We must learn from the Meralco Experience

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By Andy H. Hagad

Bottom Line

Monday, December 23, 2013


THE month-long shutdown of the Malampaya Natural Gas Facility and the net effect it has had on the Manila Electric Company, ending with Meralco consumers having to pay hundreds, and for some thousands of pesos more per month on their power bills, is a warning that the same thing can also happen to us. Their sad experience teaches us that the law meant to protect us consumers, the Electric Power Industry Reform Act (EPIRA Law) urgently needs to be amended if we want to avoid a repeat.

The EPIRA Law had twin purposes when it was enacted in 2001; to encourage those with money to put up more electricity-generating plants in order to stop the power shortage that had brought hours of daily brown-outs all over the country, as well as to ensure the end-users, us, of a sufficient and affordable supply of electricity.

It did achieve its first purpose: domestic and foreign capital were attracted by the law’s offer of a “no national franchise operation”, VAT exemption on sales of electricity and a relatively free, unregulated hand in setting the prices of the power produced. In just a few short years, the government could boast of the country having sufficient power for everyone’s needs, at little government expense. Well and good.

But corporate attraction and a basically-unregulated power generation revealed a fundamental drawback years later. In order to ensure that a buffer supply of power is readily available during critical periods, the EPIRA Law mandated that each power producer sets aside a certain percentage of its electrical capacity and plunks into a pool with other power producers, to be operated under a “Wholesale Electricity Spot Market” (or WESM) concept.

When the power contract between a power company and its distributor (an electric cooperative, an LGU operating power distribution plant, etc.) results in a temporary shortage of electricity in any part of the country, the shortage can be served by purchasing additional electricity from the WESM, at the price fixed by the WESM Administrator. One problem is that in most instances, the power generator/producer is by the express authority of the EPIRA Law, a member of the WESM board; and the producers apparently are in a position to control the decisions of the Administrator and his board.

What happened in the case of Meralco is that when the Malampaya Plant shut down for maintenance work, a number of other power generators/producers which supplied power to Meralco unexpectedly announced an that they will also shut down to perform similar maintenance procedures. Pressed for power, Meralco had no place to go except to buy additional electricity from the spot market.

My understanding of the news reports is that the power generators that shut down their operations had other plants which then sold electricity via the WESM. They then dictated a bloated selling price for these pool of electricity which Meralco, having no other option, was forced to purchase at a little over P45 more per kilowatt-hour than what it had originally contracted with the producers that shut down for “maintenance work”. Senators during the Senate inquiry into the controversy now suspect that these producers made a killing out of this purchase by Meralco with the WESM. And these undue profits were done at the expense of the consumers.

The lesson learned from the Meralco experience is that the EPIRA Law, while effective in the beginning, now needs amending in order to stay relevant. Possible amendments include:
a - increasing the regulatory power of the Energy Regulatory Commission which has lately proven ineffective in controlling the activities especially of the power producers/generators;
b - ensuring through strict provisions in the law that the persons appointed to the ERC are qualified, competent and completely independent;
c - prohibiting power generators from being members or participants in WESM, especially in the spot-pricing of electricity sold; and,
d - provisions that will encourage competition among the power players, with provisions that will prohibit them from forming monopolies or cartel.

Published in the Sun.Star Bacolod newspaper on December 23, 2013.

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