06 October 2016

THE DISGRACE TO LAWYERS AND ECONOMISTS IF ALLOWED TO CONTINUE: FREE-MARKET-COMPETITION HOAX IN WHOLESALE ELECTRICITY SPOT MARKET (WESM)

THE DISGRACE TO LAWYERS 
AND ECONOMISTS IF ALLOWED TO CONTINUE:  
FREE-MARKET-COMPETITION HOAX IN WESM
 

JUST WHAT IS WRONG WITH THE WHOLESALE
ELECTRICITY SPOT MARKET (WESM)?
 
Based on media reports and commentaries, WESM operates a ridiculous game-of-chance procurement bidding system, under whichwhatever is the last quoted price in the hourly batch of bids—even if it is the HIGHEST bid price, and even if there is a zero-amount  bid quotation—becomes the WINNING BID! (Solita Collas-Monsod, “Get Real:  Who’s responsible for power price spike?” Philippine Daily Inquirer, December 14, 2013, page A12).
 
I suppose there is no similar procurement bidding scheme anywhere in the world where the highest bid price—despite available lowest and most advantageous bid offer—becomes the winning bid. This utter lack of free-market competition—and sanity?—in the WESM bidding system is simply  outrageous!
 
While normal power generation rate shown in Meralco bills is less than P6.00 per kWh, the WESM offer price cap was set at the atrociously highP62.00  per kWh in June 2006. Owing to the prevalence of this ultra high price cap as winning bid even during times of low demand—sign of defective WESM bidding system—the price cap was reduced to P32.00  per kWh in December 2013.
 
While the Department of Trade and Industry (DTI) runs after profiteering merchants who take advantage of supply shortfall during emergency periods, WESM operators allow WESM bids at the foregoing allowable peak rate whenever there is power supply shortfall brought about by scheduled and unscheduled power plant shutdowns. This improper profiteering scheme is possible because the power generation industry is deregulated under EPIRA and unwisely freed from the Supreme-Court ruled 12% reasonable return on investment. Even then, WESM founders and operators should have exercised simple common sense and proper sense of balance—through setting competitively much lower WESM offer price cap close to P6.00 per kWh. Better still, there should be separate price cap per type of power plant (hydro, geothermal, oil-fired, etc), each with unique generation cost.   

The WESM bidding system is evil, a free-market-competition hoax foisted upon blatantly deceived consumers; a mockery of competitive bidding system; and a scheme instituted by the government’s Department of Energy (DOE) and Energy Regulatory Commission (ERC) that reflects badly on legal, economic, and financial experts in government—especially those who have been in Malacanang, NEDA, DOE, ERC, and Commission on Audit (COA)—who appear blissfully ignorant of, or helpless against, consequently overpriced WESM electricity rate, which victimizes both the government and the paying public in their capacity as overcharged power consumers.   
 
I wish present government officials and others concerned will do something about the deceitful WESM bidding system, whichwith due respect to all concernedseemingly fools by way of overpriced electricity rate even the most powerful, influential, experienced, skilled, educated, and exalted among us more than 100 million Filipinosas presented in the herein reissued still unrefuted grave issues against the government-instituted WESM, previously repeatedly communicated to seemingly sleeping-on-the-job past and present ERC, DOE, NEDA, and DOJ officials who have apparently done absolutely nothing about it 
 
 
DEBUNKING THE MYTH
OF COMPETITION IN
THE EPIRA-DEREGULATED 
POWER GENERATION OLIGOPOLY
 
PART I
 THE SMOKING GUN
OF LACK OF COMPETITION
IN THE EPIRA-DEREGULATED
POWER GENERATION OLIGOPOLY:
WESM BIDDING SYSTEM
THAT IS SIMPLY RIDICULOUS AND
DEVOID OF COMPETITION—IT IS A
GAME OF CHANCE!  
 
THERE IS SIMPLY NO PRICE-LOWERING
FREE-MARKET COMPETITION IN THE TOUTED
WESM BIDDING SCHEME THAT DECLARES AS 
WINNING BID THE QUOTED HIGHEST PRICE—
AND THIS IS DONE EVEN IF THERE ARE
SUBMITTED BUT IGNORED MUCH LOWER BIDS—
A MOCKERY OF COMPETITIVE BIDDING SYSTEM!
 
 
To Begin with,
Who are Behind the EPIRA-Mandated
Wholesale Electricity Spot Market (WESM)?
 
