Liberalizing the power sector, one slow painful step at a time

By Rey Gamboa (The Philippine Star), June 23, 2016, http://www.philstar.com/business/2016/06/23/1595612/liberalizing-power-sector-one-slow-painful-step-time

The 15-year-old Electric Power Industry Reform Act (EPIRA) continues to test the nation’s patience. Amidst calls for its repeal, one thing stands out: EPIRA has still failed to bring down power rates in the country.

This is not saying that EPIRA has been totally worthless. At the time when the law was being forged in the halls of Congress, the power sector was in an abysmally worst state where the state-owned National Power Corp. (NPC) was heavily in debt and its capability to supply power for the whole country was undermined by major brownouts.

EPIRA had tackled, albeit under prolonged birthing pains, the privatization of the power industry, although and consequently had swept under the rug some of the big problems that a monopolistic government-controlled power supply regime had spawned.

The unwieldy NPC has been dismantled in essence, and with the sale of most of its assets, has been relegated to the role of providing electricity in missionary areas that the private sector deems to be financially uneconomical.

Yet many problems remain that need to be threshed out, foremost of this being that not all of the NPC assets have been sold. Stranded costs that haunted EPIRA even before it was passed into law are still unresolved, and these costs may even be bigger now.

And of course, high electricity prices continue to stick, like an old sick man’s phlegm that doesn’t seem to go away.

Private sector participation

The bright side, though, includes the growth of private sector equity in power generation. Except for Mindanao, where NPC and the Power Sector Asset and Management Corp. (PSALM) still control majority of the power generating capacity, more than a handful of industry players are actively in operation and busy expanding their capacities.

Today, Luzon’s installed generating capacity is shared by three big companies: San Miguel, Aboitiz and First Gen. This island block also enjoys the participation of smaller but still formidable players: AES, GN Power, Quezon Power and SEM Calaca.

The Visayas has an equally healthy private sector participation in Global Business Power, Salcon and Green Core for the top three spots. Mindanao has the Therma Group, even it plays third fiddle to NPC and PSALM with regards to installed generating capacity.

All these, my friends, took more than a decade to congeal, and even then, the government through NPC and PSALM still control about 30 percent of the country’s generating capacity. Still, we’re seeing more power plants being built and planned, and this should eventually resolve the threat of future brownouts.

Still a sore thumb

It’s the electricity pricing issue that remains a sore thumb. And this will hurt the economy more in the long run as the world starts to recover from the hiatus brought about by the global financial crisis of 2008.

The Philippines remains to have one of the highest electricity rates in Asia, which is a major reason why many local manufacturing industries that are heavy electricity users have been driven out of business by competitors in other countries that enjoy cheaper power.

EPIRA has contrived to solve this sticky issue with the establishment of the Wholesale Electricity Spot Market (WESM). Its timeline, though, is a pain to read.

The WESM was put into effect a year after the enactment of the EPIRA. After two years, the Philippine Electricity Market Corporation (PEMC), which was incorporated as a non-stock, non-profit corporation, started operating as an autonomous group market operator (AGMO) to undertake the preparations for and the initial operations of the WESM.

In June 2006, the WESM started commercial operations in the Luzon grid on a sort of pilot status in Luzon. Four years later, towards the end of 2010, the Visayas grid was integrated into the WESM.

More than a decade later, by the end of 2012, retail competition and open access (RCOA) regime started, but went into commercial operations only six months later.

Key to full liberalization

WESM and RCOA could be considered the key to full liberalization of the domestic power industry’s downstream sector where those that generate electricity may truly compete in pricing, and hopefully, drive down power rates.

WESM established an open market for electricity, which had during ideal conditions driven electricity prices into a competitive environment. There were, however, allegations that WESM as presently structured and operated, may be subject to manipulation.

RCOA, on the other hand, intends to give electricity users more freedom to choose suppliers. However, RCOA is the subject of questionable DOE and subsequently ERC issuances, which are presently being challenged in court as these DOE circulars and attendant ERC resolutions are apparently aimed to restrict customer’s choice and limit competition. That’s another story.

EPIRA stipulates that electricity users down to the household level will eventually have this freedom of choice.

Right time

It may seem too early to gauge whether RCOA is indeed working, or will be effective. After 15 years of waiting, with a third president already getting on the watch list, the big question is whether this will all lead to the right electricity prices at the right time.

For sure, repealing EPIRA is not a solution given the accomplishments over the last 15 years. But then, can there be some other interventions introduced that will help facilitate the transition period from a highly regulated system to a truly free market?

If the Philippines truly believes it can become Asia’s next rising dragon, it has to bring down electricity prices for manufacturing plants to survive in the global economy. Everything else will then follow.