Solving Phl energy woes? More power plants – DOE

(First of two parts)

MANILA, Philippines - How do you solve the country’s power problem?

Energy Secretary Carlos Jericho Petilla, without hesitation, said the solution rests on the private sector building more power plants.

“It’s really the private sector that must build more plants,” Petilla told The STAR. And they have to build plants fast to keep up with rising demand.

“It is the private sector that can make EPIRA work by building more plants,” said Petilla, referring to the landmark power reform law, the Electric Power Industry Reform Act of 2001.

“I keep on telling them, if you want to make EPIRA work, build more power plants,” Petilla said.

To illustrate, data from power distributor Manila Electric Co. (Meralco) showed that in the period 2001 to 2013, the Luzon peak demand had grown by 2,659 megawatts or 47 percent, from 5,646 MW to 8,300 MW.

Yet, no new major base load plant has been constructed and added to the Luzon grid other than the coal-fired plant of GN Power in Mariveles, Bataan with a reported installed capacity of 652 MW and current dependable capacity of 495 MW.

Accordingly, demand has outgrown new base load capacity addition by around 2,000 MW during this period.

It was on June 8, 2001 that then President Gloria Macapagal-Arroyo signed into law Republic Act 9136, or the EPIRA, after more than seven years of public hearings and floor deliberations on various versions of the measure in Congress.

EPIRA promised many things but its biggest promise was to bring down electricity rates and to improve the delivery of power supply to end-users by encouraging greater competition and efficiency in the electricity industry.

“Consumers will be assured of adequate and reliable power supply at lower rates,” the Department of Energy (DOE) said in a briefer on the power reform law.

“There will be competition between and among generating companies where prices will be market-driven and competitive. There will be long-term contracts and a spot market where the trading of electricity between buyers and sellers will be undertaken,” the DOE paper said.

The signing of EPIRA came at a time when the Philippines depended largely on the National Power Corp. (Napocor), the state-owned power company, and its monopoly of the energy sector.

Thus, the restructuring of the energy sector called for the separation of the different components of the power sector such as generation, transmission, distribution and supply.

“The strategy is to put an end to monopolies that breed inefficiency, encourage the entry of many more industry players, and generate competition that will benefit consumers in terms of better rates and services,” the DOE said in the briefer.

It was the same scheme that worked in other countries, and was touted by the DOE to work just as well in the country.

“In other countries, a restructured and competitive power sector has provided consumers with lower power rates. We look around us and find that the same pattern can be seen in local industries that have been de-monopolized and deregulated like telecommunications and inter-island shipping,” it also said.

Under EPIRA, the government had envisioned that privatization would allow it to shift the burden of ensuring continuous financing for the construction, operation and maintenance of hugely capital-intensive, power-generating plants to the private sector.

Thirteen years later, however, electricity consumers are still reeling from high electricity cost. Things came to a head in December 2013 and January 2014.

Last December, the generation charge of Meralco rose to a record high of P9.10 per kilowatt-hour and to P10.23 per kwh in January 2014.

This was in contrast to the November 2013 rates of P5.67 per kwh and the monthly generation charge before that which hovered around the P5 per kwh level.

Acting on a petition from militant groups, the Supreme Court issued a temporary restraining order on the planned rate hike.

Market failure

After 13 years, EPIRA did not only fail to fulfill its promise, it also created an environment that led to market failure.

In a March 6 order issued after months of investigation, the Energy Regulatory Commission (ERC) said there was market failure at the Wholesale Electricity Spot Market (WESM) because some participants did not offer their full capacities, thereby affecting supply and pushing prices higher. WESM is the country’s trading floor for electricity.

“One reason that supply was low was because market participants did not offer their available capacity so there was market failure,“ said ERC executive director Saturnino Juan in a briefing on March 11 explaining ERC’s order.

A total of 2,035 MW in average capacity were not offered at the WESM during the one-month maintenance shutdown of the Malampaya natural gas plant, the ERC said.

Thus, the ERC declared the WESM prices during the period as void and ordered the Philippine Electricity Market Corp. (PEMC), operator of the WESM, to re-calculate the prices and issue revised bills to Meralco and other concerned distribution utilities.

The ERC said prices in WESM during the November and December 2013 supply months “could not qualify as reasonable, rational and competitive” and that in the “exercise of its police powers,” it was ordering the voiding of the Luzon WESM prices.

The ERC had ordered the PEMC to determine if generation companies violated market rules when they did not offer their full capacities in the market.

The WESM’s “must-offer rule” requires companies to declare and offer their maximum generating capacities to prevent supply shortage.

It was not the first time that inefficiencies in the market were spotted. In 2006, PEMC also found out that the Power Sector Assets and Liabilities Management Corp. (PSALM) committed anti-competitive behavior.

PSALM not blameless

The PEMC, through its Enforcement and Compliance Office (ECO) and Market Surveillance Committee (MSC), conducted an investigation into PSALM’s conduct at the WESM for the third billing month or in August 2006. PSALM is the government agency created by the EPIRA to privatize Napocor’s generating assets.

The MSC, in a memorandum report dated Nov. 20, found PSALM guilty of anti-competitive behavior and abuse of market power.

“PSALM, acting as one through its three trading teams, exercised market power. They were able to set the market price to a level that they wanted during peak hours. Since the production costs were well below the P10,000 per megawatt and above offered during the third billing month, they abused market power during the peak hours which market power would not have been there had the three trading teams acted competitively and independently with each other,” PEMC’s MSC said in its report.

At the time, PSALM’s three trading teams or the most frequent price setters in the market were KEPCO Ilijan, Pagbilao and Sual power plants. Three different teams but all under PSALM were trading all these plants.

However, the ERC eventually voided the findings of PEMC, saying there was no prima facie evidence to conclude that PSALM had indeed engaged in anti-competitive behavior.

But ERC warned Napocor and PSALM to refrain from engaging in conduct inimical to the objectives of free competition.

The STAR columnist Boo Chanco, who had worked for the then Ministry of Energy, said regulatory failure and not market failure was to blame for the problem.

“If you ERC guys were more alert in defense of the public interest, you would have seen market failure about to happen and would have taken steps to stop it from happening,” Chanco said.

EPIRA author Sen. Serge Osmeña said the law is a good one but lamented that the ERC has not been able to implement it well because it is full of political appointees.

The Philippine Chamber of Commerce and Industry, the country’s most influential business organization, submitted last month a list of proposed EPIRA amendments. It particularly urged Congress to strengthen the role of the ERC.

World Bank senior energy specialist Alan Townsend said ERC “in general is probably a bit too legalistic and process oriented and not driven enough (nor capable enough) by core economic aspects.”

(To be concluded)