Meralco Skeletons in the ERC Closet…. and A Humble Message to the New Commissioners (Part 2)

David Celestra Tan, MSK
28 February 2019

Part 2 of 3 

3. The Unfairness of Allowing “Systems Loss” averaging and its Non-transparent monthly computation by Meralco

The ERC limits the systems loss charge to be 8.5% and Meralco had been announcing its systems loss to be 6.75%. But those are averages. Captive customers that comprise 60% of Meralco’s revenue (residential customers above the poverty line and most businesses) were charged more than 10% although industrial customers are charged only 3.5% resulting to the low average.

Despite supposedly adopting a “cost of service” factor in determining systems losses, Meralco is charging residents and businesses in the highly compact Makati and Metro-Manila, the same systems loss as those in the outlying and sparsely populated areas of Batangas, Laguna, and Quezon. ERC went along with Meralco’s argument that they are the “same class” of residential and commercial customers. But they are not. One is densely populated and cost of service is low per kwh and hence technical and non-technical losses should be very low in the not more than 5% range. Outlying and sparsely populated areas cost more to serve and real systems losses, both technical and non-technical are higher. How about a simple subclassification of Captive Market 1 and Captive Market 2?

It is our position that averaging systems loss is allowing the overcharging of captive customers by 2 to 3% which amounts to more than P2 billion a year.

But wait, didn’t the ERC reduce the systems loss average to 6.5%? Yes, but Meralco’s average is already that and captive customers are still charged more than 9%. Nothing really has changed. Was this tokenism?

This is one skeleton that is easy to resolve. Just adopt an 7.5% maximum systems loss to any customer, even higher than the 6.5% average.  If Meralco wishes to charge industrial customers 3.5% that is their business. But they should not recover the reduction from the hapless captive customers like us. If Meralco’s actual systems loss to captive customers are lower than 7.5% they can keep the difference as reward for being more efficient. This is a truer form of “performance based” rate making.

Pegging the systems loss to captive customers in the metropolitan areas at say 6% and 7.5% in the remote areas would at least legitimize Meralco’s keeping the difference and we don’t have to worry about how their finance official would compute it.

4. Procurement Guidelines for Power Supply Agreements

Just before most of the new Commissioners were appointed, the ERC tried to subject to public consultation a draft Guideline for Procurement for PSA by Distribution Utilities.

In it, it was adopting Swiss Challenge and Unsolicited proposal as legitimate forms of Competitive Selection Process. In fact about 1/3 of the guideline was about implementing unsolicited proposals.  Those were what Meralco wanted and what many electric coops who wanted to manipulate the CSP process had been attempting to do.

We don’t know if the highly experienced lawyer (but new to power regulation) Chair Agnes Devanadera just got snowed by some advisers or she was a knowing participant in trying to pass that Guideline. (we hope not)

If this is adopted by the ERC, it will signal that they are preparing to legitimize Meralco 7 mid-night contracts by subjecting them to a curative Swiss Challenge type CSP.

Passing it would be a big set-back for the consumers in its aspiration for a truly competitive power generation sector and a disappointing signal that in ERC it would be business as usual.We were constrained to seek the assistance of the Office of the President. Nananalangin po tayo na mapansin ng Pangulo.

We hope the new commissioners will see through this yet another blatant attempt at watering down the CSP policy and will not allow it.

5. Delays in approvals of EC Capex applications

This is one of the major reasons many electric coops have failed to keep up with the growing demand in their service areas.  Their capex programs have not been approved by the ERC, many taking more than five (5) years.

Let us hope the ERC can provide a focused attention from one of its Commissioners on the applications and methodologies for Electric Coops.

Why cannot they get a faster Provisional Authority as long as the NEA studies and endorses the Capex plan? Why not develop a new revenue methodology for electric coops so that they can operate as efficient utilities?

The ERC foreign consultants had brought down the systems loss allowances for Electric Coops. However, it had failed to provide mechanisms for the proper and timely provision of revenues to achieve those lowered systems loss allowance.

6. Lost in Regulation – Regulating what does not need to be regulated and not regulating what needs to be regulated.

This might surprise a lot of people because the current system of regulation has been this way for more than 10 years. The danger is the new set of Commissioners might get indoctrinated into this modus operandi and accept them as they are.

The ERC has been failing to regulate the distribution sector by misapplying a PBR rate setting methodology and have been practically regulating the power generation sector that the EPIRA Law declared to be unregulated.

Regulation at the very basic level is limiting the amount of money the investors in the sector can make out of their investments to what is fair and reasonable. 

