ANNEX “1” Republic of the Philippines ENERGY REGULATORY COMMISSION San Miguel Avenue, Pasig City IN THE MATTER OF THE PRICES IN THE WHOLESALE ELECTRICITY SPOT MARKET (WESM) FOR THE SUPPLY MONTHS OF NOVEMBER AND DECEMBER 2013 AND THE EXERCISE BY THE COMMISSION OF ITS REGULATORY POWERS TO INTERVENE AND DIRECT THE IMPOSITION OF REGULATED PRICES ste THEREIN WITHOUT PREJUDICE TO ‘=i AY THE ONGOING INVESTIGATION ON BOSABE NM THE ALLEGATION OF ANTI- COMPETITIVE BEHAVIOR AND POSSIBLE ABUSE OF MARKET POWER COMMITTED BY SOME WESM ogg ae ee PARTICIPANTS Date: HAR) 6 20% pea eae Ue eee 7 tae ORDER Preface The Commission is again presented with a case that calls for the exercise of the State's police power for the general welfare of society According to the widely accepted social contract theory developed by Thomas Hobbes, John Locke, and Jacques Rousseau the State was established mainly for the protection of the well-being and the property rights of the people. Thus, the Energy Regulatory Commission as a regulator, acting for and on behalf of the State, derives its authority to intervene in the market when the general welfare of the public is at stake such - as in cases of market failures, externalities and provision of public/social good, among others. Aside from the police power of the State that it may rely upon, an action taken by the Commission may be succinctly moored on Section 6 of Atticle XII of the Philippine Constitution which states that: : Section 6. The use of property bears a social function, and all economic ‘agents shall contribute to the common good Individuals? and. private groups, including corporations,ERC CASE NO. ORDER) March 03, 2014 Page 2 of 33 Section 6. The use of property bears a social function, and all economic agents shall contribute to the common good Individuals and private groups, including _ corporations, cooperatives, and similar collective organizations, shall have the right to own, establish, and operate economic enterprises, subject to the duty of the State to promote distributive justice and fo intervene when the common good so demands. (Underscoring supplied) Thus, the Commission, under certain exceptional’ circumstances, may exercise “its affirmative duty to eliminate the excesses and injustices that are the concomitants of an unrestrained industrial economy.” At the outset, it may be recalled that in its Order dated January 30, 2008 in ERC Case No. 2006-080 RC (In the Matter of the Resolution By the Board of Directors of the Philippine Electricity Market Corporation Directing the Adjustments of Settlement Prices in the Wholesale Electricity Spot Market), the Commission set the WESM settlement prices at the National Power Corporation Time of Use (NPC-TOU) rates for September and October 2006 WESM supply months ‘in the exercise of the Commission's aulhorily lo intervene for the greater interest of the industry and the consumers.” The Electric Power Industry Reform Act (EPIRA) is a major milestone in the history of the energy policy reforms in the Philippines. The law calls for, among other things, the restructuring of the electric power industry's generation, transmission, and distribution sectors, the privatization of former monopoly owned assets, and the unbundling of tariff rates. Equally important is the law's mandated creation of a competitive electricity market that would pave the way for more reasonably priced electricily rates and ensure electticity supply and reliability. Along with — the Philippine Department of Energy, the Philippine — Energy Regulatory Commission (ERC) plays a ctitical role in carrying out the intent of the law to safeguard competition, protect the consumer and investor welfare, and ensure the highest standards of technical and financial performance from all industry players.” “One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It established a new policy, legal structure and regulatory framework for the electric power industry Chief lustice Resuato Coumission. etal € ‘1 5.2004 Page 1, Introductory eof Techie Passer Markets. Mares by the Acadenry for Paueational ond, yweysarerd fr the DevelopmentERC CASE NO. ‘ORDER March 03, 2014 Page 30f 33 The new thrust is to tap private capital for the expansion and improvement of the industry as the large government debt and the highly capital-intensive character of the industry itself have long been acknowledged as the critical constraints to the program. To attract private investment, largely foreign, the jaded structure of the industry had to be addressed. While the generation and transmission sectors were centralized and monopolistic, the distribution side was fragmented with over 130 utilities, mostly small and uneconomic. The pervasive flaws have caused a low utilization of existing generation , capacity; extremely high and uncompetitive power rates; poor qualily of service to consumers; dismal to forgettable performance of the government power sector; high system losses; and an inabilily to develop a clear strategy for overcoming these shortcomings Thus, the EPIRA provides a framework for the restructuring of the industry, including the privatization of the assels of the National Power Corporation (NPC), the transition to a competitive structure, and the delineation of the roles of various government agericies and the private entities. The law ordains the division of the industry into four (4) distinct sectors, namely: generation, transmission, distribution and supply. Corollarily, the NPC generating plants have lo privatize and its transmission business spun off and privatized thereafter, 3 Jurisprudence has consistently ruled that with the restructured power industry, the: ERC has been vested, aside from its traditional rate fixing functions, the task to exercise expanded powers that includes promotion of competition to enhance the inflow of private capital and broaden the ownership base of the power generation while at the same time ensuring that the interest of the consumers are protected, Certainly, this amalgam of mandates present a challenging role for the regulators given that the interests of both may at some instances clash ~ from the consumers point of view, an affordable cost for electricity as opposed to the other spectrum, an investor should be afforded as well a fair return for its capital infusion. Hence, at best, the regulators must always approximate fairness for both the consumer and the investors as. this is what the law has ordained the ERC to perform. It is in this context that the ERC’s actions must inevitably be measured. An action taken by the regulator partakes a long view and far exceeds the exigency of the times, Thus, despite the criticisms hurled upon it for purportedly dawaling in its response to the spike in the electricity prices in the spot market during the Malampaya shutdown, the ERC must exercise ils powers with thaae 1 * Freedoms fram Debt C 1 G.R, No, KGTL3, 1S June 20041ERC CASE NO._ ORDER Marcl 03, 2014 Page 4 of 33 circumspection and prudence lest its hasty action create a backlash whose effects may be felt not only today but in the years to come. Its action on the matter at hand takes into serious perspective the policy of the stale under Section 2 of the EPIRA which reads as Sec. 2. Declaration of Policy. - It is hereby declared the policy of the State: (a)To ensure and accelerate the total electrification of the country; (b)To ensure the quality, reliability, security and affordability of the supply of electric power, (c)To ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products inthe, ; global market; (d)To enhance the inflow of private capital and broaden the ownership base of the power genetation, transmission and distribution sectors in order to minimize the financial risk exposure of the national government; (e)To ensure fair and non-discriminatory treatment of public and private sector entities in the process of restructuring the electric power industry, (f) To protect the public interest as it is affected by the rates and services of electric utilities and other providers of electric power; (g)To assure socially and environmentally compatible energy sources and infrastructure; (h)To promote the utilization of indigenous and new and renewable energy resources in power generation in order to reduce dependence on imported energy; (i) To provide for an orderly and _ transparent privatization of the assets and liabilities of the National Power Corporation (NPC). bie ‘ERCCASENO.