Transparency

The Procurement Act has been in force for about two decades now. It ensures a regime of transparency and competitiveness necessary to protect consumers and taxpayers.

Corruption may still be abundant and that is because the unscrupulous discover ways to go around the rules or play the system. This does not, however, invalidate the need for clear rules on transparency and competitiveness. Should we ever get to amending the Procurement Act, it must be to ensure a more effective system for guarding against corruption.

Our energy sector, particularly the distribution utilities, are governed by the strictest procurement rules. Power distributors must comply with the Competitive Selection Process (CSP) overseen by the Department of Energy. Under this process, power producers must compete among themselves to offer the lowest price for bulk electricity supplies.

Under CSP, consumers are assured of the cheapest possible power. Electricity costs may still fluctuate because of changes in oil prices and other factors. Electricity prices might seem higher than they should ideally be. But the bidding system ensures the cheapest power under prevailing conditions.

Without the CSP, electricity distributors and power producers might conspire against the consumers and indulge in profiteering. Distributors could award long-term contracts to cronies or get away with transfer pricing to harm consumers.

Power supply contracts awarded through the CSP ensure producers a stable demand for the power they produce, encouraging them to offer a better price for electric power. Without these power supply contracts, distributors will be forced to rely on the spot market for their daily supplies.

The electricity spot market is the trading platform where merchant producers sell their spare energy production and where distributors buy their emergency needs. Prices at the spot market are always higher than the price of contracted supplies. Think of this as some sort of energy convenience store where premium prices need to be paid for the convenience of power availability.

Also, small and less efficient power plants sell their power through the spot market. Their production costs disable them from winning competitive biddings for supply contracts.

The spot market, we know, is vulnerable to manipulation as well as speculation. When power plants break down and producers are unable to supply the electricity they were contracted to produce, prices at the spot market tend to spike. These spikes are driven by supply-and-demand principles.

The spikes, caused by inherent inefficiencies in our energy industry, creates uncertainty for consumers – especially large consumers in manufacturing that need much forward planning in their production. This uncertainty harms the larger economy and adds to the disincentives for direct long-term investments.

We cannot go by the uncertainties of spot market pricing for our energy needs and expect to be a progressive economy. The more our power distributors meet their needs through CSP-guided supply contracts, the more reliable pricing will be for all consumers. The less power pricing will be reliant on the fluctuating prices at the spot market.

Odd

Considering all the above, it is rather odd that Sen. Alan Peter Cayetano, in a recent Senate hearing, called for the postponement of Meralco’s scheduled bidding for new supply contracts. It is unclear why he is making such a call.

In the past few weeks, we did experience a surge in electricity prices. This has been due to shortages experienced because of higher consumer demand and plant breakdowns during the hot months. Because of unscheduled plant outages, Meralco has had to resort to purchasing supplies from the electricity spot market where prices are higher than they would otherwise be if supply contracts were adequate to fill the need. As a result, our electricity bills were costlier, reflecting spot market pricing.

 It is not the power supply contracts that caused the higher electricity bills we have to pay. On the contrary, it is the resort to the spot market to fill higher demand that caused electricity prices to spike.

If Meralco postpones the bidding for new supply contracts, this will not solve the problem of more expensive electricity. This will force the distributor to buy from the spot market. It will aggravate the pricing problem.

Supply contracts, concluded under the strict rules of the CSP process, guarantee cost competition, efficiency, quality assurance, compliance and accountability. These are the principles that make the market work to benefit consumers.

Cayetano’s proposal is, therefore, anti-consumer. He should restudy his position more carefully.

If he does, he will discover that what our consumers most need at this time is more power bulk supply contracts with the most competitive power suppliers. This will, of course, reward the most efficient producers and penalize the least efficient. That is how a fair market should work.

The only other options to competitive bidding for power supply contracts are: cronyism, collusion and corruption. There are, to be sure, certain businesses that would prefer these other options. But the other options are certainly not the best for consumers.

Our energy producers are saddled with plants that are either too old or inefficient. Some of them can only survive by selling high at the spot market. But we must never return to a former regime that protects the inefficient and ends up penalizing the consumers with higher costs.

The higher costs penalize the entire economy, making our manufacturing uncompetitive. They magnify all that is wrong in our energy setup.

Transparent competition is the name of the game.