The Energy Regulatory Commission (ERC) is being set aright under its new chairman Francis Saturnino C. Juan.
There was a reason why the ERC suffered from a backlog of cases under the previous chair: the Commission entertained all pleadings from so-called ‘consumer’ advocates. Such pleadings happened after the fact – after competitive biddings happened and the outcomes ruled.
Tampering with competitively derived outcomes creates numerous systemic risks and an energy environment that is even more unfriendly to consumers. Entertaining after-the-fact pleadings expands the margin of discretion for regulators and reduced the predictability of the process.
Chairman Juan issued a public statement after the ERC was once again besieged by protests from groups who operate on a shortsighted understanding of the regulator’s role. That statement distilled the Commission’s mandate into two fundamental roles: first, to ensure that a truly competitive process in its place; second, to ensure predictable rules that guarantee cost recovery for investors.
The first mandate assures our consumers get the best energy prices possible under prevailing market conditions. When energy supplies are delivered through transparent competitive bidding, we are assured no overpricing burdens the consuming public.
The second mandate assures investors safety from shifting policies. When the rules become elastic, subject to renegotiations after the fact, the investment environment becomes a slippery slope. The rules must be firm.
Otherwise, we will continue to fail in attracting worthy investments into our economy. In the energy sector, this will translate into shortages and a greater possibility for outages. Our consumers will suffer more because of that.
Any move to alter contracts after the fact introduces uncertainty into the game. It discourages capital inflows and undermines investor confidence.
This is true not only in the energy sector. It happens in other regulated sectors of the economy as well. For instance, companies that build tollways or deliver water are ensured a predictable schedule of recovery. When scheduled toll increases are delayed because of judicial petitions and protest actions by myopic advocacy groups, the investor incurs costs. The costs undermine confidence in the consistent application of the rules.
Building up our infrastructure to at least regional standards requires large investment outlays. Our capacity to build the infrastructure we need is already restrained by rampant corruption. When our regulators act inconsistently, open up the process to a large margin of discretion by bureaucrats, we will fail to attract the infra we need.
Unfortunately, we are heir not only to a bureaucracy that has repeatedly succumbed to syndicates of corruption. We are also heir to populist politics that presume that regulations are perpetually subject to discretion.
We need to understand that consumer protection must be rooted in process, not wider margins of bureaucratic discretion. The best safeguards for consumer protection, as the new ERC chair underscores, is transparency and competitive bidding.
Every supply contract must be subject to rigorous and open bidding. Once the bidding process is done, the winning bidder must be assured that the terms hold. Contestable markets are the best guarantee against fraud. The outcomes of open bidding must be respected – otherwise every price set and every award made will be continuously politically litigated.
The new ERC chair understands the perils of populism. The role of the regulator is to find the harmonious balance between what consumers want and what investors expect.
There is, sadly, a thriving cottage ‘consumer advocacy’ industry in this country. They contest every price adjustment even if these were contractually guaranteed. They underplay the investor’s price recovery and overplay consumer preference for lower prices.
Prices, we know from introductory economics, is determined by efficiency. If our energy sector remains inefficient, the price we pay for energy will always be exceedingly high. The systemic solution here is to attract the investments that will make this sector more efficient – not pander to every populist demand.
For illustration: if we did not guarantee cost recovery for investors in tollways, we would not enjoy the convenience they bring through capital-intensive construction. Motorists pay for the convenience. It is not the motorists who decide the toll levels. It is cost recovery that determines that.
In the same way, people invest in capital-intensive power generation projects based on a recovery schedule. If that recovery schedule becomes porous, subject to bureaucratic whim or populist pressure, we will never get the investments we need. We will suffer because of that.
I was just reading an analysis of Indonesia’s current policy of moving up the value chain of minerals by insisting on domestic processing of ores to retain more value for the economy. The Philippines could not replicate that policy at the moment. We do not have a critical mass of ore to support investments in refining capacities. This is because our mining policy inhibited the growth of companies that could bring in the capital for exploration and extraction.
We now pay in opportunity costs for allowing populist agitators to prevent the proper evolution of a mining policy that serves the nation. We have very little to show in this sector even if our country is one of the most mineralized in the world.
The new ERC chair is correct in repudiating the populism of agitational groups professing consumer protection. These groups will undermine the integrity of our national strategy for energy security – and eventually providing our consumers adequate power at the most reasonable cost.