM.

As the US AID’s April 2013 report entitled “Challenges in Pricing Electricity Power Services in Selected ASEAN Countries” emphasizes: “Breaching the 90-percent mark [the percentage of WESM transactions made up of bilateral deals] is explained by the fact that five years after the establishment of WESM, the distributors were free of the legal requirement to source no more than 90 percent of their energy purchases through bilateral contracts.”

Our electricity spot market, which started in 2007, was supposedly modeled after that of Singapore’s National Electricity Market commenced in 2003. (Other countries in Southeast Asia, where electricity prices are lower than ours, have state-owned and -operated power sectors.)

However, a crucial difference in the “spot markets” of Singapore and the Philippines, according to the AID study, is that the former requires what is called “vesting contract” for generators.

Such contracts, according to Singapore’s Energy Market Authority (EMA, the equivalent of our Energy Regulatory Commission, or ERC) are intended “to curb (companies’) market power in order to promote efficiency and competition in the electricity market for the benefit of the consumers.”

The EMA explained: “Under the vesting contracts, generators are committed to sell a specified quantity of electricity [the vesting contract quantity] at a specified price [the vesting contract price]. This reduces the incentive of generators to exercise market power by withholding capacity.”

As a result, “The vesting quantity in Singapore started in 2004 at 65 percent of total electricity demand and stands at 55 percent in 2012,” according to the AID study.

That is in sharp contrast in our case in which 90 percent of power sold is through purely bilateral, commercial contracts with practically no government say. While the ERC is supposed to monitor such bilateral contracts, it has routinely approved these, and has never blocked any such deals.

This all means that while Singapore’s electricity market appears to be a free market, the reality is that there is strong government intervention, in sharp contrast to ours over which even the President claims to be helpless. I wonder if his Energy Secretary Carlos Petilla—a politician who, before obtaining his Cabinet post, governor of one of the poorest provinces for nine consecutive years—knows what the energy industry really is about.

Singapore’s EMA requires generators, through the vesting contracts, to supply the market not only with specific volumes but also at specified prices. The prices are computed through a complicated formula that represents mainly the “long-term marginal cost” of producing electricity plus a reasonable profit.

For December, the vesting contract reference price ranged from a low of Singapore $122 per megawatt hour to a high of S$250 per megawatt hour. That converts in pesos and per kilowatt-hour to P5.4/kwh to P11.2/kwH.

Be outraged: Meralco bought its power from WESM at much, much higher prices, in October at P13/kwh and in December P33/kw. The cost of all the power it buys and passes on to consumers is about P6/kwh. It doesn’t care of course how dearly it buys the power it distributes, as it simply passes on the cost to us.

This is the main reason why a Filipino living in a slum in Meralco’s franchise area pays just as much, or even more, for his electricity than a rich Singaporean in a posh condominium or a Thai in his resort in Phuket.

The AID report is invaluable in understanding and investigating the December Meralco price hike, which has been held in abeyance by the Supreme Court—until it rules on its constitutionality.

Meralco claims that the increase is necessary since the average price of the power it bought from all sources increased from P5.67/kwH in October to P9.11/kwH in November. This was in turn due to the steep rise from P14/kwh in October to P33/kwH in November of power it bought from the “WESM.”

Given the data provided by the AID report, here some questions the Supreme Court should ask the ERC and Meralco:

1. Were the purchases by Meralco of power through bilateral contracts, which is very likely given the data we have presented, and based even on WESM official data? If they were bilateral contracts, did the ERC approve these?

2. Who exactly were these generator companies, and were they owned or controlled by Meralco’s biggest stockholders? If yes, then wouldn’t these indicate collusion and price manipulation?

3. If bilateral contracts are allowed in the WESM, why didn’t Meralco enter into such contracts months before November, especially since most of the shutdowns, which reduced supply, had been scheduled.

Shouldn’t Meralco be held liable, legally and financially, for failing in its basic managerial requirement of preparing for supply shortfalls?

4. Why didn’t the ERC intervene to suspend the Luzon market as it did in the Visayas where Super Typhoon Yolanda damaged generators and transmission lines? After all, one reason for the reduction in supply was force majeure, the severance of the transmission line connecting Leyte to Luzon. A few peaking plants refused to supply the market at the crucial periods in November by offering an atrocious price of P62/kwh. Why didn’t the ERC penalize these companies?

The overarching reason, however, why the Meralco rate hike is unconstitutional is that the Epira is a flawed law whose provisions contradict the Constitution, with Epira’s provisions themselves subverting its declared goals of promoting competition in the industry and lowering electricity prices.