11 July 2007
A Joint Statement by the Freedom from Debt Coalition (FDC)
and the Philippine Electricity Governance Initiative (PEGI)
on the ERC Report on PSALM Price Fixing
The Freedom from Debt Coalition (FDC) and the Philippine Electricity Governance Initiative (PEGI) reject the report of the Energy Regulatory Commission (ERC) on the charges of price-fixing and market power abuse inflicted by the Power Sector Assets and Liabilities Management Corporation (PSALM) on the Wholesale Electricity Spot Market (WESM).
The FDC and PEGI reject in particular the ERC statement in ERC Case no. 2007-421 MC that it's investigative unit (IU) "finds no prima facie case against (Sic) PSALM for anti-competitive behavior or market power abuse." Both also call for a more comprehensive investigation, debunking ERC's declaration that "further investigation and proceedings are not warranted (and) this investigation be terminated."
There are in fact brazen and blatant acts that serve as proof of deliberate manipulation. There have also been gross omissions where related parties and avenues have not been thoroughly investigated. By recommending that the investigation which we deem as both incomplete and incompetent, be terminated, the ERC effectively condones and becomes a party to the legitimization and institutionalization of price-manipulation within the WESM. Moreover, by terminating the investigation, the ERC likewise legitimizes the excessive rates and their phenomenal movements during the initial months of the WESM thereby justifying these as acceptable and chargeable upon victimized consumers.
Far from the absence of prima facie evidence of price-manipulation and market power abuse, these glaring and specific acts, deliberately and with full knowledge and authority committed by the traders of the PSALM, fall under price-manipulation.
Where price manipulation is defined in the context of the WESM as deliberate actions committed by specific individuals to control, manage or influence the price of electricity in the WESM beyond the market forces of supply and demand, the actions of PSALM's traders certainly fall under this. The ERC however exonerates the PSALM from administrative and criminal culpability by not appreciating the prima facie evidence.
One such proof is the unusual albeit deliberate utilization of the high fuel cost oil-fired power generators owned by private entities (IPPs) but traded by PSALM. During the first four weeks of the WESM starting June 26, 2006 the generation mix at WESM went as high as 41,929 megawatt hours for one week. From the fourth week of the WESM onward until the eleventh week ending September 19, 2006, the actual generation mix for Luzon shows as much as 23.57% using these expensive oil-fired plants.
Oil-fired power generators are the most expensive sources of electricity and the increasing utilization of these compared to less expensive sources of electricity are choices deliberately made by the PSALM traders. The issue of the choice of sources is important because 2006 was an exceptionally wet year and the levels of water at the hydroelectric facilities, had the traders sourced from these, would have brought down the tariffs at the WESM.
Unfortunately, during WESM's 11-week operation in 2006, from a high utilization percentage of 41.08% during the second week of WESM, the utilization of the less expensive hydroelectric plants fell to as low as 25.60%.
By utilizing and gradually increasing the percentage dispatches from the more expensive oil-fired plants and decreasing the usage of the less expensive hydroelectric plants, the PSALM traders effectively increase generating tariffs to benefit only the owners of the privately-owned IPPs to the detriment of distributors and the consumer. Had market forces been operational at the WESM, the cheaper hydroelectric sources would have been dispatched more and more rather than less and less.
Another prima facie evidence of price manipulation where PSALM's traders resort to deliberate cost management in order to influence tariffs and dispatch priorities lies in the manipulation of costs. During the first half of the 11-month period under review PSALM traders used variable pricing in their bids. Of PSALM's four trading teams only one team during this period used production costs as the basis of their pricing. The fact that the traders are free to use either full production costs or variable costs deliberately varies their pricing bases and determines which plants to dispatch. The behavior is considered anti-competitive as variable pricing undercuts full production cost pricing.
Worse, Napocor plants bidding in the same market use true production cost pricing. By deliberately utilizing variable cost pricing for the IPPs they traded for, PSALM's trading teams resort to under-pricing and thereby engage in anti-competitive behavior. The gambit was resorted to deliberately and with full knowledge of its effects since PSALM's traders know full-well that Napocor's plants were priced at full and true costs. By undercutting the state-owned Napocor plants, PSALM deliberately favored the IPPs and their private sector owners.
Moreover, during the latter half of the 11-month period, PSALM traders deliberately shifted their pricing strategies from variable to full cost pricing when, within the generation mix, the percentage of oil-fired plants decreased. This tactic was resorted to in order to offset the relative increase in that particular source within the generation mix. Had the oil-fired plants been generated at the same level that they had been during the first half, then the use of full cost pricing would have been higher than that already prevailing at the WESM.
Had market forces and supply and demand been the sole determinants of price as envisioned for WESM, full cost pricing would have been applied throughout and PSALM's decision to undercut tariffs in order to show WESM's success during the first month of operation is prima facie proof of manipulation to effect artificial prices.
The ERC’s decision, far from closing the case, in fact raises more questions. Who is the ERC protecting, and why? Certainly, not the public interest. FDC and the PEGI therefore demand a transparent and more competent investigation than the sham that the ERC has come up with after almost a year of investigating. ###