How the Lower House Rushed the Passage of the Power Reform Bill

Based on a Failed British Model By: Nina Torcelino Iszatt

HB8457, the bill for the reform of the Electricity Industry, was passed in the Lower House last Wednesday morning. After the marathon 20-hour session, one could be forgiven for imagining that the people’s Representatives are truly masipag. This is the first of many anomalies regarding the interpellations of this important Bill. Prior to Tuesday, the sessions were sparsely attended and a quorum rare. Those in attendance, however, could observe the interesting habit of the Bill’s proponents, most notably Representatives Arnulfo Fuentabella (LAMP-NPC, Camarines Sur) and Julio Ledesma (LAMP, Negros Occ.), to cite the fantastic achievements of reforms in other countries, particularly the United Kingdom (UK) and Norway. At first it was not clear why. How is it possible to compare the experience of these two developed countries with that of the Philippines?

It is not so much that Rep. Fuentebella is an Europhile (though he may well be) rather the British and Norwegian Models are the two principal electricity models. Already the warning bells are sounding. These are two very different models. The Norwegian is a vertically integrated model which, to this day, has not been privatized. The Norwegian system is also 99.23% hydro-power1, based on trading water stored in dams. As such it operates very differently to the systems which employ thermal energy.

Conversely, after the Electricity Act of 1989, the privatized British electricity industry has seen the de-integration of generation (largely fossil fuel), transmission, distribution and supply. It is difficult to conceive how throwing together elements of the contrasting British and Norwegian models can result in a coherent electricity model for the Philippines. With a world of difference between Norway and the Philippines (including a GDP per capita of $21,200)1, it is clear that the incomparable was being compared. Neither is it sound practice to argue on the basis of one model and then use a different model to emphasize the same point. Shortly before the passage of the Bill, it also became apparent that there are strong criticisms of the British Model from Energy experts in Britain that were not being heard in the Philippine Congress.

Analysis of the House Journal highlights one obsession of the Bill’s sponsors - the unfounded proclamation that privatization will bring about a competitive environment and that this competition will result in a reduction of tariffs. Rep. Ledesma was often heard professing "…market forces will ensure that energy rates will be reduced." This type of empty rhetoric was persistently employed in place of solid justification as to why HB8457 is the answer to the problems of Napocor. Not only is this vague and meaningless, it is also false.

Under HB8457 only generation will be totally subject to market influence. A wholesale spot market has been proposed wherein, it is believed, competition will bring down the price of the power being bought and sold. Competition in supply will be phased in over an unspecified period according to the class of consumer whilst transmission and distribution will be regulated by the proposed Electrical Regulatory Board (ERB). This is very similar to the system implemented in Britain where generation capacity is sold in a wholesale spot market, the Pool, and transmission and distribution fully regulated by the government body Office for Electricity Regulation (Offer). Over the 10 years since reform in Britain, access to supply has been gradually opened up to the various classes of consumer. Only in the last year have domestic consumers had a choice.

In Britain, analysis of the breakdown of costs in a consumer’s bill indicates that generation accounts for between 54 and 68% of the bill depending on the class of consumer. It is logical to conclude that market forces do indeed dictate the power rates. However, energy expert Steve Thomas of Sussex University has illustrated how generation only accounts for approximately 2% of the reduction in prices paid by consumers.2

So why, when market forces account for such a large percentage of the cost of electricity, is the corresponding impact on reduction in the price almost negligible? The answer lies in the enigma of the Pool. Although the Pool is supposed to be an open market, no more than 10% of power has been bought and sold at pool prices since reform. Like the existing IPP contracts in the Philippines, the largest generators, National Power and PowerGen, were bound by contracts imposed by the UK government to purchase British coal in order to protect the local industry. Thus the bulk of the power bought and sold through the Pool is beyond the reach of market forces.

Moreover, generation prices rose steeply after privatization, falling only after a re-negotiation of coal contracts in 1993. In 1998 the prices were only 2% below 1990 levels. Against a background of dramatic decrease in generation and fuel costs this is hardly a positive example of market forces dictating power prices.

Rep. Ace Barbers (Lakas, Surigao del Norte) expressed a concern during the session on 15 March that a single power generating company may monopolize time-based buying and selling of electricity. The House Journal states: "Rep. Fuentebella replied that while this is a possibility, the complexity of the bidding process would make it difficult for power generating companies and utilities to monopolize and even fix power rates on an hourly basis. He however stressed that the Bill provides regulators with the power and authority to impose sanctions on probable monopolistic and anti-competitive power distribution utilities."

Despite this broad reassurance of Rep. Fuentebella, actual working experience in Britain has been considerably different. The standard licenses issued to generation companies omit any reference to their behavior in the Pool. Market abuse problems surfaced as far back as 1992 suggesting that, whilst Offer was still finding its feet, the generation companies were playing their own game on this fair and level playing field. An inquiry last July 1999 into excessively high Pool purchase prices found the direct bidding behavior of National Power and PowerGen to be responsible.