The previous set of commissioners had admitted that effectively the profits of distribution utilities under the PBR rate methodology are no longer limited or regulated due to the adoption of PBR. And that the 12% set by the Supreme Court as the limit in annual profits is not applicable “because the economic conditions are different”. This means the economic conditions then in 2006 when the 12% limit was imposed were much worse than today that 25% return on equity is justifiable?  We did our checking and by most econometric measures, the Metro-Manila economy has been booming and much better than 10 years ago.

This is another regulatory mindset of the previous ERC’s that had it “baligtad”. The policy of the state is 12% per year return as ruled by the SC. The rate setting methodology that the ERC should adopt should be towards the achievement of that policy of the state.  It is wrong , and not in the public interest,to allow the tail to wag the dog.

The ERC instead has been regulating the profits of the power generators by using Weighted Cost of Capital (or WACC) in computing the fair and reasonableness of the rate on a table evaluation. They argue that they need to do so “to protect the public interest”. What will work better for consumers is assuring that these power generation contracts are subjected to true competitive bidding or CSP. That is why the postponement of the overdue CSP policy by ERC in March 2016 was a big let- down and betrayal of the public interest (intended or not).

Competition always beats regulation in reducing rates to consumers. As a safeguard, the ERC can establish benchmarks based on efficient existing plants as a protection against overpriced and manipulated biddings. To assure least cost power for the public, table evaluations are supposed to be complementary to open and true competitive bidding and not a substitute for it.

 

A humble message to the New Commissioners:

We realize Po that the new Commissioners are in a tough situation. Walking into this quagmire. So complex and a lot to learn and sort out in a short time. And you have that backlog of applications and petitions. It is natural for those who are in the pile to seek help to expedite their long-delayed petitions.

The danger for the consumers is the very powerful and enticing lobby of the vested interests and their political patrons for the perpetuation of anti-consumer and anti-public interest methodologies.

You probably did not realize the tough patriotic challenge an appointment to the ERC Commission would entail. This is a defining moment where you have been drafted for duty to country to bring your professional expertise, moral compass, personal integrity, and patriotism to one of the forefronts of our national battle for public interest….where the public and Filipino pride have been taking a beating for more than a decade. We hope it can be shown through your example that the Filipinos are capable of governing themselves properly and fully capable of truly looking after his countrymen. We pray that the challenges will bring the best in you.

It is in the DNA of the private sector entrepreneurs to try to maximize their profits, to push their profiteering ideas to the limit, to exploit opportunities whenever open or opened to them. That’s how they measure their self-worth and their business acumen.  They go as far as what you as the Regulators will allow.

Few of them would have the self-discipline and fear of the higher Being not to exploit the vulnerable Just because “they left their door open and the police is not around”.You are our defender and our hope. Electric consumers have been waiting for saviors and protectors.We hope it is you.

We hope you can each be a catalyst for a new dawn of a sincerely consumer-sensitive ERC. All we are asking is for you to balance things.  Consumers do not need to be sacrificed all the time. After all we are the Filipino people and taxpayers that the ERC is mandated to safeguard against abuse.

Sana po you will not allow yourselves to be swallowed by the system as they say.

The above list of skeletons is not by any means complete. There are many other skeletons in the ERC closet including the hundreds of millions of penalties on the major power generators who manipulated the WESM in December 2013.

But these are the six major skeletons that we hope, forewarned, the new ERC Commissioners can deal with and correct so the country can get a true guardian of public interest as the ERC is supposed to be under a privatized and deregulated power sector.

Pasensya na Po if sometimes we are too direct, if we bring out truth that are inconvenient. Nothing personal specially since all of you are new, which is what brings consumers hope. MSK only tries to forewarn you of these regulatory skeletons that at one point or another you as Commissioners will likely run into. We are only trying to bring the message of the electric consumers. Please don’t shoot the messenger. We are not the enemy.

We hope you will conquer the regulatory skeletons and demons for the people.

God Bless.

Next: Elephant in the ERC Room.

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

Meralco Skeletons in the ERC Closet, Elephants in the Room (Part 1)

David Celestra Tan, MSK
27 February 2019

Part 1 of 3

We have an entirely new set of ERC Commissioners except one and we hope it will be a new dawn of enlightened and balanced regulation, freed from the decade old bondage of captivity by the PDU’s, where public interest is genuinely protected and not just given lip service.  To prevent these new Commissioners from getting culture shocked by thehorror stories on how ERC handles (or mishandles) its regulatory function, we would like to forewarn them of some of the Meralco Skeletons in the ERC Closet that have accumulated from 2004 to 2018.  

1. The 4th Regulatory Reset – Ghosts of the Rate Reset Past

We might as well start with the big skeleton that the succession of old commissions could not handle and now inherited by the new one.

