Market failure?

Waking up from its bureaucratic slumber, the Energy Regulatory Commission has finally declared that “market failure” marked trading at the Wholesale Electricity Spot Market (WESM) late last year. In view of this finding, the commission ordered WESM operator Philippine Electricity Market Corp. (PEMC) to recalculate the prices at which power capacity had been sold, and Manila Electric Co. to correspondingly adjust electricity rates for November and December 2013.

This is welcome news, strengthening the argument (already raised at the Supreme Court) that there was collusion among the power suppliers trading at the WESM and all but guaranteeing lower Meralco charges for December 2013 and January 2014. But the order cannot be allowed to let the ERC itself off the hook. The spike in prices after the regularly scheduled shutdown of the Malampaya natural gas platform was also a regulatory failure, and the commission must be made to answer for it.

The ERC order, dated March 6 but released only on March 11, found that the shortage of supply at the WESM was artificial, and that therefore the artificially high prices could not be “reasonable, rational and competitive.” As ERC executive director Saturnino Juan explained in a news briefing, “Supply was low because market participants did not offer their available capacity, so there was market failure.”

The order itself stated: “The lack or failure of competition necessitates government intervention to protect the consumers from unreasonably high market prices. Government intervention in this case is a valid exercise of the state’s police power and can be done by the regulatory body to which the said power has been delegated and to intervene when the common good so demands, such as the ERC.”

We note that the ERC order does not close the door on further investigation of the WESM suppliers. “Market failure” sounds like a euphemism for “market players tried to pull a fast one over consumers,” and it would have been manifestly unjust if the ERC had phrased its order in such a way as to close off further accountability. But at the start of what we can call the order’s dispositive portion, we read the crucial provision that the ERC’s new instructions were “without prejudice to the results of the investigations into the possible culpability of any or all of the market participants.” This is an important belaboring of the obvious, and we hope the Supreme Court takes cognizance of it.

In what the ERC says is a longstanding tradition, the suppliers deliberately did not offer all of their available supply, violating the so-called MOR (or “Must Offer Rule”) of the WESM and in the process artificially creating a shortage. A good case for collusion can be made from this finding.

Unfortunately, the ERC took almost three months to reach its conclusion, when experience would have alerted the commissioners early on to the possibility of market failure. After all, this was not the first time that Malampaya had shut down for regular maintenance.

The 33-page order itself notes, in its curious mix of legalistic and unidiomatic English: “It behooves the Commission to underscore that the Malampaya shutdown is not a case of first impression as its shutdown has been expected to occur but what quibbles is the fact that in previous years with nearly akin circumstances, prices were not as spiky …” (We can substitute “what nags at the conscience” for “quibbles.”)

This is the ERC’s own admission that in previous shutdowns, the hike in prices could be considered more reasonable.

But the order also states: “The non-observance [of the MOR provision] is so rampant that the entire WESM governance structure has perhaps already grown accustomed to encountering it on a regular basis. Even the previous MAG Reports [by the PEMC’s Market Assessment Group] for periods prior to the Malampaya shutdown consistently pointed to the capacity gaps brought about by the violation …”

In that case, the following question can be directed at the ERC: Why did you allow Meralco’s petition for an extraordinarily “spiky” rate hike in the first place? The ERC should have immediately investigated the circumstances that led to the petition. That it didn’t is prima facie evidence of regulatory failure.