What's the root of power rate hike problem? Justices say 'must offer' rule, regulators
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MANILA - Supreme Court justices hearing oral arguments on the power rate hike said regulators were remiss in their duty to protect consumers from market abuses, allowing a controversial market rule that hindered the ability of Meralco to give its clients 'least-cost' rates.
At the second round of oral arguments Tuesday, Meralco counsel Victor Lazatin asserted that the whole debacle over the P4.15-increase in electricity rate in December arose from the "must-offer rule" under the Wholesale Electricity Spot Market (WESM).
(What is the must-offer rule? Click here.)
Lazatin said that if the WESM did not have the must-offer rule, the problem would not have arisen since generating companies (gencos) that do not want to sell their power at the spot market - either due to potential losses, insufficient supply or some other reason - would not have been forced to price their electricity at the highest possible price.
And if some distributor like Meralco or small power cooperative buys when the high offer was made, then "the gencos do not have a choice but to dispatch the electricity," to the buyer.
Associate Justice Marvic Leonen wondered aloud why the Energy Regulatory Commission (ERC), headed by embattled commissioner Zenaida Cruz-Ducut, did not act on the "very high" jump in prices being offered, and allowed the P62-kWh transaction to clear. "Isn't there a grave abuse of discretion on the part of ERC?" Leonen asked.
He pointed out that the P62 per kWh offer price - which was the ceiling price in November - "looks arbitrary and capricious" and somebody at some point must explain why Therma Mobile Inc. (TMO) offered its capacity that high.
Therma Mobile (TMO) of the Aboitiz group has a power supply contract with Meralco.
Lazatin said the best entities to answer this are the Department of Energy (DOE), ERC and the Philippine Electricity Market Corp (PEMC) as they have a tripartite agreement to set the bidding cap.
Leonen also asked why it is that the "must offer" rule stipulates that the last price, which would automatically be the highest price, would be the market clearing price that would be paid to power firms.
CJ Sereno: Rules hinder ‘least-cost’ obligation to users
Chief Justice Ma. Lourdes Sereno, in her interpellation of the Meralco counsel, said that defective WESM rules do not provide Meralco the opportunity to offer its customers the least cost, which is the statutory obligation of the country's biggest power distributor.
The price set at WESM, which is set at the marginal highest cost or a trading cost, is not the actual cost, she said.
"It is therefore the failure of the regulators to provide for a rule that satisfied the statutory requirement imposed on Meralco to provide the least cost to its customers," Sereno said.
"I am trying to characterize the rules and it's not your fault because you are not the regulator," the Chief Justice told Lazatin.
Remove 'must offer' rule - Justice Carpio
During Associate Justice Antonio Carpio's interpellation of the Meralco lawyer, the point was raised that the WESM rules, especially the "must offer" rule, are not in the law and are just adopted by the ERC Board.
"But are those rules compliant with the law? Do you agree whether or not that rule complies with the EPIRA law?" asked Carpio, pertaining to the Electric Power Industry Reform Act (EPIRA) of 2000.
Lazatin said the 'must offer' rule must be deleted for those that are fully contracted, and this rule should only apply to those who have spare capacity. Meralco's position, Lazatin said, is to reckon clearing price at the WESM by what was bidded by the buyer--not the last bidded price, which is automatically the highest.
"Because some bids do not have economic [basis]. Some [offered] at zero, some minus even," Lazatin added.
Meralco default action wrong - Perez
Associate Justice Jose Perez said the root of the problem lay in the WESM rules and the inadequacy of the rules to prevent market manipulation.
"Cannot the ERC look into the manipulation of the WESM rules even before the imlementation of the automatic increase? Because I sense if you are correct in saying that if it was the ERC to blame, then I think you were part of the problem because instead of moving or urging the ERC to do its work in setting aright all these things, you instead wrote the ERC to put into effect what you point out now [as] the inadequacy of the rules," Perez said. Writing the December 5 letter asking the ERC for a rate increase, even a staggered one, is an acceptance of what is happening, the magistrate added.
Bidding at P62
Leonen earlier also asked why, seeing the behavior of the spot market players, where the bids vacillated between P45 per kWh and P62 per kWh, Meralco's traders continued to bid at the higher end of the range.
Lazatin explained: "The traders, when they see a certain price, even if you wanted to react, need at least two hours before you are able to change your bid. To implement your bid, you need another hour."
Leonen then pressed Lazatin to admit that it was Meralco who instructed TMO to offer at a certain price and bid at P62 kWh.
"Yes, your honor. But the strategy is for off-peak, we will bid at P62; but for peak [hours] it's going to be at P6,” the lawyer explained, adding, “so that it will be dispatched on peak [at P6] and not dispatched during off-peak hours."
The Supreme Court justice said there was nothing wrong with bidding at P62 but despite the market behavior, "still P62 was the consistent bid of Meralco?"
Lazatin replied that that is still the strategy because they did not want that P62 be dispatched and the two entities already had a prior supply agreement, therefore, Meralco would not really use the off-peak power dispatched at P62.
The problem, he said, is that rules state that even fully contracted gencos must still participate in the WESM. "If you are already fully contracted, why should you need to bid or allowed to participate in the WESM?" Lazatin said.
What did DOE, ERC do?
Leonen also wondered why it had to take Meralco, and not the Energy department, to talk to the gencos--and persuade one--to postpone their maintenance shutdowns and avoid power supply problems that would be aggravated further by the Malampaya gas field temporary closure.
"Why is it Meralco and not the DOE [Department of Energy] called them and asked to delay their shutdown?" he asked Lazatin.
Meralco’s counsel replied that only the DOE can answer this question.
Another issue Leonen raised: why did the ERC not see that TMO was made to run at 0.5 kWh at P62 when there were other gencos that may have been able to provide electricity for a much lower rate?
Lazatin replied: "Your Honor, it is not in Meralco's best interest to dispatch TMO [during off-peak hours]. We reserve TMO for our peak requirements."
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