IMMEDIATELY after the publication of my Feb. 1 column (“Slow your roll, Nino”), in which I chastised Energy Regulatory Commission (ERC) chairman Saturnino Juan for his apparent skepticism about allowing an electricity forwards market here in the Philippines, I received an email from the man himself. In the email, Juan shared the text of his keynote speech at the event where the topic was discussed, a roundtable discussion on preventing “bill shock” organized by Power Philippines and Green Tiger Markets on Jan. 26.
Consequently, I was obliged to conclude that I may have been a bit unfair to chairman Juan, as his actual remarks contained a great deal more context than the information available to me at the time (since I was unaware of the event beforehand, which I am still miffed about), that being a brief article by the Philippine News Agency (PNA) based on an interview on the sideline of the event.
Thus, for the sake of clarity on the subject of electricity forward contracts as a price management mechanism, I am sharing the bulk of chairman Juan’s original remarks, which put his and the ERC’s perspective on hedging in a somewhat different light than I did. I’ve only left out the salutations and other such fluff in the interest of saving space:
“In the electricity sector, sudden increases in consumer bills reflect more than short-term price movements. They reveal underlying systemic vulnerabilities that transfer burden to end users, resulting in what we call ‘bill shock.’ These occurrences arise when price volatility in the market is not properly anticipated, mitigated, or allocated among market participants.
Addressing these gaps presents an opportunity to strengthen the resilience and transparency of the market. By anticipating and managing price fluctuations, the sector can transform volatility into a manageable risk to protect consumers while ensuring a fair and stable energy supply.
We are all acutely aware of a persistent challenge in our electricity sector: the volatility of market clearing prices in the Wholesale Electricity Spot Market. This volatility creates significant uncertainty for our distribution utilities as they strive to balance reliable service with stable costs, and ultimately, the cost of this uncertainty is borne by the consumers.
As the regulator, the ERC’s primary mandate is to protect the public interest by ensuring reasonable, just and affordable rates. In line with this duty, we continuously examine mechanisms that can enhance market efficiency and consumer welfare.
Today, we focus our collective attention on a concept that merits serious and thorough study: the potential for forward and futures contracting arrangements for electricity.
This concept involves allowing utilities to enter into contracts to secure a portion of their future power requirements at a predetermined price for the supply to their captive markets. The core idea is to provide a tool for managing the financial risk associated with spot market volatility, which the utilities ultimately pass on to their captive customers.
The identified potential benefits of such a framework, should it be found viable and prudent to implement, are significant. For consumer protection, [a] well-designed framework could allow utilities to mitigate extreme price spikes, contributing to greater price stability, predictability for end-users over time, and avoidance of bill shocks. For utility risk management, on the one hand, it could provide our utilities with an additional instrument to manage their portfolio, potentially leading to more prudent financial and procurement planning.
In addition, there is also the benefit to enhancing energy security and investment. Forward contracts can, in theory, provide the revenue certainty that facilitates the financing of new power generation projects. This is particularly relevant for attracting capital to our much-needed baseload and renewable energy developments, which require a stable outlook to secure financing.
However, introducing such a mechanism is a complex undertaking that requires meticulous study. The current pass-through nature of the DUs’ generation costs presents a fundamental consideration. The existing framework is designed to protect consumers from undue markups from the utilities, but it also requires us to carefully examine how to incentivize prudent hedging by the same utilities without compromising consumer interests.
Preventing bill shock, therefore, requires a coordinated approach: aligning supplier responsibility, reinforcing market discipline, and implementing regulatory safeguards throughout the power sector. When these elements are applied coherently and over time, volatility can be managed more effectively, reducing uncertainty for consumers, and improving overall market outcomes.
The ERC’s commitment is this: We will initiate a serious, comprehensive and transparent review of forward contracting arrangements. Our review will rigorously examine several critical questions, such as: What specific regulatory framework would be required? How would such a mechanism interact with and strengthen the existing Wholesale Electricity Spot Market and Bilateral Contracts Market? Above all, how do we ensure any such system benefits first and foremost the consumers?
We do not embark on this undertaking with a predetermined outcome. We will proceed with a commitment to due diligence, stakeholder engagement, and evidence-based analysis. We will actively seek the expertise of our utilities, generation companies, financial experts, consumer advocates and other government agencies.
Our goal is to determine conclusively whether a structured forward contracting mechanism can be a win-win solution — enhancing market stability, encouraging sensible investment, and serving as a tool for affordable and reliable power for all....
Preventing bill shock is a shared responsibility. It requires a coordinated framework that brings together regulatory discipline, effective market oversight, and prudent risk management, supported by evolving financial and market tools.
When these elements work in concert, the electricity sector becomes more resilient, predictable and responsive to the needs of consumers. Rather than viewing volatility purely as a risk, preventing bill shock presents an opportunity to innovate — to strengthen market design, improve regulatory processes, and reinforce safeguards that protect consumers while supporting long-term investment and reliability.”
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All of that is thoughtful and sound, and I appreciate the ERC’s seriousness. It does not change my initial conclusion that ultimately, there must be a hedging mechanism available to electricity distributors, and that ERC’s regulation of that should be extremely minimal, if not non-existent. However, no harm can come from careful, thorough study of the issue, particularly an innovation (at least for this country) such as this, as long as it is approached agnostically.
ben.kritz@manilatimes.net
Bluesky: @benkritz.bsky.social
Website: www.badmannersgunclub.com
