Culprit

FIRST PERSON By Alex Magno (The Philippine Star) 

When energy bureaucrats failed to run the 650 MW Malaya power plant when prices at the electricity wholesale market was spiking wildly last November, it was easy to conclude this was due to pure incompetence. With more data now available, it seems the “failure” could be an act of shrewdness.

When speculative pricing ruled the wholesale electricity market, bringing a plague upon ordinary power consumers, it was easy to assume the usual suspect, the “greedy capitalists,” were responsible. With more data now available, it appears the windfall profits were enjoyed in the main by the government-owned generation facilities.

To put things bluntly, it was government that screwed electricity consumers to the tune of about P6.5 billion during that two-month episode of surreal electricity pricing. At the very least, the four big generating plants controlled by the PSALM were part of the cabal that profited immensely from that episode.

Consequently, with the recalculation of the obviously abnormal November-December power pricing ordered by the ERC, it is the PSALM-controlled plants that now stand to lose the most. The PSALM, which manages the assets left in government hands after the privatization of much of the power sector, is under the Department of Finance (DoF).

The Philippine Electricity Market Corp. (PEMC) and the Office for Competition (OFC) of the Department of Justice are conducting parallel probes into what really happened in November-December 2013. They are analyzing the Real-Time Ex-Post Price (RTEX) data to understand how the players in the electricity market behaved during the period of abnormal pricing.

The inquiry centers on decisions taken regarding the dispatch of the Malaya thermal plant’s capacity during the period of shortage caused by the sidelining of the plants reliant on Malampaya gas. The Malampaya gas facility, during this period, was on scheduled maintenance shutdown.
One study demonstrates that had Malaya dispatched its capacity during the November 11 to December 10 shutdown, wholesale electricity spot market (WESM) prices could have fallen by as much as 70% from the actual rate of P21/kWh to just P5. What happened was that Malaya bid high for its power then did not dispatch any electricity — an act that violates the rules. 

During oral arguments before the Supreme Court, PSALM lawyer Raoul Crecencia, justified the non-dispatch of Malaya’s capacity due to the high cost of running the plant. Government stands to lose P1.3 billion if the Malaya plant is run for a month at “normal” electricity prices.

Malaya’s electricity was eventually dispatched, but only after electricity prices surged in the wholesale market. After the price surge, operating the four PSALM-controlled power plants produced windfall profits. These four plants are: Malaya, Caliraya, Kalayaan and Casecnan.

PSALM enjoyed P2,667,150,000 in earnings from their plants’ combined output of 151.08 gigawatt hours (GWH) at an average price of P22.669 per KWh during the month of November 2013. One GWh is the equivalent of a million KWh. The high prevailing electricity prices were induced precisely by Malaya’s non-dispatch of its capacity.

PSALM’s earnings rose 60% in December 2013 to P4,173,850,000 from the aggregate output of all its four plants. The aggregate PSALM output of 184.12 GWh was sold at an average price of P22.669 per KWh.

Whether intended or not, the delay in dispatching Malaya’s capacity caused wholesale electricity prices to spike. At peak pricing, the dispatch of all the four plants controlled by PSALM produced a profit windfall of P6.84 billion.

This is the disturbing question: Was the delay in the dispatch of Malaya’s capacity, which produced an otherwise avoidable supply deficit during the course of the Malampaya shutdown, precisely intended to push up prices?

The four plants controlled by PSALM are assets of the debt-ridden National Power Corp. left in government hands because they could not be privatized. It is difficult to sell these plants because their generating costs are higher than “normal” prices in the wholesale market. When they are run, they lose money.

At a higher electricity price regime, however, operating the four large plants produces a profit for PSALM. From billions in operational losses at a “normal” pricing level, the PSALM plants were able to generate billions in profits at “abnormal” pricing levels.

None of the private generating plants could single-handedly produce a shortage and induce a price spike. The four PSALM-controlled plants could do that — and in the process dramatically alter the balance sheet from loss to profit. It is hard to imagine the vital profit/loss computation did not occur to PSALM, which is after all administered by the revenue-obsessed DoF.

From one point of view, operating the four inefficient government plants at a profit might be a good thing. It improves government revenues — although it requires an electricity price regime that is ruinous to the larger economy. Besides, there are the large costs of maintaining these usually idle plants to recover.

From another point of view, however, among the primary purposes of maintaining the government-owned plants is to protect consumers from predatory pricing. Unfortunately, the government-owned plants are so inefficient they could only be run profitably at predatory pricing levels.

This is the painful riddle that haunts the Philippine power situation at this time. We will have enough generating capacity to meet growing demand only if we run the PSALM plants. If we keep power prices down so that they do not ruin the larger economy, those inefficient plants will have to be run at a loss.

The DoF is inclined to optimize revenues and minimize subsidies. That frame of mind might have caused the price orgy in the last two months of 2013.