Regulatory rate review or “resetting” every four years is required but the ERC had struggled with doing the right thing and the evident lobbying of Meralco. Now the rate methodology is so convoluted that the 4th regulatory reset had not been done and we are supposed to start the 5th regulatory reset in July 2019.

Effect? The Meralco rates that was based on a projected energy demand in 2011 had been carried over generating revenue on the current demand that had grown 6% per year since then. That can translate to at least 20% excess revenue after seven years.

Meralco, with their usual gumption, always likes to say their distribution rates had not been increased since then. The last time in July 2015 they had to reduce it p0.1752 per kwh because their authority to recover that additional due to a previous supposed “under-recovery” had  expired and the rate we have now is an “interim” rate because ERC could not come up with a 4thregulatory reset which was supposed to start in July 2015 and end in June 2019.

We suggest that we first exorcise this ERC rate setting methodology.  The methodology the ERC adopted called PBR became very complicated and hence susceptible (as probably intended) to be easier to manipulate and negotiate.  Let us go back to basics. Follow the law.

a. Section 25 of the EPIRA Law of 2001 says, the retail rates must be based on investments INCURRED. The current rate methodology adopted by the 2nd ERC commissioner of “performance- based rate making” or PBR allows for Meralco to make money based on “projected investments”, meaning promises, and they recover in advance from the consumers. And they don’t even have to make the projected investments as long as they deliver the “performance”. Who’s to say?

They are also allowed to recover all their expenses essential to providing the service to the consumers.  It is in the interpretation of what is “essential” where the ERC looks the other way, especially if they are out touring Europe or USA.

How about allowing each Commissioner P1 million a year for study and investigation tours abroad so that they don’t have to accept sponsorships of travels from the major players.  That would be cheaper for the public as compared to when they compromise their judgement.

 b. Computing your kwh rate

From these costs of services and investments, the ERC is supposed to determine a fair return on investment and hence a total Maximum Allowed Revenue per year. To translate this into a per kwh rate that you and I will understand, they will determine an estimate of the kwh sales for the years.  I heard Meralco convinced ERC that their annual growth was only 3%.  So that was how the kwh rate you and I pay was based on.

However, with the robust growth of our economy, Meralco’s energy sales had been growing at 7% per year or more than double the 3% and hence, voila, Meralco revenues have been tens of billions a year more.

And here is what is interesting. When your organization acted as an Intervenor in 2015 when Meralco supposedly applied for a “reduction” in their rate, we had discovered something surprising and we hope the ERC can clarify it.

We asked in cross examination the Rate setting economist of Meralco, a nice and smart engineer with an MBA from UP, what Meralco does with the additional revenue due to the increase in sales. He answered under oath that “Meralco keeps it because it is allowed by the ERC rules”. Surprised, I looked at the ERC hearing officer because that was confusing. And the ERC hearing officer did not answer clearly in evident surprise.

These excess charges can be happening in the case of NGCP who is similarly on a PBR rate methodology.

Playing with the energy sales projections, the divisor in determining the kwh rate, and allowing over recoveries, could be one of the biggest inner games that the consumers had not known but is now evident. We hope the new Commissioners can look into this that involve billions in overcharges.

c. Meralco’s Excess profits (or over recovery) and Mindboggling Refund

This is a big harrowing skeleton and for the last few years compounded by the ERC quagmire, Meralco has been enjoying extra billions out of outdated and anomalous rates. Remember that Mr. MVP of Meralco likes to announce P19 billion in profits “due to increased energy sales”?

We fear that ERC’s previous set of commissioners could not finalize the 4th regulatory reset because the “excess profits or over-recovery” would be so mindboggling that Meralco cannot imagine being asked to refund it.  Let us also remember, Meralco has been announcing profits equivalent to 25% of their equity, when the Supreme Court had ruled that the legal limit for public service franchises is 12%. Now these new set of Commissioners would have to look at this pile of overcharges to the public but have to stare into the eyes of its guardian, Meralco.

With tens of billions at stake, you can imagine the kind of Meralco lobbying and enticing it would employ to manage the amount of the refund.

d. ERC’s favorite Exorcist

Normally the ERC would appoint foreign “regulatory” experts to advise them and save them from the tough tasks and being blamed for it.  That incumbent consultant is a company named Castalia whose recent works on Systems loss methodologies specially for the Electric Coops leaves one to wonder if they are right for that sensitive work.  Unfortunately, the dependence of ERC on a foreign consultant is never more profound than it is now because they are all new and groping for direction within a short time. We miss PB Associates, a very knowledgeable foreign consultant with a lot of integrity based on their work (so much so that they lost their consultancy job?).

