WESM – Mal content & Dis content

1. by Maitet D. Pascual,APL-FDC Joint Initiativein cooperation with FES and FSSIReclaiming Power: Advancing Workers' Interests by Democratizing ECs GV Tower Hotel, Cebu, 23-24 November 2009 WESM – Malcontent & Discontent

2. Three Questions What is WESM? Why WESM? Will it work?

3. Wholesale Electricity is bought and sold to wholesale users and/or distributors. Participants in this market are: Generating companies Trading arms of generating companies Power utilities, both private and public RECs included (though only a few)‏ Suppliers of electricity or aggregators Industrial, commercial and government entities with significant demand

4. Electricity Commodity being traded is electricity Strange commodity: can't be stored When demand is high, such as during peak hours, no inventory or stock of electricity to draw on to meet higher demand Which makes electricity markets highly vulnerable to abuse

5. Spot Market Traded hourly, one day ahead Market operator matches bids of buyers and offers of suppliers, awarding the cheapest electricity first The bid that closes the sale during that trading hour becomes the market clearing price Cheap electricity becomes more expensive Expensive electricity becomes more expensive Needs national grid and excess capacity

6. Why WESM Marks the shift from vertically integrated and largely publicly owned power sector to an unbundled, privatized power sector with deregulated generation and supply Based on the ideology of the market – that the market knows best, is more efficient than regulation, that it offers a choice to consumers

7. What WESM is supposed to be Venue through which competition will emerge in the power sector Competition that will lead to lower electricity prices Competition that will give consumers a wider choice

8. What it is, actually Concentrated, uneven playing field One dominant buyer: Meralco Two dominant suppliers: PSALM & NPC Expensive IPPs contracts still in effect Highly vulnerable to gaming Not effectively regulated ERC clueless about market power & abuse Not able to bring down electricity rates Choice available only to big consumers Small consumers pay for most expensive kuryente

9. Missing needed elements No transmission bottleneck No supply constraints Availability of hedging facilities to avoid price volatility Vigorous enforcement of competition law by competent regulators

10. Virtual Monopsony

11. Virtual Monopoly PSALM alone has enough capacity to supply 90% of the current peak demand in Luzon of 6,500 MW.

12. Highly Concentrated

13. Shrinking Spot

14. Will WESM work? NO Main reasons why it will fail Market power exists Market power being exercised ERC can't comprehend that this market, however level the playing field, can be gamed

15. Market Power Defined The ability of a power player to maintain higher prices by reducing output or offering to sell electricity at a price significantly above cost Reduce output: withhold capacity even if the market price is equal to your cost By withholding capacity, artificial shortage created, resulting in higher price Ability to raise and/or maintain high prices on one's own or in unison with other players

16. Vertical Market Power Firm is engaged in two or more related businesses Generation and distribution Generation and transmission Distribution and transmission Generation, distribution and transmission Firm uses its dominance in one area to raise prices and profits for the enterprise/business group. Example: Meralco buying from its IPPs

17. Horizontal Market Power Refers to the control by a firm of a single activity, e.g., power generation (where its share of total capacity is significant), which it can use to drive up prices, thereby profiting from the exercise Another related activity: fuel procurement Example: PSALM-NPC control of generating capacity

18. Market Power and Peak Hours “Market power is enhanced when demand is relatively inelastic, as well as when the supply of other firms is inelastic, such as during peak production times in electricity markets. For this reason, electricity markets are more vulnerable to the exercise of market power than are other energy markets such as the one for gasoline.” (Severin Borenstein, James Bushnell and Frank Wolak, “Diagnosing Market Power in California’s Restructured Wholesale Electricity Market,” NBER Working Paper 7868, http://www.nber.org/papers/w7868, p. 6; emphasis added))‏

19. Indicators of Market Power Capacity gap: offered capacity is below available capacity is below installed capacity Presence of pivotal supplier Presence of price setter High concentration ratios

20. Ways It is Being Exercised Withhold capacity: So far, offers to supply electricity are “normally”half of available capacity. Raise offer price: Without any change in demand or supply conditions, PSALM simply raised the price at which it offered to sell electricity. Withhold fuel: NPC has sole authority to procure/import fuel for power plants, & can therefore choose which plant gets to trade in the market.

21. Another Way: Favor one's IPPs By favoring its IPPs over the NPC and WESM, Meralco sold more expensive electricity to its customers – a violation of the EPIRA mandate Meralco bought from its IPPs during off-peak hours, even though NPC electricity during off-peak would have been cheaper. This ensured the dispatch of Meralco IPPs during times when demand is low. Meralco may not itself benefit from buying more expensive electricity from its IPPs, but the Lopez Group, which owns these IPPs, certainly will.

22. Why WESM will Fail: 10 Reasons 1 — Philippine power sector geared towards monopoly; market too small. 2 — Ownership & control in the hands of a few; control over electric power wields political power and control. 3 — EPIRA provisions ensure that WESM will not be a level playing field. Law granting transmission franchise to National Grid of the Philippines made worse an already bad situation.

23. Why WESM will Fail 4 — As shown in California and by PSALM in the early months of WESM's operation, the market can be gamed. 5 — In deregulated electricity markets throughout the world, fall in electricity rates a result of regulation, not competition. And only temporarily. 6 — Evidence in US shows that deregulating and restructuring does not bring about lower industrial prices.

24. Why WESM will Fail 7 — WESM price clearing rules result in a tendency for electricity rates to rise rather than fall. 8 — WESM must be closely monitored (very costly) by competent & non-politicized regulators (highly unlikely). 9 — Even when supply > demand, and where there are many players, the market can still be gamed.

25. Why WESM will Fail 10 — Additional generation & transmission needed to support a competitive market far more than we can afford.