Quotes from economist Solita Monsod’s “Get Real” column in the Philippine Daily Inquirer on December 13, 2014, page A12, “Who’s responsible for power price spike?”:   
 
“The Epira (Electric Power Industry Reform Act) of 2001 mandated the Department of Energy (DOE) to establish the  Wholesale Electricity Spot Market (WESM) that would ‘facilitate a transparent and reliable market for electricity, and, jointly with the electric power industry participants, formulate the detailed rules for the WESM.’ This the DOE did, with inputs from the industry participants.
 
(No representative from consumers in the group that formulated the WESM rules?  --M. L. Tecson)
 
“The Epira also entrusted to the Energy Regulatory Commission (ERC) the approval of the price determination methodology, which it did with the proper consultation.
 
“An ‘autonomous group market operator,’ the Philippine Electricity Market Corp. (PEMC) composed of industry participants—involved in generation, transmission, and distribution—was also created, chaired by the DOE.  Its role was to ‘procure necessary infrastructure and technology, and achieve institutional and participant readiness for the commercial operation of the WESM.’ With the DOE as chair, the board members of PEMC, aside from the ERC, are representatives of the generators, transmitters and distributors, plus four independent members (presumably representing consumers).
 
“I bring this out to show that the government was very visible in making the market rules (WESM).”
 
 
PROOF OF LACK OF TRUE
COMPETITION IN WESM
 
“In power, as in any other sector or industry, competition is what drives the economy to efficiency and improved consumer welfare, a fundamental principle taught in basic economics. Lack of it leads to excessive unearned profits accruing to a few at the expense of the many (that is, we consumers)….”  (Cielito F. Habito, “Wanted:  true competition in power,” Philippine Daily Inquirer, January 21, 2014, page A9).
 
In the light of such plain and basic economic thought, it is shocking how past and present DOE and ERC officials could play the principal role in the formulation, approval, institution, and perpetuation of the WESM bidding scheme, which is simply ridiculous and devoid of competition.
 
In procurement, the aim of competitive bidding is to award the purchase to the bidder who submitted the LOWEST bid price, which, with all other things being equal, equates to the most advantageous bid.
  
In the WESM procurement bidding system, there is clearly no competition for the needed lowest bid price. It declares as WINNING bid the accepted HIGHEST bid—and the winning HIGHEST bid is applied to all power sold, even if there are much LOWER bids!
 
Even if the winning highest bid price is offered for a small volume by a relatively small power producer, it will be applied to all power sold—a senseless case of the tail wagging the dog and a fertile ground for price manipulation.
 
How exalted DOE and ERC officials could approve and tolerate such anti-market, anti-business, anti-poor, and anti-reason WESM procurement bidding system is astounding and puzzling. In fact, even Meralco’s own lawyer found it improper and indirectly admitted the impropriety before the Supreme Court.   
  

Meralco’s Own Lawyer Exposed
Before the Supreme Court the Lack
of Price-Lowering Competition in WESM:
He in Effect Admitted that in its Bidding System,
Even if there are Submitted Bids at LOWER Rates,
these are Deliberately Disregarded and the Accepted
HIGHEST Price is Chosen as Winning Bid Rate—
Just What Convoluted Logic Justified this Inanity?
  
“(I)n the WESM, the sellers of electricity are not paid what they ask for; they are paid what the last accepted bidder asks for. (Their bids are arranged from lowest to highest, and the highest accepted price is what is paid by the consumers. So if the maximum bid of P62/kWh is the clearing price, think of the price spike for the consumers and the windfall profits for some power generators.” (Solita Collas-Monsod, “Get Real:  Who’s responsible for power price spike?” Philippine Daily Inquirer, December 14, 2013, page A12).
 
Economist Solita Monsod’s revelation in her newspaper column of the lack of competition in WESM may not have automatic evidentiary value before our courts, but it was corroborated, admitted, and exposed by Meralco’s own lawyer during oral arguments before the Supreme Court, on the petition for temporary restraining order (TRO) against Meralco’s P4.15 per kWh rate increase, as follows: 
  
“Senior Associate Justice Antonio Carpio repeatedly asked how many times Meralco had to buy at P62.  (Meralco lawyer Victor) Lazatin stressed no buyer can predict the price; given the mechanics, a buyer only states the quantity it needs and Meralco was a price taker. He further said the ‘must offer’ rule should cover only power not presold, and the price passed to consumers should be each generator’s actual quote instead of the highest accepted price. This, he argued, would make quotes realistic, unlike an extreme zero or P62.” (Oscar Franklin Tan, “SC proving wrong place for Meralco case,” Philippine Daily Inquirer,  February 7, 2014, page A12)
  
Thus, even Meralco’s own lawyer in effect declared that the WESM winning bid rate should be the actual lowest bid price, instead of the highest accepted price, an indirect admission that the P4.15 per kWh Meralco rate increase, corresponding to the WESM winning bid at HIGHEST accepted price, is NOT right, because what is right is the submitted actual LOWEST bid price. And if the P4.15 per kWh rate increase is not right, it should be disapproved on a final basis.    
  
