Investigation of PSALM and NPC’ s Alleged Manipulation of Electricity Prices
In the past few weeks, the Philippine electric power industry has, once again, became a hot topic in news and media, now, the focus was on the Power Sector Assets and Liabilities Management Corporation (PSALM) and the National Power Corporation (Napocor or NPC) alleged manipulation of the cost of electricity in the Wholesale Electricity Spot Market (WESM), which resulted to the increase of the price of electricity starting in the past few months. However, it was denied by both party.
The alleged manipulation has also gone too far that MERALCO and its IPP’s were also getting involved in the controversy.
To fully understand, and hopefully, solve the problem, we must, first, have a clear background of the problem. That is, we must understand the current situation of the electric power industry, which is, still in the transition stage from regulated to deregulated environment.
Before the passage of EPIRA law (RA 9136), which one of the objectives is to restructure the Philippine electric power industry, in 2001, the price of electricity sold by generation companies and NPC was regulated by then Energy Regulatory Board (ERB). The EPIRA envisioned to deregulate the generation sector and to allow the market forces to drive the price of power. The competition in the market should reveal the true cost of electricity (but not necessarily lower its cost) and also, may, thus, gave NPC an opportunity not to operate at a loss.
The vision is good and may be beneficial for both parties, including consumers. However, competition in the market may only be true and transparent if there are enough number of bidders and buyers of electricity, which are, actually, competing to each other (generation companies compete to be dispatched and distribution utilities to buy electricity).
However, this concept of a competitive market is far behind from the reality. Currently, PSALM and NPC still has the control of more than 70% of the generation capacity in Luzon, in Visayas, and in Mindanao, due to the slow privatization of NPC generation assets and still existence of supply contracts between NPC and its independent power producers (IPPs). On the other hand, other generation companies have a bilateral contract with distribution utilities.
To promote competition, EPIRA requires the privatization of least 70% of the generation assets of NPC.
Though, Pantabangan and Masiway hydroelectric power plants of NPC has been sold to First Gen on September, until now, NPC still has a control of it. Thus, NPC still has a control to more than 99% of its assets in the market.
PSALM on the other hand was mandated by EPIRA to take over NPC-IPP’s. Through PSALM, these power plants are also participating in the market.
But how did a market manipulation happen, a manipulation that may be also happening until today? Well, it’s pretty obvious. Let’s illustrate what may be happening in the market in a simple but realistic example;
Let’s take a look on particular hour, say peak load, with the following system condition;
Luzon Demand: 4000 MW
MERALCO Load: 3000 MW
PSALM Generation Capacity: 3000 MW
NPC Generation Capacity: 2000 MW
Meralco IPP’s Generation Capacity: 2000 MW
Currently, Meralco IPP’s has a bilateral contract with MERALCO. These IPP’s usually bids Php 0.00 in the market to be dispatch, while payments and settlement are made outside the market. Bilateral contract is not “bad” for market operator’s point of view, and it has also both PRO’s and CON’s for the contracting parties.
The following graph shows what may be happening in the market:
If PSALM and NPC generators do not bid zero or less, generators in bilateral contract will be a priority dispatch. However, since there is no other competitors of PSALM and NPC, they have the power to set the selling price at its desired rate, in this example, block 8 at 500 MW set the clearing price of Php 7.00 per Kwh. This price will be the cost of electricity in the market.
Take note that the clearing price is not regulated. Take note also that the market clearing price could also be higher or lower than the price of MERALCO’s contracted electricity from its IPP’s. And in the past few months, contracted electricity of MERALCO was indeed lower.
Due to the absence of real competitors, the power to influence the price of electricity is, indeed, in the hand of PSALM and NPC. This is when a price manipulation could occur. And it is always up to their discretion to set the price of electricity at a reasonable cost.
Surely, however, there is only one way to eliminate such power of PSALM and NPC to dictate the price of power – by introducing an enough number of real competitors in the market and by properly implementing the limit to the maximum controllable generation capacity of generation companies, specially, PSALM and NPC.
Filed in: Electricity Market, Napocor/PSALM
Local date: August, 2008
