One step back, two steps forward in the power industry

http://www.bworldonline.com/content.php?section=Opinion&title=One-step-back,-two-steps-forward-in-the-power-industry&id=119021


“One step back, two steps forward,” was Mao Zedong’s favorite tactical advice. Sometimes, one step back is the best way forward. One such episode was connected with Oct. 27. That was the date set by law for the issuance of the Implementing Rules and Regulations (IRR) for Department of Energy (DoE) Circular 2015-06-008 (DC 06-008, from hereon).

What is DC 06-008 anyway?

It mandates three items: (i) the Competitive Selection Process (CSP) for all uncontracted demand (those not yet covered by long-term contracts) of all distribution utilities (DUs); (ii) the aggregation of the demand of small DUs into bid-attractive volumes in the run-up to the CSP; and (iii) a single transactions manager to oversee and implement all the auctions and the employment of a uniform power supply contract. DC 06-008 came out of the blue.

Consultations prior to its issuance were for another circular, Demand Aggregation and Supply Auctioning Policy, which mandated the aggregation of uncontracted demand for all DUs. This was only one of its possibly several legal frailties. CSP -- which aims to “market test” the power supply agreements (PSA) -- was clearly the baby in the bathtub. It was also the most in-keeping with the pro-market leaning of Electric Power Industry Reform Act, the legal cover of the whole exercise. Some pushback from some stakeholders were aired over CSP but they focused mostly on the “how” rather than the “why.”

Since the power to enforce a CSP resides in the Energy Regulatory Commission (ERC), the DC 06-008 seemed to overstep DoE’s mandate. The bulk of the objections were clearly directed towards aggregation and the single manager/contract modality. Aggregation -- being only ancillary to CSP -- elicited mostly “how” queries.

It was the single transactions manager for all auctions and the possible use on a single contract that provoked valid questions of principle and efficiency. How, it was asked, can the single contract template cover all the peculiarities and contract preferences of different players? There are fundamental variations as to who bears what risk under what contingencies in contracting. The single transactions manager modality received withering criticisms: who oversees the single manager, what are its terms of reference, why no competition at this level, etc.? While the questions were not intractable, answers could not and should not be hurried.

And what about Oct 27?

All these abstruse and expertise-intensive issues had to be resolved by Oct. 27 when the IRR was mandated to be issued! To top it all, the position of Secretary of the DoE had yet to be filled. Quandary among industry stakeholders was the order of the day in the run-up to Oct. 27: hurry the IRR and a regulatory snarl could emerge to include lawsuits; delay it and the DoE may be in violation of the of the 120-day stricture for the issuance of the IRRs. The baby was in danger of being thrown out with the bath water!

Fortunately for the nation, a way out was found.

It came in the form of Joint Resolution 1 dated Oct. 20 by the DoE and the ERC. Joint Resolution 1 effectively turned over the responsibility of CSP to ERC, which put finis to the legal issue of enforcement. Heretofore, ERC will issue the appropriate regulations to implement CSP! Effectively averted was a regulatory nightmare. The ERC then issued Resolution No. 13 series of 2015 which mandated that, “Pending the issuance by the ERC of a prescribed CSP, a DU may adopt any accepted form of CSP.” Thus, CSP -- the jewel in the crown of the whole exercise -- is finally decoupled from ancillary instruments. CSP can thus now go forward before thorny problems with ancillary policies are properly resolved. Most importantly, it is for now the DU’s responsibility to prove to ERC that the CSP employed for its PSA is transparent and competitive! In the event that a PSA submission is made without a proper CSP, it can, as part of the evaluation, be made subject of a Swiss challenge. Truly two steps forward.

A truly welcome relief notwithstanding, the CSP was already in the works long before DC 06-008 and the brouhaha it triggered. In 2013, ERC, following proper consultations, had prepared a resolution mandating CSP, but which remained unsigned and likely sidelined by the initiatives of the DoE. Thus, after all the delay and costly contortions of the past two years, we are now back where ERC left off in 2013.

The said Joint Resolution 1 was signed by the ERC Chairperson Jose Vicente B. Salazar and the newly installed DoE Secretary Zenaida Y. Monsada. The latter finally accepted the standing offer to serve as DoE secretary despite its likely shortened tenure. Her acceptance and willingness to work with ERC averted a looming regulatory firestorm.

There is a lesson to be learned here.

Governments -- however well-meaning -- many times embrace even sensible ideas only to despoil them with over-ambition. Government honchos, following logics other than that of economic efficiency, tend to go for too big a bite. Massive social asphyxia follow. Nobel winner, Friedrich Hayek, called this a “fatal conceit” -- the inability of state actors to recognize their own limits to improve on markets. Surely, most markets are imperfect; but perfecting them calls most times for “nudges”, not for lobotomy. In the case of CSP, the DoE and ERC have hammered out an exception to the Hayek rule. Would that exceptions like this become the rule.

The views expressed in this column are the author’s alone and not of the Energy Policy Development Program of which he is a research fellow.

Raul V. Fabella the chairman of the Institute for Development and Econometric Analysis, a professor at the UP School of Economics, and a member of the National Academy of Science and Technology.