On having mandatory RES for contestable electricity consumers

I found this news report a twist — the PCCI, Ateneo, San Beda, RDC question the retail competition and open access (RCOA) provision of EPIRA. I thought people hate monopolies, like Meralco and the roughly 120 other electric cooperatives nationwide. RCOA gives people and large consumers the choice to opt out of those area franchise monopolies.

“The RCOA makes it mandatory for big power consumers to source their electricity supply from licensed RES. Resolution No. 10 adopts the revised rules on what is a “contestable customer” or those who are required to source power from a RES.”

So big, contestable consumers can no longer stay with their DUs, they must find a retail electricity supplier (RES)? This is reverse coercion.

“Meralco asked for a temporary restraining order and/or writ of preliminary injunction against ERC Resolution 5, which was issued on March 8, 2016, as well as Resolutions 10 and 11…”
http://www.bworldonline.com/content.php?section=Economy

“ERC has given consumers with an average monthly peak demand of 1 megawatt (MW) more time, or until Feb. 27, 2017, to secure a supply contract with a retail electricity supplier (RES).”http://www.bworldonline.com/content.php?section=Economy

Sabagay, why a deadline? If a big or medium-size consumer cannot find an RES yet, DOE and ERC will penalize it? Can they do that to non-energy players like a hotel, a mall or hospital?

Meanwhile, this is another dictatorial pronouncement by a President. ERC was created by law, by EPIRA of 2001. A President can abolish an agency created by law, not by a Presidential EO? http://www.bworldonline.com/content.php?section=Economy

erc

If an employee is (allegedly) pressured by a boss, there are many remedies and options other than suicide. State of mental health is questionable. Then the President sides with the dead employee, no investigation and just make a “resign all” order. Similar to drugs war, no investigation, just shoot and kill a suspect. http://www.bworldonline.com/content.php?section=Nation

Letter to ERC re petition by 3 wind firms for higher FIT

This is my letter to the ERC last month.
————

To: re-twg@erc.gov.ph, twg-re@erc.gov.ph

28 December 2016

Hon. Jose Vicente B. Salazar
Chairman
Energy Regulatory Commission
Pasig City

Dear  Chairman Salazar,

In relation to the ERC  invitation for public comments until December 30, 2016 of the petitions by Trans-Asia Renewable Energy Corporation (TAREC), Alternergy Wind One Corporation (AWOC), and Petrowind Energy, Inc. (PWEI) that their FIT rate be raised from P7.40/kWh to P7.93/kWh, may I send the following comments.

Please say NO to their petition. Here are the reasons why.

  1. Expensive electricity is never a virtue. Many of the things we do and use now require electricity and therefore, cheap and stable electricity supply should be the aim of energy producers and generating companies.
  1. Cost and price dynamics – rising or falling, higher or lower than what was assumed and projected – are part of capitalism and entrepreneurship. This includes the realization by the petitioners that their actual EPC cost, switchyards and transformers, transmission interconnection cost, O&M and other related expenses are much larger than what was assumed by the ERC in its earlier ruling.
  1. There is indeed a big difference between the P8.53/kWh received by EDC Burgos (Lopez group),  Northern Luzon UPC Caparispisan (Ayala group) and Northwind Power Bangui (partly Ayala), and the P7.40/kWh received by the petitioners. Then let it be known by the electricity consumers that among the reasons why Philippine electricity prices remain high, why FIT-All keeps rising from 4 centavos/kWh in 2015 to 12.40 in 2016 and up to 23 or even 25 centavos/kWh in 2017, are due to these wind farms  that get high guaranteed and escalating price for 18 more years.
  1. When public backlash against more expensive electricity from wind (and solar) will rise proportionate to the rise in FIT-All in the coming years, the three petitioners will somehow be relegated in the background as public attention will be focused on the Ayala and Lopez expensive wind farms, and the big solar farms with higher FIT rates.

The environmental costs of thousands of trees murdered on the ridges and mountain tops of Nabas, Aklan and Pililia, Rizal as PWEI and AWOC constructed wide roads, flattened ridges and built those huge wind towers in the mountains are actually not included in the supposed “environmental benefits” of those wind power plants.

Capitalism and entrepreneurship is about risks and returns, expansion, break even or bankruptcy. Nothing is guaranteed except constant competition and innovation, to cut costs and produce more per unit of input. Thus, the FIT system of guaranteed price for 20 years is abdication of the spirit of capitalism and entrepreneurship, while embracing statism and forever intervention by the state in pricing and output allocation and rationing.

