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Commentary

Legal issue in Meralco case unclear

/ 08:21 PM February 16, 2014

Supreme Court justices appeared to be searching for a legal issue to rule on in the final hearing last Feb. 11 on the Manila Electric Co.’s unprecedented rate hike. The justices probed the power market’s technical rules and a supply contract’s specific provisions as though conducting a Senate inquiry. While fascinating, the discussions had no direct relevance to the anti-Meralco petitions’ two main demands: 1) nullify the rate hike due to lack of notice and hearing, and 2) declare part of the Electric Power Industry Reform Act unconstitutional. The market’s mechanics seemed more complex than a tempting metaphor of consumers battling greedy corporations, mechanics not always summarized accurately in media reports.

In the preceding hearing, Meralco lawyer Victor “Boy” Lazatin outlined that ahead of the Malampaya gas facility maintenance in November 2013, Meralco prepurchased one plant’s capacity. The market, however, has a “must offer” rule that requires even prepurchased power to be quoted, with quotes queued and taken depending on demand. A plant that does not want to sell quotes the highest allowed price (P62) to ensure it is at the back of the queue. But Lazatin posited that when Malampaya shut down, certain other plants failed to supply power, and the market took the exaggerated high quotes at the queue’s end. This caused the price spike because the market applies the highest price taken as the entire market’s “clearing price.”

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The final hearing corroborated Lazatin’s presentation and made it difficult to simply assume that bids at the highest price constitute market abuse. First, Energy Secretary Jericho Petilla explained that such behavior is rational under the market’s peculiar rules. Other plants behave this way, such as non-coal plants wishing to conserve expensive fuel and hydro plants wishing to conserve stored water outside peak periods where selling prices are highest. After prices spiked in November, Petilla had the market’s maximum price reduced to P32 and put in place a provisional rule for suspending the queuing mechanism in certain cases.

Second, Petilla explained that the present “must offer” rule is in fact intended to include prepurchased power, to ensure that the market accounts for the “gross pool” and prevent manipulation by firms who withhold power. Comments for and against this are heard in the industry. Third, Ranulfo Ocampo of the Private Electric Power Operators Association posited that a firm may withhold the capacity of a plant from the market to constrict supply and force power from an extreme bidder such as Meralco to be sold into the market. This could jack up the price to P62, inadvertently increasing profit from the firm’s other plants. He emphasized, however, that this was posited in hindsight.

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Power Sector Assets and Liabilities Management, the government corporation that holds power assets for privatization, encapsulates the complex issues. PSALM maintains the circa 1970s Malaya plant but has declined to provide power from it for years because of its technical constraints. First, it takes 16 hours and P5.4 million to set up before it can feed power into the grid. Second, its fuel tanks refill slowly and it can run for only 16 days before these tanks empty. Third, its fuel costs are prohibitive. All these make it cheaper to pay penalties for not offering its power.

Petilla said he did not intervene when the power system operator did not activate Malaya when prices spiked in November because he was wary of the old plant breaking down, which could have led to power outages during Christmas. He said several times his priority is keeping Malaya available to stabilize the power supply despite its operating costs.

Senior Associate Justice Antonio Carpio tried to apply a clear legal rule by arguing that it takes at least two parties to contract and Meralco cannot thus contract with itself to buy its own power on the market, implying the P62 clearing price is void. But he was told that the buyer is not identified this way because power is fed into the grid and all purchasing parties withdraw it.

Justice Marvic Leonen posited there is grave abuse of discretion because the Energy Regulatory Commission has the power to investigate market anomalies but failed to act despite the price spike. Chief Justice Maria Lourdes Sereno similarly cited the ERC’s legal duty to maintain the least cost. This, in my opinion, is dangerous because it would allow future justices to pluck a legal standard and use it to reverse a government body’s judgment. And perceived incompetence or negligence is arguably not unconstitutional.

The ERC responded to due process, arguing that the rules allowing automatic rate hikes were properly subject to notice and hearing and the November rate hike was not a rate change but one governed by previously approved formulae. ERC Executive Director Francis Saturnino Juan stated that the ERC is not questioning the high court’s jurisdiction with respect to this issue.

Juan was reprimanded by Sereno and Leonen for being evasive when asked several times whether supply contracts can be made public. He eventually answered yes, but tried to justify that power generators’ operating information may be made confidential.

The high court is in a quandary because some justices hint that certain power market mechanics can be improved, but it is unclear what legal rule can be applied. The prudent course is to focus on strictly legal issues and be wary of the petitions’ extravagant claims of collusion and unconstitutionality.

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Oscar Franklin Tan (@oscarfbtan, facebook.com/OscarFranklinTan) cochairs the Philippine Bar Association Committee on Constitutional Law and teaches at the University of the East.

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