Who’s responsible for power price spike?

The electricity market has been in the news lately, with the huge spike in the price of electricity for the customers of Meralco (70 percent of Luzon). My knowledge of this market amounting to not much, I decided to bone up on it before adding my voice to the cacophony of opinions, and recommendations.  Here’s what I found:

The Epira (Electric Power Industry Reform Act) of 2001 mandated the Department of Energy (DOE) to establish the Wholesale Electricity Spot Market (WESM) that would “facilitate a transparent and reliable market for electricity, and, jointly with the electric power industry participants, formulate the detailed rules for the WESM.” This the DOE did, with inputs from the industry participants.

The Epira also entrusted to the Energy Regulatory Commission (ERC) the approval of the price determination methodology, which it did with the proper consultation.

An “autonomous group market operator,” the Philippine Electricity Market Corp. (PEMC) composed of industry participants—involved in generation, transmission, and distribution—was also created, chaired by the DOE. Its role was to “procure necessary infrastructure and technology, and achieve institutional and participant readiness for the commercial operation of the WESM.” With the DOE as chair, the board members of PEMC, aside from the ERC, are representatives of the generators, transmitters and distributors, plus four independent members (presumably representing consumers).

I bring this out to show that the government was very visible in making the market rules (WESM).

The first thing the DOE, ERC and PEMC did was to create the WESM Tripartite Committee (composed of themselves—i.e., the secretary, chair and president); it is supposedly interim, but it is still alive. Among others, this committee was tasked to “perform such other functions as may be necessary to PREVENT OR MITIGATE EXTREME PRICE VOLATILITY OR EXCESSIVE PRICING CONDITIONS THAT IMPEDE THE DYNAMIC AND PROPER FUNCTIONING OF THE WESM.” (Emphasis mine)

That was in Joint Resolution No. 1, dated June 2006. Shortly after came Joint Resolution No. 2, which was just as hot on preventing price spikes. This resolution adopted a bid cap or offer price ceiling “in order to limit or reduce possible instances of excessive increases or high market prices.” What was the initial cap? P62,000/mWh, or P62/kWh. This cap, supposed to be reviewed quarterly, has not been changed since 2006.

Reader, I assure you that I tried to find out the basis of this cap. Why? Because that price should represent the highest marginal cost or highest extra cost of producing the last additional kilowatt of electricity. But that is obviously not the case—neither in 2006, nor even now. The current operating costs range from about P4 to P23 per kWh (it was less, obviously, before). I don’t know what the marginal costs are (they should have figured it out by now), but P62 per kWh looks like a number that has no relation to any marginal cost.

It is important because in the WESM, the sellers of electricity are not paid what they ask for; they are paid what the last accepted bidder asks for. (Their bids are arranged from lowest to highest, and the highest accepted price is what is paid by the consumers. So if the maximum bid of P62/kWh is the clearing price, think of the price spike for the consumers and the windfall profits for some power generators.

The official explanation for the recent spike in prices was the scheduled maintenance of power plants supplied by Malampaya. But there was a similar shutdown during the 2010 elections and there was no spike in prices. Planning.

The PEMC has an independent Market Surveillance Committee (or MSC, currently chaired by Francis Mapile and with Peter Lee U of the University of Asia and the Pacific as a member) to monitor the WESM. There is also an Enforcement and Compliance Office to investigate possible violations of WESM rules, as well as a Market Assessment Group (MAG). In other words, Reader, the WESM is supposed to be scrupulously monitored.

Question: Has there been any investigation for anti-competitive behavior or market power abuse in the history of WESM? Answer: Yes. The first case was against the Power Sector Assets and Liabilities Management (PSALM) Corp., a government entity, which by the way, was the subject of all of the cases from 2006 to end 2011. What was the upshot? Well, the PEMC’s investigation “found that PSALM through its trading teams had market power and was exercising it to the extent that it was an abuse of its power.” But the ERC conducted its own investigation and found that “there was no prima facie case against PSALM for anti-competitive behavior or market power abuse.” The market operator was very strict, but the ERC was quite generous. Maybe that is why there were no more cases of anti-competitive behavior filed.

Question: Does the Market Surveillance Committee or the PEMC figure that there is something wrong with that P62/kWh number? Answer: In the 2012 annual report of the MSC, it noted that “the setting of the offer price cap at P62,000/mWh was made before actual WESM operations,” so it “intends to explore the possibility of recommending a more reasonable price level, supported by statistical data derived from actual WESM operations.”  That was a year ago. Nothing yet, unfortunately, for the country and the consumers.

Final result: The DOE and ERC and PEMC fell down on their jobs. They should primarily be held responsible. After them, the generators who may have “gamed” what appears to be a flawed system.