Ultimately, the RE Act of 2008 contradicts the spirit of EPIRA of 2001 and hence, the former should later be significantly amended if not abolished. EPIRA moved things towards competitive, cheaper electricity prices and stable power supply while the RE Act moves towards the opposite, for more expensive electricity and unstable, intermittent and brownouts-friendly power supply.

I hope you will consider the above points.

Thank you very much.

Sincerely yours,

Bienvenido S. Oplas, Jr.
President, Minimal Government Thinkers
Fellow, SEANET and Stratbase-ADRi
Columnist, BusinessWorld
————-

Meanwhile, look at these news reports and press releases by their respective companies. Phinma says it is earning good money in TAREC.

fit1
AWOC is expanding. From the current 54 MW will add 72 MW. Also in its website, it posted,
“On October 23, 2009, Alternergy has been awarded with six exclusive Wind Energy Service Contracts by the Department of Energy based on its financial and technical capabilities. One of which is the “Pililla, Rizal” Wind Energy Service Contract which covers an area of 4,515 hectares. The Project is estimated to generate approximately 40 MW capacity.”

fit2

Meanwhile, look at the site of PWEI’s Nabas wind farm in Aklan overlooking Boracay island. Mountain ridges were flattened and all trees and other vegetation there were removed.

fit3

WESM as market-oriented, PEMC as bureaucracy-oriented

* This is my article in BusinessWorld last March 23, 2016.

01

Power generation in the Philippines generally kept up with its ASEAN neighbors in the 1980s up to the early 1990s. By 2000, power capacity in many of our neighbors have doubled or tripled while the Philippines’ has less than doubled. By 2010, Indonesia, Thailand, Malaysia, and Vietnam have kept doubling or tripling their power generation levels in just one decade while the Philippines’ has expanded by only 50%.

The figures for China and South Korea are similar, doubling or tripling power capacity every decade. It is not possible to sustain high economic growth without high and stable electricity supply for households and companies.

2

High power production means high or fast growth in power consumption per capita. Or the reverse, slow power capacity expansion means low consumption per capita, and this is what happened in the Philippines. Until 2000, our per capita consumption was higher than Indonesia and Vietnam, and only one-third that of Thailand. By 2010, things turned around: ours were lower than those in Indonesia and Vietnam and only one-fourth of Thailand. Cambodia is catching up with four times expansion of power capacity in just one decade from 2000 to 2010.

3
Note that the Electric Power Industry Reform Act (EPIRA) was enacted in 2001. The law has deregulated and demonopolized power generation where before, Napocor was the single power producer and owner of power transmission nationwide.

So has EPIRA restricted power generation or has the law saved the industry from atrophy? Based on previous columns on the energy sector, various government bureaucracies, local and national, are major contributors to a soured business climate in power generation. Securing nearly 200 different permits and signatures from different agencies over a period of 2-5 years before one can start real power plant construction is no joke.

Power generation companies (gencos) secure bilateral supply contracts with different distribution utilities (DUs) and electric cooperatives (ECs). DUs and ECs are considered as “utilities” and hence, are described as natural monopolies. Zero competition allowed, they just need to secure a Congressional franchise for 25 years, an arrangement that can be renewed.

Outside the contracted power, gencos have extra capacity to produce and sell. DUs too need extra capacity during peak hours on weekdays, or during the hot months of March to May, during fiesta season in many cities and municipalities, and so on.

For such uncontracted power, both gencos and DUs go to the Wholesale Electricity Spot Market (WESM) to buy and sell electricity. The lead time for spot pricing is not one week or one day but only few hours before electricity supply need to be expanded or curtailed.

WESM is governed and administered by the Philippine Electricity Market Corporation (PEMC). It is a weird body because EPIRA of 2001 says there should be an Independent Market Operator (IMO) that should administer WESM, but PEMC has become a bloated government bureaucracy pretending to be a private bureaucracy.

PEMC Board is a 16-man body chaired by the Department of energy (DoE) Secretary plus 15 Directors: 4 from gencos (2 from government, PSALM and NPC, and 2 private), 4 from DUs (2 from ECs and 2 non-ECs), 4 independent of the power industry, 1 from WESM customers including suppliers, 1 from the National Grid Corporation of the Philippines (NGCP) representing the system operator and Transco, and 1 from market operator represented by PEMC itself.

