UTILITIES OF THE 21st CENTURY Introducing Competition in the Power Distribution Sector

Around the world, changes in the energy sector, particularly in the distribution segment are taking place given technological advancements as well as the world’s worry over climate change

For example, in the United States, utilities are beginning to take the threats of climate change more seriously. New York’s Reforming the Energy Vision, a plan to “rebuild, strengthen, and modernize New York’s energy system” was initiated in 2014 partly because of the devastation brought by Hurricane Sandy in 2012. This is the most comprehensive utility proceeding today with its main idea of changing the utility model so that third party service providers can come in to serve the utility’s customers by moving away from the traditional utility model and going towards a Distribution System Platform (DSP) provider

The DSP model transforms the traditional utility into something like an air traffic controller that coordinates and facilitates the deployment of distributed energy resources (DERs). This becomes the focus of the utility, which is a far cry from the traditional concept of a monopoly. The staff of the Public Service Commission (PSC) stressed that “Under the customer-oriented regulatory reform envisioned here, a wide range of distributed energy resources will be coordinated to manage load, optimize system operations, and enable clean distributed power generation.”  The primary goal of this model is to make the utility customer-centric as “Markets and tariffs will empower customers to optimize their energy usage and reduce electric bills, while stimulating innovation and new products that will further enhance customer opportunities.”

This bold move by the New York City should not surprise us since electricity experts point out that significant transformations are causing a revolution in the way electricity is produced, distributed, and marketed. They stress that technology is giving consumers more autonomy and choice. These experts argue that we “have entered an age in which the technology-powered push and the customer-driven pull have beneficially collided.

In fact, as early as 2000, the United Kingdom (UK), already started introducing competition in the power distribution business through the Independent Connection Providers (ICPs) and licensed Independent Network Operators (DNOs), thus allowing customers to use an alternative provider for some connections work known as “contestable work.” These include but are not limited to, designing, purchasing materials to form the connection, reinforcement of the connection, and even directly connecting to the network. These tasks can be done by an Independent Connections Provider (ICP).

Indeed, change in the energy sector has already arrived where the customer’s choice has become the paramount objective of industry players by making room for more competition in the power distribution trade. The services at the retail level become less integrated by letting the customers choose his/her source of power, battery storage, Heating, Ventilating and Air Conditioning (HVAC) energy efficiency systems, and other similar value services.

The innovation will come from the ability of technology to combine customer data to Smart grids, microgrids, local generation, and storage, among others. Experts assert that the primary distribution channel for services will be online and the energy retailing price will hinge on innovative digital platforms.  In their view, these are the developments and trends that are coming and they will be coming soon.

For David Cane, former CEO of NRG Energy, the confluence of green energy and computer technology, deregulation, cheaper natural gas, and political pressure, is threatening the existing utility system. His opinion is that the grid will increasingly become irrelevant as customers move towards decentralized homegrown energy. Home automation will become king. Crane further argues that “When we think of who our competitors or partners will be, it will be the Googles, Comcasts, AT&Ts who are already inside the meter.”

Given all these developments, it, therefore, no longer inconceivable to think of two, or even more distribution utilities in one geographical area in the Philippines. These utilities need not perform the same functions.  As distribution services have been unbundled, e.g., metering as separate business units, distribution utilities can compete on which among them can connect the fastest and cheapest to the distribution grid.

It is no longer impossible to have two, or even more distribution utilities in one geographical area in the Philippines

The utilities can also compete on how much each supports home automation or distributed generation like rooftop solars. As pointed out recently by Google’s Chief Technology Advocate, Michael T. Jones, companies like Google can develop the service where “all electronic devices (to) talk about their power needs to an aggregator, and you can have a power auction for each one.”

Technology is now available to connect reading and billing of meters to bills payment through the mobile phone.  All these services have developed because of technology.

Even in constructing power grids in the distribution sector, one can have overhead wires, or underground ones, depending on the requirements or needs of the customers. Smart transformers connected to a Supervisory control and data acquisition (SCADA) platforms can fine tune the needs of customers.

Unfortunately, unless competition is introduced in the Philippines distribution sector, it will take a long time for the Filipino consumers to enjoy the benefits of the 21st Century.  The distribution sector has long been in the abyss of lethargy induced by a monopolistic structure, running counter to the cornerstone of Energy Power Industry Reform Act (EPIRA), which was crafted to introduce competition within the power sector. In particular, a guiding principle of the Distribution Sector is that it is a business affected with public interest. This objective of competition and guided by the principle of public interest required the unbundling of business activities as provided in Rule 10 of the Implementing Rules and Regulation (IRR) of the EPIRA.

It has traditionally been thought that because of the nature of the distribution business, this sector, and the Transmission Business, are natural monopolies. This was probably true in the past, but technologies have developed over the past few years thus making this view no longer true. As argued above, technological change has brought in innovation, creativity, and access to the masses. It has also brought down costs – the mobile business is a clear example. It is not, therefore, a theoretical argument that technology will bring down cost. That is a fact.

