Electricity competition, EPIRA, and WESM

* This is my article in BusinessWorld last week, May 09, 2018.

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Last Monday, I discussed business competition in general and the role of the Philippine Competition Commission (PCC).

The theme will be continued in this piece and it will discuss electricity competition in particular, especially after I was able to interview PCC Chairman Arsenio Balisacan, the CEO of the Philippine Electricity Market Corp. (PEMC) and Chairman of Transition Committee Oscar Ala and PEMC Spokesperson Atty. Nino Juan.

The Electric Power Industry Reform Act (EPIRA) of 2001 or RA 9136 has drastically liberalized the Philippines electricity sector with at least three important provisions: (1) deregulation and demonopolization of the power generation sector, (2) creation of the Wholesale Electricity Spot Market (WESM), and (3) liberalization and demonopolization of electricity distribution via Retail Competition and Open Access (RCOA).

With these and other provisions of EPIRA, the questions to ask, among others would be:

(1) Were there many private generation companies (gencos) that entered the market competing with each other?

(2) Were there many retail electricity suppliers (RES) that entered the market competing with each other?

(3) Were there many players, gencos and distributors, that use the WESM spot market competition? And more importantly, (4) Have electricity prices for consumers gone down?

The short answer is YES to all four questions.

For gencos for instance, before EPIRA, the National Power Corp. (Napocor) was the state-owned power generation monopoly, which also incurred huge losses and public debts for many years.

As of April 2018, there were 113 gencos in the Luzon-Visayas grid alone and all of them are WESM participants. Excluded are gencos in the Mindanao grid which is not part of WESM yet. Of these 113 gencos, five players have become more efficient and more moneyed than others, except perhaps the government-owned Power Sector Assets and Liabilities Management Corporation (PSALM), which still owns previous Napocor-owned power plants, mostly hydro facilities in Mindanao and the Malaya plant in Rizal.

For retail competition, the number of contestable customers (CCs) or those with monthly peak demand of 750 KW or higher and have the freedom to pick their own service providers — such as electric cooperatives (ECs) and private distribution utilities (DUs) — have increased. RCOA implementation however, has been issued an indefinite TRO by the Supreme Court in February 2017 and this resulted in a decline in number of CCs.

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Here are the numbers for comparative electricity prices that include two types of customers, the captive market (small consumers who must stay with their DUs or ECs) and contestable market (they can leave their DUs or ECs and choose their own RES).

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Contestable customers are able to enjoy lower average prices, P6.91/kWh, than captive customers that pay an average price of P7.78/kWh.

So there you see it.

Despite the noise created by certain sectors that EPIRA and WESM are not working, which leads them to call for a return to the old scheme of nationalization, these data show that indeed electricity competition is working.

It is true that Philippine electricity prices in general remain higher than most of our neighbors in the region but that is because of other factors like (a) many taxes especially the high VAT of 12% applied in all parts of the electricity supply chain, from generation to transmission, distribution and supply, even the system loss; (b) many charges in our monthly electricity bill including universal charge, system loss charge, feed-in-tariff (FiT) for favored renewables.

The transition of PEMC, the market operator of WESM, into a real Independent Market Operator (IMO) as explicitly specified in EPIRA may soon become a reality.

As a result, there will be no more government energy agencies and bureaucracies at the PEMC Board. Good work, PEMC Transition Team.

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Consumer choice in electricity supply and prices

* This is my column in BusinessWorld on April 30, 2018.

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In several statistics comparing electricity prices in Asia, the Philippines often ranks as the third most expensive in Asia next to Japan, Singapore, or Hong Kong.

Here are numbers from three different sources: (1) The Lantau Group (TLG), “Global Benchmark Study of Residential Electricity Tariffs,” May 2013. The study prepared for the Energy Market Authority (EMA), Singapore; (2) Enerdata, cited by Chris Herrera, “Optimization of Supply” presented at EPDP lecture, UPSE, October 26, 2017; and (3) International Energy Consultants (IEC), “Regional/Global Comparison of Retail Electricity Tariffs: Executive Summary,” May, 2016.

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In the IEC study, subsidized markets are Indonesia, Malaysia, Thailand, South Korea, Sri Lanka, Taiwan. Unsubsidized and deregulated markets are Japan, Philippines, and Singapore. Hong Kong is unsubsidized but it is unsure if it’s deregulated.

The Electric Power Industry Reform Act (EPIRA) of 2001 has several provisions to help reduce Philippines’ electricity prices. The deregulation of power generation encouraged many private power producers to compete with each other. The Wholesale Electricity Spot Market (WESM) average prices for instance have been declining, in Pesos/kWh: 6.43 in 2010, 3.80 in 2011, 4.87 in 2012, 3.85 in 2013, 4.40 in 2014, 3.47 in 2015, and 2.84 in 2016.