I was able to secure the transcript of three Committee hearings of the Senate Committee on Energy (October and December 2015, and January 2016) headed by Sen. Serge Osmeña, thanks to his staff Vina.

From those transcripts and related readings, I gather these eight questionable or weird things in the PEMC Board and WESM.

First, PEMC is supposed to be an IMO yet there are several government officials sitting on its Board, including the DoE Secretary and representatives from the Power Sector Assets and Liabilities Management Corporation (PSALM) and the National Power Corporation (NPC). The NGCP is a private corporation but it is representing a government corporation, Transco. Then there are advisers to the Board, two of whom are from government, a DoE Undersecretary and the National Electrification Administration (NEA).

Second, the actual power production of PSALM and NPC are small, almost negligible from the genco mix of Meralco for instance, yet they are almost permanent members of the Board.

Third, those 4 independent directors and the consumer representative (5 total) are all appointed by the DoE Secretary and hence, should be friendly to the government.

Fourth, PEMC is regulated by the Energy Regulatory Commission (ERC) which is under the administrative control of the DoE Secretary. So the Secretary heads an agency that is regulated by a government body that is under the Office of the Secretary.

Fifth, all the income of PEMC and WESM is collected from the gencos, especially private gencos, and the private gencos have only two seats. No collection from DUs, from independent Directors, from consumers, from system operator and market operator. The ERC and DoE get a certain percentage from the total WESM revenues.

Sixth, PEMC is pretending to be a private corporation when in reality it is a government-owned and controlled corporation (GOCC). By virtue of its being DoE Secretary-controlled, the presence of several government corporations and agencies in the Board, it is a government-owned bureaucracy pretending to be a private bureaucracy.

Seventh, being a GOCC pretending to be a private corporation, part of its collections or revenues are being used by the DoE and ERC for their respective regulatory and policy formulation functions. PEMC budget is also approved by the ERC, then PEMC should be audited by the Commission on Audit but currently, private auditing firms do the job.

And eighth, gencos pay for all the market fees at WESM and they are subject to price control via primary and secondary price caps. Their peaking plants need to charge higher on those few hours they run to compensate for many hours a day that they are not running and still make a profit, and pay more market fees yet they are restricted from doing this via price control.

So if you are a genco and you are subject to these kinds of policy distortions and bureaucratic interventions at WESM — and paying for all of it — that creates another layer of disincentive to do business.

And that will further put some brakes on an otherwise huge demand for fast and high generation capacity so we can catch up with our neighbors like Vietnam and Indonesia. In this age of ASEAN economic integration, energy-intensive sectors can put up their manufacturing companies in cheaper-energy countries like Indonesia, Vietnam, Cambodia, and Thailand, then export to the Philippines at zero tariff. Also, energy-intensive services like hotels (lights, aircon and elevators running 24/7) and tourism can expand faster in cheaper-energy countries than in expensive-energy countries like the Philippines.

We need less government interventions and distortions in the energy sector. It is among the important prerequisites for the Philippines to grow faster and create more jobs and businesses to the people.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers, a Fellow of the South East Asia Network for Development (SEANET), and a member of the Economic Freedom Network (EFN) Asia. All three entities support the philosophy of classical liberalism in politics and economics.
minimalgovernment@gmail.com

Electricity rates in the ASEAN, with and without subsidy

* This is my article in BusinessWorld Weekender last August 28, 2015.

1THIS is a continuation of an earlier discussion, “The Philippine electricity market: Monopoly and competition” (Weekender, August 14).

As noted in that article, Carlos Jericho L. Petilla had issued, before he resigned as energy secretary last June, DoE Circular No. DC2015-06-0008, “Mandating All Distribution Utilities to Undergo Competitive Selection Process (CSP) in Securing Power Supply Agreements (PSA).” That order aims to address, among other things, the suspicion of “sweetheart deals” between some big electric cooperatives (ECs) and distribution utilities (DUs), on the one hand, and the generating companies (gencos), on the other, resulting in expensive electricity prices in the Philippines.

Here is another data, a bit old, from a 2013 commissioned study by the US Agency for International Development (USAID). The first set shows the actual prices including taxes (in Philippines and Singapore) and subsidies (Thailand, Malaysia, and Indonesia), and the second set, adjusted prices if taxes and subsidies were minimized, next to zero.

