INSIDER VIEW: Line rentals contribute to higher power costs

The concept of "line rental" is often misunderstood. As the term might suggest, it does not involve renting power lines. Instead, the line rental cost item represents the additional cost of generation due to one generator's inability to deliver its contract due to "congestion or line losses" at specific nodes or delivery points in the grid.

Line rentals arise from Locational Marginal Pricing (LMP) to set electricity prices in WESM (Wholesale Electricity Spot Market). Each node in the grid can have different prices due to varying costs of line losses and congestion. These costs are generation-related and paid by WESM customers to generators. 

Guido Alfredo A. Delgado

This power industry veteran says, "Our spot market can be straightforward. We don't need sophisticated concepts that add up to the cost."

Added burden on consumers

However, according to studies conducted by the law firm of former Independent Electricity Market Operator of the Philippines (IEMOP) CEO and Energy Regulatory Commission (ERC) Executive Director Atty. Nino Juan, the current mechanisms for calculating line rentals result in discrepancies where trading amounts collected from customers do not match the payments to generators, leading to a Net Settlement Surplus (NSS).

Atty. Juan and his colleagues found that calculating the line rentals revealed several anomalies. According to their studies, the NSS often leads to inequitable allocation and higher consumer costs, particularly for distribution utilities (DUs) that have entered into power supply agreements (PSAs).

These are households and small and medium enterprises (SMEs). In 2023 alone, these consumers paid over P23 billion to generators. 

'Anomalous'

Line rentals impact DUs with PSAs as these charges are computed based on their bilateral contract quantities declared in WESM. In the past, this situation has resulted in line rental rates that were higher than PSA rates. The irony is that the DOE requires  DUs to be fully contracted and avoid sourcing in WESM. As a result of entering these PSAs, consumers are adversely affected by these high line rental charges.

A very senior former Napocor (National Power Corp.)  executive, however, finds the very idea of a line rental "revolting."  He argues that "the flow of electrons in any state remains the same in the grid." 

Indeed, line overloading only happens when we hit peak periods. He  argues that "line rental is anomalous in that the line rental should not be counted from the source node to the consumer node."  He recommends that somebody review the formula used in calculating the NSS. Unfortunately, according to my sources, neither the government nor IEMOP could satisfactorily explain the formula. 

Legality questioned

Is it legal to charge line rentals to DUs and consumers?

First, if the IEMOP adopted zonal pricing instead of sophisticated Locational Marginal Pricing (LMP), all those line rentals would disappear, saving consumers billions of pesos. Were the consumers given the choice between zonal and LMP models?

Second, where in our unbundled electricity billing is this line rental reflected? Don't the regulations require DUs to be transparent about charging consumers?

Our spot market can be straightforward. We don't need sophisticated concepts that add up to the cost. In the context of electricity market sophistication, our electricity sector is analogous to just a barangay road. We do not need a Lamborghini of a spot market to operate our system.