Posts Tagged ‘power supply’

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.