Market failure? It’s regulatory failure!

Published by rudy Date posted on March 17, 2014

Come on, ERC… when you guys blame the unusually high Meralco rate increases last December on market failure, you really mean regulatory failure. If you ERC guys were more alert in defense of the public interest, you would have seen market failure about to happen and would have taken steps to stop it from happening.

The thing is, you ERC guys even gave your blessings for Meralco to pass on the inflated generation costs. Without such a loud public howl of protest, you ERC guys would have done nothing more that remotely looks like doing your sworn duties.

Better late than never, I guess. We, poor consumers, should count our blessings that at least the ERC schmucks belatedly did something to justify their existence. But these so called energy regulators should not get anything close to a free pass. There are many more things that ought to be done to make sure such “market failures” don’t happen again.

Indeed, I find it strange that the ERC placed the blame solely on the power generators. I still think Meralco, as the distribution utility, must share the blame because they opted to have a significant exposure to the electricity spot market.

Meralco made a wrong call by choosing to be at the mercy of WESM for the duration of the Malampaya maintenance shutdown when supply could be iffy. Meralco thru TMO compounded its mistake by setting the high price of P62/kwh 27 times.

This is simply, “self inflicted” pain, since by avoiding to be dispatched – the cost of Meralco’s WESM purchases zoomed skywards to the disadvantage of the hapless captive market. ERC must still admonish Meralco to make sure the exposure of ordinary consumers to the risks of another “market failure” is drastically minimized if it cannot be totally eliminated.

I find it amusing to read the 35-page decision of the ERC that declared a “market failure”. Such wisdom expressed in hindsight after a public outcry!

The commission said the WESM rates during the contested period “could not qualify as reasonable, rational and competitive due to confluence of factors.” (So, why did ERC allow Meralco to pass that on to us in the first place?) As such, the ERC “voids these Luzon WESM prices and declares the imposition of regulated prices in lieu thereof.”

WESM prices for the period covering Oct. 26 to Dec. 25, 2013 must now be recalculated to reflect true price. “Government intervention is needed if there is a failure in the market to correct any inefficiency and prevent these from happening again,” the ERC added.

According to ERC, the regulated prices would result in at least a 70-percent reduction in the WESM prices, which averaged P22.13 per kilowatt-hour (kWh) for November 2013 and P25.67 for December of the same year.

Billions of pesos worth of windfall profits would be “given up” by some Gencos. The list includes San Miguel’s Limay plant, 1590 (Bauang) and Aboitiz. Psalm (Malaya) also seems to have made a lot of profit but this will be used to lower the universal charge to consumers anyway.

What else must we do as lessons learned? On top of the “things to do” list is the professionalization of the ERC. I agree with the observation of Sen. Serge Osmena that there should be no room for politicians in ERC. The ERC Chairman, who obviously got her position only because of her close ties to then President Gloria Macapagal Arroyo, ought to think of the country for the first time in her life and quit.

Having a lawyer at ERC can probably be justified but that lawyer must be literate in Utility Economics to be useful. Again, I share the observation of Senator Osmena: “We need computer experts, electrical engineers, power experts there. I don’t know why they put lawyers. That is an engineering problem.”

P-Noy must also appoint a really qualified person to fill up one vacancy in the ERC. As Sen. Osmena puts it, “why are they leaving one seat vacant? One of the members retired a few months ago. Get a computer guy there. Get an energy expert out there.”

Indeed, someone knowledgeable in Big Data Analytics ought to be appointed in the ERC. They managed to get the conclusion of “market failure” only after digging through a lot of computer data on what really happened. They should have a monitoring system in place that will sound the alarm if there are signs of impending “market failure”.

Regulation is not about signing orders that are practically drafted by the power generators and distribution utilities. Regulation means having an independent view of what is going on in a sector as complicated and so fraught with public interest as the power sector.

Hooray! Public interest won after a loud public outcry. If ERC did its job intelligently and honestly in the first place, none of the furor would have happened. We could have saved time and money that went into getting the Supreme Court involved on a case that should have been resolved at the ERC level.

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