power and water

[ANALYSIS] How bias and regulatory capture bloat power rates

Dean de la Paz

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[ANALYSIS] How bias and regulatory capture bloat power rates

Guia Abogado/Rappler

'The presence of aberrant regulatory capture in the energy industry has been a festering curse akin to zombie economics'

Headline inflation seems to be the most persistent curse Ferdinand R. Marcos has not only failed to address, he’s worsened matters. Across the board there’s near unanimity Marcos should have vetted his alter-egos better. The serial failures would have been understandable had the causes been mostly external and uncontrollable. But when these are self-inflicted and avoidable, catalyzed by resurgent cronyism and colossal incompetence, then it is time for changes. Time to exorcise and cull the complicit.

The self-rated poverty statistic where nearly half of the population consider themselves poor despite the Bagong Pilipinas promise should have been Marcos’ wake-up call. The data is understandable enough to justify a reorganization.

A surgical revamp should focus on the economic managers, zeroing-in on the specific self-inflicted factors catalyzing homegrown inflation, identifying both aberrant policies and the policy-makers.

On the macroeconomy, one instrument inside the state’s anti-inflation toolbox is the setting of key policy rates, raising or lowering where money supply is either sapped or spread. Lowering keeps money in circulation. The opposite forces it into higher-yielding instruments. It depends on whether inflation is demand-pull or cost-push. Raising works when inflation is demand driven. Ours is of the supply side cost-push variety. Note how food product shortages bloat food prices. Note also how the sudden off-cycle tightening is projected to force inflation even higher than it already is.

Our economic medicine men are practicing zombie economics – a bias for a cure-all panacea regardless of the specificities of an ailment.

To address inflationary catalysts, economic indices fine-tune and provide better targets at the center of our crosshairs. For instance, for over several quarters headline inflation was led by high food and energy costs. Behind the first was epic stupidity. It reached ad nauseam levels before calls for changes were finally heeded and metaphorically, a fish was drawn out of the water.

Behind the second is a toxic mix of limp-wristed governance, poor policies, mindless regulatory capture and inordinate bias. Allow us to focus on those.

In Congress, between the chairpersons of the House and Senate Committees on Energy, or even among opposition lawmakers, the person competent and knowledgeable on energy issues is Sen. Sherwin Gatchalian (NPC), a member of the ruling bloc.

The curse of consumers is the continuing inadequacy of low-cost baseload power energy officials continue to fail to address. This has created a labyrinthian quagmire of sideshows going in all directions across the electricity value chain where influential players have redirected both policies and focus to prioritize shadowy interests over the public welfare. Realizing critical and imminent supply shortages, Gatchalian recently called the attention of regulators to immediately approve new baseload supply agreements with distribution utilities. He specifically cited an incremental 1,800 megawatts needed to ensure a modicum of stability by 2024 to 2025.

From Our Archives

[OPINION] Suffering an avoidable bloating of power prices

[OPINION] Suffering an avoidable bloating of power prices

Currently there are about 16 Power Supply Agreements (PSA) dead in the water and pending with energy regulators. This is hardly an improvement from the 18 last year followed by high per kilowatt charges when electricity tariffs spiked unnecessarily because regulators denied a least-cost supplier’s temporary six-month petition for price relief. The bullheaded tradeoffs forced upon the public were costly. Had officials done the math, they would have realized that the temporary six-month price adjustment would have kept tariffs lower than cutting off a lowest cost provider and having the supply gap filled in by a combination of dispatches from a higher cost plant and sourcing from the more expensive Wholesale Electricity Spot Market (WESM).

The regulatory denial and a bullheaded insistence on inapplicable legal panacea had forced the market to suffer from a debilitating price hike that has yet to adjust downwards and is now far beyond the six-month price relief that would have correctly allowed a generator to recover true fuel costs. Fuel cost recovery rather dispatch bias and the WESM as electricity providers is still the cheapest and fairest option.

The presence of aberrant regulatory capture in the energy industry has been a festering curse akin to zombie economics. The criteria should be consumer welfare. Not the dispatch of energy from high-cost under-performing power plants regardless of who owns these. More when time is of the essence amid high inflation periods, adequate baseload remains wanting, reserves are thin and often non-existent, and politically appointed officials are either incompetent or brazenly conflicted, or both. This confluence of a quantum of negatives created the highest energy inflation in most areas outside urban centers where rates bloat 200% higher than those already high in Metropolitan Manila.

Distribution utilities (DU) as a condition of their franchise are compelled to source from the “least cost” generator through power supply agreements (PSA). PSA petitions must be acted upon by regulators in a timely manner as fuel costs are volatile where energy officials fail to stabilize these. The recent termination of a PSA between a major DU and an undeniably least cost generator were due to regulatory inaction where a mandatory six-month period called a “long-stop” date had run out.

The six-month period of “dead time” has been inflicted on other motions requiring quick approvals even where complete documentary compliance has been achieved by parties concerned. Naturally, as defensive defaults, politically appointed regulators blame the very same petitioners as the failed parties. It’s an old refrain. Monetary authorities blame typhoons, agriculture officials blame Ukraine, and politically appointed energy officials blame those they regulate. Meanwhile, as regulators slow-walk approvals, fuel volatilities, inadequate baseload power, and a bias for influential interests bloat energy inflation and, on a nationwide basis, drive net incomes to where one of every two Filipinos feel poor. – Rappler.com

Dean de la Paz is a former investment banker and managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance, and Mathematics professor. He collects Godzilla figures and antique tin robots.

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  1. ET

    Thanks to Dean De La Paz for his enlightening article, “How bias and regulatory capture bloat power rates.” Our high-power rates have not only unduly and heavily burdened our businesspersons and consumers but also made most of the poor realize that they are really poor despite the “Bagong Pilipinas” promise. The immediate cause is that our “politically appointed officials are either incompetent or brazenly conflicted, or both.” Hence these appointees resulted in “regulators slow-walk approvals, fuel volatilities, inadequate baseload power, and a bias for influential interests bloat energy inflation.” This is not surprising under a Political Patronage System, and the more it is not surprising if this dismal energy situation continues.

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