Our National Dance on Market Concentration in Power….and the Resulting Monopolization, Oligopolization, and Cartelization.

David Celestra Tan, MSK

22 October 2017

The DOE and ERC have been dancing around the issue of Market Concentration in Power since the get-go of the crafting and passing of the Electric Power Industry Reform Act of 2001 that we all more  commonly know as the Epira Law of 2001. If they have been dancing, it was the Bicam Committee of Congress that finalized the Epira Law that wrote the music.

The Epira Law of 2001 aimed to reduce power cost by creating true competition in the power market place. It was the reason the power industry was unbundled into power generation, transmission, distribution, and retail.   A truly functioning competition is a key to protecting consumers in a deregulated sector. The Epira Law is profuse in its aspiration for control of market domination,  monopolization, cartelization, and cross ownership and in its admonition against anti-competitive behavior and abuse of market power.

The good guys among the framers of the Epira Law had tried to put in safeguards to prevent too much concentration of powercapacity as a way to assure there will be true competition. Economists estimate that it will take at least four (4) players to assure true market interplay of competition.  Well theoretically. The bad guys acting on the behest of the powerful vested interest put in enough ambiguity in the law to allow for “implementation flexibility” or loophole.

Why there is a need to limit market concentration?

To assure healthy competition in the market place, it is essential to limit the size of power generators so no one unduly dominates the market and assure there will be enough players competing. The Epira law recognized that anyone owning, operating, or controlling a power company would have influence in the availability and pricing of such power plant. Hence they can influence the supply or withholding of such capacity and their pricing in the market.  If there are only a few players and a cartel, they will not be truly competing with each other to the detriment of the Filipino electric consumers.

Undue concentration of capacity will also lead to collusion and manipulation in pricing. We only need to see what happened in November 2013 when WESM prices soared to P62 per kwh. The major players were found manipulating and were penalized.  The case is held up on appeal however and it is not clear when justice will be given to the consumers. In that WESM market exploitation, about P9 billion was the additional charge to the consumers. Yes P9 billion.

Comparatively, there are reports that the ERC is only imposing a total of P500 million in penalties to the guilty manipulators. Since no one is arguing for the consumers, chances are even that P500 million will eventually be forgotten on eternal appeal.

We are now gaming the rules in market concentration and have been dancing around its enforcement.

The Epira Law’s control of market domination are contained in several areas:

1. Dance No. 1 Started in Section 45 of RA 9136 or Epira Law of June 2001

On market domination of a regional or national grid:

To promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the following safeguards:

(a) No company or related group can own, operate or control more than thirty percent (30%) of the installed generating capacity of a grid and/or twenty-five percent (25%) of the national installed generating capacity. “Related group” includes a person’s business interests, including its subsidiaries, affiliates, directors or officers or any of their relatives by consanguinity or affinity, legitimate or common law, within the fourth civil degree;

(emphasis mine and you will see why)

On market domination of a distribution utility:

Distribution utilities may enter into bilateral power supply contracts subject to review by the ERC: Provided, That such review shall only be required for distribution utilities whose markets have not reached household demand level. For the purpose of preventing market power abuse between associated firms engaged in generation and distribution, no distribution utility shall be allowed to source from bilateral power supply contracts more than fifty percent (50%) of its total demand from an associated firm engaged in generation but such limitation, however, shall not prejudice contracts entered into prior to the effectivity of this Act. An associated firm with respect to another entity refers to any person which, alone or together with any other person, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such entity; and

These provisions avoided the limits on cross-ownership between the generation (power supply) and distribution sector (the bulk buyers and distributors of power)

2. Dance No. 2 – DOE

The DOE’s Dance Around the 30/25 Limits of Market Concentration under Section 45

It was the Department of Energy that was tasked with writing the Implementing Rules and Regulations (IRR) that was required to implement the RA 9136 Law. The DOE designated the then head of the PSALM to be the chairman of the IRR committee.

The DOE danced around the market concentration limits and further watered it down by providing under Rule 11 Section 4

b) The capacity of such facility shall be credited to the entity controlling the terms and conditions of the prices or quantities of the output of such capacity sold in the market in cases where different entities own the same Generation Facility.

In cases where different Persons own, operate or Control the same Generation Facility, the capacity of such facility shall be credited to the Person controlling the capacity of the Generation Facility. 

That is right! The DOE further watered down the idea of market domination by considering only “control” in determining market concentration instead of “ownership, operation, and control” as required by the mother law that it is supposed to implement. This did not happen by accident or oversight. Clearly it was a committee’s deliberate scheme to marginalize the market domination rule.  I think this is illegal because it contradicted the Epira law itself and those who perpetuated it should be held accountable.

The IRR was approved by the JCPC of Congress.

3. Dance No. 3 – ERC

The ERC’s Texas two-step dance on Market Concentration

Section 45 designated the ERC to put in the safeguards. “To promote true market competition and prevent harmful monopoly and market power abuse, the ERC shall enforce the safeguards:

The ERC for its part passed Resolution No. 26, Series of 2015, which was primarily based on the provisions of Section 4 of Rule 11 of the Implementing Rules and Regulations (IRR) of RA9136 which provides for control as the basis for crediting the installed generating capacity of a Generation Facility to a Generation Company and its affiliates or related entities

Consequently many generators proceeded to own installed generating capacities without fear of violating the limits on market concentration even if they own the plant as long as they don’t operate or control the facility. For a while no one was at risk of breaching the limits. But now that big generators Aboitiz Power, Meralco, San Miguel, Lopez Group, and Ayala Group are on the acquisition binge, this issue became urgent and important.

