More Competition in the New Year and the Coming Years

The previous year ended with news that the Meralco-Marubeni Consortium won the bidding for power distribution of the New Clark City, the first city in the Philippines to have a smart-power grid and underground cables. This means that residents and business of the smart city will enjoy low utility rates.

The Bases Conversion and Development Authority (BCDA), owner of the New Clark City is set to ink the agreement this month with the Meralco-Marubeni Consortium, consisting of Meralco, Marubeni Corp., Kansai Electric Power Co. Inc., and Chubu Electric Power Co. Inc., Their proposed tariff bid was P0.6188 per kilowatt-hour (kWh).

The Meralco and Marubeni consortium was able to beat the Aboitiz-Kepco Consortium of the Olongapo Energy Corp. and Kepco Philippines Holdings Inc, which proposed a P0.9888 per kWh tariff.

It is worthy to note that both bids were lower than the tariff ceiling Php 1.25 kWh set by the BCDA for power distribution. The proposals are also cheaper than the Php1.24 kWh of Mactan electric, the lowest distribution supply metering tariff that’s under the traditional distribution system.

This bidding is proof that competition, as any economist worth his or her salt would know, would always benefit consumers. And competition in the distribution of power is what the Filipinos need to enjoy cheaper power rates. Although the game I talk about is not exactly in this context, but this recent bidding gives flavor to what I mean.

And since it is the start of the year, let me share my reflections on what can be done to achieve lower electricity bills for all of us.

We can start by allowing more franchise holders in a single area rather than stick with the current rules of only granting a franchise to one. The logic is simple. Firms vying for the same customer base will find ways to beat their competitors either concerning better service or price.

Unfortunately, allowing just one franchise holder per area fails to push the franchise holder to improve its services and offer competitive pricing. This is what monopoly does– leave the firm to dictate prices and be complacent in its service delivery. If several businesses are competing for the same customer base, then surely we can expect players to always be on their toes to find ways to beat other firms or electric cooperatives.

Our lawmakers can also review the rules for the Retail Competition and Open Access (RCOA), too. Present rules, after all, require that only those with 750 kWh or higher monthly peak demand or contestable customers can choose their power providers. This means those with lesser than 750 kWh or captive customers are not given that option.

But why should we single out those with higher consumption and not give the option to all power consumers to choose their sources and distributors? If indeed the consumers’ welfare is the top priority, then we should also allow captive customers this alternative. We need to have some solutions to what people expect to be “stranded assets.” This, surely, can be addressed. We just need creativity here.

These are just some of the changes we need if we want Filipinos to benefit from the essence of EPIRA, the law crafted to foster more competition in the energy sector. We need to make major changes if indeed the Filipino consumers’ welfare is of the utmost importance.

The New Year brings hope to all of us. And, it is my wish for the New Year that our regulators would see the critical role that competition plays in the energy sector and have the political will to make the changes needed.

2 thoughts on “More Competition in the New Year and the Coming Years

  1. Dear Guido,

    in the essence of your article i absolutely agree that competition and choices can reduce the costs for the consumer. In the question about the how this should be done i might have a different opinion.
    The Philippine electricity “landscape” is quite messy currently and the regulators seems to be caught in politics not moving fast (if at all) as many would wish. Before coming up with specific ideas what will benefit the customers and should be changed i suggest to Analise closely what kind of structures were successful in other markets/ countries etc.. Because in many other countries the liberalization of electricity markets also has more or less failed as well. Compared to i.e the Telecom sector where it was more successful. One of the reasons seem to be the physical nature of how electricity works compared to the transport of voice and data. The other reason might be that nobody has really been able to push trough with a real market approach without having lobbyist of strong groups dipping their finger into the process to rig the game to their advantage. From my point of view there should be developed a multi step process transforming the market gradually info a more simpler system and providing access to more players.

    Here some ideas that are worth a thought:
    – Extend RCOA to the lowest level of consumers regardless of their monthly consumption
    – Strengthen the Whole Sale Electricity market and enable smaller customer to participate directly and being able to make buy bids.
    – Reduce the amount of Electric Distribution companies / coops to only one per region.
    – All Electric Franchises are none exclusive but building a double infrastructure is ugly, costly and should be avoided. There needs to be a mechanism for infrastructure sharing with fixed rates that should be reviewed annually with the intention to lower them with a nation wide catalog.
    – Distribution operators should be benchmark-ed against each other and the least competitive 10% should lose their franchise within 3 years. (something like this)
    – The national government should be able to build and improve distribution networks build new infrastructure and then license the operation to private contractors. ( in a bidding process)
    – There need to be an EPIRA No. 2 updated to the reality in 2019.
    – ERC and DOE should be put together into one agency and slimmed down.

    my 2 cents
    i hope other people have even better ideas without pushing their own agenda here …

    Like

    • Thank you for your comments. I especially like the the idea that the WESM should be come a real market – where buyers and sellers can participate. In addition, they should convert this into a “net pool” market so the players who do have long-term contracts cannot influence the daily spot prices by bidding zero or negative prices. Part of the problem is the fact that the government privatized individual plants instead of a portfolio. This, unwittingly, has led to pockets of monopolies in certain parts of the load profile of the system. I have no direct proof of this happening but conceptually this can happen. And who knows, this might be happening as we speak.

      I also agree with the extension of the RCOA to the lowest level of consumers. Unfortunately due to the case being heard in the Supreme Court, the government cannot move on this and may not be able to move in a long time. Worse, they have made the participation in the open access market voluntary. This will worsen the situation for household consumers as they will have to carry the additional burden of a more “peaky” load profile of their utility due to the fact that those with 24/7 power consumption will certainly leave the utility.

      The reduction of the the number of utilities is a political one and this might face stiff resistance in Congress. Technically, yes, it should be done. Maybe the use of the concept of “common service facilities” may be a good compromise where adjacent utilities can share resources and facilities. There is no need to build double infrastructures as you commented. Instead, the sharing of the infrastructure should be encouraged. The real competition should come in customer service – ability for customers to have fast service for connection, for example, to the right of the customer to choose the blend or portfolio of their power supply.

      As I said in my previous posts, distribution utilities have to be ready for distributed generation and the internet of things (IoT). The current Cus have a lot of legacy issues that catching up with the 21st center demands may be really difficult for them.

      Nice to have this exchange of ideas – you should share these with more people!

      Like

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