 
One Possible Reason for the
Absurd WESM Bidding System
(If Not Outright Manipulation
to Favor Power Companies)
 
Can it be that the WESM operators erroneously think that, as a matter of practice, they are conducting SALES bidding where there is ONE SELLER with a number of competing buyers, so that the SALE is being awarded to the buyer with HIGHEST bid? This is not the case in WESM with respect to the one BUYER Meralco, with a number of competing sellers, therefore Meralco’s PURCHASE order should be awarded to the seller with LOWEST bid.    
 
  
PART II
WHY GENEUINE COMPETITION
IS IMPOSSIBLE IN THE DEREGULATED
POWER GENERATION OLIGOPOLY
UNDER THE PRESENT EPIRA
 
   
THE FLAWED ASSUMPTIONS
THAT PRODUCED THE MYTH OF COMPETITION
IN DEREGULATED POWER GENERATION OLIGOPLY
 
The assumed free-market competition in the EPIRA-created power generation oligopoly is expected to emanate from the following:
 
a.  In contrast to the government monopoly, National Power Corporation
     (NAPOCOR), there will be a number of private generation
    companies that will compete against each other for bigger
      market share and profits.
 
b.  Deregulation will attract more private investors to the power
    generation industry, which augurs well for more intense competition
      among market players.
 
Deregulation of the power generation industry under EPIRA is based on the na├»ve—or monumentally wrong—premise that presence of few or oligopolistic power producers will already produce genuine competition and consequent low power rates. This is not right because low prices under free market stem from the confluence of stimulating factors, such as numerous suppliers and buyers none of whom can control or unduly influence market price or supply, facility of entry of new competitors with additional supply, products with elastic demand (demand increases as price decreases and vice versa), and free choice on the part of buyers and sellers, which are lacking in the capital-intensive and oligopolistic power generation industry, entry into which is difficult and entails long lead time for power plant planning, government approval, and construction.   
   
Therefore, the conclusion that introducing the economic stimulus deregulated private oligopoly—in lieu of regulated government monopoly—will produce genuine competition in the power generation industry is fallacious, because this stimulus is not enough to overcome the opposite impact of the foregoing lack of requisites of perfect competition in a really free market. Such lack resulted in absence of  free-market competition in the power generation oligopoly, with concomitant high power rates.
 
 
LACKING REQUISITES
OF COMPETITION—OR CONDITIONS THAT
MAKE COMPETITION IMPOSSIBLE—IN EPIRA’S
DEREGULATED POWER GENERATION OLIGOPOLY
  
The envisioned COMPETITION  in the deregulated private  power generation oligopoly under EPIRA—which replaced REGULATION of the government-owned power-generator monopoly NAPOCOR as promoter of low and reasonable rates in the power generation industry—did NOT materialize, because the power generation oligopoly does not possess the crucial requisites or attributes of perfect competition in a really free market.  On the contrary, there are conditions that work against the emergence of competition in the power generation oligopoly.  
 
Among the lacking  requisites of competition—or existing contradictory or  adverse conditions  that drive away competition in power generation—are the following:
 
1.   To begin with, one of two sources of power supply to power marketing companies like Meralco and power cooperatives—the EPIRA-created wholesale electricity spot market (WESM)—cannot promote genuine COMPETITION among its power suppliers because of two adverse factors:  lack of enough supply traded in it compounded by monumentally flawed WESM bidding system.  
 
On a macro basis, there is just not enough power plant capacity to meet ever growing power demand, especially whenever there are scheduled or unscheduled shutdowns of existing aging plants, hence, power generators need not worry about competition—they need not reduce their rates to fully sell their generated electricity. With the shortfall in power supply, even overpriced electricity can be sold to meet demand for it—a basic necessity in captive market that has to be consumed on a no-choice basis. As a result, there is simply no real competition in the power generation industry.           
 
