WESM a millstone around electricity consumers’ necks

By Ben Kritz – November 19, 2020
from The Manila Times

Among the several bum steers sold to the public with the Electric Power Industry Reform Act (Epira) of 2001, one that escapes most public attention in spite of having a significant impact on consumer energy costs is the Wholesale Electricity Spot Market (WESM).

Although it is fundamentally a good idea and could potentially be an effective feature of the Philippines’ energy landscape, it is yet to live up to its promise, and almost certainly never will under its present leadership and format.

The reason the WESM exists in the first place, at least according to its operator and the underlying Epira law that created it, is to serve as a critical step in moving the Philippines’ electricity sector from a government-controlled monopoly industry to a fully competitive
market. In practice, however, its function is a bit more prosaic.

Most electricity is supplied according to bilateral contracts (power supply agreements, or PSAs), subject to the approval of the Energy Regulatory Commission. There are times, however, when a generator cannot, for some reason, supply the contracted power to a customer, such as during an unplanned plant shutdown or when the customer (a distribution utility, electric cooperative or large direct consumer known as a contestable customer) needs more power than the contracted amount. This is not usually a problem, as more often than not there is surplus power being generating from other plants that the customer can purchase to fill his supply gap.

The WESM is the market where those transactions can take place. To encourage market activity and supposedly make electricity pricing competitive and truly based on supply and demand, electricity distributors are required to source at least 10 percent of their power supplies from the market while electricity generators are required to offer all their capacity (whether earmarked for distribution according to a PSA or not) for trade at the WESM for the purpose of establishing prices.

A flawed system

The WESM is not a bad idea, but it might best be described as an undeveloped one, and this lack of sophistication directly results in higher electricity bills for consumers. For one thing, it is not a true commodity market in the sense that its operators would like to believe it is, because it does not have a true price discovery function, which is fundamental to any commodity market. Prices are determined according to a relatively simple formula mandated by regulators, and are limited by regulatory floors and caps. The information that allows price discovery to function as it would in a true open market is mostly unavailable, so because the pricing structure allows it, generators compensate for the risk uncertainty by skewing prices higher. Electricity distributors do not have any incentive to make generation costs lower, as these are passed through to consumers, anyway, so power sourced through the WESM is consistently more expensive than that supplied by bilateral contracts.

In addition, even though electricity prices have some bounds, they are still very volatile, as they are affected by rapid changes in supply and demand, and the market does not offer any capability for hedging or forward contracts. Between February and August this year, for example, the monthly load-weighted average price of electricity in the WESM ranged from P1,336 per megawatt-hour (MWh) to P3,543/MWh, with a monthly average change of about P800/MWh. This extreme volatility tends to disincentivize greater market activity, which would, even with the somewhat artificial controls on prices, eventually begin to bring down the cost of electricity.

Then there are unpleasant, but still pertinent questions about the capacity and validity of the organization and people responsible for the WESM. Originally, the governance and operations of the WESM was in the hands of the Philippine Electricity Market Corp. (PEMC), set up as a government-owned and -controlled corporation led by the Energy secretary in 2003, and which launched the market in 2006.

In 2018, operation of the WESM was spun off to a new, ostensibly private operator, the Independent Electricity Market Operator of the Philippines (Iemop). Iemop was incorporated in May that year with P7,000 in capital and staffed almost entirely by people simply moving over from PEMC. PEMC retains its governance role over the WESM, although the Energy secretary is no longer its chairman.

Controversy over that apparent inside deal and the fact the Iemop’s president and CEO, Richard J. Nethercott, is married to an Energy assistant secretary came to a head at the beginning of this year, when the House Committee on Energy investigated the “anomalous” takeover of WESM operations by Iemop.

Although nothing came out of the congressional investigation — tangible outcomes from “hearings in aid of legislation” are, after all, relatively rare — three nagging questions remained and may yet cause some disruption. First, Nethercott’s relationship, as Nueva Ecija Rep. Rosanna Vergara pointed out, might be a violation of the Anti-Graft and Corrupt Practices Act, although it must be said in fairness to him that his wife, Energy Assistant Secretary Caron Lascano, is not involved with DoE functions related to the WESM. Her area of responsibility mainly concerns service contract management and oversight for coal and petroleum projects.

Second, Nethercott’s statutory qualifications to head the electricity market operator were questioned, as well as the qualifications of Iemop as an entity. As Vergara explained, under Epira, the WESM operator should be “financially and technically capable, with proven experience and expertise of not less than two years as a leading market operator of similar or larger size markets endorsed jointly by the DoE and electric power industry participants.”

It could be argued that Iemop, essentially being a cutaway of PEMC, meets the criteria, but Nethercott’s case is a little tougher. Before he was appointed to Iemop’s interim board in June 2018, Nethercott, a lawyer and mechanical engineer by education, had mostly worked in politics, serving as the chief of staff of former senator Robert Jaworski and his lawmaker-son, Dudot, and on the legal staff of the late senator Miriam Defensor Santiago. Of course, by now he has two years under his belt with Iemop and so the point could, perhaps, be considered moot, but the technicality may make some regulators and potential investors uncomfortable.

Third, as Jericho Nograles, the Energy committee’s vice chairman, pointed out at the time, the transfer of WESM operations to Iemop may have violated Republic Act 10149, which prohibits the transfer of government assets to a private entity without the President’s approval. That was apparently neither sought nor granted, and Nograles wondered aloud if President Rodrigo Duterte was even aware of the “sweetheart deal.”

All of that might be explained away satisfactorily, but what is clear is that, in 15-plus years of operation, WESM has not substantially advanced beyond what it started as, essentially an exchange for the trading of emergency electricity supplies. Iemop’s and the Energy secretary’s argument that the people involved, most having been with PEMC since the beginning, make Iemop the best and most qualified market operator rings hollow in the face of the market’s lack of progress and ultimate failure to do what it was intended to do.

ben.kritz@manilatimes.net
Twitter: @benkritz