ERC appointment raises conflict-of-interest issues

Part 1: INSIDE STORY: The real reason behind Petilla’s resignation

MANILA, Philippines (UPDATED) – The appointment of Geronimo Sta Ana, linked to the Aboitiz group, as commissioner of the Energy Regulatory Commission (ERC) has raised conflict-of-interest concerns.

It comes at a time when the regulatory agency is determining whether power generation companies, among them, the Aboitiz group’s unit Therma Mobile (TMO), colluded to jack up prices of Manila Electric Company (Meralco), the Philippines’ largest electric distribution utility, in 2013.

The price hike was broken down into the P4.15 per-kilowatt-hour (kwh) that was supposed to have been collected in December 2013 and another P5.33/kwh in January 2014. This was equivalent to billions of pesos’ worth of charges to consumers. The Supreme Court issued a temporary restraining order on the rate hike, which until today, remains unresolved.

As background, the rate hike was caused by a combination of factors – the shutdown of the Malampaya natural gas facility, which coincided with the outages of several power plants, as well as violations committed by power generation companies trading at the Wholesale Electricity Spot Market (WESM). These pushed prices to the ceiling.

Meralco sources part of its power requirements from WESM, the platform that allows generation companies to sell excess power capacities – or capacities that have not been sold under bilateral contracts. Prices are set based on the last bid that cleared.

While only excess capacities are sold in WESM, all power consumed in a day – whether excess or covered by bilateral contracts – passes through the system. This means all generators are required to offer their maximum available capacities in the spot market. This is called the must-offer rule. (READ more about how WESM works and the Meralco rate hike issue here: What Meralco’s rate hike tells us about the power sector)

Market violations

The findings of a probe by WESM operator Philippine Electricity Market Corporation’s (PEMC) Market Surveillance Committee showed that of 34 power generators investigated, 12 committed market violations.

“The board [of PEMC], upon recommendation of the Market Surveillance Committee, adopts the findings of breach and declares that 12 generators committed breach in violation of the provisions of the Must-Offer Rule of the WESM rules, more particularly Section 3.5.5 and Appendix A1.1 during various (trading) intervals from the period 26 October to 25 November 2013 and 26 November to 25 December 2013,” a copy of the board resolution obtained by Rappler showed.

Of the 12 generators, the Aboitiz group’s TMO and state-owned Power Sector Assets and Liabilities Management Corporation were found to have committed the most number of violations, and subsequently, slapped with the highest penalties of P234.9 million and P89.9 million, respectively.

The penalties were supposed to have been imposed immediately – in February 2015 when PEMC submitted its report to the ERC and notified the power players concerned. But TMO, citing technical problems experienced by its power plant, did not comply and instead, obtained a writ of preliminary injunction from a Pasig Regional Trial Court in April.

The ERC’s Investigating Unit (IU) was conducting its own probe into the matter. It was looking at data available to the ERC, the report submitted by PEMC, and the testimonies of WESM trading participants.

On June 2, the regulator finally released the IU’s report, which found that the same 12 firms, as well as Meralco, violated the must-offer rule. Meralco had a bilateral contract with TMO and had influence over its spot market bids.

The IU’s findings, however, fell short of saying that the power firms colluded to manipulate prices. Outgoing Energy Secretary Carlos Jericho Petilla was quoted as saying in a Philippine Star report: “The question on collusion was not answered but it’s really difficult to determine collusion. It will now depend on the commissioners. They will (be the ones) to conclude.”

Moreover, Petilla said the possible fines of P50,000 to P50 million the ERC plans to impose are too small – they’re not commensurate to the profits that the power players made and a far cry from the penalties imposed by PEMC.

ERC executive director Francis Juan said the IU has filed a case against the concerned power players with the Commission, and that the Commission en banc would hear the case. The power players would be given the opportunity to file their replies, and upon evaluation, the ERC would determine if there’s basis to impose the fines.

The ERC welcomed Sta Ana, 75, as its 5th commissioner in March, completing the ERC’s commissioner line-up. Sources in the power industry told Rappler Petilla believes that his predecessor, Rene Almendras, nominated Sta Ana to President Benigno Aquino III – a claim Almendras denied to Rappler. Almendras is former energy secretary and now Cabinet Secretary. He is a former official of Aboitiz companies.

Regardless, Sta Ana’s appointment raises concerns about the ability of the ERC to protect public interest over power players, independent sources said. This is the real reason why Petilla quit his post, the sources added.

Before Sta Ana, Almendras’ niece, Josephine Patricia Magpale-Asirit, was also appointed ERC commissioner.

Almendras did not initially respond to our repeated requests for his comment. However, on June 21, a day after we published the first part of this report, he emailed us with a statement: “I had nothing to do with the appointment of Mr. Sta Ana to the ERC.  As a matter of fact, since I stepped out of my DOE (Department of Energy) role, I do not get involved in energy matters.”

Sta Ana did not respond to our requests for comment, while the Aboitiz group shied away from the issue, saying the appointment process only involves the President.

Need for technical expertise

Apart from an apparent conflict of interest, the sources also believe that Sta Ana’s appointment does not solve the perceived problem of incompetence at the ERC.

The ERC must be competent enough to efficiently and proactively regulate the market and prevent power players from outsmarting it.

Critics, however, claimed that the regulator has been woefully short of leadership that fully knows and understands the energy game.

Sta Ana is an accountant. Three other ERC commissioners, including its chair Zenaida Cruz-Ducut, are lawyers, while the fourth is also an accountant.

One industry insider told Rappler it would have helped if finally, a technical person – preferably an engineer – was named to the last commissioner post. “Technical expertise is important especially, for example, when evaluating the reasons given by power players for plant outages or problems that may force them to under-offer in the market – which are among the things that may impact prices,” the insider said.

On the Meralco issue, the ERC has taken flak for being remiss in its duty to protect consumers by approving Meralco’s controversial rate hike petition without evaluating it. The ERC withdrew its approval only in reaction to public outcry and allegations of collusion.

Meanwhile, a source connected to regulatory authorities claimed that the enormous amount of time that it took the ERC to investigate the rate hike and release its findings only shows that the Commission and its staff lack the requisite skills. The ERC had been looking into Meralco’s price hike since January 2014, at the height of the controversy. 

Changing of the guards

What’s the key takeaway? So complex are the responsibilities of the ERC that any movement in the regulatory body must be sound and untarnished. The decisions it makes today have far-reaching repercussions on consumers, and can spell the difference in the energy sector in years to come.

The next post to be vacated at the ERC will be that of the chairmanship, in light of Ducut’s retirement this July. Talk is rife that Almendras’ niece Asirit is set to replace Ducut. How this, and the changing of the guards at the Department of Energy, will play out is something that will be closely watched.

Petilla’s replacement is reportedly a choice between two bets – former energy secretary Rafael Perpetuo Lotilla and National Transmission Company president Rolando Bacani. Lotilla is an independent director of Aboitiz Equity Ventures and Trans-Asia Petroleum Corporation, while Bacani is said to be another Almendras nominee. – Rappler.com