The retail competition and open access (RCOA) under EPIRA is also an excellent provision. RCOA allows the “contestable consumers” or those with average electricity consumption of 1,000 KW (or 1 MW), a level which will later be reduced to 750 KW a day, to choose their own Retail Electricity Suppliers (RES) and leave their existing private distribution utility (DU) or electric cooperative (EC).

With RCOA, electricity consumers can set their own conditions from their RES.

Some can demand that they be supplied 100% only from renewables even if the price is higher, others can demand that they be supplied only from cheap and stable sources. Small customers can also aggregate their demand or allow an aggregator to pool their combined demand to become contestable customers.

There are two recent reports in BusinessWorld related to this.

(1) SC asked to lift TRO on retail power suppliers (April 24)

(2). DoE may step in as licensing body for retail power suppliers (April 12).

Report #1 is about Bayan Muna (BM) petition at the Supreme Court (SC) that it should lift its indefinite temporary restraining order (TRO) it issued in February 2017 barring the Department of Energy (DoE) and the Energy Regulatory Commission (ERC) from further implementing RCOA and allow the contestable customers to choose their own RES.

I was surprised that the pro-state intervention and pro-big government Bayan Muna suddenly turned around and campaigned for pro-market, pro-consumer choice — that consumers be given more freedom to choose an RES from the 23 short-listed by the ERC. Turns out that Bayan Muna is only doing this to further fight Meralco as a monopoly in electricity distribution in Metro Manila and some surrounding provinces. However, the group is silent about the Constitutional provision granting monopoly power to all other DUs and ECs in the country.

Report #2 is about the DoE studying the legality of being the issuer of licenses for RES. There are no updates about this yet.

The indefinite TRO has a very adverse result, reducing consumer choice, especially the contestable customers.

Those who consume 750-999 KW a day and are willing to move voluntarily to RES cannot do so because they will be disallowed by the ERC and PEMC. And even those who consume 1MW or more per day that are already qualified for RCOA are hesitant to have power contracts with RES because of the continuing uncertainty.

The ERC also does not and cannot issue new RES licenses or renew expiring ones, resulting in reduced RES competition.

Even some DUs also face uncertainties whether to get additional generation contracts or not for contestable customers because these customers can leave them anytime once the TRO is lifted.

Government prohibitions should be kept to the minimum. The EPIRA law has already succeeded in reducing electricity prices and expanded the country’s power supply capacity so why suspend more customer choice and empowerment?

The SC indeed should lift its indefinite TRO because it is anti-consumers and anti-business. Existing DUs have the freedom to put up their own RES so that contestable customers who have left the DU franchise system can still be their customers. Or the SC can strike down certain ERC resolutions so that it can issue new resolutions and regulations to implement RCOA and further expand consumer choice.

Effects of Supreme Court TRO on RCOA

* This is my column in BusinessWorld last January 18.

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“The real bosses, in the capitalist system of market economy, are the consumers… The entrepreneur profits to the extent he has succeeded in serving the consumers better than other people have done.”

— Ludwig von Mises, Bureaucracy

Geographical monopolies in electricity distribution are among the last remaining state-created monopolies in the country via congressional franchises because electricity distribution is considered a “public utility.”

As a result, factories, hotels, malls, or hospitals have no choice but to source their energy requirements from electric cooperatives (EC) or privately run distribution utilities (DU) which were given the franchise to serve these particular locations.

However, Rule 12 of the Electric Power Industry Reform Act (EPIRA) of 2001 (RA 9136) has changed this constitutional and legal guarantee of monopoly through the Retail Competition and Open Access (RCOA) provision.

RCOA breaks the geographical monopoly and allows retail competition in electricity to a contestable market composed of medium to big-ticket electricity consumers. Open access allows any qualified person or entity to use the transmission and/or distribution system and related facilities subject to payment of retail wheeling rates.

With rising power capacity addition yearly and RCOA implementation, average prices in the Wholesale Electricity Spot Market (WESM) have been declining.

In 2010, the cost of electricity in pesos per kWh was at 6.43. In 2011, it was 3.80; in 2012, 4.87; in 2013, 3.85; in 2014, 4.40; in 2015, 3.47; and in 2016, 2.84.

However, in early 2017, the implementation of the RCOA was suspended by a Supreme Court temporary restraining order (TRO). In effect, five resolutions issued by the Energy Regulatory Commission (ERC) from June 2015 to November 2016 were likewise suspended. Besides affecting the voluntary participation of contestable customers (CCs) for 750-999 kW, the suspension also reduced potential competition because many retail electricity suppliers (RES) — especially those whose licenses were expiring — were unable to renew them.

