October 3, 2021 | 6:14 pm
Introspective By Romeo L. Bernardo
Since we passed
EPIRA 20 years ago, the energy sector has come a long way. It has not been a
smooth journey and, understandably, mistakes have been made. We have, however,
made much progress in ensuring that our country has the energy needed to power
its economy, support investment, and generate jobs, and thereby improve
outcomes for our people. To continue to build a sustainable and responsive
energy system we must understand the role of our energy policymakers and
regulators and challenges they face.
Let me start with
some disclosures. I was an Undersecretary of Finance during the last two years
of the Cory Aquino and the first four years of the Ramos administrations, and
was involved in addressing the 1990/92 power crisis. I am currently an
independent director in a diversified publicly listed holding company with
major investments in power generation (both fossil fuels and renewables) and
distribution.
The nation’s long
term structural response to prevent a repeat of the massively costly 1990/92
crisis was the passage of the Electric Power Industry Reform Act (EPIRA; 2001),
after seven years of intensive study and debate involving all stakeholders. As
envisioned, private sector players are expected to deliver electricity under a
competitive playing field. A critical element of EPIRA was to “break up” the
business — separating those selling energy from those buying it. This
transformed the energy sector into a real marketplace, which is the key to
lowering energy prices while ensuring quality supply. The government’s role is
to ensure market players abide by market rules to produce the competitive
outcome.
Over the past two
decades, much has changed. The once stable power sector has been disrupted by a
number of forces, resulting in higher levels of uncertainty for market
participants and stakeholders.
The market
liberalization set in motion by EPIRA is alone a challenge, but accelerating
technology curves, and elevated expectations around environmental
sustainability have increased the complexity of our energy system. As the
system evolves, our regulators also need to evolve to maintain their ability to
manage the system.
As we approach
elections and tackle near-term challenges such as thinness in energy supply, we
must reflect on our experiences and craft a long-term vision for the industry.
This includes a future vision for our energy sector public institutions. I would
like to put forward a few reflections for your consideration.
First, our
policy-makers and regulators must ensure a focus on the long-term, especially
when the short-term political stakes are high. In the slow-moving energy
industry, decisions can be made fast but the consequences of those decisions —
whether positive or negative — will not emerge for years. This environment can
be challenging for public leaders whose performance is measured in real-time by
the Twitterati. It is often easier to address the short-term political
pressures at the expense of the long-term health of the system.
Case in point are
the decisions to impose price caps on the wholesale market twice over. Price
controls are an effective way to reduce prices in the short term and to respond
to a burst of public criticism, but in the context of a free market, where
pricing signals encourage or discourage new investment, they can distort the
market and unintentionally result in supply gaps in peaking capacity.
Fortunately, it is
not too late to fix this. The price caps can be withdrawn and the market can be
allowed to work as designed.
It must also be
said that our regulators have demonstrated the necessary foresight and
restraint needed to manage such a complex industry. The repeated resistance to
the idea of retroactive changes to distribution rates has provided market
participants with confidence that the sanctity of commitments will be protected
and is paramount in an environment where large-scale, long-term capital
investments are necessary. These decisions that put the long-term interests of
the country and its energy stakeholders ahead of the popular (or perhaps more
aptly, populists) interests of today are the foundations for a successful
long-term energy system.
To address the underlying
tension, however, we must hold our energy institutions to a higher standard and
insulate them from political pressure, much as we have with the Banko Sentral
ng Pilipinas (BSP). The BSP has evolved over time to be recognized both here
and globally for excellence of its independent and non-politicized stewardship
of the monetary system and supervision of banks and other financial
institutions for price stability and development.
Electricity is
arguably as critical to the day-to-day health of our country as banking.
Perhaps there are lessons for the energy sector to draw from our
institution-building experience in the financial sector.
Secondly, we must
ensure we match the capabilities and strategies of our public institutions to
meet the challenges of the job at hand, not use blunt, heavy-handed regulation
as a means of avoiding the complexity of the job.
Today, the
electricity value chain includes varying levels of industry structure and
market power. The power generation sector is competitive and includes a
diversity of market mechanisms that allow the buying and selling of electricity
to occur. The transmission line sector, on the other hand, is a single
nationwide monopoly that is tasked with connecting our power plants to our
distribution networks and contracting power reserves. The low voltage
distribution sector is composed of jurisdictional monopolies that transmit
power to our homes and businesses.
The diversity of
market participation, market design, and market power across the value chain
makes the job of regulation and management a difficult one. It requires a high
level of sophistication in organizational design, capability, and culture.
Fundamentally, the
approach to regulating natural monopolies should be vastly different from the
approach to a competitive market. The regulator should take a hands-on approach
to regulating the natural monopolies’ market power, while taking a more hands
off approach, a lighter touch, in overseeing the competitive sector, allowing
the market to work and focusing instead on long term guidance and market
optimization that increases competition and market responsiveness.
Since the onset of
EPIRA, unfortunately, our regulators have done the reverse, taking what seems
to be a hands-off approach to the least competitive segment of the value chain,
the transmission line segment, and an overly hands-on approach to the most
competitive segment of the value chain, the generation segment.
This is evidenced
in the organizational structure of the regulator, whereby they have evolved to
create two teams called the Investigation and Enforcement Division to police
the generation and distribution segments, but have not established one for the
transmission line segment. This may partially explain why numerous documented
cases of non-compliance to franchise and other regulations by the National Grid
Corporation of the Philippines (NGCP) have yet to be enforced.
On the unregulated
end of the spectrum, gencos are required to obtain 326 signatures to build a
new power plant. Once built, they have to undergo a burdensome process of
Certificate of Compliance renewal every five years, lest they cannot continue
the operations of their power plant. This is in stark contrast to the 25-year
franchise renewal process of monopolies such as NGCP. This approach of trying
to regulate what is designed to not be regulated has had the unintended
consequence of increasing the level of uncertainty in the operating
environment. This in turn is dampening investor confidence and increasing the
costs of compliance.
As I look ahead
into the future of the energy industry in the Philippines, my hope is that we
as a country are able to come together to develop the foresight, the political
will, and the institutional capability necessary to make the challenging
tradeoffs involved in navigating the complex issues facing the energy industry.
As stewards of the
future, we owe it to the next generation to take the long view and to have the
clarity of vision and the courage to take the necessary, even if unpopular,
actions along the way.
Romeo L. Bernardo
was finance undersecretary during the Cory Aquino and Fidel Ramos
administrations.
romeo.lopez.bernardo@gmail.com
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