Posts Tagged ‘Open Access’

HERE WE GO AGAIN: THE LOVE-HATE RELATIONSHIP BETWEEN GOVERNMENT AND THE IPPS

Towards the end of 2013, the local utility MERALCO announced that their customers will be getting higher power bills because of higher generation charges during a temporary shutdown of the Malampaya natural gas facility which (unfortunately) coincided with problems with two (2) other plants and forcing the utility to get part of its electricity from the Spot Market[1]. Eager to pounce on negative sentiment that followed the announcement, groups led by certain legislators filed a Petition before the Supreme Court to stop the hike, claiming that MERALCO “colluded” with the generators to fatten corporate profits.  Even the Energy Secretary is talking about capping the amounts that generators can sell their power via the WESM.

If disallowed, MERALCO will be forced to bear the entire amount which represents the increased generation charges. What most people don’t realize is that MERALCO is a wires business[2] and is not allowed to make profit from the sale and purchase of electricity. Generation charges are being collected by MERALCO only as the agent of the generation companies and are considered “pass-through” charges under the scheme of Electric Power Industry Reform Act (EPIRA)[3].  Compelling MERALCO to pay for the higher generation charge is illegal and confiscatory as it will in effect obligate MERALCO to subsidize the power being distributed to its customers and will eat into the only revenue source that it is allowed by law to collect (the wheeling charge)[4].

What about the GenCos? Aren’t these fellows charging too much for the power that they are generating?

The sad truth is that generation companies are not public utilities and are driven entirely by a profit motivation. Government can attempt to curb the IPPs’ appetite but at the end of the day, it cannot force private business to get a haircut or to run plants for less than what they are content with.  While we can all cry “market abuse” to the Energy Regulatory Commission, the fact is that there are simply not enough power plants to effect the downward adjustment of prices.

Speaking of “market abuse,” the condition of the power market is exactly what it ought to be given government’s attitude towards the power sector. During the time of rotating brown-outs in the 1990s, Congress passed the Electric Power Crisis Act in 1993 [5] and all but laid out a red carpet so that Independent Power Producers would put up plants FAST in order to save a power hungry nation from literal darkness. They did but at some cost. And we’re still paying for those notorious take-or-pay contracts.

In 2001, the government solution to this train wreck (via the EPIRA) was to: (a) sell off ailing assets; (b) Unbundle power charges; (c) separate the: (i) Generation, (ii) Distribution  and (iii) Transmission sectors; (d) Reduce cross subsidies and cross-ownership; (e) mandate Retail Competition and Open Access and (f) establish a Wholesale Electricity Spot Market (WESM).

In short, the wise men of Philippine Legislature agreed that the way to arrest and ultimately reduce the price of power was to allow the law of supply and demand to freely dictate the prices.  Controlling generation charges artificially by imposing caps violates the de-regulation spirit of RA 9136, and again highlights the unstable nature of government policy which may prove counter-productive in the long run.

Admittedly, the EPIRA is not perfect. It has not brought about the reduction in power costs that it was designed for precisely because the imperfect provisions of the law have also been implemented less than perfectly. Nonetheless, government should resist the urge to give in to violent reactions calling for radical legislation in place of the current law unless it wishes to go back to the old Napocor regime. For one thing, it is not entirely clear how prices can be controlled by government in an environment where  the supply comes from a very limited pool. More importantly, increased and open competition is a proven formula for reducing prices and should rightfully remain the overarching strategy of national government going forward.  [7].

 

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[1] Wholesale Electricity Spot Market (or WESM)

[2] See Sections 23 and 24 of RA 9136. The DU is allowed to charge for the use of its wires. Of the components of the electric bill, only the “distribution wheeling charges” pertain to MERALCO.

[3] See Section 25.

 [4] Under Section 43 of RA 9136, a Distribution Utility is allowed to charge a rate that allows “[r]ecovery of just and reasonable costs and a reasonable return on rate base (RORB) to enable the entity to operate viably.” See also Section 24, supra.

 [5] Republic Act 7648

[6] Republic Act 9513

[7] More to be discussed in a later article.


Green Energy Option

Interested players listen intently during the launch of the NREP

As we speak, the Philippine Energy Regulatory Commission (ERC) is busy hearing the application for the Feed-in-Tariff.

