Regulatory Decongestion Essential to an Effective ERC

David Celestra Tan
26 December 2014

To be fair to the ERC, the Epira dumped on it an inordinate amount of responsibilities to making the privatization and deregulation of the power sector work. In the last 13 years it has struggled under the weight of these responsibilities while also trying to find and develop itself and acquire its own soul as a regulator. While the consumers are trying to be sympathetic to their “flight”, the regulatory shortcomings have been costing all of us untold billions per year in avoidable charges and we are not seeing resolute efforts on their part to do better.

The Energy Regulatory Commission is now generally thought to be too slow in coming up with timely decisions to support power development and failing to regulate the areas that they should but regulating or overregulating where they should not be. Consumers feel their decisions tend to favor Meralco and inadequate in checking NGCP and WESM. Critics call it regulatory capture. So far “sala sa init sala sa lamig”. It has become too bureaucratic, process-centric, and too busy that it has been missing the main objectives of its existence which are to assure ample power supply at reasonable costs. The “how” became more important than the “why” and the “when”.

The ERC can become an efficient regulator, effectively safeguarding the public where they are needed, and still promoting the continued development and delivery of power supply services through timely and judicious rate regulation. There has got to be a happy balance there somewhere.

Decongesting the ERC

The ERC has been suffering from bureaucratic overload, unable to properly evaluate and hear and resolve the mountains of rate petitions and accreditation applications from the distribution utilities, electric cooperatives, power generators, transmission service providers, licensees, own-use generators, consumer groups, and rule-making decisions. It is too congested by its own making many times ignoring its own rules of practice. Every year it receives hundreds of applications and petitions, from simple COC to complex rate-resetting, Feed-in tariff rules, and capex authorizations of DU’s and electric coops. All these go through financial evaluation, public notices, public hearings both in the provinces and in the main office, the addressing of intervenor and oppositor issues, and applicant compliances, all fighting for schedules from an overwhelmed bureaucracy. They also have to deal with political pressures and powerful lobbyists and the loss of trained analysts to pirating by the big power groups.

1. Streamlining processes where it is over regulating

a. Methodology of Review of Generators Tariff to Assure Fair and Reasonableness

This might surprise many people.

Power Generation is supposed to be a deregulated industry where the returns on investment is not regulated. However, ERC is actually regulating the profits on generation ostensively because it is a charge that will be passed on to the consumers. Effectively, they are regulating a supposed unregulated sector.
In determining fair and reasonableness of the generation contracts tariff, it evaluates and sets limits on how much should be the proponents return on investment. It uses Weighted Average Cost of Capital or WACC that is based on the declared capital cost and project finance structure of the generation project. They decide arbitrarily to disallow certain investment costs and operating costs and reduce generators applied for tariff. The approved tariffs result to very inconsistent levels depending on the prescience of the evaluator or how adept the applicants are in justifying the numbers Or how well they are connected. This is regulation.

The ERC can meet its duty to assure that the generation rates are fair and reasonable without crossing the line towards undue regulation and being consistent with the unregulated nature of the generation sector.

Focus of evaluation must be on whether the rate is fair and reasonable in comparison with other existing projects of similar service, fuel, and technology. This necessitates sensible and logical benchmarking. A determination of fair and reasonable price of service. Not a fair and reasonal return on investment.

A few years ago an island IPP got an ERC approval for power supply using refurbished equipment. A few months later, another IPP applied for a similar service to the same customer using also refurbished equipment. But the latter’s rate approved by the ERC was a full P2.00 per kwh or 25% higher than the first IPP with 5% more fuel consumption allowance to boot. It meant a higher subsidy from the government by P140 million a year or P1.4 billion over its 10 year term.

In yet another contract by the same electric coop, a competitive selection process was held and the announced bid was P9.38 per kwh. The contract however was signed at P12.80 per kwh, P3.42 per kwh higher, and it was approved by the DOE, ERC, and NEA! It caused an undue increase of P171 million a year in missionary subsidy for that contract alone. (You see these acts by government officials and you just scratch your head).

Had ERC been using price of service benchmarking as a consideration, they would have questioned this new application and maybe realigned them to the previous and lower IPP whose equipment was the same age and technology, save for justifiable adjustments for unique costs of the project which in no way will cause an increase in rate by 25%.

Similar inconsistencies in rate decisions abound in Mindanao and the Visayas. We are seeing inconsistencies in the rates Meralco is negotiating with its sister company generators and even in ancillary service purchase agreements of NGCP.

Processes are good and the ERC needs to have them. It should opt however for competitive processes and not bureaucratic processes. Allow the market to determine whether the rates are fair and reasonable. And we don’t mean the WESM market whose current rules are prone to manipulation and stacked against the consumers. WE mean the open bidding for power supply contracts, under which the ERC will nonetheless establish a benchmark price as the maximum bid price to protect the consumers.

b. Not all rate changes should be subject to review

Would you believe that if a distribution utility or generator would like to reduce their rate, they still need to apply with the ERC and justify why it is feasible for them to reduce their rate? Why waste the regulators time when reductions are good for the consumers? Why not consider the approved rates of the DU’s and Generators as the “maximum” with their right to reduce rates anytime they want. And they can always to go back to the previously approved maximum. This will not deter those who are in a position to reduce their rates temporarily.

