So, who’s responsible?

No rate design is able to perfectly fulfill all of the intended roles. Rather, each rate design must be judged on how it balances all of the conflicting objectives and not just on how well it achieves any single objective.   - Kenneth Gordon, Jeff D. Makholm, Retail Cost Recovery and Rate Design in a Restructured Environment , NERA Economic Consulting

While it is true that markets for electricity are more susceptible to manipulation than markets for other products, the recent price hike of electricity apparently has nothing to do with abuse of market power or flaws in electricity market design but it is the result of poor planning and MERALCO’s immunity to automatic cost adjustment (ACA)/”pass-through” mechanism.

The ACA/pass-through mechanism without safeguard, to borrow the words of Stephen Wallace, does not provide a very good regulatory approach as it creates a moral hazard. The moral hazard arises because the purchaser does not have an incentive to act prudently. That is, the purchaser does not take the full consequences and responsibilities of the price it pays for a generator/supplier, and therefore has a tendency to act less carefully than it would otherwise.[1]

Facts:

1. The Malampaya gas field shutdown in November is not the first. There were similar shutdowns in the past.

2. MERALCO and concern government agencies have known as early as October the scheduled shutdown.

Questions:

1. Why MERALCO did not seek comfort in the so-called option contract to limit its exposure to spot market? It did enter into a short term bilateral contract but only with Therma Mobile Inc. (TMO) owned by the Aboitiz group (ERC Case No. 2013-196 RC) for a maximum contracted capacity of 234 MW and an effective rate of about PhP11/kWh. Under normal condition (i.e. base load power plants are online), MERALCO’s typical exposure to the WESM is more than 500 MW. MERALCO should have contracted with other peaking plants like the 225 MW Bauang and 600MW Limay plants.

2. MERALCO should also explain why it offered to WESM the PhP62/kWh price cap for the energy generation of TMO (MERALCO President Oscar Reyes mentioned something on the must-offer-rule during the hearing). Under its supply contract, MERALCO decides on the bids of Therma Mobile in the WESM. Is this a blunder, greed or insensitivity?

Funny thing is, Aboitiz might have purchased its own TMO generation from WESM at five times the generation price to cover contract commitments to MERALCO due to the force outage of Pagbilao coal fired power plant during the same period.

3. Why the PSALM-owned 650-megawatt Malaya thermal power plant in Rizal wasn’t operating?  In early 2010, the System Operator (SO) NGCP put on almost continuous must run status the said plant during the maintenance outage of the Malampaya gas field that also coincided with force outage of several base load power plants.

The excuse of PSALM that it would not be able to recover costs even if it will bid at PhP62.00/kWh is ridiculous since the generating cost of a peaking plant like Malaya is less than PhP15/kWh. We all know that a big gap in supply and demand is costly.

Bottom-line: MERALCO is liable. MERALCO is not just a “collecting agent” but it has the obligation to source its electricity supply in the “least cost manner” as stated in Section 23 of the EPIRA. MERALCO, with the help of ERC and the DOE, could have implemented emergency measures to address the demand requirements which they did during similar shutdowns in the past. Sad thing is the DOE and the ERC sort of tolerated MERALCO’s improper planning and insensitivity.

The last-minute fixes made by the tripartite committee to reduce the cap to PhP32 from PhP62 per kWh after the senate hearing is a classic example of regulatory uncertainty.  This is similar to the way ERC handled the application for approval of the Ancillary Service Procurement Agreement (ASPA) between the NGCP and Therma Marine, Inc. (TMI) during the congressional inquiry on Mindanao power crisis.

Post Script:

The disjointed questioning of senators during the initial hearing left three brilliant quips (not exactly the transcript, ito lang yung mga natandaan ko):

Sen. Bam Aquino: Gaano katagal ang approval ng mga application para magtayo ng planta?

DOE Usec: Mga  2-3 years po. [I’m not sure about the period basta matagal plus idagdag mo pa yung ERC rate application]

SBA: Yun na nga ang point ko, paano natin ma-encourage ang mga investor pag ganyan katagal.

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Sen. Allan Cayetano: Bakit cost-based pricing? Paano kung ang market price is mas mababa?

[His reaction to ERC Commissioner Victoria Taruc’s connotation that cost-based regulation is synonymous with ‘consumer protection’.]

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Sen. Trillanes: Huwag po nating sabihin na wala tayong magagawa! Marami po tayong magagawa!

[I guess this is his reaction to Petilla’sWhat can we do…? Don’t buy, kung namamahalan kayo!” and to the ERC’s “Mas lalo namang hindi maganda kung mag-brown out tayo”. Enough to cover his apparent lack of knowledge in electricity pricing.]

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[1] GENERATION AND CONTRACTS REFERENCE PRICING, p.11