Energy Econ 11: On the Power Rate Hike

Below are my comments in one thread in Government andTaxes, Liberty and Responsibility facebook group, about the ongoing  debate on electricity  rate hike.

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January 12-16, 2014

(1)  Bobi Tiglao (he is in this list) has implied that there should be more government intervention in the power sector, like adopting the Singapore model of vesting contracts.

About the proposal by Cong. Evardone to give the President "emergency powers", Speaker Belmonte has an answer to it: The President is not even asking for it. It's a non-issue, but some legislators, some media can sensationalize it to a big issue.

Take note guys, there WILL be rotating brownouts this coming summer 2014 in Luzon including M.Manila, then another set of brown outs in summer 2015, most likely until summer 2016. The big power plants will come online by 2017 and 2018.

The main problem is in the power generation sector, not in transmission (via NGCP) or in distribution (via Meralco, other electric coops). Some days in 1st week of December 2013, last month, up to 3,800 MW of power was offline due to scheduled + unscheduled shutdowns. Forced shutdowns occur mostly in power plants that are more than 20 years old.

(2) I do not think that the left, the socialists and the pro-nationalization are winning the public debate to re-nationalize power generation and distribution. Government is the most un-trustworthy institution in the country, or even in almost all countries. People are complaining of corruption left and right, from Executive to Legislative to Judiciary, from local to national governments, from armed to non-armed units, and you give heavy political power and control of the important electricity system to the government?

The worst thing that can happen is frequent brown outs. Like what they have in Nepal, N. Korea, and to a certain extent, in Mindanao. People are willing to pay a high price just to have electricity, that's why they buy more expensive gen sets running on expensive diesel. Or the cost of frequent fires because of too many candles is something that the public will hate. A rise of P4/kWh for one month, and perhaps another rise the next month, then back to old rates the next month, is not enough justification for the public to be hoodwinked to the propaganda of the left and socialists.

(3) The typical "nationalize, socialize" argument from the Freedom from Debt Coalition (FDC), no new argument, no studies presented, just press conference.

From interaksyon.com, January 13, 2014,

Repeal of Epira, public control of power industry are best solutions to power crisis – FDC

This group btway cannot advocate freedom from borrowings policy. Only spend-tax-borrow, then demand freedom from debt later.

(4)  "Let foreign power companies compete with our own power producers and distributor. For the leftists and protectionist Centrists, a free power sector is a radical solution. I agree, freeing not only the power industry but the whole protected economy is a radical solution, but this is exactly what we need if we are to survive, both politically and economically."

-- VincentonPost,  January 14, 2014

A Free Power Industry for Cheaper Electricity

(5) Politicians and legislators tend to have very parochial minds. For any problem, to them the solution is more politics, more government. Can any politician put up a power plant in one month or one year? The main problem here is not enough new power plants. Many are old, bought from NPC, 20 yrs old, 30, 40 yrs old. Some would break down from time to time. 

From abs-cbn news, January 14, 2014
Trillanes files bill giving PNoy emergency powers minus 'bad' provisions

Instead of asking what government should do, they should ask what government should NOT do, like not imposing too many taxes, fees, royalties, permits, other regulations and restrictions to new power plant projects.

Pilipinas Forum 25: On Oilex and Proposed State Monopoly in Oil Trading

These are the exchanges more than 11 years ago and the official position paper that we issued on the proposed National Oil Exchange Commission, a government monopoly corporation on oil trading. As usual, get your favorite snacks and drinks, this is 31 pages long. Enjoy.
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Pilipinas Forum

On Oilex and Government Monopoly of Oil Trading

August-September 2001 2000

Dear Noy,

Initially, Cong. Garcia said the OilEx was patterned after the California eletric system, only latter did he start saying that it was patterned after the PEPEX...

and you see noy, it's more than just the bureaucratic inefficiency it will breed, it's also about the INAPPLICABILITY of the proposal...

1. The oil industry does not operate on a GRID system

Independent suppliers of electricity in the State of California or any of its contiguous states could supply electricity anytime and in various quantities (as long as their capacity permits) as transmission of their product throughout the state by the press of a button, such that bidding may take place on a hourly basis and that delivery of the product after bids is ensured.

Unlike an electric grid system, however, where electricity may easily be transmitted instantaneously anywhere within the grid, oil comes from different sources around the world and would take months and before it reaches our shores. The bigger oil tankers have a maximum rated speed of 16 to 18 knots, such that a tanker leaving Venezuela could take three months to reach our shores. Also, it should be noted that California buys its electricity not only from the lowest bidder, but buys only a majority of its supply for a given time from the lowest bidder. It is interesting to note that California still buys from the other bidders on a pro-rated basis, depending upon their proximity to the lowest bid. This is one reason why California was able to stabilize and even bring down the prices of electricity in their area because price competition between the participating bidders were intensified thereby resulting to lower prices.

