COMMENT: Brownouts Exploited

GENERAL SANTOS CITY (MindaNews/16 March) — Brownouts or power outages are bad. However, what’s worse is the exploitation of brownouts to raise the price of electricity in the spot market. When disasters strike, profiteers abound – like vultures waiting for the hapless, weary desert traveler to fall and die. So do, as we see, players in the Wholesale Electric Spot Market WESM). And “disasters” don’t strike; they create them.

Under Electric Power Industry Reform Act (R.A. 9136), WESM operated by PEMC (Philippine Electric Market Corporation), is good — supposedly to control electricity prices for the benefit of the end-users. But in times it was expected to prevent electricity price from spiking or shooting up WESM failed.

Rappler on July 13, 2012 (How does WESM work and affect electric bills?), wrote deploring the spiking of power cost on the previous June 20-23 bill, as high as P45 to over P46 per kilowatt/hour: “This was not the first time WESM prices spiked and threats of brownouts loomed. A similar dire spot marked situation occurred in January to February 2010 – the months leading to national election.” Last December, Meralco bought power from WESM at P62 per kwhr. (Bold text supplied)

‘Bantay Salakay’

That at some critical times, WESM has turned “bantay salakay” (guard-raider) is not a surprise. Its constitution is inducive to such monstrosity. It is constituted by the same potential sources of high prices it is instituted to prevent from occurring.

With PEMC as the market operator, WESM is composed of “equitable representatives from the electric power industry. Subject to the compliance with the membership criteria, all generating companies, distribution utilities, suppliers, bulk consumers/end-users, and other utilities authorized by ERC (Energy Regulating Commission) shall be eligible to become members of the wholesale electricity spot market”. (R.A. 9136, Provision on “Supplier”)

All these members are the only ones who can raise exorbitant prices of electricity – the very ones to be guarded against raping the retail end-users. WESM is mandated to maintain the prices of electricity at “reasonable, rational and competitive” levels. But the members’ interest for profit conflicts with that of the end-users. This is like having a pack of wolves guard the sheep.

How WESM Operates

Following, Rappler’s (7-12-12: How does WESM …) enumeration of the process is quoted in full. Necessarily, prices at the spot market are dictated by the law of supply and demand.

(1) Stakeholders determine the total demand for electricity for a certain hour.

(2) “Trading” happens. Seeing the demand, the suppliers submit bids, essentially telling PEMC they are willing to supply, for example, 100 megawatts at P10 per megawatt.

(3) PEMC ranks the bids from the lowest to the most expensive, until it has enough supply bids to meet the total demand for power.

(4) The highest priced offer that is accepted becomes the spot market’s price for the hour.

(5) Electricity is thrown to the grid and facilitated by the National Grid Corporation of the Philippines (NGCP).

6) Then it is distributed to households and businesses through distribution companies like Meralco.

Trading goes on an hourly basis, depending on demands from households, manufacturers, office buildings, and other consumers. The numbers vary, change, increase or decrease.

Is WESM not open to manipulation and collusion? It is.

Of Supply

Philippine Daily Inquirer (March 13, 2014), in its editorial, “Market failure?”, quoted ERC Executive Director Saturnino Juan’s explanation of ERC’s report of how low supply of  power happened last December: “Supply was low because market participants did not offer their available capacity, so there was market failure” – in clearer language, “shortage of power supply”.

It cited the ERC report stating that WESM has a “Must Offer Rule (MOR)” wherein suppliers “must offer all their available supply. In what the ERC says is a longstanding tradition, the suppliers deliberately did not offer all of their available supply, violating the so-called MOR … and in the process artificially creating a shortage. A good case for collusion can be made from this finding”.  

It quoted the ERC order: “The non-observance [of the MOR provision] is so rampant that the entire WESM governance structure has perhaps already grown accustomed to encountering it on a regular basis.”

Of Prices

The ERC found out that the prices on the WESM during the shutdown of the Malampaya gas pipeline for maintenance from November 11 to December 10 last year could not qualify as “reasonable, rational and competitive.”  (Philippine Daily Inquirer, March 12, 2014:  ERC voids power rate hike; Spot market prices ‘not reasonable, rational’)

During that same period, the same report above said, a number of power generation plants also shut down, creating a 45-percent shortfall in the average 6,000 megawatts that Meralco supplies to customers forcing Meralco to buy more expensive supply from the WESM and to pass on the cost to customers. To aggravate generation cost, the shutdown of the pipeline also prompted plants that use the cheaper natural gas from Malampaya and supply power to Meralco to use more expensive fuel.

This, however, is not the full truth. An earlier PDI report (February 18, 2014: Steep price spie on WESM questioned) told a sinister story. It said “that Therma Marine was contracted by Meralco for 238 megawatts of reserve power presumably to assure adequate supply and reduce cost of the contract price of P8.65 per kwhr. Of the 238 megawatts, 200 came from Sual Coal Plant that Therma had bought for P6 per kwhr.