The USAID report explained why the adjustment was done: “Several factors may explain these wide differences. One is tax: effectively 9% in the Philippines, as opposed to 6% in Malaysia and 7% in Singapore and Thailand, albeit 10% in Indonesia. But the bigger contributor to the price differences is the implicit subsidies to state-owned utilities. The International Energy Agency (IEA) estimated that the electricity subsidies in 2011 in Indonesia, Malaysia, and Thailand were at least 5.56, 0.94, and 5.67 billion US dollars, respectively….”

2
Thus, most if not all comparative electricity prices are based on artificial pricing. People blame gencos or the big DUs but not governments which intervene a lot in electricity pricing, resulting in either very high or very low prices.

The DOE Circular was the subject of discussion in a forum organized by the Energy Policy Development Program (EPDP) early this month. There were six speakers, led by OIC-Secretary Zenaida Y. Monsada of the Department of Energy (DoE), Director Mylene Capongcol also of the DoE, UP School of Economics professors Raul Fabella and Ruperto Alonzo, UP College of Engineering professor Rowaldo del Mundo, and Romeo Bernardo of LBT Consulting.

3Mr. del Mundo is the lead technical adviser to the Central Luzon Electric Cooperatives Association-First Luzon Aggregation Group (CLECAFLAG) under the USAID COMPETE project. Twelve ECs in Central Luzon aggregated their total power demand of 300 MW, auctioned it off, and contracted for 20 years the winning supplier, won by GN Power (with expanded capacity of 1,200 MW in Bataan). In his presentation, Mr. del Mundo showed this table of comparative electricity prices in the ASEAN.

By pounding on the need for demand aggregation by DUs as shown in the CLECAFLAG experience, Mr. del Mundo concluded, “The mandatory CSP is the only antidote to [the] EPIRA’s [Electric Power Industry Reform Act] cross-ownership that will avoid temptation to parties with conflict of objectives.”

There is a problem in this conclusion of supporting mandatory or obligatory, instead of voluntary, CSP, based on specific circumstances among DUs and gencos. For the following reasons:

One, as shown in Table 1, we have high electricity prices because the government imposes many taxes on energy while other ASEAN countries subsidize their energy consumption.

Two, Mr. Bernardo noted in his presentation that “Growing pains from regulatory uncertainty, and contracting, approval, and construction bottlenecks have delayed new plants. The average time it takes to build a baseload power plant in the Philippines is probably double elsewhere. Just getting approvals, coupled with overcoming NIMBY opponents, is an ordeal.” And he showed this list of some 200 signatures and permits needed to put up one baseload plant.

4
Three, Mr. Fabella suggested market testing of PSA contracts instead of mandatory CSP. Market testing is easier to enforce because the Energy Regulatory Commission (ERC) only verifies and approves the market test (say, auction) employed, and is easier to defend in public. There are many modalities for market testing like the cases in Chile, Brazil, New England.

Four, there’s the big question of who are the “third parties” that will be recognized by the DoE, the ERC, and the National Electrification Administration (NEA) which will approve or disapprove the PSA between the DUs and gencos. Will they work for free? Very unlikely. Rather, the DOE and ERC will be forced to make extra budgetary requests to pay for these “third parties” including allowances for their meetings and public consultations.

It is also possible that NGOs, the media, and other sectors actively or silently supporting the “Repeal/Abrogate EPIRA” movement may position themselves as “third party” referees. The DoE circular is not about repealing or tinkering with the EPIRA.

In short, the DoE circular is barking at the wrong tree: By making the competitive bidding mandatory rather than voluntary, it will invite or create more problems than what it intends to solve. The circular should therefore be withdrawn. Or amended to make CSP voluntary, not mandatory. The DoE and other government agencies should instead address other problems and contributors to expensive electricity in the country. Like multiple taxes, numerous permits by the Philippine government, from the barangay to city/municipal, provincial, and national government offices and agencies. Requiring a firm to present up to 200 different permits would expose it to 200 different opportunities of corruption and extortion.

Government should simply learn to step back from too much intervention, regulation, and taxation.

Bienvenido S. Oplas, Jr. is president of the free-market think tank Minimal Government Thinkers, Inc., and a fellow of the South East Asia Network for Development (SEANET).