Oddly, it was Meralco’s own legal counsel who indirectly exposed before the Supreme Court, and the whole nation, the LACK of true COMPETITION in the power generation industry, especially in the wholesale electricity spot market, created under EPIRA in the power generation oligopoly. The admissions were made during the oral arguments before the Supreme Court on the case against Meralco’s controversial P4.15 per kWh rate increase opposed by consumers, as chronicled in an article by Atty. Oscar Franklin Tan,  published on February 7, 2014 on page A12 of the Philippine Daily Inquirer,  entitled “SC proving wrong place for Meralco case.”  As quoted from the newspaper article, the damning ADMISSIONS  in the supposed "authoritative presentation for Meralco by Victor ‘Boy’ Lazatin, president  of the Philippine Dispute Resolution Center and leader of Accralaw’s  feared litigation team” are as follows: 
 
(a)  “Ninety percent of Meralco’s power is prepurchased at lower prices. Last September, anticipating the Malampaya natural gas facility’s preventive maintenance in November, it signed a 100-megawatt contract with Therma Mobile to ensure supply during peak hours.”
 
NOTE:  To quote from Meralco’s subsequent advertisement, its prepurchased power supply is actually larger: “Meralco buys more or less 95%of its electricity supply through contracts with various generation companies. These contracts guarantee the supply of power at correspondingrates that are approved by ERC.” (Meralco Advisory:  Meralco Steps Up Efforts to Ensure Steady Supply of Electricity this Summer,”Philippine Daily Inquirer, April 22, 2014, page B3). This means that Meralco’s supply from WESM is a measly 5%, hence the source of market competition from uncommitted supply is in reality very small.       
 
(b)  “However, the market’s ‘must offer’ rule caused behavior that seems strange. Power plants must quote a price for their output even if already prepurchased. Meralco thus instructed Therma Mobile to, during peak hours, quote P62 (the market maximum) to make it last priority in the system and leave its supply for Meralco. This is simply the system’s peculiar queuing method, and some plants quote zero to ensure they are first priority.”
 
 (c)  “The system applies the last batch’s price to all power sold, with no one knowing the price ahead. Lazatin said that when Malampaya shut down, other firms broke market rules and failed to supply power, leading to all quotes being taken and the maximum price of P62 becoming the market price.” 
 
 
Why There is No Competition
In EPIRA-Created WESM
as a Function of Scarcity in Supply

The far-reaching IMPLICATION of the Meralco lawyer’s damning ADMISSIONS before the Supreme Court is quite clear:  LACK of true COMPETITION in EPIRA-created WESM, here’s why:
 
As admitted by the Meralco lawyer, ninety percent (90%) of Meralco’s power requirement is already prepurchased under bilateral supply contracts, and that there is a “must-offer rule” (MOR) in the EPIRA-created wholesale electricity spot market (WESM). These two unexpectedadmissions that equated to denial of competition in WESM can be fully interpreted as follows:
 
 (a)  The prepurchase by Meralco, and apparently by other power marketers, of almost their entire power requirements under bilateral contracts means that there is no more significant uncommitted volume traded in the spot market.
 
Based on the media-reported Meralco counsel's corroborative admission that 90% of Meralco's power is prepurchased, practically the entire plant capacities of power generators are already prepurchased by Meralco and other power retailers under bilateral contracts—because they all want to ensure regular and adequate supply for their respective power requirements. Therefore, there is no more available significant power supply for sale through the supposedly competitive  free-market WESM, especially whenever some power plants are on scheduled or unscheduled shutdowns for repair and maintenance. If so, power generators can take advantage of the situation and raise their rates even if there are competitors—because once the limited supply of competition is exhausted or fully sold, consumers in the captive power market have no choice but to buy the remaining high-priced power supply to meet their inescapable need for this basic necessity.     
   
 
(b)  Lack of power generators’ free choice under the “must-offer” rule helped vitiate free-market competition in WESM. 
 
In free market with perfect competition, there is free choice on the part of both buyer and seller in their decision to enter into the business transaction, that is, neither of them is under the compulsion to buy or sell.
 
Free choice as attribute of free market is based on the judicial definition of market value:  It is the price at which a willing seller will sell, and a willing buyer will buy, with neither party under the compulsion to sell or buy. If one of the contracting parties is under the compulsion to enter into the transaction against his will, he can agree even to an out-of-line consideration. If he is the seller he can agree to a very low offered price, and if he is the buyer he can be amenable to a very high asking price—simply to meet his compelling need to sell or buy the object of transaction. The consideration agreed upon under such constraint of extreme need to sell or buy is clearly not competitive free-market price.      
 