The report noted: “It is a legitimate market move of Therma to have bought the 200-MW excess capacity of Sual at a reported P6 per kWh and to turnaround and contract it to Meralco for P8.65. While the maneuver may be allowed by the rules, market participants and Meralco should have the restraint not to take advantage of the consumers.”

And, it was “fair market” for Sual, Therma and Meralco. The report said that fuel for coal plants was only P2.50 per kwhr; for diesel, P8.50 per kwhr. Sual, a coal-fueled plant, had a profit of P3.50 per kwhr; Therma, P2.65 per kwhr.

How did Meralco end up buying from WESM at P62 per kwhr?

The report again noted: “Of serious concern was the report that Meralco had allowed Therma Marine to deliver only 90 MW to Meralco instead of 238 MW and supply the rest to the WESM at P62 per kWh, which then Meralco is trying to bill its customers.”  

By whatever explanation, the bottom line was profit. The 148 megawatts Meralco had allowed Therma to deliver to WESM which it later bought at P62 per kwhr instead of P8.65 as contracted from Therma meant P7.8958 billion profit for WESM which Meralco and Therma as WESM members would share. That was how much the Meralco customers would have been exploited or robbed had it not been for the Supreme Court intervention that must have compelled ERC to investigate.

Police Power

In the March 12 PDI report, ERC voids power rate hike, the ERC was flexing its power “to protect consumers from unreasonably high market prices” justifying in its order: “Government intervention in this case is a valid exercise of the state’s police power and can be done by the regulatory body to which the said power has been delegated and to intervene when the common good so demands.”

And, the Palace noted the report as an exercise of state police power. Presidential Spokesman, Press Secretary Herminio Coloma said: “We note finally that the ERC exercised government’s police power to stop the imposition of ‘excessive, exorbitant, unreasonable, or very high prices’ of electricity in compliance with its mandate under the EPIRA. We affirm government’s commitment to protect the citizens’ welfare by ensuring stable and reasonable electricity prices.”

However, the acclamation of “police power” for stopping the imposition of “very high prices” that had already been stoppedcoming three months after it should have been exercised — sounded hollow. That was throwing life buoy into the water after the drowning person had been saved and given first aid.

Critical Questions

When Meralco applied for a P4.15 per kwhr increase in its rate charges for December 2013 to be reflected in the January and February 2014 bills, ERC Chair Zenaida Ducut and the Commission approved it without investigating the reasons behind the stiffest rate increase ever. The Palace only folded its arms, the President saying that suspending the power rate increase was solely the function of the ERC which is not under the Office of the President.

But that did not remove from the President his police power. Did he have to abdicate this to the ERC which had defaulted on its own police mandate by approving Meralco’s application, “no questions asked”?

Public outcry compelled the ERC to investigate. The President advised the Meralco customers to be patient until ERC had completed its investigation. Finally, last March 6, the ERC came out with its 33-page report that ordered PEMC, the WESM operator, to “recalculate” the spot market prices that “in effect voided the ERC approval last December of the P4.15 per kilowatt-hour rate increase in generation charge that Manila Electric Co. (Meralco) had sought.”

Did it have to take the ERC three months to find the reasons for the very high prices – reasons that were or had been already there when ERC granted the Meralco application for the increase and which ERC could have used to reject the application had it investigated properly?

The Supreme Court restrained Meralco from implementing the rate increase. Had the Court not done so, the Meralco customers could have already fully paid the high rate before the ERC could order “to recalculate”. While WESM could have reaped billions of pesos in profit, the Meralco customers could only wait for refund applicable to future bills. Could that have been just?

In the recalculation the prices in the spot market, can PEMC be trusted to be fair to the Meralco customers? Such fairness is in conflict with the interest of the WESM operators. Both the ERC and PEMC could have stopped the P4.15 rate increase at the outset if they really had the interest of the Meralco customers at heart properly balanced with that of the WESM members.

In its editorial, PDI concluded that the primary cause of the “very spiky” Meralco price hike last December was “regulatory failure”. We agree. And, we add: Not only the ERC but PEMC and WESM. Can the President just wash his hands?

Will there be an end to artificially created brownouts to justify the exploitation of power retail users?

Closer home, Mindanao lawmakers have led a petition in Congress to stop the launching of the IMEM (Integrated Mindanao Electricity Market), the counterpart of WESM which is for Luzon and the Visayas. The petition has the support of stakeholders in the power industry in Mindanao. Energy Secretary Carlos Petilla was quoted to have said he had no objection to the petition.

Could Mindanao power end-users be blamed for being wary about IMEM seeing collusion and manipulation thriving in the WESM at the expense of retail end-users?

(“Comment” is Mr. Patricio P. Diaz’ column for MindaViews, the opinion section of MindaNews. The Titus Brandsma Media Awards honored Mr. Diaz with a “Lifetime Achievement Award” for his “commitment to education and public information to Mindanawons as Journalist, Educator and Peace Advocate.” You can reach him at