Consumer Group MSK Seeks ERC Repeal of PBR

Consumer Group Matuwid na Singil sa Kuryente Consumer Alliance Inc. (MSK) filed a rules change petition at the Energy Regulatory Commission seeking the repeal of the Performance Based Rate Making methodology that is used to determine electricity rates to the consumers.

The consumer group estimates that the PBR caused an unjustified increase of Meralco’s distribution charges by P0.40 to P0.80 per kwh.

MSK Executive Director Aya Viray-Jallorina said the PBR is illegal because it allows for charging to consumers the projected investments of distribution utilities. This violates Section 25 of Republic Act 9136 or EPIRA law, that specifically require that retail rates must be based on economic costs (or investments) incurred. Projected investments are not yet incurred and hence the resulting rate is illegal.

Worse, the ERC’s PBR rules do not even require a validation of whether the projected investments that are being charged to the consumers have actually been made by the utility.

In its petition filed December 22, 2015 MSK alleged that the ERC’s legal basis for its right to adopt PBR as an alternative to the old Return on Rate Base of RORB appear to be erroneously interpreted. ERC’s right to adopt an alternative is premised on the requirement that the alternative be “in the public interest” which means it should be an improvement over the old methodology of RORB that it replaced. Improvement can only mean lower rates or improved efficiency at the same rates.

While it is true that the law allowed the ERC to consider alternative methodologies that can improve efficiency and result to reasonable rate of electricity, we believe this should not be done unless it is in the public interest. PBR did not result to reasonable rate of electricity. The previous Commissioners of the ERC abused its discretion in adopting the PBR alternative to the RORB.

In June 2015, Meralco, the country’s Largest distribution utility, filed for a reduction in its distribution charge by about P0.18 per kwh. MSK is similarly intervening in that reduction to assure that the reduction is sufficient and that further reduction may not be needed. Meralco had been charging PBR based rates since 2007.

MSK is proposing a modification in the rate making rules to assure that Meralco’s distribution charges to consumers are only based on investments they incurred and not forecasted or promised. ERC’s rules do not even require validation of the promised investments by the regulatory commission before the additional fees are charged to the consumers. This is most unfair and unreasonable to consumers.

In their petition, MSK pointed out the audit report of foreign consultants hired by the ERC discovered that Meralco had 1.2 million kwh meters when they only had 200,000. Also too much provision were made for purchases of distribution transformers from Lopez owned Philec, way beyond the actual needs of Meralco. In their PBR application Meralco also tried to charge consumers about P3.0 billion for regulatory compliance which the auditors reduced by 90%.

MSK’s petition for rules change is part of the consumer groups campaign to reduce Meralco’s total rate by at least P3 per kwh.

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Why a Third Party Is Essential To Protect Consumers in Holding the CSP

Erratum: We deeply apologize for the wrong post of the name of ERC Chairman yesterday. Lazaro should be Jose Vicente Salazar. Our fault and we are very sorry.

12 December 2015
David Celestra Tan, MSK

The captive electric consumers need to be protected from sham biddings if they will truly benefit from the new rule for mandatory Competitive Selection Process for long term power supply contracts. An independent Third Party is needed to assure appropriate capacity biddings, transparency in the process, level playing field, and judicious evaluation and awards.

Recent press reports that ERC Chairman Jose Vicente Salazar is agreeing to the non-use of a Third Party in the conduct of the mandatory CSP should be of serious concern to the Meralco consumers because that means the regulatory agency could be relaxing on the need to assure the conduct of truly competitive biddings for power supply. How can there be a truly competitive bidding if Meralco itself is the one defining the rules of the bidding where their own sister companies can participate?

1. First, only an independent Third Party can assure the integrity of the bidding process, an essential element of a successful CSP.

2. Second, truly independent bidders will not participate because it costs a lot of effort and money to prepare a serious bid and they will do so only if there is an assurance that they have a fair chance to win and be awarded. Even the swiss challenge method of bidding should not be allowed because no one bothers to prepare a bid only for its rate to be beaten by the “original proponent”.

3. Third, There will be few bidders and the consumers will not get the best rate that can come only from a truly competitive and robust bidding process. Who would dare bid against a sister company of the customer?

4. Fourth, assuming they participate, without an independent Third Party bid participants can be influenced in all subtle ways by Meralco to cooperate and share the business among the participants thus sacrificing the consumers interest.

5. Fifth, the terms of the bidding including the technical specs and power supply requirements can be so designed by Meralco itself to either favor its sister company projects or to engineer a failed bidding that will eventually end up in a negotiated bid. (Oh, how we have seen that so often in the Philippines!).

6. Sixth, the benefits of a Third Party oversight in the regulatory process at ERC are established. In Meralco’s application for PBR rate setting, the audit by foreign third party consultants resulted in the discovery of more thanP10 billion in Meralco’s attempted claims that could have been passed on to the consumers. The cost benefit of engaging a third Party favors the consumers. Even if it costs P0.01 to 0.02 per kwh for the consultants, the reduction of power generation rate from such robust competition will range from 0.40 to 1.20 per kwh. This is a cost consumers would be willing to pay.