__ ORDER) March 93, 2014 Page 5 0f 33 (j) To establish a strong and purely independent tegulalory body and system to ensure consumer protection and enhance the competitive operation of the electricity market; and (k)To encourage the efficient use of energy and other modalities of demand side management In fleshing out its mandate to ensure consumer protection and promote competition in the electricity market, ‘the Commission promulgated in 2008 its Competition Rules and Complaint Procedures prescribing the manner through which it will investigate possible violations of rules on anti-competitive behavior and/or abuse of market power, in order to protect the public, interest Amidst the allegations that a possible anti-competitive behavior and collusion transpired in the wholesale electricity spot market during the supply months of November and December 2013, the Commission constituted the Investigation Unit (IU) uncer its Competition Rules. The IU conducted several hearings where the participants in the market, the market operator, system operator, the Department of Energy and Meralco were called upon to shed light to what transpired in the market which led to the price hikes. Accordingly, in issuing the Order containing the regulated rate, the Commission significantly took into account the partial results of the findings of the IU, which, as earlier stated, were reached after investigative hearings were held Factors Leading to the Price Hike A number of factors caused the aberrant prices in WESM in the supply months of November and December 2013, These same factors also provide basis for the Commission to exercise its “affirmative duty to eliminate the excesses and injustices that are the concomitants of an unrestrained industrial economy."* The Commission takes this opportunity to put forward its observation that there has always been a lightness of supply in the market given that it cannot be said that the market has matured to be considered a fully competitive one, Reasons for not attaining a fully competitive market may be rooted in the market itself which may be characterized as oligopolistic. tne in Freedom [rom Debt Coalition (FOC), et al vs. Energy Regulatory onvmission (ERC), et al, G-R. No. 161113, June 95, 2004ERC CASE NO. ORDER/ March 03, 2014, Page 6 af 33 From the time when government had monopoly over the generation sector till today where there are four major players in the market, a tightness of supply despite its privatization is still felt Notably, there has been a consistent increase for the demand for power through the years. From 2001 to 2013, the demand for electricity increase by 2,659 MW within the Luzon Grid while no corresponding substantial increase in the supply. In fact, the new construction of base toad power plant for the same period provided only 652 MW of installed capacity. For this reason, it canbe said that supply is highly inelastic relative to the increase in demand given the number of suppliers In a nutshell, the Investigating Unit's (IU) preliminary report highlights the tight supply situation that prevailed that is altributable to the following 1. Reduction in capacities of natural gas plants due to the Malampaya shutdown; 2. Plant outages, whether planned or unplannediforced 3. Unavailabilily of the HVDC transmission line to augment supply in Luzon 4. Capacities not offered in the market, and 5. Increase in demand during the shutdown. By way of background, on December 5, 2013, the Manila Electric Company (MERALCO) sought the Commission's clearance to stagger collection of its generation costs for its November 2043 supply month. Said supply month covers the period October 26, 2013 to November 25, 2013. On December 9, 2013, MERALCO presented before the Commission the details of its November 2013 generation costs. In its presentation, MERALCO attributed the increase in ils November 2013 generation costs to (i) the shutdown of the Malampaya Gas Plant which supply fuel to the Ilijan, Sta, Rita and San Lorenzo Combined Cycle Power Plants and (ii) the planned and forced outage of other generating plants, which it alleged caused the prices in WESM to increase due to tightness of supply. MERALCO declared that its generation charge of Php9.1070/KWh_for its December 2013 billing would be higher than both the Php5.67/kWh it billed the previous month and its inilial projected generation charge of P7.86/kWh for its December 2013 billing On December 9, 2013, the Commission issued a letter giving clearance for MERALCO to stagger collection of its generation costs for its November 2013 supply month, Specifically, MERALCO wasERCCASENO. ORDER) March 03, 2014 Page 7 of 33 authorized to implement a generation charge of PhP7.67/kWh in its December 2013 billing and (A) add to its calculated generation charge for February 2014 billing a generation charge of PhP 1.00/KWh and (B) the balance of its deferred generation costs for November 2013 billing month in its generation charge for March 2014 L Nevertheless, in the same letter addressed to Meralco, the Commission underscored that - ‘the foregoing should not in any manner be constitied as confirmation of MERALCO’s generation costs incurred in November 2013, which shall remain subject of the confirmation and post-verification proceedings in accordance with the applicable ERC resolution on the matter.” On December 12, 2013, the Licensing and Market Monitoring Division (LMMD) under the Market Operations Service (MOS) of the Commission conducted an inspection of the 500 MW San Lorenzo Generation Plant. Further, from December 17-18, 2013, LMMD conducted inspections on six (6) other plants which were on planned and/or forced outages during the Malampaya shutdown. Said plants are the a) Pagbilao coal-fired plant, b) Quezon Power coal-fired plant ¢) lian combined cycle natural gas plant, d) SEM-Calaca coal fred plant, e) GNPower, coal-fired plant, and the 1) Masinloc coal-fired plant. The Sual coal-fired plant was subsequently inspected 0” January 8, 2014 Also on December 12, 2013, the Philippine Electricity Market Corporation (PEMC) through its Market Assessment Group (MAG) made a preliminary presentation on MERALCO's exposure ity the WESM from October 26 to November 25, 2013. The MAG highlighted in ils Report certain market conditions such as non-offer of certain plants and MERALCO’s exposure to the WESM, particularly curing the third week when MERALCO's WESM transactions accounted for almost twenty percent (20%) of its weekly volume and accounted fer almost fifty percent (50%) of its WESM bill for November, The presentation also showed a snapshot of the marginal price for all the trading intervals (744 intervals) for the period October 26 to November 25, 2013 and disclosed that the price offer cap was reached on several occasions. On December 13, 2013, a tripartite meeting attended by the Secretary of the Department of Energy (DOE), Members of the Commission, and the President of PEMC was held. In said meeting, the parties agreed to coordinate actions regarding possible market abuse or collusion among industry participants and the review of potential changes in the WESM Rules On December 17, 2013, the Commission directed PEMC to a) submit the results of the investigative study conducted by theERCCASENO. ORDER) March 03, 2074 Page 8 of 33 latter's Market Surveillance Committee (MSC) on possible anti- competitive behavior and/or market power abuse, b) allow the Commission unimpeded access to market records, and c) submit daily Market Operations Report On December 20, 2013, another tripartite meeting was, conducted during which the roles of the DOE, the Commission, and PEMC were delineated in accordance with the provisions of R.A. No 9136 (EPIRA). Consistent with Sections 43 and 45 of the EPIRA, the Commission launched its investigation on possible collusion or market power abuse during the Malampaya shutdown. On December 23, 2013, PEMC submitted its preliminary data for the petiod October 26 — November 25, 2013. Likewise, the National Grid Corporation of the Philippines (NGCP) made a presentation to the Commission regarding the supply situation for the same petiod. On December 26, 2013, the Commission constituted the investigatory Unit (IU) pursuant to Rule 20 of the Competition Rules and Complaints Procedure. Upon constitution of the IU, all documents and data furnished by PEMC and NGCP were forwarded to the 1U