Meralco Skeletons in the ERC Closet…. and A Humble Message to the New Commissioners (Part 2)
David Celestra Tan, MSK
28 February 2019
Part 2 of 3
3. The Unfairness of Allowing “Systems Loss” averaging and its Non-transparent monthly computation by Meralco
The ERC limits the systems loss charge to be 8.5% and Meralco had been announcing its systems loss to be 6.75%. But those are averages. Captive customers that comprise 60% of Meralco’s revenue (residential customers above the poverty line and most businesses) were charged more than 10% although industrial customers are charged only 3.5% resulting to the low average.
Despite supposedly adopting a “cost of service” factor in determining systems losses, Meralco is charging residents and businesses in the highly compact Makati and Metro-Manila, the same systems loss as those in the outlying and sparsely populated areas of Batangas, Laguna, and Quezon. ERC went along with Meralco’s argument that they are the “same class” of residential and commercial customers. But they are not. One is densely populated and cost of service is low per kwh and hence technical and non-technical losses should be very low in the not more than 5% range. Outlying and sparsely populated areas cost more to serve and real systems losses, both technical and non-technical are higher. How about a simple subclassification of Captive Market 1 and Captive Market 2?
It is our position that averaging systems loss is allowing the overcharging of captive customers by 2 to 3% which amounts to more than P2 billion a year.
But wait, didn’t the ERC reduce the systems loss average to 6.5%? Yes, but Meralco’s average is already that and captive customers are still charged more than 9%. Nothing really has changed. Was this tokenism?
This is one skeleton that is easy to resolve. Just adopt an 7.5% maximum systems loss to any customer, even higher than the 6.5% average. If Meralco wishes to charge industrial customers 3.5% that is their business. But they should not recover the reduction from the hapless captive customers like us. If Meralco’s actual systems loss to captive customers are lower than 7.5% they can keep the difference as reward for being more efficient. This is a truer form of “performance based” rate making.
Pegging the systems loss to captive customers in the metropolitan areas at say 6% and 7.5% in the remote areas would at least legitimize Meralco’s keeping the difference and we don’t have to worry about how their finance official would compute it.
4. Procurement Guidelines for Power Supply Agreements
Just before most of the new Commissioners were appointed, the ERC tried to subject to public consultation a draft Guideline for Procurement for PSA by Distribution Utilities.
In it, it was adopting Swiss Challenge and Unsolicited proposal as legitimate forms of Competitive Selection Process. In fact about 1/3 of the guideline was about implementing unsolicited proposals. Those were what Meralco wanted and what many electric coops who wanted to manipulate the CSP process had been attempting to do.
We don’t know if the highly experienced lawyer (but new to power regulation) Chair Agnes Devanadera just got snowed by some advisers or she was a knowing participant in trying to pass that Guideline. (we hope not)
If this is adopted by the ERC, it will signal that they are preparing to legitimize Meralco 7 mid-night contracts by subjecting them to a curative Swiss Challenge type CSP.
Passing it would be a big set-back for the consumers in its aspiration for a truly competitive power generation sector and a disappointing signal that in ERC it would be business as usual.We were constrained to seek the assistance of the Office of the President. Nananalangin po tayo na mapansin ng Pangulo.
We hope the new commissioners will see through this yet another blatant attempt at watering down the CSP policy and will not allow it.
5. Delays in approvals of EC Capex applications
This is one of the major reasons many electric coops have failed to keep up with the growing demand in their service areas. Their capex programs have not been approved by the ERC, many taking more than five (5) years.
Let us hope the ERC can provide a focused attention from one of its Commissioners on the applications and methodologies for Electric Coops.
Why cannot they get a faster Provisional Authority as long as the NEA studies and endorses the Capex plan? Why not develop a new revenue methodology for electric coops so that they can operate as efficient utilities?
The ERC foreign consultants had brought down the systems loss allowances for Electric Coops. However, it had failed to provide mechanisms for the proper and timely provision of revenues to achieve those lowered systems loss allowance.
6. Lost in Regulation – Regulating what does not need to be regulated and not regulating what needs to be regulated.
This might surprise a lot of people because the current system of regulation has been this way for more than 10 years. The danger is the new set of Commissioners might get indoctrinated into this modus operandi and accept them as they are.
