Competition

FIRST PERSON By Alex Magno (The Philippine Star) | Updated July 12, 2014 - 12:00am

The Luzon grid is again on alert for possible power outages this weekend. A number of generation plants have conked out.

If brownouts do happen, we will again be reminded of this government’s failure to install new generating capacity to meet rising demand. No new plant will come online in the near term. If power shortages do not hit us with devastating economic effect this year, they almost surely will next year.

One senator interviewed on television this week blames our power woes squarely on the President. He is particularly concerned a politician, Jericho Petilla, was named Energy Secretary. The post requires a competent technocrat at the helm with a full grasp of the financial requirements of energy security.

Not only is Petilla probably not fit for the job, he compounded the predicament by naming two political cronies as undersecretaries. As if that was not bad enough, Petilla is said to be frequently away, preoccupied with his family business and local concerns in Leyte.

With power reserves running thin, plants conking out and investments in new generating capacity stalled, what could be worse than having nobody home at the DoE when outages happen? Our economy seems inevitably headed towards another bout with long brownouts.

Who cares if our economy is upgraded to investment grade by the credit rating agencies. That only means we can borrow at slightly cheaper interest charges. Few investors will dare rush in if energy supply is uncertain, courting the prospect of idled factories.

The poor leadership among the agencies responsible for ensuring energy security is reflected in questionable policies imposed on players in this sector.

There is, for instance, a recommendation that distribution utilities and electric cooperatives enter into long-term supply contracts with generating companies (gencos) to fill their peak demand levels. This, some say, will result in stabilizing electricity rates.

This is such a limp idea. It will nail consumers to power priced at peak demand levels.

If electricity distributors are locked into power supply contracts for all their electricity requirements, this will only produce windfall profits for the gencos. The gencos will be paid at peak demand rates even during the off-peak hours.

If the gencos are protected by supply contracts, this will discourage competition and encourage inefficiency. We might as well close down the wholesale electricity spot market (WESM). There will be nothing to trade.

Or else, if their supply is inadequate, it will be the gencos who will use the WESM to purchase cheaper power and then sell them at the high contract prices to the distributors. They can then use the contracts to make money even if they do not generate power.

That could hardly be called an incentive to improve our energy stock. It is like stepping back into the onerous take-or-pay regime we once had — a regime that punished consumers and nearly killed our industrial sector.

Competition is at the heart of the Electric Power Industry Reform Act (Epira). The brain-dead recommendation for the distributors to purchase 100% of their power through long-term supply contracts kills the central intent of the Epira. It will return us to the bad old days of power monopolies.

True, a regime of full power supply contracts might be an incentive for people to invest in power generation. But of what good is that if we achieve the dubious distinction of having the most expensive power rates in the world?

A high priced electricity regime, as we have seen, discourages investments that create quality jobs. It is a regime that will multiply the ranks of the poor by raising costs across the board.

The price of electricity this month fully illustrates the point.

This month, electricity charges in the NCR will increase by 3 centavos. Meralco reduced its distribution charges by 15 centavos. However, generation charges increased by 10 centavos and transmission charges increased by 8 centavos.

In sum, lower distribution charges nearly fully offset the increases in generation and transmission charges. That is not the full picture, however.

Generation charges might have been higher had Meralco not purchased some of the power supply it distributed this month from the WESM where prices were actually lower that contracted prices. Competition to sell available capacity caused that.

It is clear the spot market, its imperfections notwithstanding, allows flexibility for suppliers and distributors. With that flexibility, the spot market is a better guarantee fair pricing for a product beset by constantly varying costs.

A wholesale spot market through which a substantial amount of total electricity sold is the only way to go if we want a sane power sector. It is the only mechanism for independently benchmarking prices. Consumers will be more vulnerable to profiteering and monopoly pricing without the spot market. source