Back to business as usual on electric rates

Ben D. Kritz

Ben D. Kritz

THE speed with which critical issues that have far-reaching economic implications drift beyond the reach of public concern here is sometimes astonishing. For a period of about two months straddling the end of 2013 and the beginning of this year, the country was raptly fixed on a drama over high electricity rates, an issue that eventually made it all the way to the Supreme Court.

The crisis was caused by an initially successful attempt by Meralco, the nation’s largest electricity distributor, to impose a whopping P4.15/kWh rate increase on its customers, jacking up the generation charge component of the overall billing rate by a little over 73 percent in one blow.

The rate hike was necessary, Meralco said, because an unusual set of circumstances had made electricity from its usual sources scarce at the most inopportune time, obliging the distributor to purchase far more power than usual from the open market at a far higher price than usual.

Of course, we all know how all that turned out. The Supreme Court disallowed the rate hike, and the Energy Regulatory Commission (ERC) eventually ordered the Wholesale Electricity Spot Market (WESM) to “recalculate” the prices for the period in question, and to reduce the maximum “ceiling” price for electricity offered in the WESM from the ridiculously arbitrary rate of P64/kWh to the merely arbitrary figure of P32/kWh.
Besides those actions, however, there was virtually nothing done to solve the underlying systemic problems that had caused the uproar in the first place, and nothing done to prevent it from happening again. Half a year on, and it appears that the regulatory structure and the industry it oversees have returned to business as usual—mild bickering, casual evasiveness, and simple dithering—in managing the nation’s electricity infrastructure.

This disturbing revelation was one of the more concrete outcomes of the Power & Electricity World Philippines 2014 event held this week at the SMX Convention Center, where industry stakeholders who managed to get the attention of the media preferred to use it not to talk about ways forward but to air various complaints, and provide excuses for not only why things are the way they are, but why they have to remain that way.

The general thesis of those comments—that anything that limits the unrestrained free market in electricity in this country will have dire consequences for future supply and anything that it affects—has long been discredited by reality, but that doesn’t stop power sector backers from offering it, anyway. From the point of view of the Management Association of the Philippines, suggestions that the Electric Power Industry Reform Act of 2001 (Epira) should be amended or that the WESM should be placed under greater control could drive away investors. Wallace Business Forum chairman Peter Wallace went one better (or worse, depending on your point of view), polishing off the old “It’s not a problem with the Epira law, it’s a problem with its implementation” chestnut to support the general position of the management association.

It is Mr. Wallace’s prerogative to exercise the patience of Job in waiting for a 13-year-old (and counting) law to be “properly implemented,” but in like fashion, it is the prerogative of Filipino citizens, businesses, and potential investors to critically question whether inherent flaws in the law actually make “proper implementation” a moot point. The suggestion, in any case, that high, volatile electric rates are inevitable and even preferable to a more strictly controlled sector would be amusing, if it was not so economically destructive, and if it was not the apparent policy of the nation’s regulators to let it continue.

We can make that judgment because of comments shared by ERC commissioner Gloria Yap-Taruc at the same conference. A primary concern of the regulatory agency now, according to the commissioner, is that some electric distributors are still forming bilateral contracts with suppliers, as opposed to following a rule drafted more than a year ago recommending that distributors subject their electricity supply requirements to competitive bidding.

Back in January, I attended an ERC public hearing about these new rules “governing the execution, review and evaluation of power supply agreements entered into by distribution utilities for the supply of electricity to their captive market,” and at the time it was clear the power generation sector—with the firm support of major distributors like Meralco and business groups like the Philippine Chamber of Commerce and Industry—had no intention of honoring the proposed rules, because any supply arrangement arrived at through a competitive bidding process would still be subject to ERC review and approval, which could conceivably involve regulatory alteration of rates or other terms. The industry balked at the notion that regulatory review of agreements reached through competitive bidding should occur, and expressed the rather wounded view that a competitive bidding process should automatically be assumed to have generated the “least cost.”

Bilateral contracts, on the other hand, are still subject to review by the ERC but are not often challenged; the specter of “tight supply” allows the generators and distributors to tell the ERC that if a particular agreement is not accepted, then there may be no power at all.

Having failed for the most part to force the ERC to remove itself from oversight of rate-setting where competitive bids are involved, the industry has simply gone back to a tried-and-true method to render regulation irrelevant, which the regulator seems powerless to dispute.

And that, ladies and gentlemen, is a direct result of the implementation of Epira, such as it is; why anyone would expect anything different to happen is a mystery. The problem of high power rates has slipped away from public attention for now, but signs of supply shortages and the near-certainty of even higher fuel prices—thanks to a serious and rapidly-widening conflict in Iraq—for the foreseeable future strongly suggest the problem will return, soon, and with a vengeance. Someone with a few more insightful solutions than “we should just do what we’ve been doing” needs to speak up, the sooner the better.


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