On January 7, 2014, the 1U issued an Order setting a clarificatory hearing on January 10, 2014 on the data and records submitted by PEMC and enjoining PEMC to send representatives who can address the IU's clarificatory questions. On the same date, the IU requested PEMC to provide additional data, consisting of the name of generator, plant type. installed capacity, bid offers, quantity offers, quantity _ not offered, metered quantity, bilateral contract quantity, spot quantity and total trading amount for each participant on a per day and per trading interval basis. PEMC submitted said data to the IU on January 13; 2014 During the January 10, 2014 clarificatory hearing, PEMC made an updated presentation on the generator and market situation for the period covering October 26, 2013 to December 25, 2013, In the course of the hearing, the 1U directed it to submit an updated MAG Report to cover the said period. Likewise, the IU directed it to submit the one-year historical data on trading offers of the marginal plants whose clearing prices during the affected period are at least P10,000/MW. From January 24, 2014 until February 26, 2014, as part of its information gathering under Section 2, Rule 20 of the CompetitionERC CASE NO. ORDER) March 03, Page 90633 Rules and Complaint Procedure, the IU conducted the several hearings! conferences attended by representatives of the following WESM paiticipants: (1) Power Sector Assets and Liabilities Management (PSALM), (2) Therma Mobile, Inc. (TMO), (3) Manila Electric Company; (4) San Roque Power Corp.; (5) SN Aboiliz~ Magat, Inc.; (6) AN Aboitiz-Benguet, Inc.; (7) NGCP, (8) Strategic Power Development Corp , (9) Panasia; (10) Sem Calaca, (11) 1590- EC; (12) Vivant Sta. Clara Northem Renewables Generation Corp :: (13) Udenna Management Resources Corp.; (14) Therma Luzon, Inc.; and (15) Kepco-llijan On February 13, 2014, the IU also received the DOE's Report on Observations te: Substantial Increase in {he Power Generation Cost during the 2013 Malampaya Turnaround containing its own assessment of what transpired during the Malampaya shutdown Afier gathering all the pertinent data from the DOE, PEMC, NGCP, and the trading participants in the WESM, the IU came out with preliminary findings and recommendations on February 27, 2014 insofar as the WESM operations during the supply months of November and December 2013 Supply Situation The IU preliminary report confirms the MAG findings as stated in its Market Situationer on the Malampaya Gas Facility Maintenance Report covering 26 October to 25 December 2013 (MAG Report). According to the MAG, a “tight demand and supply situation’ existed even before the shuldown of the SPEX Malampaya Onshore Natural Gas Plant The MAG report highlighted that only 6,595 MW of capacity or 53% of the total 12,500 MW WESM registered capacity was made available in the Luzon. Capacity dedicated to ancillary, on the other hand, totaled 738 MW, while outage capacity totaled 2,337 MW. The rest or a total of 2,315 MW were capacities not offered in the market Below is a table showing the supply profile in Luzon for the billing period covering 26 October 2013 to 25 December 2013 Table 1 [ Average, | Effective j Ou age Capacity Capacity | Ancillary Not Schedule mw | SupplyERC CASE NO. ORDER/ March 03, 2014 Page 10 of 33 Source: Market Situationer (Oct. 26-Dec. 5, 2013) by Mayket Assessment Group of PEMC Reduction in Capacities of Natural Gas Plants and Plant Outages The MAG Report noted a higher level of forced and unplanned outages during the period of the Malampaya shutdown as compared with the outages under the 2013 Grid Operating and Maintenance Program (GOMP) of the NGCP, The LMMD’s inspection report submitted to the Commission confirmed this. During the 1° week of Malampaya shutdown, specifically the period of November 11 to 17, 2013, capacity not available to the system due to outages (planned, un-planned and forced) jolaled 2,148.76 MW composed of the following: a) San Lorenzo Modules 50 ‘and 60 at 254.15 MW each; b) Pagbilao unit two at 375.70 MW, c) GN Power unit two at 325.805 MW, d) Sem Calaca unit one at 300 MW; and e) Ilijan Block two at 638.95 MW. On the 2™ week of the Malampaya shutdown covering the period November 18 to 24, 2013, there was a slight improverrient in available capacity, as there was a slight reduction in the total capacity ‘on outage as compared to the outage capacity during the 1" week of the shutdown, Capacity on outage totaled 1,848.76 MW, 14% lower than the 1° week, due to the completion of the maintenance of Sem Calaca unit 1 (300 MW) on November 15, 2013 On November 29, 2013, however, unit 1 of the Pagbilao coal fired power plant with a capacity of 375. 70 MW was on forced outage due to boiler tube leak and the same was synchronized tothe grid only on December 12, 2013, Thus, capacity on outage increased by an additional of 375.70 MW as compared to that during the 2" week of the shutdown, The capacity on outage during the 3"! week of Malampaya shutdown (November 25 to December 1, 2013) totaled 2,224.46 MW. The biggest capacity on outage was observed on the 4" week of the Malampaya shutdown with the planned outage of Ilijan Block | with installed capacity of 638.95 MW for the period December 6 to 10. 2013 and the forced outage of Masinloc unit 1 and 2 (330 MW each) ‘on December 4 and 6, 2013, respectively. Based on the inspection conducted by LMMD, Masinloc unit 1 experienced an emergency shutdown as a result of the boiler tube leak of panels 33 and 34. The same unit was synchronized to the grid on December 8 2013 Masinloc unit 2 experienced an emergency outage on December 6, 2013 at 1558H due to Drag Chain Conveyor (DCC) derailment from its sprocket in the ash handling areaERC CASE NO. ORDER) March 93, 2014 Page of 33 The forced outage of Masinloc units 1 and:2 and the planned outage of llijan Block 1 resulted to the biggest loss of capacity in the system totaling to 3523.41 MW during the 4" week of the Malampaya shutdown The table below summarizes the decrease in capacily as a result of the oulages of the several power plants. Table 2 apace oe Decrease in |; Forced Nameplate | Outage _|_|____ Power Plants_|. Capacity November 11 FGP San Lorenzo Mod 50 2 11 (254.15MW) _ 254.15 FGP San Lorenzo Mod 60 |_| (254,15 Mv) __ 254.15 375.70 638.95 |Calaca Unit 1 (300 MW)* __|__. 300.00 GN Power Unit 2 (325.805 LMW) _ November 18 | | FGP San Lorenzo Mod 50 to 24, 2013 _| 1 | (254.15 MW). aL ‘GP San Lorenzo Mod 60 [eee ant] | (264/15 MW) reeeiieetcaee |e ean TEC Paghilao Unit 2 (375.70 eee 2[Mw) _L 375.70 EILCO llijan Block 5 s [NIV jeersiaeseneeeeeer aes eOaeee. ‘GN Power Unit 2 (325.805 sc 4| MW) sbeeasiseeeseees 325.81 eae enact ace Sea seeeeaet 1848.76 Nov 25 to Dec |_| FGP San Lorenzo Mod 5' 4.2013 |i {@sa1smw) 284 ‘5,4 FGP San Lorenzo Mod 60 254 15 MW) 254.15 TEC Pagbilao Unit 1 (375.70 eae cesceeeeede Tp sere eee cetcresertrecetteg 375.70 EC Pagbilao Unit 2 (375.70 MW) 375.70 ~TiEILCO liijan Block 2 (638.95 Mw) | 638.95ERC CASE NO. ‘ORDER! March 03, Page tof 33 Date of E Decrease in | Forced Nameplate | | Outage |_| __—Power Plants} Capacity | GN Power Unit 2 (325.805 ecu eaeeeaeae| 4. See ceno 32581 | (egg |r| ree 2224.46 December 2 to | | FGP San Lorenzo Mod 50 AO, 2013 (254.15 MW) _ 254.15, FGP San Lorenzo ee {254.15 MW) __ |... 254.45 TEC Pagbilao Unit 1 (375.70 : | HM) ET eto On TEC Pagbilao Unit 2 (375.70 | (eesecete | fw) Sa eee KEILCO lian Block 2 (638.95 dw) ee ie 638.95 KEILCO liijan Block 1 (638.95 Z : BNI) eee 638.95, GN Power Unit 2 (325.805 See gee gee ee Masinioc PPCL Unit 1 (330° | __ -330.00 330.00 3523.41 Unavailability of the HVDC Transmission Line During the Malampaya shutdown also, the capacity in Luzon cannot be augmented by capacity from Visayas as the High Voltage Direct Current (HVDC) lines connecting the Luzon with the Visayas grid was non-operational due to Typhoon Yolanda. In any event, the impact on the market of the status of the HVDC line cannot be determined with certainty as demand and supply in the Visayas grid were also curtailed due to the damage caused by the typhoon, as a result of which the Commission ordered the suspension of WESM operations in the Visayas starting on November 8, 2013 Capacities Not Offered Rule 3.5, in relation to Annex A.t.1 of the WESM Rules requires that all plants must offer their full available capacity The “Must Offer Rule” under the WESM Rules requires the trading participants in the WESM to offer the maximum “available” capacity of their plants pursuant to the gross pool concept of energy trading, except if there are justifiable reasons, such as planned/scheduled outage, forced outage, “grid events’ (lineERCCASENO. __ ORDER) March 03, 2 Page 13 0f 33 constraints, maintenance of transmission facilities, etc.), capacity is reserved/scheduled for Ancillary Services and other reasons peculiar to the type of plant (Le. water availability for hydro plants) The MAG reported that during the period of the Malampaya shutdown, there was an average of 2,035.13 MW that were not offered by various plants. During the said period, the average capacity not offered by the hydroelectric power plants constitutes the bulk of the total average capacity not offered at 45. 