ABOLISHING ERC AND CREATING A NEW POWER REGULATORY AGENCY NOT THE KEYS…..IT IS HEART AND SPIRIT. (Part 1)

David Celestra Tan, MSK
23 May 2018

Part 1

In February 2014 we wrote in the Philippine Inquirer about the Epira Law being an imperfect law that is imperfectly implemented.  As it relates to the Energy Regulatory Commission that it created under Section 38 the imperfections of the law pale in comparison to the damage done to consumers and country of the imperfections of the regulatory agency itself in the implementation of even its very clear mandates under the law.

Current pronouncements of abolishing the ERC to be replaced with a new Board of Energy or Philippine Power Regulatory Commission will unlikely make much difference for it would be impossible to legislate against what truly ails the power regulatory agency which is a consistent lack of a true regulatory soul that would be committed to balancing the interest of electric service providers and those of the electric consumers that need to be safeguarded under a deregulated sector.

It is hard to get excited about the publicized creation of a new regulatory agency when you hear the sponsors starting on the wrong foot.

“The ERC needs to be an independent body”.? Excuse me sirs, the ERC degenerated to what it is because it successfully parried in 2004 attempts of the DOE to coordinate policy. “Independence” only meant they didn’t want to be interfered with in whatever they were doing. And see the result?

.A reported new sponsor of an ERC abolition is quoted by the papers to say “if the ERC becomes an attached agency of the DOE, it would still be prone to corruption activities.”

.”I think if the ERC becomes an attached agency of the DOE, that would be more subject to a lot of abuses, whereas if we leave the ERC as an independent body, I think we just need to strengthen it more so we can take out the issues of corruption and abuse,” he said……So sad.

We are for strengthening the ERC more. The ERC being allowed too much independence, whether by omission or commission of the Executive Department, whether directly by the office of the President or through the DOE, is actually part of the problem.  The implication that issues of corruption and abuse at the ERC were results of interference from DOE is something new to us. We have not heard that before so we are wondering where that premise is coming from. It has been too independent (and unfortunately also too non-transparent and divergent) since 2004.

In fact in the current imbroglio about the Meralco’s seven (7) midnight power supply contracts totaling 3,551mw, and the resulting cartelization of the power generation sector, consumers have been begging unsuccessfully for the DOE to intervene to break the impasse and assure future power supply.

Imperfections of Epira Law as it relates to the ERC

Let us start by remembering that the success of a deregulated power sector and the achievement of lower power cost to the consumers depended on the creation of a truly competitive power sector. One where truly independent power generation investors can also come in an atmosphere of open and level playing field competition to assure the continuous inflow of more and better power supply. A successful deregulated sector in turn needs a strong and truly independent ERC.

1. The Epira law put too much burden on the ERC to make power deregulation work. The ERC was a new creation after the old ERB was abolished. And it struggled mightily under the weight of its monumental mandate.
2. Rather than making the ERC concentrate on rate making and promoting competition, the Epira law gave it responsibilities like inspections and provisions of operating permits to power plants and self-generators, functions that the government bureaucracy turned into full scale processes that duplicated the work of the DOE or the grid operator the NGCP.
3. The Epira Law failed to unequivocally prohibit cross ownership between a generator and a distribution utility. (Thanks to the powerful vested lobbyists) And worse under Section 45 failed to require competitive bidding for power generation supply contracts that would be passed on to the consumers. The Epira Law Implementing Rules that was written by the DOE made it worse by writing Rule 11 which further opened the loophole for concentration or domination of generating capacity. It dropped “ownership” and “operation” as part of the criteria and limited it to only “control” in clear contravention of the Epira Law that it is supposed to faithfully implement.
4. The Epira law made its language too vague on many key areas that opened the door for manipulation. (Thanks again to the powerful lobbyists). Under Section 43(f) the EPIRA Law opened the door for “alternative rate making methodologies” which unfortunately was parlayed into a “performance based rate making” (PBR) methodology that is disastrous for consumers.

Imperfect Implementation by the ERC

The ERC as the implementor of the EPIRA Law rules of competition and rate charges to consumers lost its regulatory soul after the first Chair Fe Barin was “kicked upstairs” because the powerful DU’s “could not work with her”. I guess we all know what that means. And the rest is history….the horrific kind for consumers circa 2002 to 2016

Many of the problems at the ERC have been self-inflicted.

1. Regulating what should not be regulated…..and vice versa

One reason the ERC is swamped and overworked, and hence had become slow and inconsistent, is because it is regulating things that it should not regulate. Do you know that if a utility wants to reduce its rates, they cannot do so without ERC approval? Heck, anyone who wants to drop their rates should be welcome.

The generation sector is supposed to be a deregulated sector but the way they approve the power generation sector, they are crossing the line towards regulation. In their job of determining “fair and reasonableness” of the generation rates they compute and establish profit limits. That is regulation. Instead to assure fair and reasonableness, they should insure true competition and establish protective industry rate benchmarks.  This would reduce substantially the applications and hearings at the ERC.

Not Regulating what should be regulated.

Conversely, the distribution sector that is clearly a regulated sector they refuse to truly regulate. Meralco makes 25% return on equity yearly instead of the Supreme Court ruling of 12%. ERC is content in hiding under the veil of “Performance Based Rate making” or PBR rate making methodology….as if it is a rate making policy for public service utilities. PBR is only a method of computing rates. The country’s rate policy is “least cost power”, ”distribution sector is regulated”. See Section 2 of the EPIRA law that outlines the Policies of the State.  These are also enunciated by the Supreme Courts ruling for 12% maximum limit.  Some Commissioners are claiming that Meralco’s 25% return includes “unregulated profits”. This is regulatory abdication.

For transparency, may we respectfully ask ERC to require Meralco to separate the accounting and reporting for profits of regulated and unregulated businesses?

(to be continued)