The requirement of the Epira Law for the ERC to approve all rates that will be passed on to the consumers is being taken too literally. The higher rule should be whatever will be for the public interest, and lower rates is one, should be allowed and facilitated.

c. Certificate of Compliance

Another example of an area where it is over regulating is the issuance of Certificates of Compliance (COC’s) to owners of generating units for own-use generation. This takes 60 to 90 days and involves the site inspection and submission of voluminous financial and technical data.

The Epira Law mandated the ERC to be in charge of this COC but it was meant to be only applicable to generating facilities that will be part of the grid and intended to be a ministerial function where the only thing it needs to validate is whether the facility has all the required government permits to start operating.

It is not intended to require COC’s for own use generation unless that facility intended to supply to the grid or part of the ILP (interruptible load program). Can you imagine that this own-use generation is being processed through the ERC bureaucracy and go up to the Commission for approval? Its cost of generation and technical suitability is the outlook of the owner and the ERC should have no role in it. Nothing is passed on to the public or to the government.

d. Enforcement and Follow through is where ERC should make more effort to protect consumers…..That and properly regulating the regulated sectors.

If the ERC is to become true to its mandate as a protector of the consumers for fair and reasonable charges, they have to go beyond issuing rules and resolutions.

1. The downtime limits and fuel cost consumption and cost limits of power generators specially the sister companies of DU’s need to be monitored and audited. ERC can deputize independent CPA firms, who are not saddled by conflict of interests, to do these consumers audit.

2. ERC can improve the transparency in the downtimes and capacity charges of Meralco and the DU’s by requiring them to post the information in their websites so the public would have a chance to monitor their compliance to their power supply agreements specially those of sister power producers.

3. The WESM that reeks of manipulation and exploitation needs to be policed because PEMC is not able to police its own rule-making “market participants”.

(By the way, why have they not disclosed the WESM trading behavior of the IPP’s in the fateful months of November and December 2013? We just read that ERC’s investigation unit is not done yet. They say it involves 1,440 transactions in November and December of 2013. Don’t we think a whole investigation unit can analyze easily ten (10) transaction flows per day of who offered what and the behavior of their related generators contracted with Meralco? It means the 1,440 could have been analyzed in 144 days or just 6 working months.)

e. Properly Regulating the regulated Sectors…Distribution Utilities and Transmission Co.

1. The ERC needs to look deeper into the rate setting decisions it made on Performance Base Rate Setting and Systems loss allowances.

The Epira law gave them the leeway to adopt alternative methodologies. But they forgot that the law premised those to be “in the public interest”. Section 25 specifically provides that retail rates must be based on investments INCURRED. Period. No leeway for planned and projected and promised investments.

PBR is a farce and must be discontinued. It surprised us when a rep of the Philippine Institute of Development Studies told MSK reps that our proposal to discontinue PBR is too radical. Our answer? PBR is a radical injustice to consumers so if the solution is perceived to be radical, so be it!

All we need is a change in methodologies. More on this in our petition to ERC.

2. Systems Loss

We reiterate our call for tighter rules and more transparent methodologies on how much systems loss should be charged to the consumers. The consumers might be happy with an absolute maximum to anyone of 8.5% and anything lower than 7% average systems loss, the DU or Meralco can keep. This is a better form of performance based rate setting.

For electric coops, systems loss improvement programs must be set over the next five (5) years by similarly giving them performance based methods. Over time the larger coops of 25mw and up demand, can be limited to 13% with a system cap of 11.5%. anything lower than they can keep as performance bonus.

These areas for regulatory decongestion and refocusing are by no means complete. The main point is the ERC needs to review its regulatory mind-set, search for and get in touch with its regulatory soul, and decongest itself from areas where they should not be regulating or spending too much time and focusing on where its regulatory power will serve best the interest of the public. Through its rate approvals it sends profound price signals to the investors in the power industry. As gatekeeper of retail rates to consumers, it should not lose sight of its main reasons for existence which are to promote ample supply of power at fair and reasonable rates. Many times it only focuses on the former…..and their bureaucratic process.

All of ERC’s decisions must pass the ultimate test which is “does it serve the public interest”? That is key to its regulatory soul. The wise and judicious use of their time, resources, and powers must serve the greater good.

There are signs that the ERC is getting better at looking after the consumer and working towards reducing rates. The net metering system for 100kw of solar and wind is a big leap for the consumer mankind. And the secondary cap it steadfastly imposed on the WESM appear to be a make up to consumers for previously and routinely approving a shocking 85% (P4.15 per kwh) increase in generation rate in December 2013. ERC can be judicious if they want to be.

For now, the ERC must decongest itself. Service delayed is service denied.

Matuwid na Singil sa Kuryente Consumer Alliance

Email: david.mskorg@yahoo.com.ph