PBR is a farce: Meralco’s Rate Padding Schemes Showed in its PBR Application
(Based on the audit report of ERC foreign consultants, PB Associates in relation to Meralco’s application for new PBR rates)
1. Introduction
Meralco has the highest distribution rates in the Philippines. The 5000mw Meralco is about 30% higher than the 300mw Visayan Electric in Cebu and the 260mw Davao Light in Davao.
The difference is about P0.85 per kwh.
Meralco has been caught many times padding its rate-base under the old RORB system and overcharging the consumers. From luxury estates to overpricing of purchases from Lopez companies and engineering and construction contracts to Miescor and preferred material suppliers. A 10% overprice in equipment means a 10% overcharge in the rate-base.
It was no wonder that they refused to be audited by the COA for asset base validation. It was only after realizing the backlash from public opinion that they agreed with some reported prodding from the ERC officials.
ERC’s approval of Meralco’s rate setting methodology from RORB to Performance Base Rate Setting or PBR resulted to even higher distribution charges by at least P0.40 per kwh and a grave betrayal of consumer trust.
What makes Meralco PBR application remarkable was their show of gump and arrogance in fully displaying very naked attempts to overcharge the consumers. It seemed they were very confident that they can get away with it.
2. Performance Based Rate-Setting (PBR)
a. Just like many evil schemes, PBR evokes some agreeable form of “performance” basis for consumer service. Unfortunately, PBR as approved by the ERC refers to a rate methodology under which Meralco’s distribution rate shall be based not only on the historical investment (or assets actually used to service the customers under RORB) but also for the programmed investments that they promised to make for the coming years to achieve a level of performance.
b. Since the rate is prospective, Meralco enjoys a recovery even if they have not and will not make the investment. It is therefore easy to see that PBR will result to higher rates than the old RORB which despite its loopholes is at least based on existing assets and incurred investments.
c. In the first year of PBR alone, it is estimated that Meralco gained an additional revenue of P6 billion and a penalty for non-performance of P300 million for a net gain of P5.7 billion a year on the PBR scheme.
d. Origins and Basis in Law
- Under Section 43 (f) of the Epira Law of 2001“the ERC may adopt alternative forms of internationally-accepted rate-setting methodology as it may deem appropriate. The rate-setting methodology so adopted and applied must ensure a reasonable price of electricity.”
- It is important to note however that Section 43(f) preceded this provision as follows: “in the public interest, establish and enforce a methodology for setting transmission and distribution wheeling rates and retail rates for the captive market of a distribution utility taking into account all relevant considerations, including the efficiency or inefficiency of the regulated entities”. Some emphasis has to be put on “in the public interest”.
- It should be understood by both Meralco and the ERC that while the Epira Law is providing for a possible adoption of alternative forms of internationally-accepted rate-setting methodology, the adoption of the PBR should be in the public interest. This is a prerequisite for such adoption from the old method.
- To serve the public interest the adoption of alternative methodology should result to either (a) a reduction in rate or (b) improvement in the service to the customers. In the Philippine setting these two benefits should be present to adopt a new methodology
- PBR appear to be in violation of Section 25 which clearly provides that the retail rate must be based on investments incurred. Projected capital investments are only promised and not incurred.
- Meralco in its application did not really bother to prove that the PBR would be to the public interest but only tried to justify the charges to be reasonable and proper. Unfortunately they are neither. Abuses and overcharging were blatant and open.
3. Examples of Meralco rate padding schemes that were revealed in the PBR application. Attached is a copy of the full report of PB Associates. This came from the ERC website.
a. Claim for “Additional Expenditures” of P2.463 billion
Meralco was claiming additional expenditures totaling P2.463 billion over four years from 2008 to 2011.
- This included P1.839 billion for “regulatory compliance” activities covering “PBR, the Magna Carta, DSOAR, Business Separation Guidelines and other guidelines and rules that the ERC will implement in the immediate future”.
- Even the ERC consultants noted that
- “these are generally normal business processes and activities that a well managed distribution business should be routinely undertaking”
- “no details for the additional work were provided other than very general comments”
- “Meralco has not provided details of the methodology used to quantify the additional regulatory compliance work as a result of new regulatory requirements, no its estimate of the additional work load in staff numbers, nor was any information provided as to the capability of existing staff to cope with a proportion, if any, of the additional work load.”
3. Consequently the foreign consultants of ERC recommended only P320 million of the P2.463 billion requested or 87% less.
4. The ERC however disagreed with the consultants conclusion to be “inappropriately harsh”. In Table 5.10 of its final determination dated August 30, 2007, the ERC approved a total of P358.2 million over the five year period from 2007 to 2011. This was 12% or P38.2 million higher than the consultants recommendation.
5. Meralco wanted to charge the consumers for its cost of finding legal and tricky justifications to confuse and overcharge the consumers.
4. Purchase of Distribution Transformers from Lopez Companies
- PB Associates had observed that “there appears to be excessive provision for distribution transformers leading to under-utilization” (p.23, 4.5.2)
- Meralco claims that it has 147,930 units of distribution transformers with an average loading of 50%. Meralco also claimed that 6,080 of these transformers in their network serve solely-served customers whose average usage is under 50%.
- The ERC reduced the expenditure for distribution transformers proposed by Meralco by a total of P1.446 billion for the two years 2010 and 2011 because it would further reduce Meralco’s utilization of distribution transformers below the 50% allowed for in the ERC’s asset valuation policy guidelines.
- The Lopez group owns the Philec Transformer Factory and preferred vendors enjoy substantial contracts for imported distribution transformers.
5. Anomalous Metering Expenditures and refurbishment
a. The findings of the consultants on Meralco’s claims for meter expenditures showed disturbing manipulations (P.5 and 6 of PB Associates Report)
- “Meralco provided supporting information that provides a breakdown of the 1,360,728 “excess” meters identified by PB Associates and shows an actual inventory of only 87,266 meters….We note that even though none of these meters existed, they remain on Meralco asset register. It is of concern that the 1,261,000 meters in these categories were still on the Meralco asset register at the time of the asset valuation. We suggest that the ERC require Meralco to cleanse the asset register of all non existent or unserviceable metering assets.”
- “the information provided indicates that Meralco purchases approximately 206,000 new meters a year (excluding metering transformers) to support load growth. However, Meralco connects only approximately 97,000 new customers each year.”
- Meralco is charging P518 million in 2008 for meter refurbishment costs. At an average cost of P52 per meter which means this involves recalibration only. This must be included in regular operating costs and not capitalized.
- Meralco owns a substantial ownership in local meter company GE Meters.
- The Consultants and the ERC reduced Meralco’s budget for meters byP1.43 billion for the four years that presumably would have gone to income of its sister company GE Meters.
6. Over budgeting the Costs of Service Drops
- P2.87 Billion of Meralco forecast capex for asset renewal could not be supported and was disallowed.
- A total of P323 million was disallowed for the over recovery of stores costs.
- P730 million that Meralco spends for “related business income” and it tried to pass on as utility expense was disallowed.
It is very discouraging that a public service utility like Meralco that has been exposed many times for padding its rate base and overcharging its consumers, continue to do so and seems to be getting bolder in their attempts.
We are asking the residential and commercial consumers of Meralco to read the whole PB Associates Report so they can decide for themselves if Meralco was overcharging.
For reference, the Meralco_PB Associates Report and the MERALCO_PB Associates Addendum are available for download.
