Creating the Kind of ERC the Country Needs
Part 2
David Celestra Tan, MSK
12 May 2017
The Energy Regulatory Commission had not been providing the kind of power sector regulation and oversight that assure the provision of power supply services at fair and reasonable rates. It is generally regarded as too slow, too bureaucratic, too inconsistent, too confused, too political, and too much a capture of the vested interest. It has no clear regulatory soul. And worse, it has gotten a reputation of being also too corrupt.
Until recently, it is on its way to taking this malady to the next level in the mold of the customs, immigration, and internal revenue departments.
How is it possible that a government agency with good commissioners and good and committed professionals in its ranks will be so lost?
ERC is a classic case of an institution mistaking the trees for the forest, form over substance, the how being more important than the what.
It has to start with strong and upright leadership and President Duterte has the opportunity to right this wayward agency by providing it with a good and incorruptible leader and steward. (It has been our position that the blame for this agency that has gone wrong falls squarely on the appointing authority).
The ERC however needs much more than this magic wand. The burden of the Epira Law needs to be revisited. Its whole structure and methods need to be streamlined. Its vision and mission needs to be clarified.
So how can the ERC be remade to what the country needs? let us count the ways.
1. It begins with the appointing authority, the Office of the President
First there has to be a recognition by the Office of the President that the Chairmanship of this commission will oversee a critical agency that affects that vital public service that is power, the essential component of the economy and the juice that feeds the quality of life of 100 million Filipinos.
Qualification should go beyond political affiliation and connections.
The Office of the President cannot afford to make the wrong choice this time. Or it will finally ruin this agency and with it will be the country’s power development and competitiveness.
Equally important is the marching orders that the President will give his appointee. Will it be genuine “no matter who gets affected” reforms or will it be a “steer clear of the oligarchs variety”? Will lower power cost and business competitiveness now be a national policy? Will we now finally commit to installing true competition in the generation sector, the necessary part of privatization and deregulation.Will we now commit to protect the public interest? Will we now have clear and transparent rules? Will the vicious cycle of overcharging and refunds be stopped?
2. Reform its Mind-set
a. ERC is Too Judicial to a fault
The Epira law said the ERC will be a quasi-judicial body but in that the ERC fancied itself to be a court of justice. It acquired the slow and formal processes to a fault. They forgot the “quasi” which they need to use to protect the public interest.Lawyers are needed to present cases and go through the rigid legalese formalities that if you fail to follow, you lose.Consumer groups feel the ERC procedures are designed to weed out the “inconvenient” oppositors.
Part of this “court of justice” persona is the Epira Laws mandate that the Chairman be a lawyer. Nothing wrong with lawyers but the requirement prevented choices of better available appointees. The previous four (4) chairmen did not provide the right leadership not because they were lawyers but because they were trapo politicians with deal making culture.
This faulty mindset was in evidence when the regulatory agency approved in one sitting in December 2013 Meralco’s application to pass on a 90% increase in its generation rates because the rules gave them no choice, totally overlooking their duty to protect the public interest. It was only in the face of a vehement public outcry that they thought of asking for a market rerun that discovered the power market operations breakdown and the investigations of evident market manipulations.
b. Its’ forgotten Motu Proprio responsibilities
The ERC has its own clear mandate to look after the public interest and those are in Section 43. It does not need the intervention or opposition of third parties to test the fair and reasonableness of rate applications. In the application of Meralco for its seven (7) midnight power supply contracts, the ERC dutifully started processes and hearings on the applications. If they were conscientious of their mandate, the first hearings they would hold will be on the possible violations of the anti-competitive, market power abuse, and cartelization prohibitions of the Epira Law given that the 3,551mw of contracts were all negotiated with project companies controlled by sister MeralcoPowerGen. These the ERC has the motuproprio duty to guard against. MSK had filed petitions to suspend those hearings for the approval of the MeralcoPowerGen projects and for ERC to rule first or hold public consultations on the possible violation of market power abuse, cartelization, and monopolization. We have not heard from the ERC.
In another case, a P11.9 billion submarine connection application was evidently and quietly on way to ERC approval until the MSK intervened. We were surprised that the proponents could not answer simple questions like rate impact of the project to consumers and the credibility of a claimed 300mw coal project. Application was frozen and so far saved Luzon electric consumers P0.025 to P0.04 per kwh. It now appears that the project was a subterfuge for a 300mw coal project on another island and the submarine connection was for the private benefit of that proponent that they should pay for and not by the Luzon consumers as they tried to do with evident arrangement with ERC.
c. Blind Implementation of Anti-Consumer ERC Resolutions and Methodologies
A reformed ERC needs to review the previously passed Resolutions and not just implement them blindly. Landmark rules passed in 2004 to 2011 needs to be reviewed and amended like the Performance Rate Making, Systems Loss, and etc. to cure inequities and to better improve the safeguard for consumers. This includes its rules of practice.
3. Decongesting the ERC
ERC is now slow and lumbering because it is too congested which constrains it from truly and efficiently serving the public and stakeholders interest. It is true that about half of it is due to the heavy burden dumped on it by the EPIRA Law of 2001. But the other half is self-inflicted.
a. The ERC regulates what does not need to be regulated and vice-versa.