47% or 925.29 MW. This is followed by the average capacity not offered by the oil plants at 29.92% or 608.9 MW. The average capacily not offered by coal plants stood at 12.42% or 252.77 MW. Table 3 Average Capacity Not Offered During the Malampaya Shutdown Source: Market Situationer (Oct. 26-Dec. 5, 2013) by Markel Assessment Group of PEMC Hydroelectric Power Plants Table 4 ‘Average Capacity Not Offered During the Malampaya Bde Shutdown eae Ave. | Plant | Capacity! % Reason (MW) | __ [Kalayaan GO1 | 164.03 No reason Kalayaan GO2 Kalayaan GO3 Kalayaan GO4 Casecnan | Low wi =a LA eee From Nov. 11 to 27, 2013, 120 MW was withheld with no- Lreason | Low water elevation PantabanganERC CASE NO. ORDER March 93, 2014, Page 14 of 33 ‘Average Capacity Not Offered During the Malampaya Hee _Shutdown Ave. eee Plant Capacity} % ' Reason _(W) Ancillary Service, water Magat 45.84 4.95% | elevation issues and line __.| constraints Low system frequency, under generation due to low water 9 iene 37.35 | 404% | volume and high actual Se eee ee 1 Angat 3.32% | AUX 4 and 6 on planned areieeecL outage [HEDCOR | Unplanned line outage and ow water level elevation |'No reason from Nov 25 to 27; From Nov. 28 to Dec. 11, low 5.16 | 0.56% | jrigation Diversion | Requirement (DR). Unapproved capacity scheduled for Ancillary Binga 3.89 | 0.42% | Service only from Nov. 26 to Dec. 11 From Nov. 11 to Nov. 25, __| there was no reason. The MAG noted that in the case of the hydroelectric plants, "the Jevel of capacity gap varies for peak and off-peak periods averaging at 2.454 MW and 2,046 MV, respectively. The same was dictated by the offer pattern of hydro plants which normally submits more of their available capacity during peak period.” During the Malampaya shutdown, Kalayaan’s average non offered capacity constituted the bulk of the average capacities nol offered in the market at 55.07% or 488,95 MW. According to the MAG Report, PSALM did not offer any reason for the nonvoffer, Casecnan came in next, with non-offered average capacity at 12.47% or 110.72 MW, allegedly due to low water elevation. Pantabangan, Bakun, and Magat followed at 11.08% or 98.36 MW, 7.37% or 65.43 MW and 4.95% or 5.16 MW, respectively, due to various reasons such as Ancillary Service scheduling, water elevation issues, and transmission line constraintsERC CASE NO, ORDERY March 03,204 Page 15 of 33 Oil-based Power Plant Table 5 ‘Average Capacity Not Offered During the Malampaya Shutdown | Ave. Plant Capacity % (MW) Reason Malaya — [578% | Economic shutdown by polic No reason from Nov. 11 to 26; Afterwards, [reason was] either ela 20.80% | check vaive 2, Lube Oil system muna ____| trouble, SC or CC mode. _ No reason, n Nov. 26 to 27; TMO Afterwards, day-ahead and intra- ‘APEC _— |Bauang | _ Afterwards, [reason was] either Enron rll 2.81% | rotor inspection and repair and turbo charger repair; No reason from Dec. 4to6_ No reason from Nov. 26 to Dec. 1 Afterwards, [reason was] charge air cooler replacement or Angat Line constraint Trans, Asia 3.97 0.65% Source: Market Situationer (Oct. 26-Dec. 5, 2013) by Market i Assessment Group of PEMC Malaya Thermal Power Plant During its conference with the IU, PSALM disclosed its standing policy to submit offers for Malaya in compliance with the Must Offer Rule even though the plant is on an open-breaker status, PSALM continued to implement this policy of putting Malaya on an econemir shutdown during the Malampaya shutdown. As result, Malaya effectively withheld an average of 350 MVV from the grid, equivalent {0 57.48% of the total average capacity not offered by the oil plants. Limay Oil-Fired Power Plant Limay followed Malaya and accounted for 20.80% of the total average of capacity not offered by the oil power plants during the Malampaya shutdown or 126.68 MWERC CASE NO. ORDER/ Mar Page 6 of 33 03 2014 Other Oil-Based Power Plants Three (3) other oil-based plants were recorded as not offering! their available capacities. TMO, APEC and Bauang Plants registered average capacities not offered at 9.16% or 55.7 MW, 6.24% or 38.02 MW and 2.85% or 17.36 MW, respectively, out of a total 608.9 MW average capacity not offered by oil plants, i Coal-Fired Power Plants Table 6 Fig Eee Heer aeata de eeteeeeeae eg ONIMIMOWN EE im | Plant | Reason aera jeak, feeder problem and load stabilization (Note: on Dec pete 24 0.94% |8 from intervals 15 to 18, 302 | | MW. was withheld with not reason) Turbo charger maintenance and loading problem Problem w/ opening of turbine Masinloc », | governor load (Note: 315 MW Got 6.69 | 2.62% | Was withheld on Dec. 8, 2013, eee ___ [interval 23, with no reason) | | Limited capacity of pulverizers Masinloc 4, |and D (Note 315 MW was Go2 5.33 | 2.08% | withheld with no reason on Segoe tere se rand 8) | furnace temperature and P. ces bag filler differential pressure of Un eee eee : \Valve tests, mill changeover, | | poor coal quality (Note: on Dec Sual \ 44, 2013 from intervals 4 to 7, CFTPP 10.17 | 3.98% |362 MW was withheld due to \Got | heat rate tests and from. intervals 8 to 11, 224 MW was withheld _|forthe same reason) | Valve freedom tests (Note: on 1.99 | 0.78% |Dec. 8, 2013 on intervals 4 and : ~____ {8,297 MW was withheld normal vibration at primary 106.49 | 41.64% | fan and abnormal sound on feeder Calaca GotERC CASE NO. ORDER/ March 03, 2014, Page 7 0133 El yy ~lisolated leaking and “high alaca i y, |pressure heater (Note: on Dec G02 50.87 | 19.77% 17 "5943, on intervals 9 and 10, nf | 140M was withheld i , On Nov. 17, 2013 on iniervals 15 Ce 0.55 | 0.22% |tol7, 172 MW was withheld with cor | no reason _ inspection” for high marginal | bearing vibration and pump alignment, boiler feed pump load Pagbilao ,, |iesis and super heater safety GO2 24.86 | 8.55% | Jaive tests (Note: On Nov. 26, | 2013, between intervals ‘4 ‘and 15, 382 MW was withheld with | no reason) _ 7 147% |No reason Out of the total capacity not offered by coal-fired power plants during the period of the Malampaya shutdown, the combined average capacity not offered by Calaca was highest at 62.14% oF 157.06 MW Tie reasons given for the non-offers were abnormal vibrations at the primary fan and sound on its feeder, isolated leaking and high pressure heater. On December 7, 2013, between intervals 9 and 10, Calaca was not able to offer 140 MW. Petron followed Calaca and registered an average capacity nol offered in the market at 16.61% or 41.98 MW due to high furnace temperature and bag filter differential pressure of Unit 2 Pagbilao GO2 registered an average capacity not offered in the market at 2186 NW or 8.65% of the total average capacity nol offered by coal plants during the Malampaya shutdown. Between the intervals 14 and 15 on November 26, 2013, Pagbilao GO2 was unable to offer 382 MW with no submitted reason De mand The MAG Report noted an 8.9% increase in demand a week before the Malampaya shutdown and another 3.3% increase in the 1" wosk of the Malampaya shutdown, The table below shows that the highest average demand was during the 4°" week of the shutdown (November 11 to 17, 2013) at 6,197 MW. Peak average demand, on the other hand, reached a high of 7,074 MW during the week of November 25 to December 1, 2013, while off-peak average demand was highest during the 1°" week of the shutdown at 5,601 Mw.ERCCASENO. ORDER) Marel 03, 2014 Page 8 of 33 Table 7 Priot aMaintenance | After Malampaya | Malampaya (0) Malnitenanicel| is nmciieennce rine venir) Mallon ee Week | Week | Week | Week 1 2 3 4 Dec. | 28- | 4-10 | Nov. | Nov | Nov. Dec. | Dec. | 16 -22| Nov. | 41- | 18- | 25- | 2-8 19-18 3 i; 17 | 24 | Dec: 4 5,548 | 6.444) 5,717 | 5.429 4 | 6, ‘© a HOURS | 6,508 |5,999 | 6,197 | 6,128 | 6.129] 6,011 | 6.288 | 6.101 Source: Market Situationer (Oct. 26-Dec. §, 2013) by Market Assessment Group of PEMC MARKET PRICES * ‘A sampling of trading intervals readily showed that high clearing prices were reached as a consequence of the tightness in supply due in large part to non-offer of capacity by certain plants. For the duration of the Malampaya shutdown, price offers of PhP6O, 500 OOIMWh and above were cleared about fifty-three (53) times and for the period from November 6 to December 12, 2013, price offers of PHPGO. 