I remember a conversation with an ERC Commissioner who was very proud to claim that they saved the government a lot of money by removing a foreign consultant in the reset process.  And cost consumers 10’s of billions a year in the process?

e. Test Case

Meralco was supposed to have been allowed to recover P20 billion in under recovery from the 2nd Regulatory Reset from the 3rd regulatory reset from July 2012 up to June 2015. But the revenue from “recovery of under recovery” must have been higher during the recovery period to June 2015 when that recovery authority expired.  How much was the “over recovery from the recovery of the under recovery”?  It sounds like a riddle but this can be easily quantified by the right thinking analysts for ERC.

f. The Good News is Rate Setting need not be so complex and confounding.

Let us get off the PBR gravy train and go back to RORB, a more transparent system or go with a Modified PBR where only returns from investments actually incurred will be allowed. And over and under recoveries due to changes in the assumed energy sales (the divisor of the rate formula) are adjusted every year and not allowed to accumulate in multi year resets. This will also end the vicious cycle of refunds and rate adjustments.

Dear Commissioners, don’t be scared. PBR is actually against the wording and spirit of the law which require that for this alternative to be adopted, it must be “in the public interest” as provided for under Section 43(f) of RA 9136.  And certainly the PBR as currently allowed by ERC is clearly NOT IN THE PUBLIC INTEREST. In addition to it being illegal as it violates the provision that“ the rates must be based on the principle of full recovery of prudent and reasonable economic costs incurred.”

2. The Good Skeleton of Finally Correcting the Treason of Rule 11 of the EPIRA IRR

In the waning days of the former ERC Chair Zenaida Ducut in 2015, the ERC surprisingly made an effort to correct one of the great illegalities in the implementation of the EPIRA Law (RA 9136 of 2001) which was Rule 11 of the EPIRA. This Rule watered down the restriction of concentration of power generation facilities to only “control” instead of “ownership, operation, or control” as required under Section 45 of the EPIRA Law. This punched a mammoth loophole that had led to the monopolization of power generation and hence avoided true competition that was expected to lower the rates.

The EPIRA Law under Section 45 tried to promote competition in power generation and avoid concentration of ownership of the power plants by limiting the ownership, operation, or control of power plants that can be owned by an entity and their affiliated companies to only 30% of the regional grid and 25% of the national grid.  Mathematically it means there would be at least four (4) generating companies that will compete in each area, thought to be sufficient to create beneficial competition for consumers.

Using Rule 11 as guideline, the ERC had been determining and announcing every year the maximum limits of installed power generating capacities and no one had been in danger of breaching the limit. We believe that at some point they also realized that by using only “control” they are not implementing the requirements of the EPIRA Law itself which clearly included three criteria which are “ownership, operation, or control”. They also noticed that power generation groups were just forming partnerships and joint ventures to circumvent the “concentration” limits.

After months of staff work, on October 13, 2015 the ERC posted its draft new guideline inviting public comments as ERC Case No. 2015-005 RM.

“GUIDELINES FOR THE DETERMINATION OF INSTALLED GENERATING CAPACITY AND ENFORCEMENT, OF THE LIMITS ON CONCENTRATION OF OWNERSHIP, OPERATION OR CONTROL OF INSTALLED GENERATING CAPACITY UNDER SECTION 45 OF REPUBLIC ACT NO. 9136″. 

“The proposed amended Guidelines, on the other hand, provides that in the determination of the Generation Companies’ market shares and potential breach of the 30% and 25% market share limitation, it shall be separately determined based on three (3) separate tests, as follows:

a. Ownership test;
b. Operation test;
c. Control test.

The generation company and its related group, if any, should comply with all the above mentioned tests. In the event that the generation company exceeds the limits in either of the tests required, the ERC shall consider the same as a breach of any of the market share limitation. If a generation company and its related group exceed the limits as periodically determined and set by the ERC in accordance with the Guidelines, it is obligated to inform and report such breach and the reason therefor to the ERC within the prescribed period from the occurrence thereof.

Thus, the Commission seeks the comments from the various industry stakeholders on the proposed amended Guidelines pursuant to Section 4s(a) of RA 9136.”

The draft revision does not go far enough but it would have been a big step forward towards correcting the legal infirmity of Rule 11 but also the control of market concentration and domination.

The Salazar ERC’s Step Backward on that fateful day of March 15, 2016

The ERC then quietly “held in abeyance” the rules on the determination of market concentration by passing Resolution 3 of 2016 on March 15, 2016 the same day and session that they famously “extended” the CSP policy by 6 months from November 6, 2015 to April 30, 2016. According to the Alyansa para sa Bagong Pilipinas, the two actions were interrelated because the new contracts that will result from the CSP extension will run counter to the limits of the new rules on concentration of installed capacity.

We hope this is one good skeleton that the new ERC can revive.

(to be continued)

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph