Retail Competition and Open Access: Empowering consumers in the power industry

By Ladislao Z. Avila Jr.

First Published in Business World (7/9/2012)

In a previous column, we wrote about how controlling project costs is critical to the success of power companies. As the country’s power supply situation stabilizes, consumers, industries and Government will demand more reasonable and competitive power rates. With the emerging implementation of Retail Competition and Open Access, where end-users have the power to choose their electricity supplier/s, power companies with efficient overall cost structures will be better placed to face the highly-competitive market and will continue to be successful and profitable, especially with increasing competition among power retailers.

Retail Competition and Open Access

Under the current rules, retail competition and open access will initially be implemented in the franchise areas of both private utilities and cooperatives, and the economic zones in the Luzon and Visayas grids. At the start, only end-users which have an average peak demand of one megawatt (MW) for 12 months before the start of actual retail competition will become part of the contestable market. The rest of the end-users — the captive market — will continue to receive electricity supply and distribution service from their respective distribution utilities.

The second phase of retail competition will occur two years after the initial phase, when end-users who have an average peak demand of 750 kilowatts will become part of the contestable market. In this phase, end-users within a contiguous area may also aggregate their demand to reach the threshold level and become part of the contestable market. The final phase is when all electricity end-users are allowed to become contestable consumers.

Open access is the system of providing electricity buyers and sellers with equal right of access to the transmission and distribution systems and associated facilities, subject to payment of transmission and distribution wheeling rates duly approved by the Energy Regulatory Commission (ERC). Retail competition is the provision of electricity to contestable customers by the Retail Electricity Suppliers (RES) or Local Retail Electricity Suppliers (Local RES) through the distribution systems.

Based on the most recent pronouncements by the Department of Energy, the retail competition and open access regime is targeted for implementation later this year, following its deferral last year.

Benefits to contestable customers

The most obvious benefit goes to contestable customers, who can select electricity suppliers based on advantages – such as reliability of supply, price and pricing schemes, payment terms, fuel type, and other possible value-added services. Contestable customers will need to assess their energy demand profile and match pricing with energy consumption patterns to optimize their power costs. In addition, they may choose environment-friendly energy sources (renewable energy) depending on their advocacies. In the end, contestable customers can enjoy more stable and predictable power costs over the duration of their retail supply contracts.

End-consumers need to ascertain whether they have already qualified as contestable customers though the receipt of a letter notice and certificate of contestability from the ERC. Otherwise, they can explore ways to gain eligibility, as the rules for contestability allow for the consolidation of electricity demand in a single premise.

End-consumers that do not qualify as contestable customers in the initial phase should prepare for the second phase by exploring demand aggregation within a contiguous area, which may refer to subdivisions, villages, economic zones and business districts.

Retail Electricity Suppliers (RES) / Local Retail Electricity Suppliers (Local RES)

New players and operating models, the RES and Local RES, will emerge to transact with generation companies to source their contestable customers’ energy requirements, and will deal with the transmission company and the distribution utilities on their behalf. Under this system, power generation companies can broaden their markets by competing for the supply of electricity to the contestable customers through the RES. This will create efficiency pressures on the generation companies in order to compete successfully.

Being relatively new, it is important that RES and Local RES evaluate the accounting and taxation aspects of their operating and business models.

Distribution utilities

Distribution utilities are required to separate their business activities into regulated and non-regulated segments. Regulated business consists of the supply and distribution of electricity to their captive markets. Non-regulated business pertains to the supply of electricity to the contestable customers in their franchise areas. Accordingly, distribution utilities need to adapt their organization, processes and infrastructure to ensure that these are aligned with the changes brought about by retail competition, in order to maintain effective and efficient operations.
Similarly, distribution utilities should also evaluate the accounting and taxation aspects of these new operating models.

It is vital that all participants in power retail competition (i.e., contestable customers, RES, local RES, distribution utilities, suppliers of last resort and central registry) become familiar with the various rules, guidelines and codes of conduct. This is to ensure successful implementation and allow all the participants and the Philippine economy in general, to reap the benefits that this new system envisions.

After all, the main purpose of the EPIRA is to ensure transparency and reasonable electricity pricing under a system of free and fair competition in the power industry through greater operational and economic efficiencies. Not only will this enhance the competitiveness of Philippine products and services in the regional and global markets, but it will also, literally, bring more power to the people.

Ladislao Z. Avila Jr. is a Partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.