000.00/MWh and above were cleared about seventy (70) times. WESM registered high ex-ante prices ranging from an average of PhP24, O30/MW in the 1 week of the Malampaya shutdown, PhP16, 2647MW in the 2" week, PhP24, 064/MW in the 3" week and PhP37, 632/MW in the 4" week, Offers even reached the cap at PhP62, 000/MW on several intervals Below are tables showing the weekly Load Weighted Average Price (LWAP) before, during and after the Malampaya shutdown, and the weekly average supply margin for comparisonERC CASENO. ONDER March 03,2014 Page 19 0f 33 Table 8 Malampaya ____| Maintenance Oct. 28 - Nov. Nov. 4 “10 A week before the Malampaya shutd 2013) average effective supply decreased by 2 6.336 MW while demand registered an increase of MW to 5,999 MW, effectively decreasing s\ LWAP during the period of the Malam PhP25, 491.00 and reached week or December 2 to 8, 2013 at experienced a very steep decrease in suppl MW to 88 MW. Decrease in LWAP w: 337 | 247 HOURS | 3,075 | 22,254 | 24,003 | 16, erage Supply N Priorto | Malampaya Maintenance Malampaya Maintenanc ease j-iasistasdl eeseesstnzacsostneesoneeane if | Wee | Wee | Wee | Wee Oct. | Nov.| k1 | k2 | k3 | k4 28— |4-10| Nov. | Nov | Nov. | Dec. a1- | 18- | 25- | 2-8 24 | Dec 88 442 | 385 eae After Malampaya Maintenance Dec. | Dec. | 16- | 9-15.) 22 436 | 1,148 | | After Malampaya Pee ee eee lenance Week | Week | 4 2 4 Dec. | Nov. | Nov | Nov. |Dec.2|Dec.9| 16- 41-17 / 18-24) 25- | -8 | -15 | 22 Dec 1 | 0 5,865 | 10 336 | 26,716 | 9,935 | 4,982 48,846 | 20,306 | 5. | 7,632 15 042 | 3,576 lown (November 4 to 10. 4% from 6,492 MW to 9% from 5,508 upply margin by 66%. paya shutdown averaged its highest weekly average in the 4" PhP37, 632/MW as the market ly margin of 75% from 355 as registered by 60% The and 70%ERC CASE NO. ‘ ORDER) Marel 03, 2014, Page 20 of 33, as supply maigin improved by 394% and 163%, in the weeks December 9 to 15, 2013 and December 16 to 22, 2013, respectively The above movement in the LWAP clearly indicated that prices moved with the demand and supply situation and confirmed the tightness of supply starting the week prior to the Malampaya shutdown. RULING OF THE COMMISSION For purposes of evaluating how the players atthe wholesale spot market behaved during the supply months of November and December 2103, the definition of the relevant market is apropos The definition of the market in the primer on Monitoring and Surveillance of Electric Power Markets aptly squares with the market under consideration -" market is used to define a place where buyers and sellers interact in buying and selling their goods: This interaction between buyers and sellers in the market determines the market clearing price. Buyers and sellers put in bids for how they want to buy or sell at what price. Typically, the price of the last winning bidder selected to meet the demand sets market clearing price that gets paid to all the winning bid sellers."" To create a more competitive market situation, government pursued the privatization of its generating facilities, including its power contracts with Independent Power Producers (IPPs). The EPIRA mandated this for competition to thrive Notwithstanding the privatization of a substantial percentage of the government's generating assets and contracts, it can be said that the market only migrated from a monopoly to an oligopoly situation where a few players or groups of companies dominate the market, In WESM, there remains a concentrated market, thereby making it prone to the exercise of market power by the large generators Market power is "a company's ability to manipulate price by influencing an item's supply, demand or both. A company with market power would be able to affect price to its benefit, Firms with market power are said to be "price makers” as they are able to set the price for an item while maintaining market share. Generally, market power tefers to the amount of influence that a firm has on the industry in which it operates.”° edt 5 supa note U hms sny-erms'n marbet poser asp (ast viewed on March 1.2001)ERC CASE NO. ORDER) March 03, 2014, Page 21 0f 33 During the Malampaya shutdown, the MAG reported that four (4) major participants control the market, namely: San Miguel Corporation (SMC), Aboitiz Power, First Gen, and PSALM. Although the Herfindahl-Hirschman Index (HHI) level was in the range of 1500 to 1800 for the duration of the Malampaya shutdown which indicated moderate market concentration, the HHI level before the shutdown ranged from 1800 to 2500, indicating a high level of concentration The MAG altributed the decrease in the HHI level to the unavailability of SMC's llijan Plant during the Malampaya shutdown: In terms of total metered quantity during the shutdown, SMC's share was highest al 32%, First Gen was second at 18%, and Aboiliz was third at 16%. For the spot quantities, SMC, Aboitiz, and PSALM's shares were 58%, 29% and 18%, respectively. Finally, on the total trading amount, SMC’s share was 44% while PSALM, and Aboitiz’ shares were 25% and 18%, respectively Be that as it may, at this juncture, the Commission is stil completing its findings on the possible abuse of markel power which could have negatively impacted on the prices of electricity in the market. Nonetheless, the Commission takes significant note of the withholding of capacity through the non-observance or breach of the “Must Offer Rule" under the WESM Rules amidst all the plant outages: that occurred Below is a table showing the supply profile in Luzon for the billing period covering 26 October 2013 to 25 December 2013 Table 10 [ Average, | Effective | Outage | Capacity Not | ~ Ancillary __Capacity |__ Offered | Schedule _ eee 656 738 Apparently, the ‘Must Offer Rule" (MOR) has been honored more in its breach by the trading participants at the wholesale spot market and this was underscored by the sheer number of failure to abide with a rule that has been agreed upon being a participant in the marketERC CASE NO, ORDER] March 03, Page 22 of 33, Consistent with the gross pool concept, the MOR requites traders to offer all its maximum available capacity, as defined under the WESM Dispatch Protocol, to provide equal opportunities for all generators, whether with or without contract, to participate in the WESM. It mitigates artificial shortage of supply brought about by capacity withholding, which may drive prices higher. it may be said that the failure to abide with the MOR is closely intertwined with the exercise of market power by trading participants Needless to state, the wrongful exercise of market power adversely affects efficiency, transparency, fair and reasonable pricing and the integrity of the market "ome of the methods of exercising market power Physical Withholding: By not offering,all, or only a part of the generation supply info the market, even though it is available for operation; falsely declaring that the unit is out of service, operating at a level lower than instructed by the Market Operator, 7 Economic Withholding By offering all or part of the generation in the market but bidding it at a high uncompetitive level.” As electricity is imbued with public interest, it is therefore of significant importance that all available capacity is offered into the Aarket. It has, been envisaged that the current MOR scheme offers rare flexibility since the marginal plant has the option to bid al its economic value thru the pricing mechanism while, at the same time, providing comfort to the System Operator of having approptiale available capacity to run the grid securely The Commission has not seen any other rule in the market as Violated as the "Must Offer Rule” of WESM. The non-observanes 16 So rampant that the entire WESM governance structure has perhaps already grown accustomed to encountering it on a regular basis. Even the previous MAG Reports for periods prict