Price cap

While we scurry about, making preparations for the oncoming super typhoon, our energy regulators might forget that the “secondary price cap” provisionally imposed on the wholesale electricity market expires in two days.

The Energy Regulatory Board (ERC) imposed the secondary price cap as a check against recurrence of the wild orgy of speculation that caused power prices to spike in the last quarter of 2013. It maintains a price cap defined by a margin over average prices of the previous three days.

The primary price cap imposes a ceiling of P32 per kWh on what the generation companies (gencos) may charge for the supplies they sell at the spot market, regardless of supply conditions. This guards against the profiteering the gencos indulged in last year when power supply tightened after maintenance work at Malampaya forced several plants to shut down.

The price orgy we saw last year demonstrates the energy industry is vulnerable to market failure. The ERC needed to play a stronger regulatory role to protect consumers. The price caps appear to be reasonable means to check market abuse.

We saw the efficacy of the price caps in the aftermath of Typhoon Glenda. When several plants were shut down and the national grid damaged in parts, we experienced supply shortages. The potential power price spikes were tempered by the price caps, sparing consumers from what might have been a repeat of the December 2013 spikes.

The same price caps prevented another potential spike in prices when Malampaya production was curtailed last October. Despite pressures from the supply and demand situation, prices remained generally stable.

In the next few months, we expect a really tight power supply situation. As the output of hydroelectric plants diminish during the dry months, power consumption rises during the hot days. Any unplanned shutdown will cause widespread outages that could harm the economy, apart from causing much discomfort.

This tight power situation is clearly conducive to speculative pricing and profiteering, the evils we saw in the last quarter of 2013. It is a situation vulnerable to market failure, therefore requiring the ERC to maintain its vigilant regulatory role.

The primary and secondary price caps are the only working instruments the ERC has to protect consumers from vultures among the gencos. Generation charges account for 60% of the final electricity bill consumers pay each month.

While it is likely the ERC will extend the secondary price cap beyond next Monday, the word in the market is that gencos are lobbying hard to extend the monitoring period after which the price cap comes into play. The present monitoring period is three days. Some gencos want this extended to five days.

We need to be very cautious about this proposed extension of the monitoring period. It will give unscrupulous gencos two additional days during which they could “game” the system, jacking up offer prices to the maximum cap of P32 per kWh before the secondary price cap kicks in.

With another potential natural calamity looming, and with the certainty that power supplies will be tight because government failed in bringing new generating capacity into place, it will be the wiser course to maintain the status quo on the price caps.

They have proven to be effective weapons against the vultures.

Logistics

Much ado was made about the President meeting the NDRRMC last Thursday. It was covered in its entirety by at least one media outlet.

Convening this meeting was important to countervail the impression that government was caught flatfooted when Yolanda stuck and bungled rescue, relief and rehabilitation efforts after. The script for this meeting clearly intended to show the President hands -on in the face of coming calamity — except that, as he is wont to, he gets mired in the details.

After every other report about preparations being undertaken, the President quipped that those “should have been done yesterday.” That line must have been composed by the event’s scriptwriter to show that this President is capable of having a sense of urgency — except that he was also the President yesterday.

The joke that quickly went around said this administration is so fortunate Ruby will likely take the same path as Yolanda. It will wash away all evidence of what was not done the past 12 months.

 We hope that when the sad moment comes to count corpses, the President does not quote a number early in the day. We saw, in the aftermath of Yolanda that doing so will have a strange effect on the official body counters.

Recall that when the body count more than doubled the President’s baseless estimate, bureaucratic measures were quickly put in place. Some genius in the NDRRMC decreed that corpses without identification (or identifier) will not be officially counted as dead.

The saddest part of that NDRRMC session was when the President pored over a map, intent on giving orders to bring rescue teams and supplies forward. He thought of Guian, until his Executive Secretary reminded him this ill-fated town will likely bear the brunt of the onrushing typhoon.

The President then turned to the AFP chief of staff for a suggestion about where to bring supplies and personnel into forward position. Without batting an eyelash, Gen. Gregorio Catapang said this could be the Lipa airbase in Batangas. Fine, except that Batangas is distant from what could be the center of devastation.

We can only hope Typhoon Ruby moderates before it hits us. Our country’s logistics backbone is simply too backward to enable rapid response to a large calamity, especially one that hits the same area twice.