Market failure

Was there market failure when speculative pricing ran amuck late last year, causing energy prices to spike and threatening consumers with economic devastation?

The free play of market forces is supposed to protect consumers, ensuring reasonable pricing and rewarding the most efficient. Open markets are not supposed to strangle consumers by rewarding collusion. The spike in electricity prices November and December last year did not seem like the usual play of market forces.

Consumer groups immediately petitioned the Supreme Court to intervene. The Court responded promptly, issuing an injunction against the price spikes.

That injunction, however, would harm only the distribution utilities if they were prevented from collecting what the power generators were charging. The spike in the charges of the power generators needed to be addressed.

On March 3, 2014, the Energy Regulatory Commission (ERC) responded as it should have much earlier. An order was issued declaring market failure in electricity pricing. Invoking the police powers granted it by the Electricity Power Industry Reform Act (Epira), the ERC decreed that generation charges for the last two months of 2013 be recalculated based on the running average for the previous months.

This was a courageous order. It rolled back the charges made by the generating companies and refunded consumers who paid the abnormally high power rates. The ERC’s police powers were exercised to protect the consuming public from what appeared to be profiteering on the part of the power generators.

On March 27, 2014, the ERC issued a supplemental order to the electricity market. This second order gave market participants 45 days to comply with the first order. The 45-day allowance was given in consideration of the complex recalculations that needed to be done to comply with the regulated pricing.

The power generators, not surprisingly, filed motions for reconsideration with the ERC.  The motions raised multiple issues against the ERC’s decision to regulate electricity pricing. They questioned the legal basis for the exercise of police powers, claimed the rules of the wholesale electricity spot market (WESM) were violated, contested the ERC’s power to regulate prices and insisted the price rollback constituted legally doubtful cancellation of the sales contracts.

The power generators likewise questioned the procedures undertaken leading to the rollback order. They even questioned the constitutionality of the ERC’s actions.

Because the power generators independently filed motions for reconsideration, each focusing on different issues, it took some time for the arguments to be dissected and the legal concerns properly addressed. All the issues raised required the collaboration of lawyers and utilities economists. Hundreds of trades at the electricity spot market had to be reviewed and the pricing pattern closely studied.

Finally, a few weeks ago, the ERC issued a resolution on the voluminous motions for reconsideration filed earlier in the year. Except for one motion for reconsideration granted because of the unique circumstances of the petitioner, all the other motions were denied.

In denying the motions, the ERC declared it was vested with police powers under the Epira. That power needed to be exercised to protect the interests of the consuming public in the face of abnormal electricity pricing during the supply months of November and December 2013.

The ERC, in its resolution, affirmed its regulatory authority over the power generation sector. It claimed the imposition of regulated prices does not amount to an imposition of penalties on the power generators.

Its action, the ERC declared, is fully constitutional, specifically Article XXI, Section 6 of the competition. Imposing regulated pricing does not violate the Epira, the rules of competition and the rules governing the operation of the WESM.  

In its resolution denying the motions for reconsideration of the power generators, the ERC insists its March 3 order does not violate the constitutional prescription against unreasonable impairment of contracts. Citing several Supreme Court rulings, the ERC argues contracts cannot be absolute, especially in the face of public interest.

Although there are sparse legal precedents covering the precise definition of “market failure,” the ERC reserves it right to declare such a failure has happened. On that basis, and in accordance with its mandate, the ERC is convinced it could step in and regulate prices to protect consumers. A more activist ERC is now born, surely to the disdain of the power producers.

Finally, the ERC argues there were no violations of due process when it acted to prevent an energy price crisis from worsening.

To be sure, there are many legal issues here that might be pursued in another judicial arena. We are not sure yet if the power generators are inclined to continue the legal tussle in another forum. They do have billions of pesos in windfall profits at stake in this debate.

It is a bit of a puzzle why the October 15, 2014 resolution of the ERC was not as prominently treated in the media as it should have been. This resolution, which reaffirms the ERC’s March 3 actions, redefines the regulatory authority of the agency.

For too long, the ERC has been roundly criticized for being virtually inutile, for failing in the task of protecting consumers and for falling into regulatory capture. It had been weak against the power generators.

With its March 3 order regulating generating charges and its October 15 affirmation of that order, we now have a more empowered ERC. It should now develop the capacity to track electricity trades in the market to quickly spot collusion and stop profiteering.

It is bad enough that we have among the highest power prices in the world. It will be worse if we allow pricing to be dictated by cartels.