By Bienvenido S. Oplas, Jr.

Risks and uncertainties in business development and innovation are natural and are generally factored in by players. Uncertainties due to policy changes if not policy reversals by government regulators are something that companies find hard to deal with. Unless of course they are cronies for which these policy uncertainties are meant to rattle and harass existing and potential/future players and competitors.

During the BusinessWorld Economic Forum last May 19, 2017 at Shangrila BGC, panel on “Fueling the future”, positive developments and remaining uncertainties in the energy sector were discussed by two of the three speakers, Mr. Eric Francia of Ayala Energy and Mr. Antonio Moraza of Aboitiz Power.

I am enumerating some uncertainties based on the presentations by the two speakers, as well as new ones not tackled by them.

Antonio R. Moraza

Mr. Francia started on a positive note that there is adequate power supply in the Luzon grid and the rest of the country until early 2020’s, thanks mainly to the Electric Power Industry Reform Act (EPIRA) of 2001. Then he mentioned two major uncertainties:

1. More than four gigawatts of coal plants awaiting Energy Regulatory Commission (ERC) and ECC approvals which need to be decided upon within one to two years. Reserves in the Luzon grid are thinning due to ageing plants, so these proposed coal plants need to be acted upon early.

2. More than three gigawatts of natural gas plants that are dependent on Malampaya, which may soon run out of natural gas by mid-2020s. There is a need for liquidified natural gas facilities soon.

3. Minor uncertainty — Retail competition and open access (RCOA) implementation is faced with short-term legal challenges. The 1-MW customers can choose their retail electricity suppliers (RES) but the 0.75-MW customers cannot due to the on-going TRO at the Supreme Court.

Mr. Antonio Moraza of Aboitiz also started his presentation on a positive note, saying that we have sufficient power supply in the medium term, thanks mainly to the EPIRA that resulted in four important restructuring processes benefitting the Philippine power industry:

(a) More private sector investments. From only 13,380 MW capacity in 2001 up to 21,423 MW in 2017, and more than 5,000 megawatts of committed projects by 2020. The number of players increased from only one — the National Power Corporation monopoly — to 75 players, 15 of which have more than a capacity of 150 megawatts.

(b) Competitive market that drives down power costs. The Wholesale Electricity Spot Market (WESM) Load Weighted Average Price (LWAP) dropped from an average of P5.40 per kilowatt hour in 2012 to only P2.8/kWh in 2016.

(c) Customer choice through RCOA, the “contestable market” group of electricity consumers enjoy cheaper rates due to competition among many retail electricity suppliers even with existing DUs. And

(d) The halt of the government’s financial drain. Remember that former state monopoly Napocor was the single biggest deficit-generator in the government then.

The challenges, according to Moraza and on top of challenges identified by Mr. Francia, are the following.

4. Transmission infrastructure — need coordination plans with the generators.

5. Price control at WESM. No, Mr. Moraza did not use the term “price control” in his presentation but I think that is how the primary price cap (P32/kWh) and secondary price cap (P6.245/kWh) at WESM should be called.  As shown in the chart above, there are “outlier” price spikes and price dips which are very short-term, lasting for a few hours or few days, but the public and certain sectors of society point to these temporary price spikes as “abuses under EPIRA” by the oligopolies, the oligarchs, the capitalists.

Mr. Moraza also added among the challenges are (a) social acceptability, government should work hand in hand with developers, and (b) that the regulator — the Energy Regulatory Commission (ERC) — should continue being independent and autonomous.

Not discussed in the panel is the new issue of distribution system loss cap by the ERC and contained in two Senate bills. I would call this measure as another price control.

6. Price control at system loss charge. The ERC Draft “Rules for Setting the Distribution System Loss Cap and Establishing Performance Incentive Scheme for Distribution Efficiency” has set the following caps:

(a) Technical loss (component of distribution system loss that is inherent in the physical delivery of electric energy including conductor loss, transformer core loss, and technical error in meters) caps are: Cluster 1: 7.00%, Cluster 2: 5.50%, Cluster 3: 3.25%, and Cluster 4: 2.75 %. Private distribution utilities (DUs) like Meralco are in Cluster 4.

(b) Non-technical Loss (energy lost due to pilferage, meter reading errors, meter tampering, others not related to the physical characteristics and functions of the electric system) cap: for Electric Cooperatives (ECs), 4.5% of energy input while for private DUs, it is 1.25% of energy input.

This differentiated price control is favoring the ECs while penalizing private DUs. The philosophy of rule of law states that rules should apply equally to unequal people and players. If the real purpose of the ERC new regulation is to protect the consumers from high system loss charge in their monthly electricity bill, then ERC should slap a uniform low cap for all DUs, whether they are ECs or private corporations.

By imposing a differentiated system loss cap, ERC is not exactly promoting consumer welfare but protecting certain electric cooperatives so that their inefficient if not outright wasteful distribution system is rewarded with higher profit at the expenses of users.

Bienvenido S. Oplas, Jr. is a Fellow of SEANET and Stratbase-ADRi and President of Minimal Government Thinkers.

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