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

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