The ERC’s Step Forward

The ERC apparently reacting to feedback that Rule 11 of the Epira IRR maybe illegal, took the first step forward to review the methodology and released an Issues Paper on August 19, 2015 signed by then Executive Director Atty. Saturnino Juan, calling for comment from industry stakeholders on a proposed

REVISED GUIDELINES FORTHE DETERMINATION OF INSTALLED GENERATINGCAPACITY ANDENFORCEMENT, OF THELIMITS ON CONCENTRATIONOF OWNERSHIP, OPERATIONOR CONTROL OF INSTALLEDGENERATING CAPACITYUNDER SECTION 45 OFREPUBLIC ACT NO. 9136″.

ERC CASE NO. 2015 – 005 RM

In about October 13 2015 they released the draft new rules in determining the concentration of capacity

“The proposed amended Guidelines, on the other hand, provides that in the determination of the Generation Companies’ market shares and potential breach of the 30% and 25% market share limitation, it shall be separately determined based on three (3) separate tests, as follows:

a. Ownership test;

b. Operation test; and

c. Control test.

The generation company and its related group, if any, should comply with all the above mentioned tests. In the event that the generation company exceeds the limits in either of the tests required, the ERC shall consider the same as a breach of any of the market share limitation. If a generation company and its related group exceed the limits as periodically determined and set by the ERC in accordance with the Guidelines, it is obligated to inform and report such breach and the reason therefor to the ERC within the prescribed period from the occurrence thereof.

Thus, the Commission seeks the comments from the various industry stakeholders on the proposed amended Guidelines pursuant to Section 4s(a) of RA 9136.”

The draft revision does not go far enough but it would have been a big step forward towards correcting the legal infirmity of Rule 11 but also the control of market concentration and domination.

4. The ERC’s Step Backward

The ERC then quietly “held in abeyance” the rules on the determination of market concentration by passing Resolution 3 of 2016 on March 15, 2016. It was quiet only because it was unnoticed under to the pandemonium that came with the extension of the CSP policy by 6 months from November 6, 2015 to April 30, 2016 which they passed on the same day and session on March 15. The ERC effectively also “held in abeyance” the implementation of the CSP policy.

And the rest is history. Meralco took advantage of the extension that in 41 days it was able to hammer 3,551mw of PSA with 5 strategic partners who are willing to be the minority partners (and plant operators) of MeralcoPowerGen.

Freed from the market concentration limits “held in abeyance” by the ERC, they also proceeded to acquire the 1,000mw Global Business Power of the George Ty group and Aboitiz for its part acquired controlling interests in erstwhile competitor 1,200mw GN Power.  Meralco partner EGAT of Thailand also bought 45% of the 800mw AES Masinloc coal plants in Zambales. GBP in turn bought controlling interest in the Alsons coal projects in Mindanao.

(see article on ERC-Meralco conspiracy, 6 October 2017 by ABP)

5. Knight in a ShiningArmour

One energy official who has been asking the right questions is Senator Sherwin Gatchalian, the Senate Energy Committee Chairman.

Could the young Senator Gatchalian be the knight in a shining armor for consumers? Can he “hip-hop” and “twerk” the rules for an enlightened limit on market concentration? Can he put ERC to task for “holding in abeyance” the market concentration limits?

In a keynote speech reported by the Business Mirror,  Sen. Sherwin T. Gatchalian said the metric used to determine the market-share limitation should be reviewed. 

The law specifies installed generating capacity as the measure in computing market shares.

However, Gatchalian said, this is not reflective of the true market power of a company since the installed capacity is different from the power generated and the actual power injected to the grid.

The share of coal in the country’s total installed capacity is approximately 35 percent, but its share in actual generation is 48 percent. For natural gas, its installed capacity is only 16 percent, but its actual generation is 22 percent. 

As a consequence, Gatchalian said, the use of installed generating capacity underestimates the true market share of a company, especially if its plants have comparatively higher capacity factors.

According to the senator, almost 60 percent of the installed energy capacity is controlled by only three firms.  These are First Gen of the Lopez Group at 19.63 percent, San Miguel Corp. at 18.73 percent and Aboitiz Power at 17.48 percent.

“There exists no formal monitoring of associated party contracting between generation companies and distribution utilities,” Gatchalian said.

“We have to [undertake a review]. It has to be an ERC recommendation. We will have a dialogue with ERC to look at it. We will talk to them on how to remedy this,” Gatchalian said.  

(See our article on The  Betrayal and Treason of Rule 11 of Epira IRR, 26 August 2016)

We hope you really do Sir. It will be a big step forward towards liberating the electric consumers from being captives of cartelization, oligopolization, and resulting negotiated contracts. 

It is the Line Dancing to Electric consumers Emancipation we have been waiting for.

MatuwidnaSingilsaKuryente Consumer Alliance Inc

matuwid.org

david.mskorg@yahoo.com