This decline in competition resulted in lower capacity demand by the contestable customers, from 3,456 MW in end-2016 to only 862 MW in November 2017 for the 1MW and higher customers, and from 351 MW end-2016 to only 78 MW in November 2017 for the 750-999 kW customers (see table).

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A BusinessWorld report last Jan. 8 entitled “DoE to seek SC guidance on retail competition” said that the department issued a new circular allowing the switching from captive to contestable consumers to allow greater participation from new players. It also allowed the ERC to continue issuing licenses to RES and renew the licenses of RES with expiring licenses.

Here is a summary of the benefits of RCOA to consumers and the Philippine economy in general. Many of these were discussed at the EPDP presentation last September.

  1. Contestable customers will have more choices in pricing and power supply contracting — privileges that are not available to small and captive customers.
  1. Small customers can aggregate their demand or allow an aggregator to pool their combined demand to become contestable customers.
  1. Contestable customers can choose the type or source of power they want. Some simply want cheaper prices, others want stable 24/7 electricity even if costs are higher than those offered by their previous ECs or DUs, whose services may be unreliable. For their part, other consumers who wish to source all of their energy needs from renewables can also do so — as long as they are willing to fork out more money for the privilege.
  1. Contestable customers can have full control of their generation costs and are not required to subsidize small and/or off-grid consumers, unlike traditional end-users. They can choose to have flatter load factors by using more baseload, an arrangement that is ideal for companies, especially those that use power 24/7 like manufacturing plants, big hotels, hospitals, and BPO centers.
  1. Customers can shift demand to off-peak hours and can “peak shave” to reduce their electricity price. Consumers have big leeway and choices based on their needs and corporate philosophy and branding.
  1. There are more than 50 RES to choose from, shown in the table above. Contestable customers can also engage in financial hedging or enter into contracts with any financial provider to hedge its existing contact structure and they need not necessarily be an RES.
  1. More investments in power generation can be expected as power companies can contract directly with customers and bypass ECs, a number of which have issues with paying generation companies on time.

The SC TRO has therefore resulted in the following unintended consequences:

1) It disallowed many contestable customers in the 750-999 kW demand category to enjoy RCOA, forcing them to stay with their ECs or DUs and depriving them of the benefits discussed above.

2) Other eligible customers have been discouraged from availing the RCOA due to lingering uncertainties.

3) DUs also face uncertainties whether to get additional generation contracts or not for contestable customers because the latter can leave them anytime once the TRO is lifted.

4) New RES players and existing RES with expiring licenses cannot get new ERC licenses. This means lesser competition among RES, DUs, and ECs. Less competition means lesser choice for customers.

The SC therefore, should resolve this uncertainty soon — either lift the TRO and allow the various ERC resolutions to be implemented again, or strike down those resolutions so that the ERC can issue new resolutions and regulations to implement RCOA. RCOA has to be implemented because it is pro-choice, pro-consumers, and abandons monopolization and unreasonable subsidies.

Top 8 energy news of 2017

* This is my article in BusinessWorld last January 2.

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This should have been a “Top 10” list but due to space constraints, I limited it to only eight, divided into four news stories each for global and national.

GLOBAL

1 “Non-news” to many media outlets but good and big news to me: NO major energy catastrophes in 2017. No major oil spill, no gas blowouts, no reactor meltdowns, no major infrastructure destroyed by natural disasters, and energy prices did not rebound to their 2014-2015 levels.

2 In June 2017, the British Petroleum (BP) Statistical Review of World Energy 2017 was released and among the highlights of that report are: (a) China and US remain the planet’s biggest energy consumers, (b) increases in oil, natural gas, nuclear and renewable energies (REs) but decline in coal use, (c) for big Asian economies, coal use remain very high especially in China, India, Japan, South Korea and Indonesia (see chart).

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3 In September 2017, the US Energy Information Administration (EIA) released its “International Energy Outlook 2017” and among its projections are (a) In 2040, fossil fuels (oil, natural gas and coal) and nuclear will supply about 83% of global total energy consumption; 8% from hydro and 9% combined from wind, solar, geothermal, other REs, and (b) coal use is projected to be stable until 2040 and declines in China to be offset by increased use in India.

4 In November 2017, the “America First Energy Conference” was organized by the Heartland Institute in Houston Texas to analyze US President Trump’s pronouncement of US global “energy dominance”. “Energy dominance” is defined on two key goals: (a) meet all US domestic demand and (b) export to markets around the world at a level where they can “influence the market.” The important lessons from the papers presented are that (i) the US can have energy dominance in oil, natural gas and coal, but (ii) US cannot and should not aspire to have dominance in nuclear and REs. It was a very educational conference and I was the only Asian in the conference hall.