Under the must-offer rule (MOR) of EPIRA’s wholesale electricity spot market (WESM), to create and maintain the myth and illusion of competitive wholesale market under EPIRA, power generators must offer their output to WESM at the prices they want, subject to a maximum rate set by WESM. However, as admitted by Meralco's legal counsel, because most power producers have entered into bilateral contracts for the supply of electricity to Meralco (and other power retailers), to avoid selling through WESM of the power generation already contractually committed to power retailers, the power producers are constrained to quote the highest rates possible, in order to intentionally lose in the WESM bidding and sale. Their winning in the bidding and selling through WESM will result in their reneging on their supply contracts with power retailers.
 
Why There is No Competition
In EPIRA-Created WESM
as a Function of Profoundly
Defective WESM Bidding System
 
WESM has a queer or RIDICULOUS bidding system that is blatantly anti-consumer and anti-poor—it sacrifices accuracy, logic, and fairness for the sake of expediency in determining the winning bid rate, because it is a GAME OF CHANCE!
 
The EPIRA-created wholesale electricity spot market or WESM has a bidding system that sabotages and prevents the attainment of the very purpose of its being—to come up with winning low bid rate to be charged to power marketers, like Meralco, and passed on to consumers. Under the WESM bidding rules as disclosed by the Meralco lawyer before the Supreme Court, the WINNING bid is NOT the LOWEST bid rate as it should be, but simply the last batch’s price regardless of amount—that is, the last batch’s price wins even if it is the highest bid rate and there are previous lower bids—as in the case of the media-reported P62 per kWh winning bid of Therma Mobile. Earlier bids, even if much lower than the winning last batch’s price, such as the zero quote cited by the Meralco lawyer, are ignored and become losing bids in the WESM  roulette bidding method.
  
In other words, in the outlandish and deceptive WESM bidding system borne out of convoluted logic, the lowest bid rate will determine which bidder will be awarded the supply—which is why some bidders quote zero rate to win the supply award. However, the winning bid rate or selling price for the winning bidder—which quoted zero rate and won the supply award—is not its lowest bid rate but whatever is the resulting last batch’s rate, regardless of amount and even if it is the highest allowable bid rate, like the P62 per kWh winning bid--as can be deduced from the admissions against interest of no less than the Meralco lawyer himself!       
 
 What kind of anti-poor, senseless, deceptive, and out-and-out game-of-chance bidding system is this that government regulators—ERC and DOE officials—have allowed to be foisted upon victimized, unsuspecting, and generally poor millions of consumers in households, agriculture, business and industry, as well as on the government itself which also consumes power?
 
Now, we know that when Meralco asked its contracted supplier, Thermo Mobile, to bid in WESM at the maximum allowable P62 per kWh—even if Meralco has purchase contract with it at much lower rate—it might not be just to avoid Thermo Mobile’s winning in the bidding because in such event, the sale will still be to Meralco. Rather, it might be because of conflict of interest on Meralco’s part. It might have wanted to raise the winning bid rate or generation charge that it will pass on to consumers. Doing so will yield Meralco higher profit because bulk of its power supply will still be at pre-contracted lower rates, while the power generation companies where it—or its controlling group of stockholders—has co-ownership will profit more from the WESM winning highest bid rate. This susceptible-to-manipulation rate-raising WESM bidding system can be cured through one feasible way—overhaul of EPIRA.       
 

Combined Impact of Scarcity of Supply,
Must-Offer Rule, and Utterly Defective
Bidding System in the EPIRA-Created WESM 
  
Thus, as can be deciphered from the Meralco lawyer’s admissions, we   have the ridiculous situation where the touted COMPETITION in WESM—the anchor of PRIVATIZATION and DEREGULATION of the power generation industry under EPIRA---is in the form of the deregulated power producers’ competition in the quoting of HIGHEST (instead of expected LOWEST) electricity RATES, designed to INTENTIONALLY LOSE or avoid winning in the bidding and selling in the farcical free-market WESM,    which SELLING, if done by them, will VIOLATE their exclusive supply contracts with market retailers! Avoidance of such violation—or  contracted supply disruption—was probably the reason for the Meralco counsel’s revelation that “when Malampaya shut down, other firms broke market rules and failed to supply power, leading to all quotes being taken and the maximum price of P62 becoming the market price.” 
 
 
2.   There is NO COMPETITION either in the second and lopsidedly much bigger source of power supply to Meralco and other power retailers—the bilateral contracts they entered into with power generation companies—because the contracts are awarded to power generators through NEGOTIATION instead of competitive bidding, and the arms-length nature of transaction can be lost if the supply contracts are between Meralco and its power-generation-company affiliates.   
 
