Why competition in WESM causes costly ‘kuryente’

The Philippines is known for having the most expensive electricity in Asia, second only to Japan. Yet our per capita consumption of electricity is less than a fifth of Japan’s, and our per capita income much lower—a mere 4.4 percent.

When Republic Act 9136, or the Electric Power Industry Reform Act (EPIRA) was enacted in 2001, Filipinos were promised that the establishment of the Wholesale Electricity Spot Market (WESM) would herald competition into the industry and thus bring down electricity rates. In June 2006, the WESM began operating in the Luzon grid.

In theory, competition to supply the Luzon market with electricity is supposed to result in “the best economic value for participants,” quoting from a presentation1 to FDC by Lasse Holopainen, then president of the Philippine Electricity Market Corp. (PEMC) which runs WESM. Transparent rules agreed upon by all players and a bidding process that is transparent to all ensures that the market will be fair and competitive.

The reality has proven to be worlds apart from theory. The country’s first WESM has one dominant buyer, Meralco, which accounts for 70 percent of demand in Luzon. When WESM began, two state-owned companies, the National Power Corp. and PSALM, held nearly 90 percent of the country’s supply of electricity. A virtual monopsony where demand is concerned, and monopoly in supply, hold little if any promise of competition. The charts below show the lopsided picture.

[Manila Times Editor’s note: The numbers seen in Ms. Pascual’s charts clearly prove her point. Unfortunately, we have no space for them in this edition. They can be seen in the Times online edition.]

The next chart from the first annual report on the WESM tells us that PSALM and the NPC held about 8,500 MW of capacity in its first year of operation. The Lopez Group, which also controlled Meralco at the time, held slightly over 1,500 MW. The Aboitiz Group held less than 500 MW of registered capacity in WESM at the start. Clearly, the government held the monopoly of supply when WESM was first launched in June 2006.

It comes as no surprise therefore that as early as the third and fourth months of WESM’s operation, a 73 percent spike in prices not triggered by the market led to an internal investigation by the stakeholders in the WESM on possible market abuse by the Power Sector Assets and Liabilities Management Corp., or PSALM—a government-owned entity created by EPIRA.

In November 2006, less than half a year into the establishment of the WESM, PSALM was found guilty of market abuse by the PEMC board of trustees2 . This led to an investigation by the Energy Regulatory Commission (ERC) that same month. However in June 2007 the ERC ruled to dismiss the case because of insufficient prima facie evidence.

Apparently the ERC was looking for a document that could prove there was price fixing between PSALM and the National Power Corp. Having found none, it dismissed the case. In its order, the ERC says that it “cannot simply rely on speculations, conjectures or guesswork, no matter how appealing, to establish the act or conduct of PSALM that amounts to anti-competitive behavior or market power abuse.”

The ERC had access to and was given data on the market behavior of the PSALM trading teams in question, such as bid offers, timing of bid offers, costs faced by the generating units involved in the alleged market abuse, and demand and supply conditions during the period in question. But as its order implies, these were deemed by the ERC to be “speculations, conjectures or guesswork.”

Why did the PEMC board find one of its members in violation of competitive market rules and behavior? According to the PEMC, the 73-percent price increase took place at a time when conditions of supply and demand were similar to that of the previous months. So the market could not explain the hike in prices. The PEMC then looked at the plants in question: Ilijan (natural gas), Pagbilao (coal) and Sual (coal). All three were at the time traded by PSALM. The PEMC then found that, contrary to the bidding behavior in the past:

• Beginning on 30 August 2006, at 10:00 in the morning, the three trading teams of PSALM responsible for each of these plants began offering electricity at PhP10,000 per mWh.

• Their bids were identical, beginning on the same trading day at the same trading interval or block, and continued through 11:00 that morning till 9:00 at night.

• The bids made at 10:00 in the morning of the previous week (23 August 2006) were lower and were not identical: Ilijan and Pagbilao–PhP2,000, and Sual, PhP4,528 per mWh. Likewise the bids made at 10:00 in the morning of the previous day (29 August 2006): Ilijan–PhP3,900, Sual–PhP4,528, and Pagbilao–PhP5,000 per mWh.

• The new uniform bids of PhP10,000 per mWh were above the costs faced by each of these plants.

The three trading plants could raise their prices without fear of not being dispatched because each of them was both a top price setter and a top pivotal supplier. A generating plant is a price setter in a particular trading hour if its accepted offer is equivalent to at least 95 percent of the price for that period. It is considered a pivotal supplier if it is needed to fully supply the demand during a trading hour.

