THIS week, the Energy Regulatory Commission (ERC) approved the issuance of an order regarding a petition (ERC Case 2025-009 RM) related to line rental charges in the Wholesale Electricity Spot Market (WESM), which will have the effect of reducing these charges and lowering generation costs for most consumers, especially those in the Visayas who have been burdened by them. Although I would like to think that recent legislative questions about line rental and my drawing attention to them in my Aug. 9 column had something to do with the ERC’s apparent quick reaction, the timing was largely coincidental.
The petition in question was filed by the Independent Electricity Market Operator of the Philippines (IEMOP) in May 2025, in reaction to complaints from a group of electric cooperatives about a spike in line rental charges in October 2023. So, while it looks like exceedingly timely action on the ERC’s part — and I am certain the commission does not mind that perception — the analysis involved was rather complicated, and not something that could be done in a week.
Nevertheless, the decision is certainly welcome and a bit of good news for consumers already on edge about high energy bills. To be clear, the actual order has not been issued yet; when I spoke briefly with ERC Chairman Nino Juan earlier this week, he said that would happen very soon, probably in the next few days. It is a bit unusual for the ERC to issue a press release about a pending order rather than just waiting for the order itself, so perhaps that was the commission’s sop to the current scratchy public mood about power rates.
However, even though the press release explains the problem, the ERC’s analysis of it, and its resulting course of action quite clearly for people who may understand a bit about the technicalities of the energy network and market, it is still probably a bit confusing for the average consumer. So, let’s pretend I’m an AI agent — only one that’s not stupid and doesn’t require three times the amount of time to fact-check than to actually use — and I’ll try to explain what’s changed in simple terms.
Under the pricing system used in the Philippine energy market, called locational marginal pricing (LMP), line rental is a surcharge (or, in some cases, although very rarely, a discount) that covers the difference in the price of power between different points, or “nodes” in an electrical network. One node is the generation source; another node is the distribution utility or electric cooperative. Another — and actually more specific — way to define line rental is as the difference between what a distributor would have to pay from the cheapest generation source connected to the same network, and what it actually has to pay for the power it receives when it does not come from that cheapest source. The reason there is a difference is because of the distance between the source and the distributor and congestion on the lines in the transmission grid that carry the power. The LMP at each node has three components: the cost of the cheapest available generator that can serve that point (the System Marginal Price), the cost of the electrical energy lost as power travels through the wires (the Cost of Losses), and, when transmission lines or interconnections are congested, an added cost that reflects the fact that cheaper power elsewhere cannot fully reach that point (the Cost of Congestion).
Subject to charges
Even for established, bilateral contracts between generators and distributors, all dispatch of electricity through the system is handled by the WESM, which, in turn, sets the prices for each node in the system. This means that even power supply agreements (PSAs) that have an established generation price can be subject to line rental charges, because the electricity dispatched to a distributor might not necessarily be the same batch of electrons produced by its contracted generation supplier. The reason that happens is that a PSA is essentially an agreement that the generator will produce the contracted amount of power to supply to the grid, and the distributor-customer will purchase the corresponding amount of power from the grid. Because of the way the grid works, those two things might not be the same, and because of the way the LMP system works, the price might not be the same as what’s in the contract. There are ways this can be accounted for in the contract ahead of time, but that’s a whole other ball of wax that I won’t get into now.
Where distributors in the Visayas have been running into trouble and, consequently, incurring much higher line rental charges is when their contracted sources of supply have gone offline, which has happened with disturbing regularity over the past few months. Even when all the generation in the Visayas is operational (which almost never happens), because there is a shortage of capacity, congestion in the transmission network still results in line rental charges.
One more point before I explain what the ERC intends to do with its soon-to-be-released order: Prices in the WESM are determined in five-minute intervals, which makes it practically impossible to collect and distribute line rental charges (or rebates) in real time. So, what the WESM has is a Net Settlement Surplus (NSS) or Net Settlement Deficit (NSD) formula, under which line rental fees are aggregated, and then paid out periodically. The total amount collected does not always equal the total amount owed to generators (or to be rebated to distributors), but ideally, the pool is distributed (or additional costs collected) proportionally according to the line losses and congestion attributable to each node, generator or distributor. There is a complex formula in the WESM rules, referred to as the NSS formula, that dictates how NSS or NSD is distributed, and that was approved by the ERC back in 2019.
When the group of Region 8 co-ops complained about being overcharged for line rental to the WESM, the market operator filed a petition with the ERC in May 2025 seeking to modify the NSS formula to answer the co-ops’ concerns. However, upon investigation, the ERC determined that it was not the NSS formula, but rather the way the market’s dispatch optimization program computes electricity prices when the big Luzon-to-Visayas or Mindanao-to-Visayas grid interconnections reach their capacity limits. This flaw in the dispatch optimization model resulted in two problems, the ERC found. First, it inflated line rental charges beyond what the basic formula (SMP plus loss cost plus congestion cost) indicated it should be, and it resulted in NSS refunds to market participants that had nothing to do with the line congestion that caused the line rental charges in the first place.
As a short-term solution, the ERC will order the suspension of the collection or payment of the line rental trading amount in instances where the price differential is caused by congestion at an inter-island or other connection between pricing regions. Longer-term, the upcoming order will utilize a new methodology to recalculate the three components of line rental charges, and will oblige the market operator to have the NSS and NSD dating back to 2021 independently audited, and then develop a plan for the refund or recovery of costs, depending on the audit’s results.
ben.kritz@manilatimes.net
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