to the Malampaye jNutelown consistently pointed to the capacity gaps broughl about by the violation, that in some instances, an entirely separate section of the report would appear under the heading, "Continued Violation of the Must Offer Rule.” Notably, this has been summarized in the Status of Investigation conducted by the Enforcemerit and Compliance Office of the WESM as of January 31, 2014 which contains a litany of 7 Supa Note 4ERC CASE NO. _ ORDER) March 03, 2014 Page 23 0f 33 violations of the “Must-Offer Rule” and non-compliance with the Real Time Dispatch among others.” Furthermore, the Commission saw that a number of trading participants have capacity to supply but did not offer and worse, no teason was even provided for such behavior as shown in Tables 3-6. Such non-disclosure runs counter to the principle of transparency adhered to under the EPIRA Law Cettainly, withholding of capacity justified or not, imposed an aitificial constraint on supply of electricity available to the markel Under the circumstances obtaining when the Malampaya was on shutdown, this created an environment wherein higher offers were practically assured of clearing in the market to the detriment of the Consuming public. This was fairly evident from the way the market participants behaved and the market prices moved during the period in question It behooves the Commission to underscore that the , Malampaya shutdown is not a case of first impression as. its shutdown has been expected to occur but what quibbles is the fact thal in previous years with nearly akin circumstances, prices were nat as spiky as shown by the graph herein below culled from the DOE Report provided to the Commission. (Intentionally left blank) hag oe vest phi s_jnyestizagigns eiled 02 March 2014ERCCASENO. ORDER) March 03, 2014 Page 24 of 33, Luzon Supply-Demand Situation DCC a i ‘RBSEERSBGSERASESEES oe Highlights during Halampaya Turnaround: ‘Average available empacty Isat 8.097 t1¥0 dveragecoattired capacity 's 3431 MV, major power pfants on outages: erate Unit (200 MIN} on freed oulage fram 25 Oet-15 Nov 2013 due fo lor condense” vaLN, Cat ae ch enplannesouloge ton 31 Oct Nev 2013 eve to Excess la of supthoar on vee Nov 2013 ditt bole tube Tank Mi ‘outage ttm 06.08 Nov 2013 due to conveyor problens crane cand MMi) on planned outage tm 28 Sepet 1 Nov 2013. on forced outage fom 12-12 How 2013 di «+ Paghilng Unit 2 (382 R12 an planned outage trom 31 Aug-26 Nov 2013, ‘Avoraganatgas eapactly during Malanpaya Turnaround ts 1,989 MV: een covenza Unit 18 2 aid nol fun (Unt ton planned outage, Unit 2 on forced outage) 1 fjou Block A run at 417 i using Biesdlesel how 11 Novs Gee 2013 1 Stelnite ram at an average of 1,034 MV using condensate during fomeround some: HOSP Dally operation Report Likewise, a close scrutiny of the effective settlement spol prices in 2010 as compared to 2013 reveals that the prices were twice as much. The question that must be pointedly answered is what caused the aberration in the prices in the spot market, when despite the tight supply, the same could stil sufficiently address the demand albeit its peak level Besides, it should be recalled that under similar circumstance In 2010, prices during the shutdown were much lower than those in 3013. Prices in 2013 more than doubled the price of 2010, as shown by the illustration herein-below, to witERC CASE NO. ORDER) March 03, 2014 Page 25 of 33, HISTORICAL MALAMPAYA SHUTDOWN Effective Spot Settlement Prices (ESSP, Php/MWh) se0000 seco Ree Marabi6 = PRBLS $e) 1.0000 0 J, 22November to 16 December 2006- Scheduled Routine Vessels Inspection and Maintenance; 10 February to 13 March 2010 Scheduled Routine Vessels Inspection and Maintenance October 20 to 26, 2014 — Preventive Maintenance Schedule june 8 to 11,2012 ~ Gas Limitation, Natural Gas plants running on half of its capacity: July 13 to 20, 2012 ~ Preventive Maintenance Schedule November 11to December 10, 2013— Preventive Maintenance Schedule anawn ® sau ose Hhansinlesion Congestion In the foregoing context, there could not have been a significant spike in the price in 2013 under normal competitive market condition The significant increase in the market clearing prices could thus Be triggered by non-market factors, despite the "Must Offer Rute” which tesulted to artificial supply shortage attributable to both physical and eoonomic withholding. This is clearly demonstrated by the large capacity not offered on “all hours’ at 2,315 MW. Ik can even be surmised with great suspicion that the trading behavior of the participants is ciucial in the spike of the prices in the market during the period in question, which to this date still being judiciously weighed by the IU. To a great extent if substantiated, this could ikewise be considered as being contributory to the failure of competition in the market In addition, the MAG Report highlighted that only 6,595MW of capacity or 53% was made available in the Luzon Grid compared to the total WESM registered capacity of 12,500 MW. CapacilyERC CASE NO, ORDER) March 03, 2014 Page 26 of 33 dedicated to ancillary, on the other hand, totaled 738 MW while outage capacity totaled 2,337 MW. The rest or a total of 2,315 MW were capacities not offered in the market Having definitely established that the contrived supply shortage impaired the market and this resulted to market failure, it becomes imperative for government to intervene to restore competitive market conditions. Electricity, the same as gas, is a valuable article of merchandise, bought and sold like other personal properly and is capable of appropriation by another. Electricity, aside from being a social and political good, is also and economic good where payment for its use must be exacted because it is a legal, reasonable, and valid consequence of its consumption by a consumer. Be that as it may, it should also be made clear at this point, that the government, through the Commission, exercises the twin functions of ensuring consumer protection and enhance investment climate in the power generation “Market failure occurs when freely functioning markets fail to deliver an efficient allocation of resources. Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits thal the free market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole ih ‘The dispatch schedules and the prices during the November and December 2013 supply months reflected an inefficient allocation Of resources, contrary to the aspirations of WESM. This was brought about by the tight supply condition arising from the “capacity not offered’ along with the participants’ failure to abide with the "Must Offer Rule"--with some of them not providing reasons for such failure. Also noted were exacerbating factors to the tight supply condition such as MERALCO's purchase of additional supply in WESM in anticipation of the MALAMPAYA shutdown and the inability of its supply contractors to meet their obligation as a resull of scheduled plant shutdown and forced outages of various power plants. MERALCO purchases from the WESM for the October and November supply months were at 7.6% and 9.5%, respectively. It is noted that purchases were at 14.1% for the December 2013 supply Month. Hence, MERALCO's additional purchases at the WESM caused a "crowding out effect” in the WESM triggering an upward spike in prices ico Carlos ,G.ft, No, 6295, September 1 1911 te tilen ral aated 2 September 3012 cite af WW ora nevecsmennses an 2 Merch 2004ERC CASE NO. ORDER) March 03, 201 Page 27 of 33, It is important that the payment for such electricity, being a social and political good, remains to be rational. A true market competition results in rational prices where the trading participants are willing to become price-takers as they want to “gel rid of the commodity immediately’ or to be dispatched forthwith, Conversely, whenever there is lack of competition, there may be high pices and other problems, and the government may need fo intervene (0 protect the consumers. One form of government intervention is by regulating the price that the participants may charge. i Precisely, Section 43 (c) of the EPIRA mandates [he Commission to enforce rules that ensures sufficient supply and rational pricing of electricity in the spot market He The lack or failure of competition necessitates government intervention to protect the consumers from unreasonably high market prices as shown by the fact that the bid cap of PHP62,000/MWh