The ERC has been failing to regulate the distribution sector by misapplying a PBR rate setting methodology and have been practically regulating the power generation sector that the EPIRA Law declared to be unregulated.
Regulation at the very basic level is limiting the amount of money the investors in the sector can make out of their investments to what is fair and reasonable.
The previous set of commissioners had admitted that effectively the profits of distribution utilities under the PBR rate methodology are no longer limited or regulated due to the adoption of PBR. And that the 12% set by the Supreme Court as the limit in annual profits is not applicable “because the economic conditions are different”. This means the economic conditions then in 2006 when the 12% limit was imposed were much worse than today that 25% return on equity is justifiable? We did our checking and by most econometric measures, the Metro-Manila economy has been booming and much better than 10 years ago.
This is another regulatory mindset of the previous ERC’s that had it “baligtad”. The policy of the state is 12% per year return as ruled by the SC. The rate setting methodology that the ERC should adopt should be towards the achievement of that policy of the state. It is wrong , and not in the public interest,to allow the tail to wag the dog.
The ERC instead has been regulating the profits of the power generators by using Weighted Cost of Capital (or WACC) in computing the fair and reasonableness of the rate on a table evaluation. They argue that they need to do so “to protect the public interest”. What will work better for consumers is assuring that these power generation contracts are subjected to true competitive bidding or CSP. That is why the postponement of the overdue CSP policy by ERC in March 2016 was a big let- down and betrayal of the public interest (intended or not).
Competition always beats regulation in reducing rates to consumers. As a safeguard, the ERC can establish benchmarks based on efficient existing plants as a protection against overpriced and manipulated biddings. To assure least cost power for the public, table evaluations are supposed to be complementary to open and true competitive bidding and not a substitute for it.
A humble message to the New Commissioners:
We realize Po that the new Commissioners are in a tough situation. Walking into this quagmire. So complex and a lot to learn and sort out in a short time. And you have that backlog of applications and petitions. It is natural for those who are in the pile to seek help to expedite their long-delayed petitions.
The danger for the consumers is the very powerful and enticing lobby of the vested interests and their political patrons for the perpetuation of anti-consumer and anti-public interest methodologies.
You probably did not realize the tough patriotic challenge an appointment to the ERC Commission would entail. This is a defining moment where you have been drafted for duty to country to bring your professional expertise, moral compass, personal integrity, and patriotism to one of the forefronts of our national battle for public interest….where the public and Filipino pride have been taking a beating for more than a decade. We hope it can be shown through your example that the Filipinos are capable of governing themselves properly and fully capable of truly looking after his countrymen. We pray that the challenges will bring the best in you.
It is in the DNA of the private sector entrepreneurs to try to maximize their profits, to push their profiteering ideas to the limit, to exploit opportunities whenever open or opened to them. That’s how they measure their self-worth and their business acumen. They go as far aswhat you as the Regulators will allow.
Few of them would have the self-discipline and fear of the higher Being not to exploit the vulnerable Just because “they left their door open and the police is not around”.You are our defender and our hope. Electric consumers have been waiting for saviors and protectors.We hope it is you.
We hope you can each be a catalyst for a new dawn of a sincerely consumer-sensitive ERC. All we are asking is for you to balance things. Consumers do not need to be sacrificed all the time. After all we are the Filipino people and taxpayers that the ERC is mandated to safeguard against abuse.
Sana po you will not allow yourselves to be swallowed by the system as they say.
The above list of skeletons is not by any means complete. There are many other skeletons in the ERC closet including the hundreds of millions of penalties on the major power generators who manipulated the WESM in December 2013.
But these are the six major skeletons that we hope, forewarned, the new ERC Commissioners can deal with and correct so the country can get a true guardian of public interest as the ERC is supposed to be under a privatized and deregulated power sector.
Pasensya na Po if sometimes we are too direct, if we bring out truth that are inconvenient. Nothing personal specially since all of you are new, which is what brings consumers hope. MSK only tries to forewarn you of these regulatory skeletons that at one point or another you as Commissioners will likely run into. We are only trying to bring the message of the electric consumers. Please don’t shoot the messenger. We are not the enemy.
We hope you will conquer the regulatory skeletons and demons for the people.
God Bless.
Next: Elephant in the ERC Room.
MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph
