The merit of market independence 

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Free markets serve as one of the levers for economic development.

If only government adheres to the laissez-faire doctrine where there is minimal interference in the market by the State, free competition, a level-playing field and liberalization will truly be enhanced and institutionalized.

This very tenet became the foundation of the policy that would dramatically transform the landscape of the Philippine electric power industry from a vertically-integrated and monopolistic operating structure to a more competitive and transparent business model. In 2001, the Electric Power Industry Reform Act (EPIRA) was enacted, mandating the restructuring of the power sector and the establishment of a power bourse, the first of its kind in the country. This scenario basically allowed distribution utilities and big consumers to purchase their power requirements through bilateral contracts with generating companies or directly, on a real time basis, from the power bourse … now commonly referred to as the Wholesale Electricity Spot Market (WESM).

The WESM’s inception ushers in an era of competition, efficiency, transparency and reliability of electricity trade where a level playing field exists among its participants. As much as practicable, electricity prices are governed by instantaneous mercantile exchange wherein the process of economic dispatching and locational or nodal pricing framework are at work. This integrated pool type of power bourse ensures that both merchant and bilateral contract transactions are centrally-coordinated for dispatch.

The nearly 10 years of WESM operations have led to significant developments in the sector with the implementation of the retail market, renewable energy integration as well as central scheduling of reserves in preparation for the ancillaries trading among others.

Indubitably, such developments reveal the market’s vital function as springboard for the entry of sustainable power investments, greater choice of supply and competitive pricing which are wanting and illusory under the former monopolistic regime.

This commercial approach to electricity service via the WESM has instigated a momentum for innovation and sustainable power sector development, which can only prosper or flourish when market operations uphold its independence. To ensure non-discrimination and objectivity, the Philippine Electricity Market Corporation (PEMC), which acts as the Market Operator of the WESM must now be truly independent of power industry stakeholders and of the government’s control. This has been the proven model in existing power bourses in other countries.

To carry out the EPIRA’s mandate, the Department of Energy (DOE) had caused the establishment of PEMC as the WESM’s interim Market Operator and governance arm. It is a non-stock non-profit private corporation that was organized and registered in November 2003. DOE then had envisioned PEMC as a transition body that will eventually lead to the creation of the Independent Market Operator (IMO) as mandated under Sec. 30 of the EPIRA. This entity has a governing board composed of 15 members headed by the Energy Secretary and with membership equitably represented by stakeholders in the power industry as well as independent members.

To support the transition to an IMO and to set directions on its implementation, DOE and PEMC had requested the Asian Development Bank (ADB) to provide technical assistance and to study the matter. The resulting report on the ADB’s IMO study was already submitted and its recommendations are now being considered.

The transition is envisioned to give rise to greater consistency of WESM systems and processes. Independent management and operations will help revitalize governance, boost innovation, obviate bureaucracy and facilitate a more efficient business performance.

Independence in WESM operations will then become a ground breaking episode in the industry as it exemplifies the government’s commitment to industry reform and progress. Having an autonomous governance framework fosters more transparency and accountability in the electricity market.

PEMC had acquired extensive and valuable experience in running the market for the past nine years and in devising tools and programs that respond to various stakeholder requirements and emerging market conditions. For PEMC to meet the EPIRA’s mandate for the creation of an IMO, and qualify as such, specific changes to the WESM rules are needed. These include changes in the composition of PEMC board and strengthening the so-called WESM Governance Committees that handles market surveillance, enforcement and compliance, rules change, dispute resolution and technical matters.

In the end, amidst the crucible of the industry’s revolution, the WESM continues to evolve as a catalyst for sustainable energy development and the creation of a more conducive investment climate. Truly, market liberalization has heralded a more acceptable and efficient level of energy security at more competitive costs than ever before.

Nevertheless, WESM can only reach its utmost potential with veritable autonomy as it underpins stability in governance and injects a potent stimulus to the industry’s growth and the market’s relentless evolution.