Reforming the Philippine Electric Power Industry Reform Act (EPIRA)


Published on

Analysis of RA 9136, the Electric Power Industry Reform Act, for my Policy Analysis I course in Carnegie Mellon circa Apr-May 2010. Full paper can be viewed here:

  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • 3. Little baseload demand to help defray cost of installing facilities to cover peak demand
  • TRANSCO privatized in 2008, now NGCP81% of NPC generation assets in Luzon & Visayas have been privatized
  • VECO – Visayan Electric CompanyERC rules on generation capacity and market share limits coupled with ownership structure of companies prevent any corrective action. Both Lopez & Aboitiz continue to acquire and consolidate market power.
  • cost-efficient dispatch of power through economic merit orderReliable price signals for players to weigh investment optionsFair and level playing field for suppliers and buyers of electricityMO is PEMC, SO is NGCPLaunched behind schedule due to delays in privatization of NPC assets; trial operations for Visayas began in March 2009, no specific date for commercial launch
  • Hourly auctions, 24 trading periods daily for next day’s requirementsMCP – where last supply bid meets last demand requirementLowest bid dispatched firstSettlements through WESMMore expensive – data from January 2007 to March 2008, comparing NPC, IPPs and WESMTheory: SaroshTalukdar (CMU Electrical & Computer Engineering) simulation with 10 firms, each having 10% of system capacity. Firms not as smart as human traders and learn slowly. Even when capacity is twice the amount of electricity needed, suppliers managed to raise price to monopoly levelsPractice: hourly spot market auctions in US fostered tacit collusion among participating generators. Pivotal supplier problem (firm has enough capacity and withholding it can cause blackout) – single firm or group of firms colluding explicitly or implicitly. Lopez-owned IPPs routinely bid zero to ensure dispatch.
  • ERC investigated the wrong parties, disregarded evidence from PEMCIPPs were the pivotal supplier, able to set price
  • Strengthen safeguards against cross-ownership and abuse of market power
  • Pay-as-bid done in UK and failed. Generators still able to game spot market, tacit collusion and pivotal supplier problem persistAdministered market is what we tried to reform 9 years ago
  • Luzon – natural gas, Visayas – geothermal, Mindanao – hydro, nationwide – natural gas, coal, geothermal, hydroRenewable Energy Act – market participation enabled through feed-in tariff system, implemented in 42 countries/states/regions, responsible for uptake in renewable electricity capacity and generation
  • Reforming the Philippine Electric Power Industry Reform Act (EPIRA)