We cannot reach the goal of empowering the Filipino power consumer unless change comes in now. Distribution utilities’ vision should always be proactive and aligned with the varying needs and load profile of a dynamic consumer.  This may be reflected in the flexible design of a distribution system that instantaneously addresses the power demands and delivers the preferred sources of power to the customers. A sophisticated consumer-centric designed system encourages the proper management of electricity usage, which translates into savings on prices and resources.

To illustrate this point, let us take the case of a distribution utility and how it handles system loss. Currently, the task of managing systems loss at almost 20% seems like an insurmountable challenge. However, the introduction of smart meters and automated billing and payment systems can bring this down to a more manageable level at about 14% thus bringing down rates for the consumers, which translates into savings of about PHP 0.15/kWh. And this is just the initial and rough calculation.

The above is just an example how a much better equipped, and better-financed utility can bring down costs of the electricity consumer. In the medium term, replacement of aging wooden poles and overworked transformers will further push down systems loss and thus power rates. Finally, because of a strong balance sheet and excellent knowledge of the power market, the cost of generation can also be brought down.

Plus, competition is always beneficial for consumers because more players in the market will always result in cheaper goods and services.  Hence, consumers should be able to choose between service providers like distribution companies so that distribution companies can no longer just “pass on” any cost that they think they are traditionally entitled. While the Energy Regulatory Commission (ERC) will approve the rates, ultimately it will be the consumer who will choose.

Opening up our distribution system for more competition will also pave the way for more use of cleaner forms of energy. It would be ideal to have distribution companies who will have intelligent systems to accommodate renewable energy sources. Such a move will then give the consumers a choice to go for greener forms of power and help us in our goal of saving our environment. After all, making our power grids responsive to climate change will be another area of transformation and competition.  With typhoons becoming an even more frequent phenomenon in the country and elsewhere in the world, change has to come in designing, building and managing power distribution networks.

Making drastic changes in the way we distribute our energy locally is a win-win solution for all of us. We give consumers autonomy and more choices, we lower our electricity bills, and we help save our environment by paving the way for more RE use.

Indeed, significant changes are needed. And we need them soon.

References:

Institute for Local Self-Reliance, https://ilsr.org/u-s-power-grids-days-numbered/

https://www.utilitydive.com/news/are-recent-disasters-enough-to-spur-utilities-to-take-climate-change-seriou/517373/

https://www.utilitydive.com/news/rev-in-2016-the-year-that-could-transform-utility-business-models-in-new-y/412410/

Schwieter, N, and Flaherty T., “A Strategist’s Guide to Power Industry Transformation,” https://www.strategy-business.com/article/00355?gko=9fa18

 

 