Rep. Fuentebella also argued that complex bidding rules would prevent foul play. Analysis in 1999 by the regulatory body (renamed Ofgem to include gas markets) noted that the Pool rules are too complex, making them open to abuse. It was also evident that generating companies were manipulating inflexibility markers to ensure that plants operated at specific times of day, reducing price competition during these periods and compounding the price-setting influence of these generators.3

This highly flawed market appears to be held by Rep. Ledesma as an exemplary model. Yet the British Pool is not a credible reference. The regulatory body claims that a number of generators have willingly exercised their market power at the expense of the customer "which is facilitated by the present trading agreements". It has been established beyond question by both the regulatory boards and independent advisors that the Pool is a failure, resulting in the proposal of a new trading agreement (NETA) which should be implemented by autumn 2000. This new "efficient" system is expected to provide savings to consumers of approximately GBP1.5m per year leading to the reasonable deduction that during its 10-year life span, the inefficient Pool cost British customers an extra GBP15m.2 HB8457 proposes a wholesale spot-market modeled on a proven failure.

The savings which proponents refer to as a result of "privatization" and "efficient competition" have only occurred in Britain with the tightening of regulations over the last few years. The second largest component of a bill comes from distribution. Initially, the government’s distribution formula was overly generous and these charges actually rose in the first few years after reform. Only with one-off price cuts followed by stricter regulatory reductions, did price decreases occur. 2 Analysis of the components of distribution outlines very clearly that the drop in electricity rates has not occurred as a result of market forces but rather ever stricter regulation.

Inferences by Rep. Ledesma that the private sector should "regulate and control business" is an insult to common sense. The British experience he is so fond of quoting has clearly illustrated that government regulations were necessary for the reduction of power rates and to penalize the market abuses of certain generating companies. With such blatant corruption occurring under the Erap administration it is clear who will be benefiting from self-regulation of the private sector.

That "consumer’s choice" will result in competition and lower rates was constantly cited during interpellations. Consumer’s choice will be phased in depending on the class of consumer, as occurred in Britain where, only early last year, was the designated market (domestic and small business consumers) given full access. However, despite a non-discriminatory clause in contracts, there are differential savings according to class of consumer. Whilst the designated market (small business and domestic consumers) was ‘captive’, the Regulator discovered that they were being charged around 13% more for generation than the non-captive market. Examination of distributors’ purchase costs shows how the most expensive power purchases were sold to this franchise market. In addition, the cheap nuclear energy that was being allocated to the non-captive market was being subsidized with the Fossil Fuel Levy paid by the designated market. In effect the designated customer was paying twice. Since the time of total open access it continues to be the large consumer who, with the time and resources to actively hunt down competitive prices, is rewarded with cheaper power. The designated consumer on the other hand, has neither the time nor resources to analyze the multitude of complex supply contracts on offer.2 Market power commands cheap prices. So, who are those who will benefit from the passage of this bill? Is it a surprise that just days after the passage of the Bill, Meralco has filed a P0.30 rate increase?

A further study by the Regulator has spelled out exactly how it is the poor and vulnerable consumers in Britain who are losing out. Those in financial difficulty tend to use the pre-payment meters for which both the standing charge and kWh tariff are greater than for other payment methods. The survey notes that these consumers are also less likely to switch and that they use this method as a means for budgeting.4

In Britain, at the end of 1999, companies with generation interest owned 8 out of 12 supply companies. It is unlikely that so many companies will survive in a "competitive environment", so there is a risk of an oligopoly of 4 or 5 companies who have no incentive to compete. Generation companies would effectively be able to side step the wholesale pool and sell directly to customers leaving the market redundant. Concern about vertical mergers was also voiced recently by the Director General of the Office of Fair Trading.5

Looking beyond the tired market rhetoric and misinterpretations of the experiences of Britain, the speed at which HB8457 was passed is simply alarming. In Britain, considered analysis has illustrated that the wholesale spot market is not working. Only the strictest of regulation in distribution, and less so in transmission and supply, has reduced the price of electricity in Britain. Despite apparent reductions it is still the most vulnerable members of society who are being losing out. There is now a danger that the emerging cross-ownership of generation and supply companies will be manipulated at a cost to the consumer. Considering the facts begs the question, were the Congressmen representing the people, or self-interest? HB8457 must be scrapped. Certainly, reforms need to be made but first the Representatives of Congress should ask themselves, do we really want to implement a model that has been abandoned in its country of origin?

References

2 Thomas, S. (1999) The British Model: A Decade of Experience Paper presented at Congresso Brasileiro de Energia 30 November – 2 December 1999

3 Pool Prices in July Statutory Consultation on Proposed Licence Amendments OFGEM (December 1999)

4 A Review of the Development of Competition in the Designated Electricity Market OFFER (June 1999)

5 Lucas, D. (1997) Indecent proposals? Office of Fair Trade UK

Fair Trading News. Office of Fair Trade, UK (December 1998)

House Journal Wednesday, March 15, 2000

House Journal Tuesday, March 21, 2000

House Journal Monday, March 27, 2000

Morgan, O. (1999) Doomed to generate failure . The Guardian, London, Sunday

September 5, 1999

OFGEM, UK 22/03/00 – Press Release: Ofgem issues npower licence with market abuse condition

OFGEM, UK 22/03/00 Press Release –First Hydro, Edison First Power and Lakeland Power agree to licence modification

Thomas, S. (1999) Has Privatization Reduced the Price of Power in Britain? Monolith to be published by Unison.