Pacame the market clearing price even during off-peak hours, In this case,” regulation is necessary because social and private costs and benefits, and hence incentives, are misaligned." Government intervention is needed if there is a failure in the market to correct any inefficiency and prevent these from happening again. As pointed out by John Stiglitz (2009, Regulation & Failure), “the purpose of government intervention is to address potential consequences thal go beyond the parties directly involved, in situations in which private profit is not a good measure of social impact. Government intervention, in this case, is @ valid exercise of the State's police power and can be done by the regulatory body to which the said power has been delegated and to intervene when {he common good so demands, such as the Commission. After al, the Commission is possessed of vast powers under the EPIRA and its Implementing Rules and Regulations to, among others + protect the public interest as it is affected by the rates and Services of electiic utilities and other providers of electric power, ; + ensure consumer protection and enhance the competitive operation of the electricity market, wT ocor usu edu; Utah State University; University Studies; US. Institutions; Market Fahire © Section 43 (¢). EPIRA Ac nonce the rues and regulations gowering the eperations of the spt amare te vetivities af sn Spe net eperater an ier participants he spe ve. For the pus ewsinb SAGE supply: and rational pricing of electricity eects, Regulation and Fare, New Perspectives in Regafation, exited by Pavid Moss and tofwn Cisternino, The Tobin Project ti. 7ERC CASENO. ORDER) March 03, 2014 Page 28 of 33 = ensure the quality, reliability, security and affordability of the supply of electric power; ; ! = ensure the adequate promotion of consumer interests; and » ensure,the successful restructuring and modernization of the electric power industty Moreover, existing jurisprudence recognizes that the regulation, of rates is an exercise of the Police Power of the State and the State, through the Commission, needs to exercise said power with great flexibility when the need arises, to wit “This Court discussed the nature of rate-reguiation in Republic of the Philippines, represented by the Energy Regulatory Board (ERB). vs. Manila Electric Company (MERALCO), G.R. Nos. 141314 and 141369, promulgated on November 15, 2002 viz The regulation of rates to _be charged_by public ulililies is founded upon the police powers of the Stale and slatutes prescribing rules for the control and regulation of public ulifilies are a valid exercise thereof. When private property is used for a public purpose and is affected with public interest. il ceases to be juris privati only and becomes subject fo regulation. The regulation is to promote the common good. Submission {o regulation maybe wilhdrawn by the owner by discontinuing use; byt as long as use of the property is continued. the same is subject fo public regulation. In regulating rates charged by public ulililies, the State protects the public against arbitrary and excessive rates while maintaining the efficiency and quality of services rendered. However, the power to regulate rates does not give the Slate the right to prescribe rales which are so low as to deprive the properly performing the service and one that is reasonable fo the public for the services rendered. The fixing of just and reasonable rates involves a balancing of the investor and the consumer interests. It is evident that rate regulation is one of the more important aspects of public utility regulation I allows the regulator sufficient power to protect consumers from unreasonable charges while ensuring that the ulilily is able fo maintain a viable business."ERC CASE NO. ORDER/ March 03, 2014 Page 29 of 33, “xxx Electric power generation and distribution is a traditional instrument of economic growth (hat affects not only a few but the entire nation. It is al important factor in encouraging investinent and promoting business. The engines of progress may come (oa screeching halt if the delivery of electric power ig impaired. Billions of pesos would be lost ‘as a resull of power outages or unreliable electric power series. The Stale thru the ERC should be able_{o exercise ils police power wilh great flexibility when the need arises, xxx"? (Emphasis : y when the need arises supplied) Chief Justice Reynato §. Puno in Freedom from Debt Coalition described the immensity of police power in relation to the delegation of powers to the Commission and its regulatory functions over electric power as a vital public utility, to wit Over the years, however, the range of police power was no longer limited to the preservation of public health, safety and morals, which used to be the primary social interests in earlier times. Police power now requires the Stale fo “assume ar ‘affirmative duly to eliminate {he excesses and injustices that are the concomilanis of an unrestrained industrial economy." Police power 'S now exerted "lo further the public welfare — a concep! as vast as the good of sociely ilsell.” Hence, "police power is but another name for the govemmental authority to further the welfare ‘of sociely that is the basic end of all government.” When police power is delegated to administrative bodies.with regulatory functions, its exercise should be given a wide latitude. Police power takes on an even broader dimension in developing countries such as ours, where the State must take a more active role in balancing the many conflicting interests in society. The Questioned Order was igsued by the ERC, acting as an agent of the Stale in the exercise of police power. We should have exceptionally good grounds to curtail its exercise This approach is more compelling in the field of rate-regulation of electric power rates. Electiic © Freedom fram Debt Coalition, supra.ERC CASE NO, ORDER) March yee 30 of 33 3.204 power generation and, distribution is a (radilional instrument of economic growth that affects not ovly a few but the entire nation. It is an important factor in encouraging investment and promoting business. The engines of progress may come {o a screeching halt if the delivery of electric power is impaired. Billions of pesos would be lost as a result of power outages or unreliable elecitic power services. The State thru the ERC should be able to exercise ils police power with great flexibility, when the need atises."° It is relevant to underscore that under Section 6, Article XII National Economy and Patrimony, the use of property bears a social function and all economic agents shall contribute to the common good While power generation is not considered a public ullity operation'’, it is declared by EPIRA to be a business affected with public intetest. The prices charged by a generation company for the supply of electricity are subject to regulation by the Commission in the instances specified in the EPIRA. Section 25 of the EPIRA empowers the Commission to regulate the retail rates, which include the generation component, charged by distribution ullities for the supply of electricity in their captive market based on the principle of full recovery of prudent and reasonable costs. In the exercise of its rale-fixing authority, the Commission is guided by the principles laid down in the EPIRA, such as (a) ensuring transparent and reasonable prices of electricity, (b) the rates must be such as to allow the fecovery of just and reasonable cost to enable the entity to operate viably ‘As power generation is a business imbued with public interest, profit should not be the only concern of the generation companies but rather, the same, must be tempered by its obligation to society as ithas been accorded by the state to serve the needs of the public. Hence, while ‘under Section 6 of the EPIRA, generation Is not Considered a public utilily as it has been exempted [rom Sblaining a franchise, the law in stating that il is a business affected by public interest subjects it to regulation as at) adjunct to the State's police power. As compared lo other businesses, notwithstanding that it has been declared as open and competitive one. the government has not totally relaxed its reach ove! the sector when public interest so demands. Hence, under exceptional secre eeeeeeeeeeeee ee % Cited in Geraci vs. DOE, ERC, et al. G.R, No. {59796 July 17, 2007 "3 par. Sec. 6. EPIRAERC