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5 Hike in excise tax for oil products and coal under TRAIN but zero excise tax for natural gas even if it is also a fossil fuel. Diesel tax will increase from zero in 2017 to P2.50/liter in 2018, P4.50 in 2019, and P6.00 in 2020. Gasoline tax will increase from P4.35/liter in 2017 to P7 in 2018, P9 in 2019, and P10 in 2020. Coal tax will increase from P10/ton in 2017 to P50 in 2018, P100 in 2019, P150 in 2020. There was successful maneuver by some senators, a known economist and some leftist organizations to spare natural gas from higher taxation, benefitting a big energy gas firm.

6 The feed-in-tariff (FiT) or guaranteed high price for 20 years for wind-solar and other renewables keeps rising, from only 4 centavos/kWh in 2015, became 12.40 centavos in 2016, 18 centavos in mid-2017 and petition for 22 centavos by late 2017 not granted. A pending 29 to 32 centavos/kWh by early 2018 is awaiting approval by the Energy Regulatory Commission (ERC).

7 Continued exemptions from VAT of the energy output of intermittent wind-solar and other renewables but stable fossil fuel sources were still slapped with 12% VAT under TRAIN. Government continues its multiple treatment of energy pricing: High favoritism for wind-solar, medium-favoritism for natgas, and zero favor for oil and coal.

8 Supreme Court issuance of TRO in the implementation of Retail Competition and Open Access (RCOA) provision of the Electric Power Industry Reform Act (EPIRA) of 2001. In particular, the SC TRO covered five ERC Resolutions from June 2015 to November 2016, affecting the voluntary participation of contestable customers (CCs) for 750-999 kW and many Retail Electricity Suppliers (RES) with expiring licenses cannot get new ones yet, reducing potential competition. Data from the Philippine Electricity Market Corporation (PEMC) show that as of Nov. 26, 2017, there were 28 RES, 12 local RES, 862 CCs for 1 MW and higher, and only 78 CCs for 750-999 KW. There should be thousands of CCs in the lower threshold, there should be several dozens of RES nationwide to spur tight competition in electricity supply and distribution.

Overall, EPIRA of 2001 was a good law that introduced competition, broke government monopoly in power generation, broke private geographical monopolies in power distribution. The RE law of 2008, SC TRO 2017 and TRAIN 2017 are partly reversing the gains of EPIRA.

On the retail competition and open access (RCOA) and EPIRA

* This is my article in BusinessWorld on April 19, 2017.

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Electricity distribution, unlike generation, is defined as a “public utility” and hence, is granted as a monopoly right via congressional franchise. There are more than 120 distribution utilities (DUs) such as Meralco and electric cooperatives.

To dilute this monopoly, the Electric Power Industry Reform Act (EPIRA) which was passed in 2001 came with Section 31, Retail Competition and Open Access (RCOA) that “shall be implemented not later than three (3) years upon the effectivity of this Act,” and Section 29, Supply Sector, “The supply of electricity to the contestable market …” These are useful, anti-monopoly provisions, thanks to EPIRA.

The RCOA was finally implemented 12 years after, on June 26, 2013. The Department of Energy (DoE) and the Energy Regulatory Commission (ERC) issued orders to implement this beautiful provision.

But somewhere along the way, what should be a competitive scheme has become a “mandatory” order.

Some electricity consumers are unhappy because their choice to stay with their DUs — especially if these provide them good service and prices — has been done away with. This is why they went to the Supreme Court (SC) and asked for a Temporary Restraining Order (TRO) against the RCOA.

Below is a summary of these orders (one from DoE, four from ERC, and one from the SC).

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The SC TRO has mixed signals. It is good because (a) it stopped the “mandatory migration” to RES by contestable customers (CCs) and thus, they have the option to stay with their DUs or not, and (b) local RES will be allowed again. But it can also be bad because (a) it stopped the voluntary participation of CCs for 750kW (lowered threshold), and (b) some ERC Resolutions suspending earlier prohibitions to Retail Electricity Suppliers (RES) are also removed.

Government prohibitions should be kept to the minimum as much as possible.

These prohibitions would give people — especially those with very low technical and financial capacities — the right to become RES which might invite abuse of CCs.

2017041893842Such prohibitions should not include more RES players, the right of CCs to stay with their DUs or not, and voluntary participation of customers at 750kW.

EPIRA has provided for more customer choices, strengthened consumer empowerment, and demonopolization of electricity generation and distribution. Let this spirit stay in the succeeding orders of the DoE and the ERC.

 

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

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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