Moderate your grid

In the three-system value chain of our energy grid, perhaps the most powerful entity statutorily vested with the most control is the transmission company. While it is regulated, the transmission company is a monopoly. And even as it lies between the unregulated generation companies and the heavily regulated distribution utility, it calls the shots, determines both supply and demand, and effectively has absolute control spanning the whole archipelago.

Privatized under the Arroyo administration, the transmission grid is the largest and most critical single asset in our energy portfolio. When it was hocked, the principal Filipino entity that won the bid has since substantially flipped its ownership, but its foreign technical partner continues to hold the largest single block and has its hands firmly on the operating levers. That entity is the State Grid of China, an enterprise fully owned by the Chinese government with whom the Philippines has a serious diplomatic row.

From that alone, immediate questions beg answers. More so as the Filipino equity holder has vast business interests in mainland China. These affectations and issues are important. As a franchise holder, in a sense, its true major stakeholders are the public that grants its franchise. Any entity granted such tremendous powers over a national security infrastructure, and entitled to operate against disparate geopolitical affectations, must necessarily be answerable and regulated to degrees that preclude market abuse.

Recently, tucked in unobtrusive corners of the major broadsheets, more disturbing questions have been festering on the manner and method of how our national electricity transmission grid is being controlled. These range from questions of external regulation, basically the province of the Energy Regulatory Commission (ERC), to controversial internal procurement practices, statutorily surrendered to the independent management of the grid.

For an economy reputedly with one of the highest electricity tariffs in the region, and made even more uncompetitive by underspent infrastructure programs, questions of regulating the transmission grid are important. More so where, in contrast to neighboring economies, there are specific powers surrendered to private entities that impact on the quality and cost of electricity in a fractured archipelago where expensive cables are strung beneath deep and vast seas.

One of the objectives in privatizing our transmission facilities was to transfer the financial risk of expanding the wires and cables infrastructure to the privatized entity. Simply put, these companies must undertake to spend where the state could not. In exchange, we allowed them some purchasing autonomy.

The ERC has allowed utilities vast license to pick its suppliers even where winning bidders submit the highest and most uncompetitive bids. So that these uncompetitive bids and what might possibly be inordinate cost overhangs are not passed on or recouped at the consumer end, the ERC imposes tailpipe measures and approves only cost recoveries that pass its criteria. This exposes the franchise to inevitable and, by and large, dysfunctional cost-price squeezes where it effectively advances capital costs it may not be able to recover down the line.

Consider the case of a recent award by the transmission company of a multibillion-peso bid for the uprating of a submarine cable that increases the capacity of an existing line strung beneath the waters from Panay to Negros and Cebu. In the past, Panay was at the very end of a submarine transmission system that delivers energy from Leyte to Cebu and then from Cebu to Negros before eventually ending with Panay. Little was left over for Panay because of the insatiable demand from Cebu. But, over time, as Panay developed its own capacities, it needed less of imported energy and eventually gained enough generating capacity to export to both Negros and Cebu. This necessitated increasing cable capacities going in the opposite direction.

When the transmission utility recently bid out the uprating project, it curiously awarded the contract to a company that had less or no experience in the country. Moreover, its offer was also the most expensive given that its proposal had less redundancies than other bids. Redundancies are critical especially where submarine cables are concerned. A redundant cable system is easier to maintain and repair and assures continuous power supply compared to one with little or no redundancies. Meter for meter, a system without a redundant cable is doubly more expensive.

While we trust that the ERC will not allow capitalized costs to eventually find their way to transmission tariffs, the cost-squeeze created when awards are given, not to the lowest bidder with the most optimal systems, but to the highest with less redundancy measures, there remains the possibility that unnecessarily expensive bids are eventually burdened on the public.

Dean dela Paz is a former investment banker and a consultant to the Joint Congressional Power Commission. He authored a book on energy governance tool kits and teaches finance, investment mathematics and corporate strategy.