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Asian Electric Competition Custom Tailored For Success

Taking the anti-FERC approach to the grid.

Fortnightly Magazine - August 2007

likely to inhibit much needed competitive tension. This lack of diversity in ownership will inhibit competition even if multiple participants are trading these assets in WESM.

This also introduces an uncertain climate for new generation investment because of the perception that a monopoly player controls an uncomfortably large portion of the generation asset base. It makes market participants extremely susceptible to the exercise of market power (predatory pricing) by the largest player. The government is cognizant of the market concerns, and there is an increased momentum to accelerate the sale of generation assets, which is key to a competitive wholesale market.

In fact, that is exactly what happened shortly after the market opened. The first few months of operation seemed bumpy, with public allegations of power-price manipulation as electricity rates in Luzon started to go up. The price escalations allegedly were caused by collusion amongst the limited set of authorized traders on the system, making it look more like an oligopoly than a true free market for wholesale trading of power. The situation was further complicated by the outage of a natural-gas pipeline that supplied many of the gas-fired power plants in Luzon, as well as damage to the grid from a typhoon and unsuccessful attempts to repair the damage.

The Philippines Government moved quickly to reassure and restore confidence in the deregulation process, and tasked the Department of Energy to more tightly monitor WESM to prevent any possible recurrence of the reported price manipulation.

“We are confident in the capacity of the free market for self-repair and recognize that the Wholesale Electricity Spot Market is still in its infancy. Free competition is still the best way to establish prices and we will continue to strengthen this mechanism as the government pursues the privatization of power assets,” said Energy Secretary Ignacio Bunye.

Other uncertainties in the market pertain to management of market-price volatility. WESM has a price cap for generation offers and an administered price-cap mechanism for settlement during suspension of WESM operations. The maturity of the financial contract market, combined with improvement in liquidity in the coming years, should enhance the ability of market participants to manage price volatility.

Challenges of an Archipelago

The Visayas electricity grid is expected to be integrated into WESM in 2007. Given the relatively small size of the Visayas grid, and the limitations on the interconnection capacity between the islands, it may not be very practical to operate the Visayas grid as a market.

The grid also is experiencing capacity shortages that have resulted in periodic blackouts. The successful integration of this grid into the market is a challenge that WESM will soon be forced to face. The most likely way to success lies in a customer-tailored solution that recognizes the unique footprint of the high-voltage topology and the distribution of supply and load.

The different Asian electricity markets have had their share of bumps and bruises on the road to competitive free markets, but many in government and industry deserve credit for confronting their monolithic utility structures and incorporating competitive changes, without disrupting the equilibrium