SUNDAY, 16 JANUARY 2011 20:42 ALBERTO C. AGRA AND MARI JENNIFER M. BRUCE / FORENSIC SOLUTIONS
Conclusion
The main thrust of EPI reform under the Epira was the introduction of competition. However, legislators saw the state of Napocor’s power plants, unfavorable terms of IPPs, and the huge Napocor debt as impediments to private investment. Thus, to attract private investments, legislators deemed it necessary for the government to absorb a substantial portion of Napocor’s debts.
In addition, to make investment in the EPI even more attractive to the private sector, absolute-competition restrictions traditionally existing in the wholesale-competition model was watered down. This is, in all probability, a bad decision that limited the effectivity and efficaciousness of EPI reform under Epira. One of the prerequisites for the wholesale-competition model to succeed is the existence of competition, which can only be brought about when there is a sufficient number of unaffiliated industry players.
Competition is undermined by Epira’s cross-ownership provisions allowing:
1. a single company or group to own, operate or control up to 30 percent of the installed generating capacity of a grid.
2. a single company or group to own, operate or control up to 25 percent of the national installed generating capacity.
3. distribution utilities to enter into bilateral power-supply contracts for up to 50 percent of its total demand from an associated firm engaged in generation, without prejudice to contracts already entered into prior to the effectivity of Epira.
4. for the first five years of the establishment of the electricity spot market, a distribution utility to source up to 10 percent of its total demand from bilateral power-supply contracts.
The forgoing ownership and affiliate-contract limitation were deemed by legislators to be sufficient to prevent harmful monopoly and market-power abuse. The apparent justification for the watered-down cross-ownership prohibitions was that coownership may lead to lower electricity rates due to economies of scale and scope.
These, however, do not apply to the Philippine EPI. Associated generation companies have been shown to collectively possess the power to determine the price of electricity in the electricity spot market. Distribution utilities, on the other hand, prefer to enter into “sweetheart deals” and purchase their energy requirements from associated generation companies and IPPs even if the price is higher than Napocor rates. In either instance, the cost of electricity is passed on to end users.
Retail competition. In retail competition, customers have the choice of supplier. There is open access to both transmission and distribution networks (together with associated facilities), and distribution is separate from retail activity.
Epira mandates the implementation of retail competition and open access upon the occurrence of, among other things, the establishment of the wholesale electricity spot market, privatization of 70 percent of Napocor’s total generating capacity in Luzon and Visayas, and the transfer of 70 percent of the total energy output of power plants under contract with Napocor to the IPP administrators.
Retail competition and open access ideally free end-users to choose their own supplier, thereby forcing suppliers to respond to customer demands in terms of price and quality, and ultimately improving overall service to compete with other suppliers for customers. This, however, requires the existence of actual competition.
Where are we heading?
Epira adopted the wholesale- competition model to open the electricity market to the private sector, and to facilitate fair competition through an electricity spot market that will serve as a transparent, fair and equal-trading venue for suppliers of electricity. Wholesale competition is, however, vulnerable to anticompetitive conduct, not just from vertical integration, but from actual market power held by select industry players. Just as competition is the great driving force of market economies, a significant increase in ownership concentration to a limited powerful few raises the likelihood of coordinated anticompetitive behavior among related owners. Thus, there is actual market power when one or a few companies control the generation sector to an extent that they are able to exercise horizontal-market power and drive up prices.
Further, while both distribution and transmission are recognized general monopolies, Epira absolutely restricts cross-ownership only in transmission. Other than to appease existing EPI players, there is no reason to allow cross-ownership between distributors and generators.
Experience in other jurisdictions has shown that such anticompetitive conduct is difficult to monitor when the regulator does not have significant antimonopoly experience. This particularly applies to the Philippines, where cross-ownership and purchase of electricity from associated companies are allowed. The current EPI players in the Philippines are not diverse enough, and the wholesale electricity spot market is not well-enough equipped to prevent a few power players in the private sector to virtually exercise monopoly.
The current structure of the EPI aims to correct the mistakes of the previous two models, with the ultimate end of providing reliable, adequate, secure, stable and cost-effective electricity to consumers, and Epira tells us that the EPI is headed toward open access and retail competition.
The law’s reform framework, however, relies on the existence of meaningful competition. To get to retail competition, we must first clean up the fundamentals of wholesale competition. Provisions in Epira allowing ownership concentration in the generation sector must be revisited. More important, the allowable cross-ownership between distribution utilities and generation companies must be abolished. Otherwise, the last three decades would be nothing but one botched-up attempt after another to reform the EPI.
This is the position of Forensic Solutions.
Alberto C. Agra is former secretary of justice, solicitor general and government corporate counsel. As counsel of government institutions, he represented administrative agencies and government corporations on water, as well as water districts. He is also a former Trustee of the Metropolitan Waterworks and Sewerage System and OI-chief regulator of its Regulatory Office. He teaches Law on Local Governments and Public Corporations.
Mari Jennifer M. Bruce is a consultant of the Asian Development Bank, former associate of Puyat Jacinto and Santos Law Office, and former director at the Office of the Chief Presidential Legal Counsel, and former court attorney in the Supreme Court. Her areas of expertise are water, energy and infrastructure.
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