Did Arroyo’s boys sabotage Epira?

I suspected as much a long time ago. The boys of former President Arroyo at Napocor/PSALM were sabotaging the implementation of Epira. And then, the Arroyo allies in the House led by Mikey are blaming the high electricity prices on Epira’s failure. They wanted to amend a law that had not been given a chance to work.

An article in Business Mirror over the weekend confirmed my suspicions. Lasse Holopainen, the man who established the electricity spot market in the country, wrote about his experiences at WESM and identified the culprits behind our sky high electricity bill.

I do not know Mr. Halopainen personally, but from what I have heard about him, he is reputed to be a highly principled professional. Needless to say, he is frustrated by the experience. I thought the importance of what he wrote must be shared with a wider audience if only because the information directly affects our pocketbooks. Here are key portions of that article.

Mr H started off with a basic description of what a market is… nothing complicated… a place where buyers and sellers meet and prices determined according to basic economic laws like supply and demand.

“An electricity market is no different. Buyers and sellers meet to transact what is a pure undifferentiated commodity — a megawatt hour… There are a couple of special rules with electricity though; you cannot store it so it must be used during that hour…”

He then proceeds to describe WESM: “The Philippine Wholesale Electricity Spot Market (WESM) is one of the most modem and technologically sophisticated electricity markets in the world. It was built to efficiently price an incredibly complicated and convoluted power system — a job that it sometimes does too well. Inevitably though a market is only as good as the sum of its parts which in the Philippines are:

“ Our transmission system — a beat up overcrowded highway on which electricity travels with very little redundancy;

“The buyers — mainly Meraico, as well as some electricity cooperatives with very little real incentive to buy cheap as well as little control over when they buy;

“The sellers — private generators, the rump of Napocor as its assets are sold off and the largest slice of it, the fabled Independent Power Producers (IPP) that are entirely under the control of a new government corporation the Power Sector Asset and Liability Management Co. (PSALM).”

Mr H took the offer of then Energy Secretary Vince Perez to start the WESM. He said he had no idea how difficult it would be. His mandate was to “establish an electricity market” with no staff, no funds, and indefinite resources. Three years later, with the help of a superb, disciplined technical team (blood, sweat, tears, beers, piss, vinegar, and more blood) and massive industry participant support we had put together the required market infrastructure, and the WESM successfully launched in Luzon.”

He describes the early days: “The first few months of operations were crazy as we were clearing billions of pesos across the entire system and tracking real-time electricity costs in over hundreds of nodes. By month four of operations we began investigating the trading operations of PSALM the government agency designated to manage the IPP capacities for withholding generating capacity that caused significant price increases.

“By month six we were dealing with line outages across Bicol that cut off most geothermal power due to the typhoons that year. While there were good months since then, the same old problems kept recurring, and I began to pay closer attention to the underlying structures that were supposed to be in place to protect the consumers, but were curiously missing.”

Mr. H explains that WESM does not make money from the sale of electricity except for a one-centavo per kilowatt hour surcharge (one percent of one percent of your electricity bill on average). “The WESM is not the vendor of electricity but merely the roof and floor where the stalls are set up.”

Who makes money then? Mr H explains: “Some of it goes to private corporations generating and selling into the spot market and their bottom line reflects this sometimes on the same business page of the newspapers where you have electricity price articles — going up!

“The bulk of the money, at least for the periods while I was running the market, went to the largest seller of electricity — PSALM. Through its trading of IPP capacities that are already guaranteed and paid for, PSALM earned revenue from its sales through the spot market.

“At the same time PSALM should have been filing a Universal Charge which it pointedly refused to do, despite its being required by law. The Electric Power Industry Reform Act of 2001 requires the filing of the Universal Charge. The anticipation was that, during the process of reform the costs of the remaining IPP contracts could become increasingly burdensome and therefore needed to be re-financed over time so as to not cripple the Philippine economy.

“In other words, if PSALM was paying more than it could charge for selling IPP generated electricity, they could re-finance this over time rather than immediately pass on the cost to the consumer.

“However during this period PSALM did not have any need for supplementary financing (they have an operating budget approved by a joint Senate and congressional committee). So unless they somehow managed to find a way to print money, they have likely been significantly profiting from the trading of lPP capacities, something that was never intended in the law.

“I mean, there is a very obvious intellectual problem with this — any entity controlling 70 percent of power generation with a profit motive…well what do you think will happen?

“To add insult to injury, since the regulated rate includes IPP recovery, there is no downside if the electricity is not sold: profit at no risk — always nice.

”In other words, the law was created to restructure the power industry while maintaining reasonable electricity costs for businesses and consumers. Instead, PSALM took all of this paid for capacity and has likely significantly profited from its trading without any risk, regulatory oversight, nor any real reporting to the public as to how much it has been making.

“There is a very easy way to remedy all of this, of course. File the Universal Charge for public scrutiny. The formula is neither complicated nor burdensome and is very effective. Total revenue from contracting sale and trading of IPP generated electricity for the year less total payments to iPPs for the same year.

“If this number is positive — then return this to the consumers through a positive Universal Charge (a Universal Refund, if you will) or apply this to repayment of our Power Sector Loans and reducing the regulated rate to reflect this — which will give somewhat the same net effect. (The same goes for proceeds from the IPP administration process; these should be reflected transparently on our bills as either a refund or a rate reduction due to lower financing costs.)

“If on the other hand this comes out a loss, then at the very least we will know what is the true economic cost of our electricity. What is important is transparency. Despite drawing the attention of both the Department of Energy and the regulator to this issue, no real steps had been taken; a situation that eventually led to my resignation as President and Independent Director of the WESM due to the issues I am expounding on in this article, as well as three other issues that I feel will lead us inevitably to spiraling electricity costs, blackouts or both.”

Mr H says he continues to believe, that a competitive transparent and financially viable electricity sector will drive the development of our country. I felt that if we stayed the course on the reform process, we could achieve a time of abundant and affordable energy which will be so essential to our country’s development…

“The WESM was intended to set the price of electricity at the wholesale level; these prices were never intended to be fully passed on to the consumer without regulatory safeguards, until there was sufficient competition in power generation. Instead, we the consumers have had to pay for this increased cost, and the revenue went somewhere. It did not go to the market; most of it likely went to PSALM. I don t know about you guys, but personally I would really like my money back.”

It seems Ms Arroyo’s boys did sabotage Epira. The ball is now on P-Noy’s court to do what is right for the benefit of consumers.. –Boo Chanco (The Philippine Star)