by Maitet D. Pascual, APL-FDC Joint Initiative in cooperation with FES and FSSI Reclaiming Power: Advancing Workers' Interests by Democratizing ECs - PowerPoint PPT Presentation

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Title: by Maitet D. Pascual, APL-FDC Joint Initiative in cooperation with FES and FSSI Reclaiming Power: Advancing Workers' Interests by Democratizing ECs


1
WESM Malcontent Discontent
  • by Maitet D. Pascual,APL-FDC Joint Initiativein
    cooperation with FES and FSSIReclaiming Power
    Advancing Workers' Interests by Democratizing ECs
  • GV Tower Hotel, Cebu, 23-24 November 2009

2
Three Questions
  • What is WESM?
  • Why WESM?
  • Will it work?

3
Wholesale
  • Electricity is bought and sold to wholesale users
    and/or distributors.
  • Participants in this market are
  • Generating companies
  • Trading arms of generating companies
  • Power utilities, both private and public
  • RECs included (though only a few)?
  • Suppliers of electricity or aggregators
  • Industrial, commercial and government entities
    with significant demand

4
Electricity
  • Commodity being traded is electricity
  • Strange commodity can't be stored
  • When demand is high, such as during peak hours,
    no inventory or stock of electricity to draw on
    to meet higher demand
  • Which makes electricity markets highly vulnerable
    to abuse

5
Spot Market
  • Traded hourly, one day ahead
  • Market operator matches bids of buyers and offers
    of suppliers, awarding the cheapest electricity
    first
  • The bid that closes the sale during that trading
    hour becomes the market clearing price
  • Cheap electricity becomes more expensive
  • Expensive electricity becomes more expensive
  • Needs national grid and excess capacity

6
Why WESM
  • Marks the shift from vertically integrated and
    largely publicly owned power sector to an
    unbundled, privatized power sector with
    deregulated generation and supply
  • Based on the ideology of the market that the
    market knows best, is more efficient than
    regulation, that it offers a choice to consumers

7
What WESM is supposed to be
  • Venue through which competition will emerge in
    the power sector
  • Competition that will lead to lower electricity
    prices
  • Competition that will give consumers a wider
    choice

8
What it is, actually
  • Concentrated, uneven playing field
  • One dominant buyer Meralco
  • Two dominant suppliers PSALM NPC
  • Expensive IPPs contracts still in effect
  • Highly vulnerable to gaming
  • Not effectively regulated
  • ERC clueless about market power abuse
  • Not able to bring down electricity rates
  • Choice available only to big consumers
  • Small consumers pay for most expensive kuryente

9
Missing needed elements
  • No transmission bottleneck
  • No supply constraints
  • Availability of hedging facilities to avoid price
    volatility
  • Vigorous enforcement of competition law by
    competent regulators

10
Virtual Monopsony
11
Virtual Monopoly
PSALM alone has enough capacity to supply 90 of
the current peak demand in Luzon of 6,500 MW.
12
Highly Concentrated
13
Shrinking Spot
14
Will WESM work?
  • NO
  • Main reasons why it will fail
  • Market power exists
  • Market power being exercised
  • ERC can't comprehend that this market, however
    level the playing field, can be gamed

15
Market Power Defined
  • The ability of a power player to maintain higher
    prices by reducing output or offering to sell
    electricity at a price significantly above cost
  • Reduce output withhold capacity even if the
    market price is equal to your cost
  • By withholding capacity, artificial shortage
    created, resulting in higher price
  • Ability to raise and/or maintain high prices on
    one's own or in unison with other players

16
Vertical Market Power
  • Firm is engaged in two or more related businesses
  • Generation and distribution
  • Generation and transmission
  • Distribution and transmission
  • Generation, distribution and transmission
  • Firm uses its dominance in one area to raise
    prices and profits for the enterprise/business
    group.
  • Example Meralco buying from its IPPs

17
Horizontal Market Power
  • Refers to the control by a firm of a single
    activity, e.g., power generation (where its share
    of total capacity is significant), which it can
    use to drive up prices, thereby profiting from
    the exercise
  • Another related activity fuel procurement
  • Example PSALM-NPC control of generating capacity

18
Market Power and Peak Hours
  • Market power is enhanced when demand is
    relatively inelastic, as well as when the supply
    of other firms is inelastic, such as during peak
    production times in electricity markets. For this
    reason, electricity markets are more vulnerable
    to the exercise of market power than are other
    energy markets such as the one for gasoline.
  • (Severin Borenstein, James Bushnell and Frank
    Wolak, Diagnosing Market Power in Californias
    Restructured Wholesale Electricity Market, NBER
    Working Paper 7868, http//www.nber.org/papers/w78
    68, p. 6 emphasis added))?

19
Indicators of Market Power
  • Capacity gap offered capacity is below available
    capacity is below installed capacity
  • Presence of pivotal supplier
  • Presence of price setter
  • High concentration ratios

20
Ways It is Being Exercised
  • Withhold capacity So far, offers to supply
    electricity are normally half of available
    capacity.
  • Raise offer price Without any change in demand
    or supply conditions, PSALM simply raised the
    price at which it offered to sell electricity.
  • Withhold fuel NPC has sole authority to
    procure/import fuel for power plants, can
    therefore choose which plant gets to trade in the
    market.

21
Another Way Favor one's IPPs
  • By favoring its IPPs over the NPC and WESM,
    Meralco sold more expensive electricity to its
    customers a violation of the EPIRA mandate
  • Meralco bought from its IPPs during off-peak
    hours, even though NPC electricity during
    off-peak would have been cheaper.
  • This ensured the dispatch of Meralco IPPs during
    times when demand is low.
  • Meralco may not itself benefit from buying more
    expensive electricity from its IPPs, but the
    Lopez Group, which owns these IPPs, certainly
    will.

22
Why WESM will Fail 10 Reasons
  • 1 Philippine power sector geared towards
    monopoly market too small.
  • 2 Ownership control in the hands of a few
    control over electric power wields political
    power and control.
  • 3 EPIRA provisions ensure that WESM will not be
    a level playing field. Law granting transmission
    franchise to National Grid of the Philippines
    made worse an already bad situation.

23
Why WESM will Fail
  • 4 As shown in California and by PSALM in the
    early months of WESM's operation, the market can
    be gamed.
  • 5 In deregulated electricity markets throughout
    the world, fall in electricity rates a result of
    regulation, not competition. And only
    temporarily.
  • 6 Evidence in US shows that deregulating and
    restructuring does not bring about lower
    industrial prices.

24
Why WESM will Fail
  • 7 WESM price clearing rules result in a
    tendency for electricity rates to rise rather
    than fall.
  • 8 WESM must be closely monitored (very costly)
    by competent non-politicized regulators (highly
    unlikely).
  • 9 Even when supply gt demand, and where there
    are many players, the market can still be gamed.

25
Why WESM will Fail
  • 10 Additional generation transmission needed
    to support a competitive market far more than we
    can afford.
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