    1. 1. Genuine & SustainableReforms in the PhilippineElectric Power IndustryElvin Ivan UyEmerging Policies Forum II22 May 2010
    2. 2. Executive Summary   Electricity rates in the Philippines is 3rd highest in Asia1   The Electric Power Industry Reform Act of 2001 (EPIRA) aims to bring down power rates and improve delivery of supply through greater competition and efficiency in the industry. It has failed to achieve both.   3 necessary amendments to EPIRA: 1.  Strengthen safeguards against cross-ownership and abuse of market power 2.  Reevaluate the practicability of the Wholesale Electricity Spot Market (WESM) 3.  Overhaul the Energy Regulatory Commission (ERC)   Beyond EPIRA: fast track implementation of Renewable Energy Act of 20081 RP Power 3rd most costly in Asia: 2
    3. 3. Presentation Overview 1.  Anatomy of High Electricity Rates 2.  Nine Years After: A Review of EPIRA ◦  Privatization, Rent Seeking and the Power Oligarchy ◦  Gaming the WESM, Delays in Implementation of Open Access and Retail Competition ◦  An Ineffectual ERC 3.  Reforming EPIRA and the Power Industry 4.  Securing a Sustainable Energy FutureImage from: 3
    4. 4. Anatomy of High Electricity Prices1 1.  Lack of sufficient domestic fuel reserves – generation companies forced to import fuel 2.  Higher cost in transmission infrastructure due to country’s topography, required resilience against tropical storms & earthquakes 3.  “Relatively peaky” electricity demand curve – little baseload demand on a 24-hour basis due to lack of strong industrial base 4.  Most inputs sourced overseas – purchased at international prices, subject to significant foreign exchange risk1 The IPP Experience in the Philippines: 4
    5. 5. Nine Years After: A Review of EPIRA State-owned EPIRA restructured1 the electric power industry from… to… For privatization and/or driven by private sector1 ERC: 5
    6. 6. Privatization, Rent Seeking, and the Power Oligarchy   EPIRA bars cross-ownership between generation/distribution and transmission, but not between generation, distribution and supply (Sec. 45)   Capacity share limits: 30% (regional), 25% (national)   Two families1 – Lopez & Aboitiz – have horizontal and vertical market power; acquired 10 out of 20 privatized NPC generation plants to date Generation Luzon Visayas Mindanao National Lopez 19.8% 53% 5.6% 15% Aboitiz 12.3% 6.53% 35% 14% Distribution Lopez Meralco – largest distribution utility, serves Luzon VECO and Davao Light & Power Co – 2nd and 3rd Aboitiz largest, serve Visayas and Mindanao, respectively1 From state monopoly to de factor electricity oligarchy, People Against Immoral Debt Vol. 13 No. 1 pp. 7-27 6
    7. 7. WESM, Open Access and Retail Competition•  WESM – trading place between electricity buyers and sellers via auctions that match bids for demand and supply•  Must be established within 1 year from effectivity of EPIRA (Sec. 30)•  Launched in June 2006 and only for Luzon1Figure from ERC1 Why WESM Won’t Work, People Against Immoral Debt Vol. 13 No. 1 pp. 43-54 7
    8. 8. Gaming the WESM •  Mechanism is prone to gaming, in theory1 and in practice2 •  Electricity sourced through WESM was more expensive3 •  Distributors obtain electricity largely through bilateral4 contracts, EPIRA allows them to source up to 90% bilaterally and up to 50% from their affiliates (Sec. 45b and 45c)Figure from: WESM Overview – Rethinking Electricity Deregulation, Elsevier The Electricity Journal Vol. 17 No. 8 pp. 11-262 Lessons from the Failure of U.S. Electricity Restructuring: Why WESM Won’t Work4 14th EPIRA Status Report: 8
    9. 9. An Ineffectual ERC   ERC tasked1 to “ensure adequate promotion of consumer interests”, and “promote competition, encourage market development, ensure customer choice and penalize abuse of market power”   Has the authority to approve rate hikes and act on complaints regarding anti-competitive behavior   Dismissed complaints from PEMC (WESM operator) due to “lack of evidence”: 1.  PSALM trading teams simultaneously2 raised MCP for 3 plants 2.  Meralco3 bought more from WESM when its IPPs were price setters next to 2 other NPC plants   Arguably a case of regulatory capture1 Sec. 41 and 43 of EPIRA2A commission of power: Why WESM Won’t Work 9
    10. 10. Necessary Amendments to EPIRA 1.  Total ban on cross-ownership in transmission, generation, distribution and supply 2.  Restriction on firms with vertical market power from further acquisition of NPC generation assets 3.  Clearer guidelines on the regional generation capacity share limits to curb horizontal market power 4.  A lower limit on the amount of supply that may be sourced through bilateral contracts by a distribution utility from its affiliate generation firm 10Image from:
    11. 11. Reevaluate the Practicability of WESM   Pay-as-bid pricing will not solve gaming issue1   An administered2 market will not be sustainable   Free and competitive market requires numerous companies that do not have horizontal market power; needed investments are prohibitive   If WESM cannot be made competitive, limit amount of electricity sourced from the spot market   Enforce better regulation of bilateral contracts – place generation as close to average cost as possible, allow agreements to span life of generation plants31Rethinking Electricity Deregulation2Lessons from the Failure of U.S. Electricity RestructuringImage from: 11
    12. 12. Securing a Sustainable Energy Future   Reforming the electric power industry both a technical and adaptive challenge   Renewable Energy Act – addresses technology gaps of EPIRA, encourages broader market participation1 in renewables sector; must fast track implementation   Overhaul the ERC – ensure appointment of commissioners based on competence and integrity, remove2 power to grant provisional authority to firms   Decisive and strong leadership from Congress, Department of Energy and ERC1 Energy [R]Evolution, A Sustainable Philippine Energy Outlook: A Dozen Ways to Reduce Electricity Rates Towards Sustainable and Pro-Consumer Electric Power Industry, People Against Immoral Debt Vol. 13 No. 1 pp. 58-59 12