From energy regulation to deregulation, Part 1

The Electric Power Industry Reform Act (EPIRA, RA 9136) was signed on June 8, 2001, and will turn 24 in five months. I will compare electricity production from 2001 onward in the three largest ASEAN countries by population—as of 2024, Indonesia has 283 million, the Philippines has 116 million and Vietnam has 101 million.

The power generation in terawatt-hours (TWH) for Indonesia, the Philippines and Vietnam was as follows: 101.7, 47.0, and 30.6 TWH in 2001; and 133.1, 56.8 and 57.9 in 2006. Vietnam overtook the Philippines in 2006. In 2011, the figures were 183.4, 69.2 and 101.5 and in 2023, 350.6, 119 and 276.4 TWH.

The percentage increase from 2001 to 2023 was: Vietnam 803 percent, Indonesia 245 percent and the Philippines 153 percent. Vietnam and Indonesia must have been doing something better to provide more electricity for their large populations and big manufacturing plants compared to the Philippines. Their energy regulation may be less restrictive than ours.

EPIRA’s Chapter IV is titled “Regulation of the Electric Power Industry,” and the Energy Regulatory Commission (ERC) was created (Section 38). The main purpose of the ERC is the “Promotion of consumer interests” (Section 41), and its main function is to “promote competition, encourage market development, ensure customer choice, and penalize the abuse of market power in the restructured electricity industry” (Section 43).

As a free-market advocate for 25 years now (I co-founded Minimal Government in 2004, which was renamed Minimal Government Thinkers in 2008), I advocate fewer bureaucracies, lower taxation and regulations, more market and capitalist competition and greater individual choice and freedom. I am particularly unfriendly toward government price control, whether direct or indirect, and I strongly support increasing supply, attracting more players and fostering competition.

I checked the ERC resolutions from their website—dozens upon dozens of regulations are issued every year, and most are highly legalistic. Engineers, entrepreneurs and economists like me struggle to keep track of them, let alone understand the growing number of legal documents each year. This complexity alone is bad for business in the power sector.

Nevertheless, I found a few resolutions that I think are anti-competition, anti-market development and therefore anti-EPIRA’s Section 41.

One, price control via the secondary price cap in the Wholesale Electricity Spot Market. ERC Resolution 08, Series of 2014 (May 5, 2014), set a price cap of P6,245/MWh or P6.245/kWh for a 72-hour period, despite a rolling price of P8,186/MWh. Then, Resolution 20 (Dec. 15, 2014) made this price cap permanent, applying it once a P9,000/MWh rolling average price was breached over a seven-day period.

Price control is wrong. At times of high demand and low supply, due to scheduled, unscheduled or extended maintenance of big power plants, oil-powered peaking plants step in to provide additional supply—but at higher prices, reflecting the higher cost of oil as a fuel, as well as the capital expenditures and maintenance of these plants. They must be properly compensated to help prevent blackouts and the need for candles.

Imposing price control means that new peaking plants will not be built because the ERC, the government, and the public will demonize them if they charge higher rates. Yet the most expensive electricity is no electricity at all—a blackout. The regulators are indirectly saying that “cheap but not available” is preferable to “expensive but available” electricity, even for a few hours or days each year. This largely explains why yellow-red alerts continued even last year.

Subsequent ERC resolutions in May 2017 and July 2021 reduced the rolling period but maintained the price control policy to this day.

Two, high reliability standards and fines. ERC Resolution 10, Series of 2020 (Dec. 19, 2020), introduced the Reliability Standards/Interim Outage Rules. Under this, ERC reduced the allowed outage time for maintenance or planned shutdowns and began penalizing generation companies (gencos) that exceeded these limits.

This is wrong. When a power plant extends its maintenance shutdown, it already incurs losses due to its inability to sell power. If it has a supply contract, it must buy alternative power at a higher price. Excessive regulatory suspicion and restrictions discourage power expansion.

Regulators are not onsite plant engineers. Regulators do not risk losing their jobs if a company loses money due to extended maintenance and fines on top of that. Thus, regulators themselves may be violating EPIRA’s spirit and purpose—encouraging market development and competition.

Three, price regulation after competitive price selection. ERC Resolution 16, Series of 2023 (Oct. 6, 2023), introduced the Competitive Selection Process (CSP) Guidelines. It requires distribution utilities to secure their Power Supply Agreements (PSA) through a competitive selection process (CSP) involving competing gencos, with CSP parameters set by the ERC itself. Thus, any winning bid should already be the least-cost option for consumers.

Then, ERC introduced a two-level review process: Step 1: CSP compliance; Step 2: PSA reasonableness. Why is Step 2 needed? Does this mean that if ERC deems the CSP result “unreasonable,” it can override the most competitive winning bid?

Regulators are not entrepreneurs. They do not lose money if a company teeters on bankruptcy due to selling at a loss over a 10- to 15-year PSA. Moreover, ERC lacks clear guidelines on how it determines PSA rates to be “unreasonable.”

I will continue this discussion in another column. For now, I think the ERC should consider the regulatory strategies of Milei (Argentina President) and Trump (US President). Milei mandated that for every new government employee hired, three must be retired or fired. Trump ordered that for every new regulation, regulators must abolish two or three old ones. There’s energy deregulation somewhere, we should try that.