In the bilateral supply contracts with power generators, the lopsidedly larger source of power supply to power marketing companies95% of total supply in the case of Meralco based on its latest advertisement (Meralco Advisory: Meralco Steps Up Efforts to Ensure Steady Supply of Electricity this Summer,” Philippine Daily Inquirer, April 22, 2014, page B3)—there is no price-lowering competitionbecause the basis of contract award is negotiation, not competitive bidding.
 
Worse, if the negotiation is between Meralco and power generation companies where it and its major stockholders have part ownership, there is no incentive for it to really bring down the contracted rates owing to conflict of interest. As part owner of the supplying power generation companies, it will benefit from their higher rates. What’s more, any contracted higher generation rates will not penalize Meralco at all, because it can simply pass on the higher rates to power consumers.          
 
Bilateral Power Supply Contracts
Reduce Power Supply through WESM
and Adversely Affect Competition in it
  
To ensure availability of long-term market for the output of their capital-intensive power plants, and thereby eliminate business uncertainty and risk, power producers entered into bilateral supply contracts with Meralco and other power retailers, which were free to commit up to 90% of their electricity purchases during the first five (5) years of WESM, then up to 100% thereafter. With present bulk of power producers’ sales done through bilateral contracts instead of through farcical bidding in WESM, the role of WESM as venue and mechanism of free-market rate-lowering COMPETITION has become a myth or elusive dream.       
  
Even if Harmful to WESM,
Bilateral Supply Contracts are a
Necessity and Cannot be Prohibited
 
Unfortunately, while bilateral contracts have caused lack of competition in WESM, these cannot be disallowed. Bilateral contracts are for the mutual protection of power generators and power marketers. Generators need  assured market for their power supply, while marketers need assured supply for their power market. Thus, removing bilateral contracts that assure the two parties their corresponding market and supply will cause uncertainty to both of them. The effect on power generators is worse. Lack of long-term supply contracts may cause existing generators to suddenly lose their market—if Meralco and other power retailers will stop buying from them and patronize other power producers, especially those where the retailers have new co-ownership.
 
If without interest or clout in power marketing monopolies, a power generator’s risk of losing its market in the monopolistic power marketing industry is real. There was already a precedent  in the past. In 2002, Meralco  PRETERMINATED  its 10-year power purchase contract for the remaining years 2003 to 2004, with no less than its supplier that provided bulk of its needs for years and, unfortunately, had outlived its usefulness to Meralco—the government-owned National Power Corporation or Napocor (Riza T. Olchondra, ‘Court upholds P14-B Meralco, Napocor deal,’ Philippine Daily Inquirer, May 1, 2014, pages B1 and B3). Prolonged court litigation did not compel Meralco to resume its power purchases from Napocor.   
 

If Bilateral Power Supply Contracts—
Awarded Without Competitive Bidding—
Cannot Be Banned and Can Even Become
100% Source of Supply to Power Marketers
Like Meralco, then Lack of COMPETITION
Is Clear and Incurable under Existing EPIRA
 
The lack of real competition in bilateral power supply contracts—as well as in WESM stemming from reduced uncommitted supply traded in it as a function of allowed bilateral contracts—is incurable because bilateral contracts cannot be prohibited under EPIRA-mandated deregulation in power generation. Prohibiting bilateral contracts will merely solve a problem by creating another problem—discouraged investments in power generation owing to lack of long-term contracted and assured market.
 
On the other hand, requiring competitive bidding as basis of award of bilateral supply contracts contravenes the EPIRA-mandatedderegulation of the power generation industry. Consequently, once most power marketers have reached the stage where 100% of theirpower supply is sourced from bilateral contracts without prior competitive bidding—it is now 95% in the case of Meralco—then perhapsit will finally  dawn upon responsible executive, legislative, and regulatory government officials the glaring lack of COMPETITION in EPIRA, which its framers and their economic and financial advisers failed to visualize.                   
 
 
3.  There is recurring tightness or even shortfall in total power supply compared to growing total demand, as a result of lack of power plant construction on a timely basis by the private sector, aggravated by scheduled and unscheduled power plant shutdowns, especially of aging plants, with adverse effect on COMPETITION and upward impact on power rates.  
 