On  the (far?) horizon for Renewables is another mechanism called the “Green Energy Option” mandated under Section 9 of the Renewable Energy Law (RA 9513), to wit:

“Section 9. Green Energy Option. – The DOE shall establish a Green Energy Option program which provides end-users the option to choose RE resources as their sources of energy. In consultation with the NREB, the DOE shall promulgate the appropriate implementing rules and regulations which are necessary, incidental or convenient to achieve the objectives set forth herein.

Upon the determination of the DOE of its technical  viability and consistent with the requirements of the green energy option program, end users may directly contract from RE facilities their energy requirements distributed through their respective distribution utilities.

Consistent herewith, TRANSCO or its successors-in-interest, DUs, PEMC and all relevant parties are hereby mandated to provide the mechanisms for the physical connection and commercial arrangements necessary to ensure the success of the Green Energy Option. The end-user who will enroll under the energy option program should be informed by way of its monthly electric bill, how much of its monthly energy consumption and generation charge is provided by RE facilities.”

Insofar as it allows end-users to “directly contract from RE facilities their energy requirements distributed through their respective distribution utilities,” the  Green Energy Option (GEO) is similar to the concept of “open access under Section 31 of the Electric Power Industry Reform Act (RA 9316), thus:

“SEC. 31. Retail Competition and Open Access. – Any law to the contrary notwithstanding, retail competition and open access on distribution wires shall be implemented not later than three (3) years upon the effectivity of this Act, subject to the following conditions:

“(a) Establishment of the wholesale electricity spot market;

“(b) Approval of unbundled transmission and distribution wheeling charges;

“(c) Initial implementation of the cross subsidy removal scheme;

“(d) Privatization of at least seventy (70%) percent of the total capacity of generating assets of NPC in Luzon and Visayas; and

“(e) Transfer of the management and control of at least seventy percent (70%) of the total energy output of power plants under contract with NPC to the IPP Administrators.

“Upon the initial implementation of open access, the ERC shall allow all electricity end-users with a monthly average peak demand of at least one megawatt (1MW) for the preceding twelve (12) months to be the contestable market. Two (2) years thereafter, the threshold level for the contestable market shall be reduced to seven hundred fifty kilowatts (750kW). At this level, aggregators shall be allowed to supply electricity to end-users whose aggregate demand within a contiguous area is at least seven hundred fifty kilowatts (750kW). Subsequently and every year thereafter, the ERC shall evaluate the performance of the market. On the basis of such evaluation, it shall gradually reduce threshold level until it reaches the household demand level. In the case of electric cooperatives, retail competition and open access shall be implemented not earlier than five (5) years upon the effectivity of this Act.”

The initial impression seems to be that the GEO may have the effect of partially superseding the conditions prescribed for open access under the EPIRA. The question therefore, is whether the Renewable Energy Law authorizes the implementation of the Green Energy Option Program (GEOP) even if all the conditions of open access are in effect.

Unfortunately, it does not seem that an answer is immediately forthcoming given the status of the implementation of the RE Law and the rate the current deliberations for the more important incentives are going.

Nonetheless, our firm has rendered an opinion that official debates before the members of the Lower House and the Senate strongly suggest that the GEOP was intended to be implemented even prior to open access and hence, regardless of whether the conditions for open access are met.

A contrary interpretation would also mean that the GEOP should be “synchronized” with open access. However, implementing the GEOP at the same time that open access is declared and under the same parameters or limits would have the effect of making the green energy option legally indistinguishable from open access. In other words, when open access is declared, end users which fall within the open access demand thresholds would already have the right to directly contract with RE facilities whether or not a GEOP is in place. This interpretation would render Section 9, Chapter III of RA 9513 a surplusage which is generally not favored under certain deeply entrenched rules of statutory construction.

While that may be the case “strictly speaking,” a way out for the NREB could be the same Section 9 of the RE law which  provides that the right of end users to “directly contract” their energy requirements with RE facilities is conditioned on the determination by the Department of Energy of its “technical viability.”    This would imply that the DOE has the authority to limit or restrict the GEO for reasons of technical viability.