The Pros and Cons of a MinPoCor

Recently, there are initiatives to push for the refiling of house bills, which seeks for the creation of Mindanao Power Corporation or MinPoCor, according to a Businessworld report. The new entity will be a government owned and controlled agency (GOCC) that will manage the Agus and Pulangi hydropower plants.
The report cited the interim head of the Mindanao Power Monitoring Committee (MPMC), Glenn Jay Reston saying that the MinPoCor “will help maintain affordable electricity rates in Mindanao and assure that the revenues earned will also be reinvested in the island.”
The House of Representatives of the last Congress passed a consolidated bill on the establishment of the MinPocor. However, the said bill failed to pass the scrutiny in Senate. Under the bill filed in the lower house, MinPoCor will operate as a stand-alone GOCC and will raise funds to operate and maintain the remaining power assets of the government in the region.
Now that the discussion on the MinPoCor has been revived, let us ask the following questions: Is it beneficial to create such a GOCC? What are the pros and cons of having the Mindanao power corporation?
On the one hand, having MinPoCor will address the power crisis in the island. It will be an entity that will focus on the needs of Mindanao’s energy sector. After all, the appalling power situation in the region is a result of the long neglect of the national government through poorly crafted government policies.
To stress this point, a report from the Asian Correspondent said that in 2009, the Philippine Chamber of Commerce and Industry already stressed that the island was in need of additional 100 Megawatts to keep up with the economic activities in the region. Plus, business and industry leaders were already asking the national government to address the need for additional capacity as estimates show that Mindanao will likely suffer from power shortages by 2011 if no new capacity were to be installed.
However, the previous administration failed to heed the calls for the additional base load capacity. It was no surprise then that a full blown power crisis interrupted in 2012, with the island suffering from at least 8-hour rotating black outs.
Given the above slow response of the national government to focus on the power situation in Mindanao, it might be in the best interest of Mindanawons to have an entity that concentrates on the power situation in the region.
However, there is also a downside to the creation of MinPoCor.
Being a GOCC, it is still a government entity and will suffer the same problems of a government monopoly, as well as bureaucratic issues.
The possible lack of funding for MinPoCor could create bigger problems as it could delay the much-needed repairs and rehabilitation of the hydro complexes in the region.
The essence of EPIRA is to privatize the government-owned energy assets. The government, after all, has limited funds for the maintenance and operation of assets. This said, it is probably better for the private sector with deeper pockets to take the commercial, operational and constructions risks of operating and maintaining the power plants. Otherwise, the government will need to borrow additional funds and pay for the interest of borrowing money.
There are various ways of going about the privatization of the hydro plants. In my opinion, the Power Sector Assets and Liabilities Management or PSALM could enter into a 25-year power supply agreements before bidding out the hydro plants. This is to ensure that low prices are kept low despite the privatization for the benefit of NAPOCOR’s existing clients including distribution utilities and industries directly sourcing their power from the said plants. Of course, this will be much more complicated given the implementation of the Competitive Selection Process or CSP but still can be done if the government acts on it.
Additionally, Pete Ilagan, President of the National Association of Electricity Consumers for Reforms Inc has suggested privatization through “cooperativization” where cooperatives will own the assets. According to Ilagan, this will ensure that consumers welfare prevails over the interest of big businesses.
We also have to consider that the creation of a new entity always comes with challenges. For one, the efficiency of a GOCC is questionable. GOCCs work under a framework of a democratic government where there is a separation of powers. A democratic government is, almost by definition, designed to be inefficient – there are strict rules on checks and balances. So, if one desires to have an “efficient” company, going through the GOCC way may not be the answer.
However, one can separate the ownership of an asset like the Mindanao power plants and the management of these plants. As government way of running things is based on a democratic framework– it does not have the discipline of profitability and efficiency that private capital will require. So, therefore, there is a way to compromise: the government can keep the ownership of the assets, but the management, including future investments, can be done by the private sector.
Before opening the management to the private sector, the government can enter into long-term power contracts with all existing customers. The government can, for example, fix the current power rate and maybe index to CPI for the next 25 years. This will ensure two things: the government asset will not compete with private generators and second, low power rates from these hydropower plants are assured for the next 25 years.
The private sector entity that comes in will then face the challenge of improving the efficiency of the assets by rehabilitating them and improving operations and maintenance to have an upside on their investment.
So, this is the challenge of a MinPoCor: have the discipline that the private sector (and consumers) require but operate within a framework of a democratic government. Otherwise, there will be no change in the cost structure nor ability to maintain these plants. It is essential to form a management team for the MinPoCor that is not only knowledgeable and transparent but also can approximate or surpass private sector management efficiency. Otherwise, the reforms needed to push the national government to pay attention to the power problems of Mindanao will remain unsolved due to the problems within the organization.
This is not to say the GOCCs cannot be run efficiently. I have seen some GOCCs and government agencies that are at par with the standards set even for private sector companies. These GOCCs are often those that have had the luck of having someone with a vision of running the GOCC effectively. However, these are few and far in between. As a whole and in the long run, the need to adhere to the principle of separation of powers will wear down on efficient management set in place by different administrations.
So, are the hydro complexes better off in the hands of a GOCC? While some may say the jury is still out, others disagree outright.
According to UP economist, Gerardo Sicat, there are several studies showing the success of privatizing hydropower plants:
“There is growing evidence that the privatization of the hydroelectric power plants in the whole country is working well. With the government being relieved from the task of operating the generating plants, gains in efficiency and in service delivery improvements have become noticeable among the privatized plants.”
So, just how beneficial is the creation of the Mindanao Power Corporation? It’s also advantageous to have an entity that is dedicated to the needs of the island. But on the other hand, the possible lack of funding and management problems may exacerbate the woes of Mindanao’s power sector further. There is a way out – the government can keep the assets and maybe even transfer these assets to MinPoCor.
In summary, one need not privatize the ownership of an asset – it is the management of these assets that may need private sector discipline. Further, to ensure a fair level of power rates, the government can enter into long-term power sales contracts with all current consumers of Mindanao. If the management of these assets is privatized, the private investors should have the incentive to invest in the rehabilitation of the power plants so that its efficiency is enhanced thus giving the investors the upside that they are looking for.
In the end, everyone wins: the Mindanao consumers are happy because their low rates are assured for the next 25 year and the government and the local governments should be happy because the assets are not privatized. The MinPoCor proponents can even lobby to have these assets transferred to MinPoCor. Plus, the private sector is happy because a chance to invest in the power sector is open to them.

References:

http://www.econ.upd.edu.ph/perse/?p=913

http://www.bworldonline.com/content.php?section=Economy&title=mindanao-power-corp.-backers-push-for-law-ahead-of-agus-pulangi-privatization&id=135866

http://www.philstar.com/nation/2015/05/27/1459319/bill-creating-mindanao-power-corp.-passes-house-joint-committee

Energy Book by Myrna Velasco

http://opinion.inquirer.net/83960/better-way-to-privatization