Rethinking the ERC plan to shift to “fixed price”generation rates…And the “30% of Project Cost” Exemption from CSP!!

David Celestra Tan, MSK
2 April 2019

The new ERC has been hard at work on a new guideline or template for the contracting of power generation supply agreements. Without exaggeration this guideline would be one of the big signals to consumers on the regulatory soul of the new ERC Commissioners as a group.

In the 3rd version, one of the new rules under Section 13.2(e) is the shifting to fixed price generation rates including fuel as opposed to the current regime of variable costs and pass on charges.

Just like other utility economists, i am shocked to my core. Whhatt! This may be well intended but we hope the ERC will rethink this.

It is true that the current pricing formula of pass on charges for changes on fuel price and forex rate variations had been resulting to a yoyo effect on generate rates and gives electric consumers reason to complain every time it happens.

And every time it goes up Meralco, ERC, and DOE have the inconvenience of explaining to the public what’s going on.

Addressing this regular complaining seems to be the only reason the new ERC is considering this fixed price regime. And if consumers no longer complain then the ERC has come up with a good solution?

But Fixed Rate pricing is not necessarily good for nor protective of the consumers. Pacifying the consumers this way is a lot like addressing the crying of a child but not really the cause of his crying. Yes poor baby, let’s give him cough syrup to induce him to sleep, pain killers for his pain, or downers!

This is eerie dejavu! During the finalization of the EPIRA Law in 2001, there were clear efforts to change Meralco’s rate setting from RORB or return on rate base on which consumer advocates became very adept and had been raising a lot of questions and inconveniences for both ERC and Meralco.  That opened the door for a change to a new rate setting methodology called PBR or performance base rate setting.  People are so confused by this PBR and no one is able to question them a lot.  Na set-up ang consumers and worse, the fruit of the pudding is Meralco started making 25% per year return on investment, double the 12% determined by the Supreme Court for the distribution monopoly. And in your organizations petition to change or modify the PBR, the previous set of commissioners were apathetic to correcting the injustice.

The current variable costing vs fixed pricing

Under our current generation rate formula, inflation indices, currency variations, and fuel price changes are factored in every month and it is resulting to the rising and falling of the generation rate. Thus the yoyo effect.

In regulatory economics this is also called “sharing of risks between generators and consumers”. And the principle has merits.

1. Generators do not need to increase their rates to cover forex and fuel fluctuation risks. And those are big financial risks. We estimate a “risk factor” can add 10 to 20% to a fixed rate. Ironically, the generators would be happily keeping the profits when fuel is down but when they have to lose a lot of money when fuel goes excessively high, they will shut down their plants for some alibi.  Consumers lose.

2. The adjustment factors of inflation, forex, fuel pr