In 2006, according to the annual report of PEMC on the WESM, the plants of Pagbilao, Ilijan and Sual were the first, second and fifth top price setters, respectively, in the Luzon grid. That same year, Ilijan was the second top pivotal supplier, followed by Pagbilao in third place, and Sual in eighth place. The three plants enjoy considerable power in the market because their supply is crucial to meet demand and they set the price most of the time. PSALM didn’t need a price setting agreement with any other player in order to raise prices in WESM. It just needed to flex its market muscle.

The ERC dismissal of the PSALM market abuse case was an unwitting statement to WESM players that they could game the market for as long as there was no price setting agreement between two or more players. And game they certainly did.

Fast forward to February 2010. According to the Department of Energy estimates, dependable capacity in the Luzon grid in the first half of 2010 was 10,230 MW, while demand for electricity in February 2010 peaked at 6,878 MW. In other words, there was more than enough dependable capacity to meet demand. Yet the WESM price spiked to as high as PhP60,000 per mWh (or PhP60 per kWh) in that fateful month of February 2010. Economists tell us that when supply is greater than demand, the price falls. So why the opposite result in WESM?

PEMC, the company that runs WESM, gives us a clue. Despite the WESM rule requiring all generating plants to offer to sell ALL their available or dependable capacity, “no matter what conditions were prevailing in the market at each time, the ratio of the average offered capacity to average available capacity ranged between 55 to 66 percent during the first twelve months of WESM’s operations.” This pattern was evident in February 2010: According to WESM data, in 19 of the 28 days of the month, or 242 trading intervals out of 672 hours in February, the maximum offered capacity was below peak demand despite the fact that dependable capacity was greater than maximum demand.

A portion of the lower offered capacity could be explained by scheduled maintenance of plants, particularly, the natural gas plants of Ilijan and Sta. Rita. But this does not tell the whole story. On top of the scheduled maintenance were unscheduled non-utilization of plants.

For example, a unit of San Miguel’s coal plant in Sual, Pangasinan, stopped operating for a month because of “fuel constraint.” Other plants, according to PEMC, also experienced unscheduled outages. The effect of all this is that from 06 February 2010 to the end of the month the norm was that demand exceeded supply.

When that demand is at its highest, or peak, and available capacity is being withheld for whatever reason resulting in an artificial shortage, the opportunity to raise prices is created and the promise of untold profits too tempting to resist.

How can WESM players do this when the government has privatized most of the generating assets in Luzon? Unfortunately for Filipino consumers, privatization is no remedy for market anomalies and market abuse. A WESM player is confident it can game the market if:

• It has more than one generating plant whose capacity it can offer to the market.

• One of these plants is a price setter or a pivotal supplier. If it is both a price setter and pivotal supplier, it enjoys greater market power.

• It won’t be charged with anti-competitive behavior by the ERC.
The table below uses data obtained from the WESM website for the month of February 2010. As the table shows, on the 19 days that demand exceeded supply, three plants stood out as exercising considerable market power. The plants of Pagbilao, Sual and Masinloc were both price setter and pivotal supplier for 16, 14 and 12 days, respectively. Furthermore, a confidential report of PEMC says that the highest price set by Masinloc in February 2010 was PhP13,980 per mWh; by Sual, PhP15,700 per mWh; and Pagbilao, PhP60,000 per mWh. [Times Editor’s note: Just as the charts, lack of space prevent us from showing the tables, which can be seen in the online edition.]
Moreover, throughout the month of February 2010, Pagbilao and Sual had affiliated plants that were on outage in February.

When Pagbilao and Sual were being held by PSALM at the start of WESM, they were already found to have engaged in market abuse. Pagbilao is now owned by the Aboitiz group, Sual by the San Miguel group, and Masinloc, by a consortium led by the US energy company AES. The WESM data tell us very clearly that privatization is no insurance against market power and market abuse. And that competition in WESM is a myth.

1. Philippine Electricity Market Corporation, “The Philippine Wholesale Electricity Spot Market,” 2005.

2. Philippine Electricity Market Corporation Market Surveillance Committee, Report to the PEMC Board on the ECO Investigation Report on the Alleged Competitive Behavior/Market Power Abuse by PSALM, 20 November 2006. https://www.wesm.ph/files/Market Surveillance Committee Report on the ECO Investigation Report on the Alleged Anti-Competitive Behavior.pdf (downloaded 16 February 2008). –Maitet D. Pascual, Freedom from Debt Coalition, Manila Times

Short URL: http://www.manilatimes.net/?p=4919