Viewpoint: Regulatory Capture of the ERC Has Resulted in High Rates for Electricity in Mindanao

By David A. Tauli, Mindanao Coalition of Power Consumers

“Regulatory capture is a form of government failure that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating. When regulatory capture occurs, the interests of firms or political groups are prioritized over the interests of the public, leading to a net loss to society as a whole.” (Wikipedia)

This paper explains that regulatory capture of the Energy Regulatory Commission has made it impossible to attain one of the main objectives of the Electric Power Industry Reform Act of 2001 (EPIRA); namely, the reduction of the prices of bulk power generation through the introduction of competition in the electric power generation sector.

It is well known that the highest price of coal power generation in the Mindanao Grid is higher by more than one peso per kilowatt-hour than the highest price in the Luzon-Visayas Grid. What is not generally known is that the reason for the higher rates of coal generation in Mindanao is the regulatory capture of the ERC.

Note that I am assuming the regulatory capture of the ERC, rather than its corruption, which is why this note starts with a definition of regulatory capture. But I am not discounting the possibility that the ERC has been corrupted by the electric power corporations that it is regulating. Corruption, however, can be stopped only by filing legal suits against the ERC, while regulatory capture can be corrected by officials in the Department of Energy working to do so.

Regulatory capture of the ERC can be most clearly seen in the cases filed for approval of PSAs for the generation of the Mt. Apo geothermal power plant. In those cases, the ERC could have decided, using only the admitted facts on the case, in favor of lower rates to be paid by power consumers for the generation of the Mt. Apo GPP. Instead, the ERC decided instead to award more money to the generating company that won the Independent Power Producer Administrator (IPPA) contract for Mt. Apo. The rate for Mt. Apo (5.40 pesos per kilowatt-hour, compared with the rate of less than 3.00 pesos per kWh previously approved by the ERC, resulting in around 17 billion pesos of profits for the generating company) that was given provisional by the ERC is clearly unreasonable and unjust. Hence, the Mt. Apo case also smells most offensively of corruption in government agencies in the electric power sector. And it might yet become the basis for the filing of cases by the Ombudsman.

In its Declaration of Policy, the EPIRA states that it is the policy of the Philippine government “to ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products in the global market”.

To help put this policy into effect, the EPIRA also provided that: “A Distribution Utility shall supply electricity in the least cost manner to the Captive Market within its Franchise Area” The simplest procedure for a distribution utility to comply with the requirement for least-cost acquisition of power supply is to conduct competitive bidding for power supply for its customers. Prior to 2010, all the distribution utility companies in the Philippines, investor owned and electric cooperatives, carried out competitive bidding for power supplies (except for supplies from renewable energy power plants for which a competitive regime could not be established).

From 2010 to 2015 in Mindanao, no competitive bidding was conducted by the distribution utility companies for power supply from coal power plants, except in two cases: the power sales agreements between electric cooperatives and the GNP coal plant in Lanao del Norte, and the PSA of CEPALCO with the MINERGY coal plant in Balingasag, Misamis Oriental. As a consequence, the distribution utilities entered into negotiated contracts with coal generating companies at the prices higher than 5.00 pesos per kWh, when DUs in Luzon were getting prices of less than 4.00 per kWh from coal plants.

The EPIRA also mandates the Energy Regulatory Commission to “enforce the implementing rules and regulations of this Act”. That includes of course the requirement for the DUs to carry out least-cost acquisition of power supplies. Prior to the appointment of Zenaida Ducut as chairperson of the ERC, all the DUs applying for approval of PSAs had to show in their applications that they conducted a least-cost acquisition process before entering into contracts with generating companies for their supply of power. During the Ducut regime at the ERC, however, this requirement was disregarded, and PSAs that did not go through a least-cost acquisition process were approved by the ERC. That was the point at which the regulatory capture of the ERC became evident. PSA cases decided after Jose Vicente Salazar became chairman of the ERC were not strict about the requirement for least-cost acquisition; hence, the regulatory capture of the ERC is still in place.

To correct (or maybe to cover up) this failure on their part to enforce the implementing rules and regulations of the EPIRA, the ERC enacted in October 2015, Resolution No. 13, series of 2015, “A Resolution Directing All Distribution Utilities (DUs) To Conduct a Competitive Selection Process (CSP) in the Procurement of their Supply to the Captive Market”. The ERC was forced to enact the CSP resolution by a petition to do so that was submitted by the Matuwid na Singil sa Kuryente Consumer Alliance, Inc. (MSK), headed by David Celestra Tan.

Electric cooperatives in Mindanao started complying in November 2015 with the ERC directive, and carried out CSPs prior to entering into PSAs for power supply from the coal power plant of the San Miguel Consolidated Power Corporation (SMCPC) in Malita, Davao del Sur. The contract price for the power supply from the San Miguel coal plant is around 4.30 pesos per kWh. That is indeed a big reduction from PSAs for the FDC coal plant in Villanueva, Misamis Oriental at 5.40 pesos per kWh, in which no CSP was carried out.

It would be wrong, however, to believe that the rates for electric power in Mindanao would start going down with the institution by the ERC of CSP by the distribution utility companies. Because of the regulatory capture of the ERC, the generating companies, the transmission companies and the distribution utility companies can find ways to get the ERC to approve high rates for electric power. Only the ending of the regulatory capture of ERC would result in fair and reasonable rates in all parts of the electric power industry. Moreover, the high rates of coal plants that were already approved by the captured ERC would not be reduced by the belated enactment of CSP resolution. Mindanao power consumers will have to resort to other means to bring down the exorbitant rates of the coal power plants that were approval during the period of regulatory capture of the ERC.

The regulatory capture of the ERC cannot be ended by the introduction of new rules and procedures for the ERC or by the ERC, such as the CSP. Even amendments of the EPIRA would not correct regulatory capture. The only solution is the organizational reform of the ERC along such lines as would make it difficult, if not impossible, for the regulated entities to capture the regulating agency. Obviously that cannot be accomplished by the ERC itself. We will have to appeal to the new officials of the Department of Energy to do that.