ERC stops faulty line rentals, orders refund audit

MANILA — The Energy Regulatory Commission has ordered the suspension of certain line rental collections and payments in the Wholesale Electricity Spot Market after finding that a pricing flaw repeatedly inflated electricity costs, particularly in the Visayas.

The intervention could reduce improperly computed charges and lead to consumer refunds dating to 2021, although the independent audit may also identify additional amounts that some market participants or customers must pay.

The final financial effect on electricity consumers will depend on the audit results, the speed of market-system corrections and the methodology approved for distributing past adjustments.

The directive was issued through an order in ERC Case No. 2025-009 RM.

The case resolved a rule-making petition that the Independent Electricity Market Operator of the Philippines originally filed on May 28, 2025.

IEMOP sought to amend the formula for distributing the Net Settlement Surplus under Section 9 of the WESM Price Determination Methodology and ERC Resolution No. 7, Series of 2019.

The petition followed complaints from Visayas electric cooperatives over a sharp increase in line rental charges for the October 2023 billing month.

The issue resurfaced when the Federation of Rural Electric Cooperatives in Region VIII raised concerns about recurring and unexplained line rental increases and their effect on generation rates.

FRECOR 8 questioned whether WESM pricing and surplus-allocation mechanisms reflected actual grid conditions and the benefits received by market participants.

Unlike a market using one nationwide electricity price, WESM sets a separate locational marginal price at every grid connection point or node.

Each node’s locational marginal price combines the System Marginal Price, the cost of electricity lost during transmission and the cost created by grid congestion.

The System Marginal Price represents the cost of the cheapest available generator capable of serving the location.

The cost-of-losses component accounts for electricity dissipated as power travels through transmission lines.

The congestion component reflects the added expense when transmission constraints prevent cheaper electricity in another location from reaching consumers.

Many WESM buyers and sellers have bilateral contracts covering an agreed quantity and price of electricity.

A Line Rental Trading Amount is the charge or credit used to reconcile the price difference between the node where contracted electricity is generated and the node where it is consumed.

Line rental is intended to reflect actual transmission losses and congestion rather than function as an arbitrary fee.

WESM collections from buyers do not always equal the amounts owed to generators because of the treatment of losses and congestion.

A Net Settlement Surplus occurs when collections exceed generator payments.

A Net Settlement Deficit occurs when payments owed to generators exceed collections.

Under WESM rules, the surplus or deficit should be returned to or collected from participants according to their actual contribution to transmission losses and congestion.

The ERC’s review found that the recurring line rental spikes did not originate from the NSS allocation formula that IEMOP proposed to amend.

The commission traced the problem to the Market Dispatch Optimization Model used to calculate electricity prices when interregional high-voltage direct current links reached their transmission limits.

The affected links connect Luzon with the Visayas and the Visayas with Mindanao.

When an HVDC link becomes constrained, cheaper electricity from one region may be unable to reach another region fully.

The ERC found that the market model failed to record the resulting regional price gap properly as a congestion cost.

Instead, the model generated separate baseline System Marginal Prices for different regions while effectively showing zero congestion cost.

Market data from July 26, 2026, illustrated how wide the price differences could become.

At the 20:25H interval, the System Marginal Price in Luzon and the Visayas reached PHP 6,551.52 per megawatt-hour.

Mindanao’s System Marginal Price during the same interval stood at PHP 3,457.47/MWh.

The gap occurred while the Visayas-Mindanao HVDC link was scheduled at its 450-megawatt limit.

A similar pattern appeared at the 19:20H interval, when Luzon recorded an SMP of PHP 6,544.95/MWh while the Visayas posted PHP 14,485.78/MWh.

The pricing flaw inflated line rental charges beyond the cost attributable to actual congestion and transmission losses.

It also caused the resulting NSS to be distributed to participants that did not bear the congestion costs.

Consumers in constrained regions, particularly the Visayas, shouldered much of the higher electricity expense without receiving the corresponding settlement relief.

The ERC said recalculating the price components should bring affected WESM costs closer to what consumers should have paid.

As an immediate remedy, the commission ordered the suspension of Line Rental Trading Amount collection or payment whenever different SMPs are generated because of an HVDC constraint or cross-regional price separation.

IEMOP must implement the interim measure within 30 calendar days of receiving the order.

Any resulting shortfall in market collections will be recovered from customers in the higher-price region according to their actual electricity consumption.

For the long-term remedy, the ERC adopted a methodology to recalculate the System Marginal Price, Cost of Losses and Cost of Congestion at each grid node whenever this type of regional price separation occurs.

The recalculation is intended to capture the actual cost of congestion without changing the existing NSS allocation formula under the Price Determination Methodology and ERC Resolution No. 7, Series of 2019.

The ERC ordered IEMOP to make the necessary enhancements to the Market Dispatch Optimization Model and the Central Registration and Settlement System.

IEMOP must also hire an independent auditor to recalculate actual NSS and NSD allocations from June 26, 2021, until the corrective solution is fully implemented.

Based on the audit, IEMOP must submit a proposed methodology and timetable for refunding or collecting the resulting adjustments from affected market participants and consumers.

The adjustments may be staggered over several billing months.

IEMOP must incorporate the changes into the relevant Market Manual.

The market operator must file a separate application to recover the cost of implementing the reforms, subject to ERC review and approval.

“Rather than simply tweaking the NSS allocation formula as proposed by IEMOP, the ERC dug into the underlying pricing methodology of the WESM to identify and fix the actual source of a problem that has unduly burdened consumers, especially those in the Visayas, for years already,” ERC Chairperson and Chief Executive Officer Francis Saturnino C. Juan said.

“By suspending the erroneous charges immediately, addressing the root cause of the Line Rental issue, and ordering a retroactive audit with the prospect of refunds dating back to 2021, the Commission aims to ensure that Line Rental and NSS allocations genuinely reflect the cost-causation principles embedded in the PDM, so that consumers pay only for the actual cost of the power they consumed, nothing more,” Juan added.

The case began as a formal proposal to revise the NSS distribution rules, with the ERC issuing a notice of proposed rule-making in September 2025.

The ERC previously intervened in 2021 to suspend and refund congestion-related line rental charges linked to the damaged Cebu-Negros submarine cable, which had driven up electricity rates in Negros and Panay.

The next steps depend on IEMOP’s implementation of the interim suspension, completion of the required system changes and the independent audit determining the scale of past settlement adjustments.