In the case of the NOEC, it bids out its oil requirements monthly, and this is a totally different, if not, a precarious situation because what will the NOEC exactly do? Anticipate demand monthly? There is no clear mechanism how the NOEC or the DOE will do this and the prospect of fuel shortages occurring isn’t too remote.

The idea that the price of our supply may go to the lowest bidder will not be guaranteed because the NOEC will only have a day to approve the bids. What would happen if a day after bidding the prices of world crude oil immediately goes down? Prices in the world market change daily, even hourly, and fluctuates widely (ANNEX 1b). Still, the best price stabilizer is the presence of competition which has continually checked domestic oil prices despite increasing crude and product prices in the international market.

Also, the measure’s plan to tap the spot market (this is where the government will ideally get the cheapest price) also poses a number of problems, specifically on the cost and time of delivery and the quality of the commodity ordered. For all we know, we might end up spending more processing poor quality Chinese crude! Take into consideration that soon enough power generation plants will be requiring “sweet crude,” or the best quality crude, to conform to air emission standards under the Clean Air Act.

2. Suppliers of crude oil are located in different areas of the world

The Philippines comprises less than ½-percent of the world’s crude oil consumption and it is difficult to presume that we precede others in the sellers’ order of preference. We should always remember that we’re at the bottom of the hierarchy of importance as far as the distribution of crude oil supplies is concerned. The demand for crude oil is highly volatile, though cyclical, such that during the month of October, Europe tries to buy all the oil it can get its hands on, and that US demands for the product traditionally rises in the months of March and April. So how sure are we that we can get a steady supply from the world during these months. It is said that during the Gulf War, the Big 3 have to literally beg to crude oil suppliers the world over to supply them with the commodity. Should the Philippines bid out its crude oil requirements to the world on a monthly basis, wouldn’t it be hard to guarantee that supplies would reach the country on time save when Singapore, who is the closest exporter of crude oil to the Philippines, win out the bid every time.

3. The supply of world oil, as the bill admits, is cartelized.

One irony in the proposed measure is that while it recognizes that a monopoly/ oligopoly/ cartel in world oil supply exists, it fails to subscribe to the fact that the problem of rising oil prices in the country is not a domestic issue, but an international one. If Rep. Garcia vehemently protests against the cartelization of the world supply of crude oil then establishing a NOEC is NOT THE SOLUTION because prices in a cartelized environment will always remain the same. If Rep. Garcia is dead serious about government intervention to augment the problem then maybe it would just be more practical, and less expensive, if government would just implement another subsidy program to deter any oil price hike. But is this not going a step back back?

So what lowest bidder are we then talking about? We should remember that it’s a seller’s market out there, and that OPEC and non-OPEC countries shall and will always sell its product to those who can pay more, like Japan, the US, and the EU. And if we think that the prices of crude oil from non-OPEC countries is cheaper then we should think again. Their prices have historically been the same! What oil producing economy in its right mind would sell its crude oil at a price lower than the OPEC’s when the demand for the product have always been continually high (remember that oil is price inelastic, in the long term, at least)?

To say that what worked with power industry in California will work for the oil industry in the Philippines is downright oversimplification of the problem and of the solution. We cannot get away that easily. Electricity, given that there is a critical amount of power suppliers could be available anytime, anywhere. But, oil, sad to say, could only be available from a limited few (about 40 suppliers the world over) and that the delivery of the said commodity is subject to so many variables (i.e. weather disturbances, political instability, or any other acts of God).

hope this adds to the discussion...

- Poch Bermudez

Hey Poch,

This is interesting. Actually I'm not so familiar about the nitty-gritty of the debate about this oil exchange of Cong. Tet Garcia. My disagreement with the proposal is basically on its economic theory and principle: it's again back to regulation. Government regulation accdg. to theory and experience, will always result to inefficiency (& corruption) if the subject of regulation is not a "public good", if there is no "market failure", and no "externalities" involved. Thus, if these things are not present, government should NEVER come in to intervene or regulate.

Thus, unlike the provision of national defense or traffic lights, where no private businesses will dare produce and expect to make profit, oil retailing is a purely private good where private businesses – in competition with one another - will provide and make profit in the process.

- Nonoy Oplas