CASENO, ORDER) March Page 3rof 33 circumstances, the State is constrained to intervene by setting regulated prices to protect the public from unreasonably high prices. “A business affected with a public interest is subject to regulation by the Police Power of the state to protect and to promote the General Welfare of the community which it serves. ,, Such a designation does not arise from the fact that the business is large, or that the public receives a benefit or enjoyment from its operation The enterprise, as a result of its integral participation in the life of the community or by the privilege it has been granted by the state to serve the needs of the public, is regulated more strictly by the state than other businesses.""” Consistent with its mandate under the EPIRA to protect the public interest as it is affected by the rates of electric utilities and preure transparent and reasonable prices of electricity, the Commission cannot allow excessive, exorbitant, unreasonable oF very high prices of electricity. In the light of what transpired during the period of the Malampaya shutdown, as confirmed and verified based on the IU's preliminary report and all data gathered by the Commission in these past weeks, the Commission deems it necessary and justified to exercise its police power by setting aside those WESM prices and imposing instead regulated prices, which are compliant with the EPIRA standards of reasonableness and transparency. The Commission deliberated on various ways of selling these regulated prices with the afore-stated EPIRA standards in mind. It deemed that the use of market-based prices as basis would be consistent not just with these EPIRA standards, but also wilh its mandate to promote and develop the electricity market, Thus, it Fesolved to use the load weighted average ex-post energy prices of the corresponding trading interval covering the period December 26, 2012 to September 25, 2013. These prices were considered to be representative of the 2013 market prices under normalized’ condition tue to the removal of the outliers covering October to December stipply months. The Commission did not include October 2013 supply month in its normalization since tightness of supply Wak already noted «in the said month and LWAP correspondingly increaged in response to that, Considering, however, that the imposition of such prices may still not allow certain plants to receve! fall their reasonable costs, the Commission would further allow payment to the oil-based plants of additional compensation to cover thelr full Fuel and Vatiable O&M Costs, if warranted, following the = wants Encyclopedia of Ruerican Law, exfition 2. Copyright 2008 The Gale Grow me A rights reservedERC CASENO. ORDER) March 03, 2014 Page 32 of 33, manner and procedure for computing. additional compensation undet the Administered Price Determination Methodology in WESM While the action taken in setting a regulated price is not novel because this was already resorted to in ERC Case No, 2006-080RC, the ruling in the case at hand is only pro hac vice.'? This clarification ig necessary $0 t0 allay stakeholders’ concerns that this action by the Commission shall be precedent in all future price increases 11) WESM As a {inal statement, while the electric power industry has been restructured by virtue of the EPIRA Law, attention is directed towards improvement in its apparent productive inefficiency aS indicated by a relatively high number of forced outages which resulted in the inability va number of players to meet their contracted obligations under their power supply agreements. Likewise, the igh degree of market Share concentration in four major players, which is is a characteristic Of an oligopolistic market, points to the industry's need 10 mature to a fully competitive market, Thus, the need for a constant evaluation of the market to ensure its graduation to a fully compelitive markel, which is envisaged to result in a more efficient allocation and rational pricing of electricity. The Commission also particularly noted the formation asymmetry between the market operator and the system operator which may have significantly affected the supply forecast ceiver data, Information asymmetry creates disequilibrium of power in transactions that may lead to unethical behaviour . IN VIEW OF THE FOREGOING, given that prices in WESM during the November and December 2013 supply months could not qualify as reasonable, rational and competitive due to the confluence af factors as pointed out above, and without prejudice to the results of the investigations into the possible culpability of any oF all of the market participants, the Commission, in the exercise of the police power delegated to it by the State and for the genetal welfare of Pociety, hereby VOIDS these Luzon WESM prices and declares the imposition of regulated prices in lieu thereof aE The regulated prices shall be calculated based on the load weighted average of the ex-post nodal energy prices and meter quantity of the’same day same trading interval that have not been Administered covering the period December 26, 2012 to September 25, 2013, subject to the payment to the oil-based plants of additional ESE EEe eee jo liag vice i a Latin ter sng "for this one particutar accasion (Blick’s Law dctionany) Aijing expressly qualified as pro hac vice cannot be relied upon a5 precedent to gow" creee [Porto 1g Manggagawa (PM) ond ButilFermers Party (BUTE) COMELEC, GR, Kn. 164702, March 15, 2005) couyrterms cited on 02 Morel 2014 stonedFRC.CASE NO. i ORDER March 03, 2014 Page 33 of 33, compensation to cover their full Fuel and Variable O&M Costs, if warranted, following the manner and procedure for computing additional compensation under the Administered Price Determination Methodology. PEMC is hereby directed within seven (7) days from receipt hereof to calcullate these regulated prices and implement the same in the revised WESM bills of the concemed distribution utilities in Luzon for the November and December 2013 supply months for, thei icamediate settlement, except for MERALCO whose November 2013 WESM bill shall be maintained, unless otherwise ordered by the Commission, in compliance to the Temporary Restraining Order igsued by the Supreme Court in G. R. No. 21024 and G R. No 210255, Within a period of no less than ninety (90) days from receipt of this Order, PEMC is further directed to conduct an investigation of the possible breach of Must-Offer Rule pursuant to Section 2.4 of the Protocol adopted in the Memorandum of Agreement between the Commission and PEMC dated January 31, 2008. Thereafter, the Cant of the investigation (Investigation Report) of the Enforcement and Compliance Office (ECO) shall be submitied directly to the Commission containing the recommended sanctions and penalties, as the case may be. $O ORDERED. March 03, 2014, Pasig City. Iara fh. Cum NAIDA olcRuz-DUCUT Chairperson (tm. {Hae hcieoe Feared (Wrol ¢ inh ALFREDO J. NON GLORIA VICTORIA C? YAP-TARUC Commissioner Commissioner Aube JOSEFINA PATRI A. MAGPALE-ASIRIT cq mmissionerCopy Furnished: 10. Office of thie Solicitor General (OSG) 134 Amorsolo Street, Legaspi Village, City of Makati 1229 Commission on Audit (COA) Commonwealth Avenue, Quezon City 1124 Senate Committee on Energy a GSIS Building, Roxas Boulevard, Pasay City 1300 House of Representatives Committee on Energy Batasan Hills, Quezon City 1126 Department of Energy (DOE) Energy Center, Merritt Road, Fort Bonifacio, Taguig City 1201 Office for Competition, Department of Justice (DOJ) Padre Faura Street, Ermita, Manila 1000 Philippine Electric Market Corporation (PEMC) 48" Floor, Robinsons-Equitable Tower, ADB Avenue corner Poveda Street, Ortigas Center, Pasig City PI 3! ppine Chamber of Commerce and Industry (PCCI) Floor, ECC Building, Sen. Gil Puyat Ave., Makali City National Grid Corporation of the Philippines (NGCP) Quezon Avenue corner BIR Road, Diliman, Quezon City National Transmission Corporation (TRANSCO) * | Power Center, Quezon Avenue corner BIR Road, Dilim Quezon City National Electrification Administration (NEA) NIA Read, Diliman, Quezon City 4 an,12. 13. 414, 15. 16. 47. All Luzon On-Grid Electric Cooperatives All Luzon Private Utilities All Luzon-Based On-Grid Generating Companies All Retail Electricity Suppliers (RES) All Luzon-Based Wholesale Aggregators All Directly Connected Customers Which ate Menibers : of the Wholesale Electricity Spot Market (WESM)