Are Electric Consumers Double Charged for Ancillary Services by NGCP and its dispatch of MRU?

David Celestra Tan
January 2, 2014

In September and October 2014 Meralco’s purchases from WESM reached astonishing levels of P43.05 and P35.60 per kwh, even higher than the P33 per kwh that wrought havoc on the generation rates in Meralco’s generation rate in November and December of 2013.

It did not become an issue to the Meralco consumers because it did not increase rates to the consumers due to the low off-take of Meralco from the WESM at less than 1%.

There is more to the astronomical increase in the WESM rates than meets the eye. Consumer Kris Balitbukel pointed out that the WESM prices for those months would have been around P4.50 per kwh if not for NGCP’s decision as Systems Operator to dispatch “Must Run Units’ (MRU’s) to cover reserves which costs are passed on to the consumers. We see what appears to be double charge to consumers.

Following are the Explanations of Mr. Balitbukel:

December 26, 2014 at 8:25 am

You were too easy in just letting the high WESM prices of P 43.05/kwh for September and P 35.60/kwh for October slip by without closer scrutiny. Except for the P 36.08/kwh for the January WESM, these are the highest WESM charges this year (despite the lower primary price cap of P 32/kwh and the secondary price cap of P 6.245/kwh set by the ERC). These are price shocks that begs examination notwithstanding the impact may have been mitigated by the lesser WESM quantity bought by Meralco during those months.

Our research reveal that that these price spikes did not come from WESM trading (pure spot prices) but from MRU charges, as well as line rentals. MRU stands for Must Run Unit which in WESM operations refers to a power plant dispatched to operate by the System Operator (the “SO” or the NGCP) even after the Market Operator (the PEMC) has already established the Merit Order Table of the plants that will meet the demand at the least cost. MRUs are plants which are “out-of-the-merit-order-table” or sometimes referred to as “out-of-schedule” dispatch (the schedule being the order of the plants determined in accordance with an objective market algorithm, the Market Dispatch Optimization Model, which results in an price-ordered stack of plant capacity offers that provide the least cost to meet the demand).

Further research on the reasons why the SO/NGCP dispatched MRUs reveal that much of it are for system voltage requirements and inadequate reserve levels for which the plants dispatched for MRU were compensated by way of WESM charges. Still further research reveals that in these instances of MRU dispatch by the SO/NGCP, the plants which were made to run are the oil based plants (Malaya, Bauang, Limay, Subic) whose operating costs are quite expensive. There should not be any surprise here the corresponding MRU charges should be high. (The other instances of MRU dispatch pertain to commissioning tests by new plants which should hardly result in incremental WESM charges.)

Voltage quality and availability of reserves are the responsibility of the SO/NGCP for which they are paid their fees. However, in the above instances where MRUs are used, NGCP is solving a transmission problem with a generator solution and effectively is getting a free ride (at the expense of generators) from performing its responsibility in voltage quality and availability of reserves at a cost borne by end-users who pay the WESM charges. The SO/NGCP should solve the voltage quality problems by using its assets for which they are paid transmission charges (automatic on-load tap changers of its substations, shunt reactors and capacitors) and should address the paucity of reserves by purchasing enough of it. But when NGCP is made to get away with NOT doing its responsibilities simply because existing WESM rules allow it the expedience of simply dispatching MRUs whose cost NGCP does not have to bear, then the interests of end-users are grievously harmed when they in turn are made to pay MRU charges which in the first place are avoidable.
The average load weighted WESM price, excluding MRUs and line rentals, is about P 4.50/kwh. That MRU should increase this by multiples is simply not acceptable, especially when costs are cavalierly incurred simply because an entity has the power to dispatch MRUs and such power is not subject to review or accountability.

MSK asked Mr. Balitbukel if this is resulting to a double charge considering NGCP is already charging the consumers these reserves under the Ancillary Services Purchase Agreements.

Mr. Balitbukel clarified as follows:

The P 0.36/kwh ancillary services (AS) charges collected by NGCP reflect the actual AS purchases by NGCP. However, our research shows that NGCP is able to purchase only about 45% of the required AS for Luzon and this is what is being passed on as the P 0.36/kwh AS charges to transmission users are AS. BTW, AS refer to the generating capacity deployed for regulating reserves, contingency reserves, and dispatchable reserves. It also includes purchases of KVAR for voltage support, black start capability and interruptible load in lieu of reserves.
Because NGCP has not been able to purchase the required KVAR support , it has expediently used MRU for voltage regulation. However, NGCP is paid under its transmission service charge certain amounts to recover the cost of operations and capital for its voltage correction devices such as its automatic on-load transformer tap changers, its reactors, and its capacitors which if properly operated would have obviated the use of MRU for voltage requirements.

