Regulating both greed and grid

Dean dela Paz / The Next Page

Overwhelmed by compelling issues of national importance and thus, tucked in unobtrusive corners of the major broadsheets, disturbing questions have been festering on our national electricity transmission grid. These range from questions of regulation, basically the province of the Energy Regulatory Commission (ERC), to controversial internal procurement practices, surrendered to the independent management of the grid.

In our energy grid, the most powerful entity is the transmission company. While it is regulated, the company is a monopoly. It determines supply and demand, and effectively has absolute control spanning the whole archipelago.

Privatized under the Arroyo administration, the transmission grid is the largest and most critical single asset in our energy portfolio. While it is a Filipino entity, the company’s foreign technical partner holds the largest single block in its capital structure and has its hands firmly on the operating levers. That entity is the State Grid of China, an enterprise owned by the Chinese government with whom the Philippines has a serious diplomatic row.

From that alone, disturbing questions beg immediate answers. More compelling as the Filipino equity holder has vast interests in mainland China. These affectations and issues are important. Any entity granted such tremendous powers over a national security infrastructure, and entitled to operate against disparate geopolitical conflicts, must be regulated to preclude market abuse.

For an economy reputedly with one of the highest electricity tariffs in the region questions of transmission grid regulation are important. More so when one of the objectives in privatizing the transmission sector was to transfer financial risks to the privatized entity. These companies undertook to spend where the state could not. In exchange, we allowed them some purchasing autonomy.

Along such grants, the ERC has allowed utilities vast license to pick its suppliers even where winning bidders submit the highest and most uncompetitive bids. So that these uncompetitive bids and what might possibly be inordinate cost overhangs are not passed-on or recouped at the consumer end, the ERC imposes tailpipe measures and approves only cost recoveries that pass stringent criteria. This exposes the franchise to inevitable and dysfunctional cost-price squeezes when it effectively advances and sinks in unrecoverable capital costs occasioned by awarding bids.

Consider the case of a recent award by the transmission company of a multibillion-peso bid for the uprating of a submarine cable that increases existing line capacities strung beneath the waters from Panay to Negros and Cebu. In the past, Panay had been at the very end of a U-shaped submarine transmission system that delivers energy from Leyte to Cebu, and then from Cebu to Negros before eventually ending with Panay. Over time, as Panay had developed, it had eventually gained enough of its own generating capacity to export to both Negros and Cebu. This necessitated increasing cable capacities going in the opposite direction.

When the transmission utility had recently bid out the uprating project, it awarded the contract to a company that not only had less or no experience in the country but its offer was also the most expensive, given that its proposal had less redundancies than other bids. In the bid in question, the award was granted to a single-core system as opposed to the multiple-core bids of others. Redundancies are critical where submarine cables are concerned. A redundant cable system is easier to maintain and repair and assures continuous power supply compared to one with no redundancies.

Moreover, the losing bidders did not only have extensive local experience that rationalized their pricing economies of scale but they were also responsible for most of the submarine cables already stringing the archipelago.

While we trust that the ERC will not allow aberrant capitalized costs to eventually find their way to tariffs charged on the public, cost-squeezes created when awards are given, not to the lowest bidder with optimal systems, but to the highest with less redundancy measures, there remains the possibility that unnecessarily expensive bids are eventually burdened on the public.