Where there is competition, supply is enough or more than demand, so that those who will price their products too high cannot sell their products, hence they will be constrained to reduce their prices. This is not the case in the power generation industry, a case of sellers’ market, where supply is oftentimes tight or   less than demand owing to lack of timely power plant construction, worsened by scheduled and unscheduled plant shutdowns, so that even high-priced power can be sold—as in the case of the expensive electricity generated by Malaya thermal plant. Consequently, even power generators producing cheap electricity, like that from geothermal and hydro plants, can quote high rates and their power supply can still be sold.
 
As further cause of scarce power supply that makes competition impossible in the power generation industry, the option for producing cheap electricity from hydro and geothermal plants is limited because we do not have unlimited potential sites for them—these depend on unexplored geothermal reserves underground and availability of rivers suitable for the purpose. Consequently, our country cannot go on a building spree of these low-cost power plants, hence their supply is just a fraction of total demand.
 
To meet demand that cannot be satisfied by low-cost plants, our country is constrained to build even high-cost coal- and oil-fired plants—and this is possible only because consumers are constrained to shoulder the high-cost generation companies’ high power rates.  If consumers are compelled to shoulder high rates to have continuing supply of electricity—a basic necessity needed on a daily basis—then, under EPIRA-mandated deregulation of power generation, even low-cost power generators can charge high rates because their supply is also needed in meeting total demand. Meralco could not care less about the high power generation rates being charged to it by power generators because it merely passes these on without question to consumers. Thus, there is simply no price-lowering competition in the EPIRA-deregulated private power generation oligopoly. 
 
 
4.  Lacking prerequisite to COMPETITION in the deregulated power generation oligopoly: In a really free market, perfect or pure competition, or simply competition, “exists  when there are so many buyers and sellers that no single buyer or seller has any influence over the price.” (On the other hand:  “Imperfect competition exists when any buyer or any seller is able to influence the price.”) [Paul Wonnacott and Ronald Wonnacott, An Introduction to Macroeconomics, 3rd Ed. (New York: Mc-Graw-Hill, Inc., 1986) pp. 54-55]
  
Genuine competition arises from numerous buyers and sellers, with no one among them big enough to affect market price, such as in relatively low-capital small and medium enterprises, where collusion is impractical because it is difficult to unite several market players with conflicting motives and interests—plus the fact that if prices are too high and profitable, new market players can be attracted to readily come in, bring in added supply, and promote low prices, in the process validating the role of competition as automatic price control mechanism. 

This most basic requisite for competition—existence of numerous buyers and sellers—is not present in the oligopolistic power industry, where there are only few power producers in each grid selling on wholesale basis to each monopolistic power retailer in each franchise area, out of existing franchise areas nationwide.
  
The significance of having many buyers and sellers in the  market is further explained as follows: 
  
(a)  Having many buyers in the market as requisite of competition  means that there is enough competing demand  that can attract more suppliers or sellers to join the free-market competition. This is not possible in the case of MONOPSONY, where there is only one buyer in each large market territory, as exemplified by the monopoly Meralco as lone wholesale buyer of generated power and retail reseller in its franchise area. With Meralco as lone buyer, failure to clinch a sales contract with it, or having a price or other dispute with it during implementation of supply contract, can spell doom for the particular generator-supplier—either  its supply contract is promptly terminated or never renewed upon expiration. With lack or loss of market, its plant facilities will stop operation and suffer losses. With this very real risk, new power generators will shun the market, resulting in shortfall in supply that will cause prices to rise. This one monopolistic buyer per franchise area is the existing attribute of power generators’ market, where generators are at the mercy of the lone buyer in each area—like the monopoly Meralco—causing general lack of new entrants in the industry and consequent lack of enough competition.     
 
(b)  Having many sellers in the market as another requisite of competition signifies that there is ample supply, the promoter of low prices under normal operation of the economic law of supply and demand. In the power generation industry, the opposite situation exists—dearth of market players because it is an oligopoly. There are no prospective power investors waiting in line to invest in power generation, despite impending shortfall in plant capacities as a result of growing demand and inefficiencies and shutdowns of aging plants.
 
Furthermore, the nature of electricity—that after generation it cannot be stored for future use---contributes to the unavoidable influence over pricing of some power producers whenever there are scheduled and unscheduled plant shutdowns for maintenance and repair.  With some plants out of production and without inventory of electricity because it cannot be stored for future emergency use, power supply becomes tight. Major power producers can then quote high rates in WESM because they know that without their offered supply, there will be supply shortfall in the system with dire consequences.     


5.  Another lacking crucial precondition to COMPETITION in deregulated power generation oligopoly:  In competitive free market, there is no barrier to entry and exit of market players.
 
