The Market Monitor Minding the Nation's Business
By Riza Lozada
The government, finally heeding the growing demand to lower the cost of electricity—reputed to be the highest among members of the Association of Southeast Asian Nations (Asean)—has announced a plan that requires power distributors to hire foreign auction managers who would make sure that electricity is bought from suppliers at the lowest price.
A circular issued by the Department of Energy (DOE) orders the dominant Manila Electric Co. (Meralco), the Visayan Electric Co. (Veco) and other power distributors to involve these intermediaries during the so-called competitive selection process (CSP) when purchasing electricity supplies from generation companies (gencos). The foreign managers’ task is to help set up a system in which the distributors could buy electricity at the lowest price.
The DOE did not say what prompted the government to adopt the novel third-party scheme.
But a study by the University of the Philippines School of Economics (UPSE) noted that existing power-supply agreements (PSAs) were dominated by bilateral negotiated contracts and were affecting the prices.
Said UPSE Chairman Raul Fabella: “The possible market failure of PSA is the abuse of market power that leads to the practice of gencos dictating the terms of PSA for fragmented distribution utilities.”
Fabella noted the absence of competition among gencos and the strong possibility of collusion among them and the distribution utilities. He acknowledged, however, that these suspicions were “not easy to prove conclusively.”
The fact, however, that the DOE issued the new circular indicated that the government was inclined to agree with the UPSE study and determined to stop the suspected collusion.
The residential rate for electricity in the Philippines, at 24.83 cents per kilowatt-hour (kWh), is the highest in Southeast Asia, compared with Singapore and Brunei Darussalam at 19.76 cents and 19.11 cents, respectively, according to a study by the University of the Philippines (UP) Economic Foundation Inc.
In the UPSE document, Fabella noted that among the other factors behind the Philippines’ costly electricity rates were the taxes, subsidies for universal charges like missionary electrification, low generation capacity per capita, as well government failures, including too much red tape and conflicts between the national government and some and LGUs (local government units).
Based on its record, generation charges make up 47.48 percent of Meralco’s cost of generation per kWh for residential consumers. The average generation cost of Meralco for March 2015 for its captive market was P5.2503 per kWh.
This month, the DOE is set to finalize the CSP rules through a public consultation, in compliance with a department circular mandating all power distributors “to undergo competitive sale in securing supply contracts.”
The DOE hopes that, by March next year, distributors will have submitted all requirements and will have become compliant with the competitive sale process with the third-party managers.