Analysis of RA 9136, the Electric Power Industry Reform Act, for my Policy Analysis I course in Carnegie Mellon in 2010. Full paper can be viewed here: http://scr.bi/HNHTHU

1. Genuine & Sustainable
Reforms in the Philippine
Electric Power Industry
Elvin Ivan Uy
Emerging Policies Forum II
22 May 2010

2. Executive Summary
 Electricity rates in the Philippines is 3rd highest in Asia1
 The Electric Power Industry Reform Act of 2001 (EPIRA)
aims to bring down power rates and improve delivery of
supply through greater competition and efficiency in the
industry. It has failed to achieve both.
 3 necessary amendments to EPIRA:
1. Strengthen safeguards against cross-ownership and
abuse of market power
2. Reevaluate the practicability of the Wholesale
Electricity Spot Market (WESM)
3. Overhaul the Energy Regulatory Commission (ERC)
 Beyond EPIRA: fast track implementation of Renewable
Energy Act of 2008
1 RP Power 3rd most costly in Asia: http://newsinfo.inquirer.net/breakingnews/regions/view/20100404-262343/RP-power-3rd-most-costly-in-Asia 2

3. Presentation Overview
1. Anatomy of High Electricity Rates
2. Nine Years After: A Review of EPIRA
◦ Privatization, Rent Seeking and the Power Oligarchy
◦ Gaming the WESM, Delays in Implementation of
Open Access and Retail Competition
◦ An Ineffectual ERC
3. Reforming EPIRA and the Power Industry
4. Securing a Sustainable Energy Future
Image from: http://rfestin.files.wordpress.com/2008/12/transco31aug07-0061.jpg 3

4. Anatomy of High Electricity Prices1
1. Lack of sufficient domestic fuel reserves – generation
companies forced to import fuel
2. Higher cost in transmission infrastructure due to
country’s topography, required resilience against
tropical storms & earthquakes
3. “Relatively peaky” electricity demand curve – little
baseload demand on a 24-hour basis due to lack of
strong industrial base
4. Most inputs sourced overseas – purchased at
international prices, subject to significant foreign
exchange risk
1 The IPP Experience in the Philippines: http://iis-db.stanford.edu/pubs/20816/PhilippinesIPP.pdf 4

5. Nine Years After: A Review of EPIRA
State-owned
EPIRA restructured1
the electric power
industry from…
to…
For privatization and/or
driven by private sector
1 ERC: http://www.erc.or.th/ERCWeb/Upload/Document/10.30-12.30%203Rauf%20A.%20Tan(Philippines).pdf 5

6. Privatization, Rent Seeking, and the
Power Oligarchy
 EPIRA bars cross-ownership between generation/distribution
and transmission, but not between generation, distribution
and supply (Sec. 45)
 Capacity share limits: 30% (regional), 25% (national)
 Two families1 – Lopez & Aboitiz – have horizontal and
vertical market power; acquired 10 out of 20 privatized NPC
generation plants to date
Generation Luzon Visayas Mindanao National
Lopez 19.8% 53% 5.6% 15%
Aboitiz 12.3% 6.53% 35% 14%
Distribution
Lopez Meralco – largest distribution utility, serves Luzon
VECO and Davao Light & Power Co – 2nd and 3rd
Aboitiz
largest, serve Visayas and Mindanao, respectively
1 From state monopoly to de factor electricity oligarchy, People Against Immoral Debt Vol. 13 No. 1 pp. 7-27
6

7. WESM, Open Access and Retail
Competition
• WESM – trading place between electricity buyers and sellers via auctions that
match bids for demand and supply
• Must be established within 1 year from effectivity of EPIRA (Sec. 30)
• Launched in June 2006 and only for Luzon1
Figure from ERC
1 Why WESM Won’t Work, People Against Immoral Debt Vol. 13 No. 1 pp. 43-54 7

8. Gaming the WESM
• Mechanism is prone to gaming, in theory1 and in practice2
• Electricity sourced through WESM was more expensive3
• Distributors obtain electricity largely through bilateral4 contracts,
EPIRA allows them to source up to 90% bilaterally and up to 50% from
their affiliates (Sec. 45b and 45c)
Figure from: WESM Overview – http://asianenergyadvisors.pbworks.com/f/WESM-Overview.pdf
1 Rethinking Electricity Deregulation, Elsevier The Electricity Journal Vol. 17 No. 8 pp. 11-26
2 Lessons from the Failure of U.S. Electricity Restructuring: http://repository.cmu.edu/cgi/viewcontent.cgi?article=1236&context=tepper
3 Why WESM Won’t Work
4 14th EPIRA Status Report: http://www.doe.gov.ph/EP/14th%20EPIRA%20Status%20Report.pdf 8

9. An Ineffectual ERC
 ERC tasked1 to “ensure adequate promotion of
consumer interests”, and “promote competition,
encourage market development, ensure customer
choice and penalize abuse of market power”
 Has the authority to approve rate hikes and act on
complaints regarding anti-competitive behavior
 Dismissed complaints from PEMC (WESM operator)
due to “lack of evidence”:
1. PSALM trading teams simultaneously2 raised MCP for 3 plants
2. Meralco3 bought more from WESM when its IPPs were price
setters next to 2 other NPC plants
 Arguably a case of regulatory capture
1 Sec. 41
and 43 of EPIRA
2A commission of power: http://pcij.org/stories/a-commission-of-power
3 Why WESM Won’t Work 9

10. Necessary Amendments to EPIRA
1. Total ban on cross-ownership in transmission,
generation, distribution and supply
2. Restriction on firms with vertical market power from
further acquisition of NPC generation assets
3. Clearer guidelines on the regional generation capacity
share limits to curb horizontal market power
4. A lower limit on the amount of supply that may be
sourced through bilateral contracts by a distribution
utility from its affiliate generation firm
10
Image from: http://cdn.wn.com/ph/img/bb/49/1099a26a93557b0e8c74dbd1a62b-grande.jpg

11. Reevaluate the Practicability of WESM
 Pay-as-bid pricing will not solve gaming issue1
 An administered2 market will not be sustainable
 Free and competitive market requires numerous
companies that do not have horizontal market power;
needed investments are prohibitive
 If WESM cannot be made competitive, limit amount of
electricity sourced from the spot market
 Enforce better regulation of bilateral contracts – place
generation as close to average cost as possible, allow
agreements to span life of generation plants3
1Rethinking Electricity Deregulation
2Lessons from the Failure of U.S. Electricity Restructuring
Image from: http://thinkgeoenergy.com/wp-content/uploads/2010/03/Tongonan_plant_Philippines.jpg
11

12. Securing a Sustainable Energy Future
 Reforming the electric power industry both a technical
and adaptive challenge
 Renewable Energy Act – addresses technology gaps of
EPIRA, encourages broader market participation1 in
renewables sector; must fast track implementation
 Overhaul the ERC – ensure appointment of
commissioners based on competence and integrity,
remove2 power to grant provisional authority to firms
 Decisive and strong leadership from Congress,
Department of Energy and ERC
1 Energy [R]Evolution, A Sustainable Philippine Energy Outlook: http://www.greenpeace.org/raw/content/seasia/en/press/reports/energy-r-evolution-a-sustain.pdf
2 A Dozen Ways to Reduce Electricity Rates Towards Sustainable and Pro-Consumer Electric Power Industry, People Against Immoral Debt Vol. 13 No. 1 pp. 58-59 12