The generation sector is supposed to be a non-regulated sector but the way they evaluate them crosses the line towards regulation in the pretext of assuring fair and reasonableness of charges to consumers. Whats the difference? ERC evaluates rates by using fair return on investments. Now it’s WACC.This is effectively regulating profits, a hallmark of regulated sectors. What they should be evaluating is “fair and reasonableness” which require benchmarking for existing cost efficient comparatives.In a project in Palawan, one evidently favored power generator got their approval for a rate almost double that of another IPP for the same technology and time period. Mainly because the favored generator knew how to play games with his numbers. They say each project is different. Some projects are not reasonable for consumers. That ERC decision caused a P140 million a year increase in missionary subsidy for 10 years or P1.4 billion! In another project in the Visayas, a generator applied for a P4.00 per kwh rate which is better than the prevailing coal rate of P5.25 per kwh. Yet, ERC disapproved the P4.00 and gave them only P2.00 per kwh only because they are producing the energy so efficiently. The grid lost a source that is P1.25 per kwh cheaper.
Similarly, if the ERC will seriously implement the Competitive Selection Process rules for the generation sector, then there is no need to regulate profits. They do need to put in safeguards against manipulation of bids and establish “fair and reasonable” benchmarks. This will also simplify the ERC evaluation and avoid the need to issue interim Provisional Approvals.
When they need to regulate, they don’t. In the systems loss computations of private DU’s like Meralco, the ERC issued its Resolution 11 of 2011, loosening the rules by requiring only a sworn affidavit of DU officials to support the computations of systems loss charges. Its original rules on systems loss provided that the systems loss shall be “actual” but not higher than 8.5%. By accepting only sworn affidavits, ERC is reneging on its regulatory duty to assure the systems is actual and not higher than 8.5%.
The biggest regulatory abdication is the PBR which in effect deregulated the profits of distribution utilities like Meralco that the Epira Law of 2001 clearly provided should be regulated. Now we have a DU that makes 25% return on equity AFTER tax instead of 12%. In the current ERC’s world this is legal, fair, and reasonable to consumers.
b. Issuing Permits to Operate to Power Generators called “Certificate of Compliance”
The issuance of a Certificate of Compliance before a generator can operate was meant only to be a ministerial checklist to verify if the private generators have complied with all the government permits before they operate. A one week process the most. The ERC had expanded this COC process to a full blown bureaucratic application complete with technical inspections and testings of the power plant which typically take 3 to 4 months unless you are well connected. The ERC witness testings are only duplications of the those already being done by the NGCP, DENR, and PEMC for WESM. The expanded process added work to ERC and delayed the power delivery to the grid of new power generators by 3 to 4 months, almost as long as summer. The revenues lost to generators are significant.
COC’s for self-generators are another example. Why not transfer this to the WESM if they want to be members or to the DOE since the latter anyway need to know which plants are adding capacity to the grid.
c. Deliberate Process Design for Repetitive Applications
As an approving agency, ERC appear to be designing its processes so that applicants will have to come back to the agency for renewals and reapplications unnecessarily. This is the oldest trick in the bureaucrats “relevance” or money making playbook. To observers, it started getting worse in the last year. Approvals of generation supply contract renewals are given only for one year even if the parties have agreed on five years. Conversely, Supply contracts of two Mindanao electric coops were extended by the ERC without commission deliberations and even if the two concerned Coops have notified the ERC that they did not want to renew.
There is a great need to streamline its processes and regulatory practices.
d. Deconcentrating Power
Power corrupts and absolute power corrupts absolutely so goes the adage. This is very true in ERC. The Epira Law put too much power and consequently to the Chairman. The power of the ERC needs to be deconcentrated. By law, may be there should be a Commissioner for Regulated Sectors like Distribution and Transmission utilities. Another Commissioner shall be incharge of the non-regulated generation sector. The Chairman should no longer be allowed to have absolute domain over the whole power industry terrain.
4. Institutional Capacity Building
The ERC will be stronger and committed to its upright regulatory function if it has a competent bureaucracy that is dedicated to a clear regulatory vision and public service. It can do so only if the agency has the ability to hire, train and indoctrinate, and retain good professionals and talent. Essential to that is a sufficiently competitive salary and benefits scale and a professional and inspiring work environment.
5. Reforming the Epira Law of 2001 that created the ERC
The Epira Law not only gave the ERC too much far reaching power. It also gave it too much discretion and leeway in interpreting the rules. This is where the Office of the President comes in. Reforming the Epira Law will need the power and persuasion of President Duterte if the law that created the ERC can be amended to close the loopholes for monopolization and market manipulation and to narrow the discretion of the ERC to reduce their opportunities to go astray. Now we have a maverick President who has demonstrated the kind of political will to make things happen. The opportunity to finally correct the long injustice to the consumers and the confused course of the wayward regulatory agency is now.
One of the bi-cam framers of the Epira law knew that the final version gave dangerously too much discretion to the ERC. He passed an Amendment to the Epira Law in 2006 seeking to narrow the regulatory mandate of the agency. I understand that Senate Bill passed in the Senate but was never taken up by the Lower House. And we should know why.
For some reason the current rules do not allow the promotion of commissioners to the position of the Chairman? Why require always someone new who will have to learn the ropes when there are qualified Commissioners who can step in and provide experience and continuity to regulatory rules?
The Electric Power Industry Reform Act of 2001 and its various versions had been kicking around since 1995. It did not happen until the newly installed President Arroyo backed it up and mobilized the executive department to use its immense power to lobby for its approval. Similarly, making the badly needed amendment will not happen without a resolute support from the Office of President Duterte.
Of course, for now he has to start with choosing a good ERC Chairman.
MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com
