CREW PROJECT

National Orientation Workshop & National Reference Group Meeting

September 24, 2015

Manila

PURSUING PRO-COMPETITIVE REFORMS IN PH EPI

BY

EDNA ESPOS

PH EPI ENTRY POLICY

Open National Monopoly Regional Monopolies Contestable

50%

8%

23%

14% 5%

PH Electricity Cost

Generation

Taxes

Distribution

Transmission

OTHER MAIN REGULATORY POLICIES & MARKET FEATURES

Generation Transmission Distribution Supply

Rate

Regulation

• Spot-market

• Bilaterals lifted with RCOA

• Indirect via DU retail rate

Regulated Regulated Market

Non-Price

Regulation

ERC Competition Rules,

ERC/DENR/DOE regulations on

performance standards such as heat

rates; emissions etc

Mainly direct

ERC regulations

Mainly direct ERC

regulations

RCOA Code of

Conduct & other

rules

Horizontal

Structure

Installed generating capacity

ownership,operation or control by

company/related group limited to 30%

of grid, 25% national

Only 1 private

operator of govt

assets

None None

Vertical

Structure or

Cross-

Ownership

1. Allowed between DU & GENCO but former limited to 50% of demand sourced

from associate

2. Dus, GENCOs their officials, stockholder, affiliates, relatives within 4th degree

consanguinity & affinity cannot hold interest in TRANSCO & concessionaire, &

conversely

3. NGCP franchise diluted 2. Exempts a) relatives of Dus/GENCOs etc w/o

employment, consultancy, fiduciary relationship/interest in Grantee &

conversely and b) 1% stock ownership

Generators ,

DUs allowed in

contestable retail

market

OTHER MAIN REGULATORY POLICIES & MARKET FEATURES

Generation Transmission Distribution Supply

Market • 3 separate wholesale.

LUZ-VI WESM. At least

90% physical BCQ

• Wide price separation of

Leyte-Samar-Bohol from

other Visayas sub-grids

on peak hours

• Mindanao 100%

physical bilaterals

3 • 146

(121 EC, 17 PDU, 8

LGU)

• MERALCO,75%

Luzon peak

• VECO, 31% Visayas

peak

• DLPC, 23% Mindanao

peak

• 1 MW

competitive

retail now in

LUZ-VI

• 750 kW

soon; Others

to be

determined

Supply-

Demand

Balance

Inadequate Generation (See

chart)

• Congestion

problems

• Insufficient grid/sub-

grid interconnection

• 79.9% households

electrified (target 90%

by 2017)

• 66% sitios electrified

(target 32.4k by end of

PNoy term)

Not enough RES

supply offer to 1

MW contestable

customers

Market

Concentration

HHI

Luzon 1,280

Visayas 1,879

Mindanao 3,970

monopoly monopoly A/o Oct 2014

MERALCO Local

RES 60%;

Balance to Local

RES of other Dus

& GENCOs

Entry Barriers 100 + permitting and

licensing requirements

Franchise Franchise ERC License

Power Generation Capacity

21,470

32,901

15,54817,025

10,627

23,52725,416

30,318

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

Indonesia(PLN) Philippine Vietnam ThailandMW

Increase in PH

Generation Capacity

captured only increased

Residential

Requirements.

Source: IEEJ-JICA (2013)

PRO-COMPETITION REFORM POSSIBILITIES

TRANSMISSION & DISTRIBUTION

(1) Application of PH Competition Law

Limited

prohibitions on agreements between competitors not applicable

Applicability of prohibitions on anti-competitive vertical restraints limited by State Action Immunity & Filed Rate Doctrines

Merger provision not applicable

o only 1 transmission

oECs should merge; MERALCO divest but very difficult because franchise – property right protected by Bill of Rights

(2) Pro-Competitive Regulatory Reforms

Transmission Planning & Investment to Enhance Generation Competition

Robust design and implementation of Incentive Regulation in Rate Methodology. Current ERC approach incorrect (rate base valuation, WACC calculation, no efficiency targets, efficient cost

