Upon presentation by the Action for Economic Reforms (AER) of its position paper during the 16 February 2001 public consultative hearing conducted by the Bicameral Conference Committee on the proposed Electric Power Industry Reform Act, the Honorable John H. Osmena, Chairman of the Senate Panel of the Bicameral Conference Committee on the Power Bill, requested AER to submit its proposed specific amendments to the bill following the issues that it raised. In response to this request, the AER submits this updated version of the position paper, with the section spelling out its proposed specific amendments to the bill presently under consideration by the Committee.
The main selling point of the power bill is the creation of a more competitive market in the industry. It is expected that the companies that will engage in the deregulated and liberalized power generation sector will be numerous enough to create competition in the supply of electricity. The end users, in turn, will be given market power to negotiate their supply contracts.
However, certain provisions of the bill restrict the realization of a competitive market. In fact, we believe that these provisions allow the
dominance of certain players in the industry rather than introduce “a regime of free and fair competition” as the bill enunciates in the declaration of policy.
The danger of “vertical” market dominance. Vertical market dominance
occurs when related interests in the vertically integrated sectors of the electricity industry are able to exploit their relatedness to improve their position against rivals. This is particularly true when the end-users cannot choose their suppliers, and the supply is instead determined by the distribution utility that enjoys a monopoly over the franchise area. When a single entity is allowed by law, is given the power to choose its supplier and has a monopoly over distribution, clearly there is an incentive to discriminate against rival power generators.
The bill seeks to correct this situation by requiring open access to the distribution utility and allowing the end-users to choose their supplier. Thus, the supplier can deal directly with the power generators, thereby avoiding the discriminatory transaction between affiliated power producers and distribution utilities. The generator and the consumer, upon perfection of their supply contract, are given an open access to the distribution utility for a service fee called the “wheeling charge.”
Under the bill, however, open access will be available only to the big consumers. Small consumers, will remain a captive market, unable to participate in the competitive transactions for an indeterminate period. Thus, upon passage of the bill into law, a distribution utility like MERALCO can choose its affiliate suppliers such as First Gas Corporation, Bauang Private Power Corporation, and Panay Power Corporation even though their supply price is higher than their rivals.
The bill hopes to mitigate the problem by subjecting the distribution retail supply rate in the captive market to regulation by the ERC (Energy Regulatory Commission) “based on the principle of full recovery of prudent and reasonable economic costs incurred, or such other principles that will promote efficiency as may be determined by the ERC.” Such safeguard, however, is not so reassuring given the known problems of regulation: (a) prevalence of regulatory capture; (b) weak consumer representation in the regulatory agencies and in the adjudication process of these agencies; (c) control by the regulated sector of a large segment of the relevant information.
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