7. Seventh, allowing Meralco to conduct their own bidding would be a lose-lose proposition for both Meralco and the consumers. The result will always be suspect and it is one way to assure lawsuits that Meralco itself said they are fearing. Meralco though can conduct their own bidding if they want, but their sister companies cannot participate and there is a prohibition against Meralco or its sister companies or affiliates buying eventually into the winning bidder.

8. Eight, it is only through a Third Party that the DOE and ERC can assure compliance with the energy mix and other policy guidelines for future power generation projects.

9. Ninth, it is the duty of the ERC and the DOE to follow-through with effective CSP implementation. It is not enough that they have passed the mandatory CSP rules. It would be a dereliction of their mandates to protect consumers if they relax the rules and allow non-transparent and suspect biddings. Being lax now in the implementation will be a defeat of the Filipino spirit.

Let us have pride in ourselves and resolutely implement something that is really good for the Filipino consumers. Let us show the world that we can be focused on a good thing and not be distracted in the implementation and again lose our way, as we as a nation have gained an unfortunate reputation to have. Let us not compromise.

Signal to the power generation community that the CSP will be truly independent and will be the policy for the long term. We count at least six current players who can participate and at least an equivalent number of foreign investors not yet in the Philippines.

Let us insist on an independent Third Party administrator of each CSP. And Let us not allow Meralco’s delaying tactics so they cannot justify negotiations “due to urgency of need”.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Note: The writer is a 35 year veteran of international biddings in the Middle East, Latin American, Asia, and the Philippines under World Bank, US AID, Japan Exim, German KFW, OECD, and etc rules for competitive bidding. We have participated in many Philippine style rigged biddings and have seen most of the circumvention tricks.

Meralco’s P0.18 Distribution Rate Reduction is a Fruit of the Poisoned PBR Tree

David Celestra Tan, MSK
5 December 2015

Meralco’s Rate reduction of P0.18 per kwh is a fruit of a poisoned tree which is why MSK wants to scrutinize it as an intervenor.

Meralco petitioned the ERC in June this year for an urgent 10.17% reduction in its distribution charge equivalent to 0.18 per kwh. It did not submit any supporting calculations but ERC approved and MSK endorsed the interim reduction since it will benefit the consumers.

The mystery is why was Meralco so uncharacteristically generous given that their track record of padding its rate base and hence overcharging the consumers is legendary? P0.18 per kwh is not peanuts. It translates to approximately P5 to 6 billion a year!

Consumers can bet that Meralco’s rate making group did their calculations for the Fourth Regulatory Reset and their numbers kept showing that Meralco had been making too much money. And an interim P0.18 per kwh is a safe number to easily give up for the consumers.

Meralco for its part is probably betting that by gratuitously offering that reduction (urgently!) the consumers will be satisfied and keep quiet in gratitude, while they are making the excess charges and still trying to figure out how to justify it. (Sorry we have grown cynical of Meralco and it’s not our fault.)

MSK as an intervenor is still waiting for Meralco to submit their detailed calculations for its PBR rates for the Fourth Regulatory Reset. The Third regulatory reset was for the period June 2011 to June 2015.

In the 2nd Regulatory Reset the ERC hired Parsons Brinckerhoff Associates (PB Associates) a giant USA engineering and consulting firm. They discovered significant abuses of Meralco in excessive capital cost and expense claims. For the 3rd Regulatory Reset the ERC hired Sinclair Knight Merz (SKM) of Australia. We are still securing a copy of their audit report as cited in the ERC approval. SKM is reported to have been sanctioned in 2013 by the World Bank for corrupt practices within its organization. We don’t know yet who ERC hired as its Regulatory Reset Expert for the 4th Regulatory Reset.

Note also that the 2rd regulatory reset happened under the old ownership of Meralco. The 3rd regulatory reset was undertaken by the new ownership of Metro Pacific Group who took over in May 2010.

The contributions of independent foreign experts to the regulatory review saved billions a year of charges to the consumers. These point to the benefits of having an independent Third Party in protecting consumers from abuse that can run into billions a year. Similarly, Billions in generation pass on charges are at stake in the mandatory CSP process which is a compelling argument for the engagement of Third Party consultants to oversee and administer the CSP process. The ERC only needs to look at the results of independent audits in the 2nd and 3rd regulatory resets to see the wisdom and worthwhile costs of engaging a Third Party consultant.

MSK estimates that it would cost only P0.01 to 0.02 per kwh to engage a foreign Third Party which is a cost the consumers would be willing to pay compared to the savings of P0.40 to P1.20 per kwh price differential of negotiated sister company rates.

There is a lot to look into in Meralco’s P0.18 per kwh gratuitous interim reduction. In MSK’s point of view PBR is a poisoned tree and its fruits will be poison even if it is implemented with elaborate analyses.

Let us see the details when Meralco submits them.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.