June 13,
2021 | 6:55 pm
Introspective
By Romeo
L. Bernardo
From May 31 to June 1, thin
power reserves resulted in the National Grid Corporation of the Philippines
(NGCP) raising yellow and red alerts and hours-long rotational brownouts in
some parts of Luzon. Understandably, this episode drew indignation from
consumers and sharp criticism from pundits and politicians.
To me, this very much feels
like déjà vu. On Jan. 27, 2014, I wrote an article (“The way forward for the
power industry,” https://www.bworldonline.com/content.php?section=Opinion&title=The-way-forward-for-the-power-industry&id=82546)
on the then price spikes and the hearings and investigations that ensued. Much
like in 2014, the initial reaction and resulting discourse centered around
short-cut solutions due to an oversimplified understanding of what is a
difficult-to-understand industry. Much of the criticism was directed towards
the Electric Power Industry Reform Act (EPIRA), which is the law passed in 2001
to reform the electricity industry.
I said then that a fair
appraisal of EPIRA could be captured in the common idiom “so far, so good.” Seven
years later, I would now submit that EPIRA, “like fine wine, has grown better
with age.”
When discussing EPIRA, it
is always important to start from the beginning. EPIRA was created to address
long-term structural weaknesses in our power system that accumulated over time
and resulted in crippling brownouts in the 1990s and a ballooning debt burden
for the government. It was likewise meant to introduce competition to bring
down power rates, give consumers more choice, and attract long-term private
capital.
In 2014, I explained that
EPIRA had advanced in the privatization of 80% of government assets. I
mentioned that it had progressed, albeit at a slower pace than envisioned, in
market formation with the Wholesale Electricity Spot Market (WESM) and Retail Competition
and Open Access (RCOA), which has given businesses, and soon individual
consumers, the choice of where they source their power and the ability to get
better rates.
Since then, EPIRA has
recorded more wins. From 2011 to 2020, we have seen a decline in the prices of
electricity in most major markets. In this time period, WESM prices have fallen
by 43%, Meralco generation rates by 16%, and RCOA (from 2017 only) by 17%.
We have seen the entry of
new generation companies (gencos). The sale of assets to the private sector
yielded the government P911 billion that reduced the obligations of the Power
Sector Assets and Liabilities Management Corp. (PSALM), and, more importantly,
unburdened the government from spending to build new plants to keep up with growing
demand.
Now, you may wonder, if
EPIRA has been mostly a success, why are we still experiencing rotational
brownouts? Surely this is not evidence of success. To be clear, EPIRA as a law
laid the legal foundation for a sustainable and competitive electricity sector,
but like any law, it is only effective if we implement it properly, if market
participants play by the rules, and if our regulators enforce the rules
effectively.
By most measures, the
implementation of EPIRA has been incomplete and slow. A clear example of this
is the RCOA Market. It was intended to provide all consumers with the power to
choose their power supplier not later than three years after EPIRA enactment,
but the implementation started only in 2013. Today, 17 years have elapsed and
we have only partially implemented it.
EPIRA’s implementation
requires the private sector to carry a greater role in the mission of powering
the country. On this front, we have seen a number of shortcomings. First, while
we see significant growth in the generation side of the industry (capacity
increased from 15 GWs in 2003 to 26 GWs in end-2020), we still experience gaps
in power supply. This is primarily because as a fast-growing economy, power
demand is expanding at a pace that gencos are hard-pressed to keep up with. A
contributing factor is that much of our existing generation fleet is old and
thus given to breakdowns.
On the transmission side of
the industry, we have seen bottlenecks in the construction of transmission
lines. On average, transmission lines are three to four years delayed in their
implementation. Without certainty in transmission, generators are unable to
build new power plants. We have also seen that the transmission line operator
has not fully contracted firm power reserves. Where the system operator’s role
is to procure reserves, much like procuring a genset for your home, to call on
in a time of power crisis, it has not procured sufficient firm reserves and so
is unable to faithfully perform its role as an emergency backstop.
Finally, our regulators
play an important role in seeing to it that the rules are properly enforced. On
this front, I can only describe our regulator’s approach as schizophrenic,
where they have tended to over-regulate the competitive part of the industry
and under-regulate the regulated part of the industry.
EPIRA designed the power
generation side to be competitive, and allow competition to yield lower prices
and higher reliability. There are rules in place, including market power
restrictions, to keep any one player from unfairly prejudicing the consumer.
Unfortunately, since then, the regulators have churned out regulation after
regulation to curb the activities of generators. Each regulation is designed
with the consumer in mind, but, as with many regulations and laws, they often
carry unintended consequences that distort the behavior and incentives of
market participants. When investors do not build new plants or do so slowly
because the business environment has been riddled with regulatory uncertainty
and risks, end consumers and our entire economy lose.
On the other hand, the
regulators have fallen short in its responsibility to enforce the rules over
NGCP, which has the monopoly over the transmission lines in the country. NGCP
over the past 10 years has been non-compliant with the rules that require it to
build transmission line infrastructure to ensure that we have the power when
and where we need it, especially during times of power shortage. The
non-compliances come in the form of a lack of transmission lines, a lack of
redundancies in our network, a lack of power reserves, and not meeting the IPO
requirement under the law.
The schizophrenic approach
to regulation is also apparent in the approach to regulating the weighted
average cost of capital (WACC) allowed different market participants. Where
arguably the WACC used by regulators to regulate rates of competitive gencos
should be higher than that of a monopoly, reflecting the higher risk
environment, it is today the reverse. The monopoly (NGCP) earns a higher return
in a market where it has no competitor.
Where do we go from here?
If we want to avoid the power shortages that we just experienced, we need to
first correct our regulatory approach. We have a strong legal and regulatory
framework in EPIRA. Our regulators should focus on enforcing it rather than
adding to it. More specifically, our regulators should focus on regulating the
regulated business of transmission of power and consider simplifying the rules
for gencos to allow the market to work, to de-risk the environment and to
attract more long-term private capital.
In order to ensure that we
have adequate reserves, the regulators should compel the Systems Operator to
contract the full, firm reserve requirement. This can be done within 30 days,
as there are genco offers today sitting on the desks at NGCP. This would ensure
that we have the spare reserves the next time that the supply of power thins.
Lastly, we need to fast
track the implementation of the transmission line network. A three to four-year
year lag creates significant uncertainty and an imbalance in the market.
Correcting this will de-risk the investment environment and will encourage the
entry of more power capacity into the grid.
All in all, EPIRA has come
a long way and has saved billions for consumers and taxpayers alike. Let’s
focus our efforts on making it work.
The views and opinions in
this article are those of the author and do not necessarily reflect the
position of these Institutions.
Romeo L. Bernardo was
Finance Undersecretary during the Cory Aquino and Fidel Ramos administrations.
He is an Independent Director in a major publicly listed conglomerate active in
the energy business and serves as a Trustee/Director in the Foundation for
Economic Freedom, The Management Association of the Philippines and The Finex
Foundation.
romeo.lopez.bernardo@gmail.com