Clearly in this case. NGCP has chosen to NOT subject its assets to “wear and tear” of operations by simply running MRUs for voltage regulation. In effect, they were paid for NOT using their voltage correction devices and made users pay avoidable MRU charges for voltage regulation.

As to the inadequate AS purchases by NGCP, the lack in Luzon is in contingency and dispatchable reserves for which the ERC approved rates are lower than the approved rates for regulating reserves (which requirement NGCP is able to purchase). Arguably, if NGCP will fully purchase the AS requirements, it would not double the P 0.36/kwh currently passed on for the 45% it is able to buy. The ERC approved rates are P 2.25/kwh for regulating reserves, P 1.50/kwh for contingency reserve and P 1.25/kwh for dispatchable reserve.

In any case, there is rectitude in requiring NGCP purchase AS in any of these methods considering these are subject to regulation, transparency and competition. Today, NGCP inflicts end-users with MRU charges without any accountability in its decision to dispatch MRU plants. There are no objective standards by which NGCP’s decision to run MRUs can be reckoned with and NGCP cannot be made to pay for its mistakes and capriciousness.

Sent on Dec. 29 at 9:40 am

WESM Price Spikes in November and December 2013 due to abuse of market power or scarcity of supply?

by Mr. Kris Balitbukel

One of the most difficult task in reviewing WESM operations is the determination whether a price spike is the result of abuse of market power or merely by scarcity. Scarcity is easily explained by the law of supply and demand. On the other hand, abuse of market power in the WESM is the ability of a generator (or a firm controlling several generating plants) to increase the price and the ability to benefit from such increase. Market power may be exercised by withholding capacity (Physical Withholding) or by egregiously high price offers (Economic Withholding). To prevent Physical Withholding, the WESM has the “Must Offer Rule”, which requires generators to offer all their registered maximum capacity (the Pmax) in all trading intervals. To prevent Economic Withholding, the WESM Rules have a “Price Cap”, which requires generators to offer their capacity at a price not higher than the Price Cap.

It is important that in reviewing compliance with these rules to remember that violations may have differences in degree as well as in kind. Just like when a person is killed, there is a big difference whether the death is attributable to an act murder or to an act of self defense.

It would seem to be popular to liken what happened in the WESM last November and December as simply “murder” even in the absence of clear and unequivocal findings from the investigation by the ERC Investigation Unit (IU). We need to be objective about this because we need to punish the guilty only and not call everybody a “murderer”.

The IU’s task is a forensic investigation with big data (each of the 34 Luzon generators submitted in each interval ten (10) bid blocks for each generating unit, each block progressively priced starting with the minimum unit capacity priced at zero and the last bid block to be priced at no more than the Price Cap (but not necessarily at the Price Cap). That would mean discerning a pattern of abuse of market power from at least 732,000 data points for November and December 2013. This is a daunting challenge which I am afraid is way beyond the capability, if not competence, of the ERC IU. I hope I am wrong.

There is a train of evidence which would suggest abuse of market power. The WESM monitors concentration indices and an examination of the pattern of these indices would show whether abuse of market power has been committed. There is the Herfinddahl-Hirschman Index (HHI) which shows the extent of market concentration. There is also the Residual Supply Index (RSI) which indicates the presence of a pivotal generator. Then we have records which show who are the Clearing generators, ie, the generator whose bid set the market price for the given interval. Based on these indices, the proximate cause of a high price in a trading interval would need further scrutiny if the same is the result of a clearing price set by a generator belonging to the same firm whose HHI is significant and whose plants became the pivotal generators (because of event(s) resulting in an outage of some plants belonging to the same firm) for that interval when the RSI has become less than 100%.

Sadly, we don’t know whether the ERC is capable of doing this sort of investigation. Again, I hope I am wrong.

MSK Editors Note: The Meralco consumers are entitled to an explanation from the NGCP and PEMC on these issues. We are calling on NGCP and PEMC and ERC to respond and for the DOE to shed light on the MRU rules and how it can be rationalized. Maybe this should be replaced by a Reserve Market?