baselining) and leads to higher tariffs, not efficiency

Source: NGCP 2013 TDP Consultation Draft

Visayas Sub-Grids Demand and Generating Capacity, 2014

Source: DOE 25th EPIRA Implementation Report

VISAYAS NODAL PRICES HOURS 8 & 20, 220215

HOUR FUEL CODE RESOURCE_ID PRICE HOUR FUEL CODE RESOURCE_ID PRICE

8 6 5EAUC_G01 5452.9 cebu 8 1 8SLWIND_G01 6105.81 guimaras/panay

8 4 5KSPC_G01 5456.8 cebu 8 4 8PEDC_G01 6099.66 panay

8 4 5TPC_G02 5454.71 cebu 8 1 6SACASL_G01 5904.41 negros

8 4 8PEDC_G01 6099.66 panay 8 3 6PAL1A_G01 5481.52 negros

8 3 6NASULO_G01 5476.16 negros 8 3 6NASULO_G01 5476.16 negros

8 3 4LGPP_G01 3724.71 leyte 8 3 6PAL2A_G01 5476.16 negros

8 3 6PAL1A_G01 5481.52 negros 8 4 5KSPC_G01 5456.8 cebu

8 3 6PAL2A_G01 5476.16 negros 8 4 5TPC_G02 5454.71 cebu

8 3 4LEYTE_A 3743.38 leyte 8 6 5EAUC_G01 5452.9 cebu

8 1 8SLWIND_G01 6105.81 guimaras/panay 8 3 4LEYTE_A 3743.38 leyte

8 1 6SACASL_G01 5904.41 negros 8 3 4LGPP_G01 3724.71 leyte

20 6 5CPPC_G01 9011.63 cebu 20 6 8PDPP3_G01 10037.89 panay

20 6 5EAUC_G01 8994.99 cebu 20 1 8SLWIND_G01 10037.51 gumaras/panay

20 4 5KSPC_G01 9028.71 cebu 20 4 8PEDC_G01 10019.88 panay

20 6 8PDPP3_G01 10037.89 panay 20 3 6PAL1A_G01 9250.4 negros

20 4 5TPC_G02 9024.87 cebu 20 3 6NASULO_G01 9235.62 negros

20 4 8PEDC_G01 10019.88 panay 20 3 6PAL2A_G01 9235.62 negros

20 3 6NASULO_G01 9235.62 negros 20 4 5KSPC_G01 9028.71 cebu

20 3 4LGPP_G01 4613.96 leyte 20 4 5TPC_G02 9024.87 cebu

20 3 6PAL1A_G01 9250.4 negros 20 6 5CPPC_G01 9011.63 cebu

20 3 6PAL2A_G01 9235.62 negros 20 6 5EAUC_G01 8994.99 cebu

20 3 4LEYTE_A 4640.12 leyte 20 3 4LEYTE_A 4640.12 leyte

20 1 8SLWIND_G01 10037.51 guimaras 20 3 4LGPP_G01 4613.96 leyte

PRO-COMPETITIVE REFORM POSSIBILITIES: GENERATION & SUPPLY

(1) Application of PH Competition Law

Constrained

No GENCO/related group caught by 50% market share threshold

generation rates for at least 90% regulated via DU retail rates

Source: PEMC Annual Report

PRO-COMPETITIVE REFORM POSSIBILITIES

GENERATION & SUPPLY

(1) Application of PH Competition Law

ability/incentive to game organized electricity market not dependent on

market share.

p

P’

(2) Streamline/Simplify Permitting & Licensing Requirements

(3) Build Generation Adequacy

Mandatory long-term contracting for 100% of DU demand thru

CSP with DOE Circular

Weak incentives for generation investment in restructured &

privatized industry. Excessive market , finance, regulatory risk

Missing money problem of electricity spot markets

ERC must ensure auction design competitive & transparent;

maximize participation of existing investors & encourage new

entry; format minimizes procurement cost; promote regulatory

stability; sustain investments e.g. reasonable price ceilings

Proper sequencing of policy reforms

delay RCOA for < 1 MW market until generation adequacy

achieved or at least make it optional to consumers

(4) ERC to promulgate and implement market behavior rules

prohibiting market manipulation

prohibit physical withholding, economic withholding,

uneconomic production, others

set conduct & market impact thresholds; default bids

(5) Proper Market Rules & Appropriate Market Design

MC pricing principle

price caps as scarcity price (& relationship between offer

price and offer cap)

Gross pool vs net pool

Source: PEMC Annual Report

-2000

0

2000

4000

6000

8000

10000

12000

1 6

11

16

21

26

31

36

41

46

51

56

61

66

71

76

81

86

91

96

101

106

111

116

121

126

131

136

141

146

151

156

161

166

171

176

181

186

191

196

PhP

Off-Peak Offers By Plant Type, Per MWh, Jun-Sept 2006

Binga-Hydro

Magat-Hydro

SRoque-Hydro

Sta Rita-NG

Ilijan-NG

Tiwi-Geo

Leyte-Geo

Makban-Coal

Sual-Coal

Pagbilao-Coal

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1 9

17

25

33

41

49

57

65

73

81

89

97

105

113

121

129

137

145

153

161

169

177

185

193

201

209

217

225

233

241

249

257

265

273

281

289

297

305

313

321

329

337

345

353

361

369

377

385

Peak Prices/MWh of Marginal Plants, June-Sept 2006

Angat Binga Magat SRoque Kalayaan Sta Rita Ilijan Tiwi

Calaca Makban Masinloc Sual Pagbilao Limay BPPC

PRO-COMPETITIVE REFORM POSSIBILITIES: INSTITUTIONS

Institutions That Work Well

Build Administrative capacity of regulator or simplify rules

and regulations to align with regulator’s administrative

capacity

Independence of Market Operator

End of Slides

Thank You