ERC extends secondary WESM price cap anew

Regulators have further extended the secondary cap aimed at controlling price spikes in the energy spot market.

The Energy Regulatory Commission (ERC) said it was extending the implementation of the secondary cap pending permanent measures to keep prices at the Wholesale Electricity Spot Market (WESM) stable. Some sectors support the secondary price cap while others want it scrapped and still others are calling for at least a higher rate for the second price ceiling.

“Pending the determination of a new WESM offer price cap, which considers the permanent mitigating measures to be issued by the ERC, the Interim WESM offer price cap of P32 per kilowatt-hour (kWh) set in the WESM Tripartite Committee Joint Resolution No. 2, series of 2013, is hereby further extended for a period of 120 days from Oct. 24,” the regulator said in a resolution published in local newspapers.

The impending power crisis in the summer of 2015 has got government scrounging for power capacity from the private sector and it has not escaped notice that the second layer of rate control in the WESM is making peaking plant operators reluctant to operate, citing costs that are higher than the secondary price cap.

On May 5, regulators added another layer of price control in the power market for the rest of summer to “ensure the transparent and reasonable prices of electricity.” The ERC first extended the measure for 45 days from its expiration on June 25.

Tight supply

ERC said that regulators continued to expect tight power supply in the coming months because several large power plants were expected to go on maintenance outage, coinciding with an anticipated reduction in generation capacity for hydroelectric power plants. This was despite the anticipated dry spell referred to as the El Niño phenomenon.

The earlier ERC resolution said the WESM clearing price would be lowered to P6,245 a megawatt-hour (MWh) or P6.245 per kWh when average prices breach the threshold of P8,186 a MWh or P8.186 a kWh over a 72-hour period. The second layer of price control could cut average power spot market rates by about 18.4 percent, ERC said, citing studies.

The secondary price cap would apply until average prices fall below the threshold. “An hourly evaluation of possible lifting of the secondary price cap shall be in place once the same is imposed,” ERC said in the resolution.

While the secondary cap is in effect, oil-based plants are entitled to recover additional compensation if the secondary price cap is not enough to cover the fuel and operations and maintenance cost of the facility. Claimants must submit supporting documents to WESM operator Philippine Electricity Market Corp. (PEMC) to be able to recover the cost difference.

The Department of Energy has made several announcements warning that power supply would be tight in Luzon next summer, especially in April, although it was unlikely that there would be power outages. ERC said market reports showed a weekly increase of at least 20 percent in WESM prices from Feb. 24 to March 23. On the average, WESM prices for that week was 164 percent higher than the previous week, ERC said.

The WESM is designed such that Manila Electric Co. (Meralco) and other buyers could get additional supply whenever electricity demand was higher than what the distribution utility contracted from power plant operators. Existing rules prioritize power suppliers with the lowest price offers for electricity buyers. However, the price paid is based on the last offer made to meet the demand, although a ceiling (called the “bid cap” or “price cap”) is set.

ERC earlier sought comments from “interested parties” on the proposed resolution and the deadline for sending feedback was on April 22.

Price spike

Tight power supply and high WESM prices resulted in a record generation charge hike of P4.15 a kWh in the December 2013 bill of Meralco’s customers. Noting the impact of the Malampaya maintenance shutdown and WESM price spikes amid tight power supply, Meralco sought a rate increase of P4.15 a kWh. However, various groups questioned the rate surge and on Dec. 23, 2013, the Supreme Court issued a temporary restraining order (TRO) that in effect kept generation rates steady at P5.67 a kWh for the billing month of December.

On Dec. 27, 2013, regulators temporarily set a lower price cap on WESM trades (P32,000 a MWh or P32 a kWh from the previous P62,000/MWh or P62/kWh) while further studies are conducted to prevent future power rate spikes. The new ceiling was to be in effect until the issuance of a new offer price cap, which was originally said to be “not later than 90 days” from the issuance of the joint resolution. The deadline has since been extended by another 60 days.

In January 2014, Meralco said it decided to maintain the P5.67 a kWh in generation cost to avoid another price surge even though power generation costs—again partly due to WESM price spikes—were still high.

In a March 3 order, ERC told WESM operator PEMC to recompute “unusually high” and “unjustified” spot rates that affected the billing months of December 2013 and January 2014 for customers of Meralco.

On March 18, PEMC cut WESM rates for the months in question by nearly 80 percent. PEMC issued a new bill for Meralco’s December 2013 supply month, which was reflected in customer bills for January 2014. PEMC did not bill Meralco for the supply month of November, which was to be reflected in the December 2013 Meralco bill. Meralco could not yet bill customers for the rate increase in the billing month of December due to an extended Supreme Court order barring the rate hike collection for Meralco customers.