Unhampered entry of new competitors that adds product supply and softens high prices—thereby serving as automatic price lowering tool in free market—cannot take place in the power generation business because of the following factors that DISCOURAGE investments in new power plants: 
 
(a) Awfully long lead time in securing permits and actual construction of new power plants that can tax the patience of new investors, who know  that by the time the new plants are completed and ready to operate, the market situation may have already changed—power retailers may have already contracted long-term purchases from other power producers.
 
(b) Large capital investment needed—and the bigger the capital, the harder to raise and the bigger the risk.
 
(c) Lack of assured market share causes difficulty in obtaining bank loans for the financing of new power plants.   
 
(d) Existing disincentive to new investors’ construction of new power plants:  entry-problem for new competitors whose new power plants—which have to be constructed in large capacities for economies of scale—will be initially underutilized and have to indefinitely incur losses, owing to lack of readily available market share.
 
 
Why New Investors are Discouraged
from Building New Power Plants under EPIRA: 
Difficulty of Penetrating the Monopolistic Retail
Market Controlled by Meralco and Other Power
Retailers in their Respective Franchise Areas    
     
For new entrants, it is difficult to establish a beachhead in the market because it is controlled by market monopolies—Meralco and other power retailers, which already have purchase commitments with existing power generators under EPIRA-allowed bilateral contracts. In entering into new supply contracts, they can also give priority patronage to their affiliated power producers, at the disadvantage of new investors without clout in the retail market.
 
With monopolies controlling the retail power market, new power generation investors cannot do what the first Filipino oil refining company, Filoil Refinery Corporation, did in the early 1960s. It  developed market share through (a) putting up service stations nationwide, (b) temporarily importing finished (refined) petroleum products for sale in their stations, and (c) having retail marketing conducted while the oil refinery was still under construction, so that by the time its refinery was ready to operate in 1963, it had ready market share for its production. Aspiring new power producers cannot do this prior marketing preparation in the local power industry—they are at the mercy of monopolistic marketers Meralco and other power retailers, which have stranglehold of the retail market.       
 
The foregoing entry-problem for new market players was the same problem after EDSA I that caused the failure of the Philippine National Oil Company (PNOC) to put up a petrochemical plant near its oil refinery in Bataan. It could not compete with already cost-efficient foreign competitors— operating with economies of scale and dominating both foreign and local markets, especially with the advent of globalization in later years.
   
No Easy Exit Either
for Power Generation Investors
 
As for exit of investors from the power generation industry, it is not easy to do it either owing to the large amount involved in the disposal of their power plant or their interest in it.    
  
 
6.  Suppliers’ self-restraint against raising their prices in a truly free market—an attribute of price-lowering competition—is not true in the captive power market, because electricity is a basic necessity without cheap substitute and has to be purchased on a daily basis regardless of price—this condition, plus recurring tight supply in power generation, resulted in a deadly combination that produced high power rates, NOT COMPETITION, in the power industry.   
 
Where genuine competition exists, such as in the case of products with ELASTIC demand---or those in which price increase reduces sales VOLUME and vice versa---suppliers avoid raising their prices.  If these products are priced too high, consumers can do without them because these are not basic necessities and these have cheap substitutes.
  
In contrast, electricity is a product with inelastic demand, therefore its sales is not affected much by rise or reduction in prices. Households, business establishments, and industries will purchase it and consume it on a daily basis regardless of rates for as long as they can afford to do so, because it it is a basic necessity without cheap substitute.
 
Thus, unlike suppliers of products with elastic demand which suffer from customer backlash or reduced demand if they raised their products too high, as electricity is a basic necessity without cheap substitute and has to be consumed regardless of price, NGCP, Meralco, and power producers are not constrained from raising their rates because they suffer no such penalty of dampened demand even if they raised their rates to unwarranted levels, or earn returns on equity that are way beyond their opportunity costs—a situation that tempts suppliers to exploit their advantage through cartel, instead of going into mutually harmful competition.     


MARCELO  L. TECSON

San Miguel, Bulacan
August 27, 2016

TITLE: Puzzlers Economic Sting AUTHOR: Marcelo L.Tecson EDITED BY: Erick A. San Juan, Casiano A. Navarro. PUBLISHED: Makati City : Raiders of the Lost Gold Publications, © 2005. ISBN: 9719204923 DESCRIPTION: xviii, 247 p. ; 25 cm. SUBJECT: Economic Crisis / Asian Financial Crisis