California power crisis won’t happen in RP, says Camacho

Incoming Finance Secretary Jose Isidro Camacho said yesterday that the California experience will not happen in the Philippines.

In a paper, the outgoing energy chief said the power reform bill will contain provisions that will prevent such power crisis from taking place in the country.

He said the structure embodied in the power bill allows for bilateral contracts up to 90 percent of the demand which is not provided for in the California power reform model.

This paper is in response to concerns raised by some sectors that the power reform bill was patterned after the California model and will most likely repeat the failures of such model.

Camacho pointed out, however, that the bill provides for a cap on bilateral contracts between related companies as a safeguard against any abuse and to promote competition.

At the same time, he said there is no regulated fixed selling rate to consumers. "These features will prevent the mismatch in the wholesale and retail prices that cause the big losses and insolvency of the utility companies.

He said the Philippines also enjoys diverse sources of power including fuel oil, geothermal, coal, hydro, biomass, and soon natural gas.

In addition, he said one of the considerations in clustering the generating assets of the National Power Corp. into the generating companies to be privatized is to provide diversification in source of power, geographic representation and other similar considerations.

He also pointed out that the proposed measure has a provision allowing the executive branch upon the determination of an imminent power shortage to obtain Congressional approval to establish additional generating capacity to prevent such shortage.

The energy chief said the California power crisis happened because of a convergence of events and flawed market structure.

What happened to California, he said, was that with the sharp growth in demand and five-fold increase in natural gas prices, the selling price of the generators to pool rose sharply. Since the utilities had to buy from the pool 100 percent of their requirements and their own selling price to the consumers were frozen until March 2002, they very quickly accumulated very large losses in the billions of US dollars.

Because of the deteriorating credit of the utilities, the generating companies became increasingly reluctant to supply them. At one instance, generating companies would rather sell to Arizona at half the wholesale price in California because of the credit concern even while the supply/demand situation had stabilized.

To address the problem, the state authorities are now trying to accelerate the construction of new power plants, have allowed an increase in rates to consumers, have ruled that the utilities and generators must negotiate multi-year contracts up to 95 percent of the state’s power needs and are looking for ways to keep the utilities solvent.

Another reason for the California power failure was the lack of fuel diversity wherein the environment restrictions in California led to the shutdown of higher polluting coal-fired and nuclear plants.

There was also a high demand growth rate which could be partly traced from the strong growth of new economy business like information technology, and growth in population wherein demand for electricity grew sharply by 12 percent from 1999 to 2000.