Remaking the ERC – Purpose before Size
David Celestra Tan, MSK
2 January 2016
New ERC Chair Jose Vicente Salazar is engineering a shakeup of the ERC. We are sure there is a method to the ensuing madness caused by the reorganization and by officers leaving because they could not live with the changes or losing their clout. Some good people will leave and some undeserving ones can be promoted inadvertently but in the whole the collateral damage will be minor compared to the overall good. We can expect some natural tentativeness in decision making as the new Pnoy ERC finds its own bearings and head toward its rightful direction.
Let us all hope that the new year will find us with a better ERC, more faithful to its mandate to protect the consumers, better able to balance things with the power and service providers, and more effective in bringing order in this very confused regulatory environment where only the influential get their way. Consumers hope to enjoy improved safeguards against abuse.
As obvious to most and to new ERC Chair Salazar, the ERC he took over has been a broken institution that’s stuck in the mud, immobilized by the heavy load of its immense and broad mandate, left astray by the failure of succession of politico chairmen to provide principled consumer-sensitive leadership, and mistaking the formalities of its quasi- judicial processes as substitute for true, judicious, practical, and timely regulation. It had been process and not purpose driven. The how more important than the what.
The ERC is certainly congested. Decisions are too slow and too uneven and inconsistent. The big winner in the Arroyo ERC had been Meralco and the Abotiz group. They got all the rate increases they wanted specially PBR rate methodology that essentially did away with regulated rate of return. The systems loss charging system is non-transparent and anti-consumer. Its new Meralco owners are on their way to monopolizing the generation sector in mockery of the anti-monopoly aspirations of the Epira Law.
The common observation is while the Arroyo ERC could decide fast on the very complex applications of Meralco and the Aboitiz group, they took so long in deciding on more simple applications of the nation’s 119 electric cooperatives for their system improvement capex programs. Unable to undertake their needed system improvements to meet the demands of their fast growing service areas, their services are deteriorating. Systems losses are rising and their financial viabilities are in jeopardy. Palawan, Gensan, Bacolod, Dumaguete, Aklan, Iloilo, Camarines, Marinduque, Mindoro, etc.
Newspaper reports say Chair Salazar is trying to grow the ERC bureaucracy to 500 people from the current 300. Consumers realize that a bureaucracy is needed to provide the regulatory enforcement necessary to protect them. But that is as long as the bureaucracy is being applied in the right objectives and in the right priorities.
We hope that the shakeup is not about just throwing bodies at the regulatory congestion. There must be a clear definition of purpose. Let’s hope it is guided by an enlightened regulatory soul with clear notion of its two fold purpose which are to 1) assure reasonable price of electricity and 2) to assure ample supply of electricity by insuring fair return on investments of the service providers. The Arroyo ERC only took care of the latter and totally forgot about the consumers.
We believe the ERC had been congested less because of lack of personnel but more by misguided application of its regulatory power and resources.
1. Generation must not be Regulated (Surprise!!)
One thing new Chair Salazar can rethink is the ERC’s approach to the generation sector. The ERC is actually regulating the generation sector when it is supposed to be a deregulated sector under the Epira Law. In the name of assuring the fair and reasonableness of the generation rates that will be passed on to the consumers, the ERC’s methodology is to regulate the profits of the generators. They impose limits on profits by using “weighted cost of capital”. And all the hearings and theoretical data analyses lead to delays and unfortunately not necessarily fair, reasonable, and consistent rates.
ERC can decongest itself by assuring fair and reasonableness through market mechanisms and not by quasi-judicial and bureaucratic theoretical processes. It had taken the first step by mandating the CSP of power generation supplies. It then must establish benchmarks using cost of service data existing in the market. And of course it must properly implement the CSP rules, assuring sham biddings.
It must stop the monopolization of the generation sector, a necessary in safeguarding the consumers. It does not need to create new tough rules. All it has to do is implement the anti-monopoly and market domination limits set by the Epira Law. It must call for the review of Rule 11 of the Epira IRR that provided the loophole for monopolization in violation of the mother law which is the Epira.
2. Properly Regulating the Distribution and Transmission Sectors
The franchised holders of these two natural monopolies must be made to accept the limits of return on investment in exchange for the market protection under the franchise granted by the people through the government. Most business risks are passed on to the consumers. Forex, fuel fluctuations, typhoon damages, etc.
The Performance Based Ratemaking (PBR) effectively did away with the 12% return on rate base and also violated Section 25 of the Epira law that retail rates must be based on economic input incurred. It allowed charging to the people forecasted investments that may or may not be made.
ERC must require that the procurement of equipment and services that become part of the rate base are also done competitively. A 10% overprice in assets is a 10% overcharge in the return.
NGCP’s right to operate its system did not mean it must be the systems operator, which is a rule making function that is clearly not intended by the Epira Law to be privatized. Put simply, ones right to judge someone does not make the person a “judge” in the judicial system. Two different animals. By the trick of language, that effectively was done by the NGCP Concession law passed by the Arroyo Administration. Now that anomaly is causing unnecessary transmission charges to the consumers because you have one private institution whose profits are affected by the rules he himself makes. Good thinking legislators. Unless this is changed we will see transmission charges to double in about 5 years.
The ERC by its own PBR rules on transmission assets are actually constraining the development of power generation projects because they cannot be connected unless the connection facilities are approved by both the NGCP and ERC, two very red-tape laden processes.
3. Bloating the ERC Bureaucracy through the Open Access Rules
The ERC bloated itself by overreaching regulatory rules where they are actually not necessary.. Regulating the generation sector by judicial and table analytical process is one. Another is the expanded and tedious rules they made in the issuance of the Certificate of Compliance that power generators needed to start operations. It was intended only to be a ministerial function to determine whether a generator has all the needed compliances with government permits like environmental and market rules. ERC turned it into a full blown regulatory process. Rate reductions also go through similar rigorous processes. Leave it to the businessmen at the distribution utilities and generators to decide if they can handle the rate reduction. Why slow down something that will benefit the consumers?
The ERC is doing it again. It will be inundated with regulatory work by its creation of the RCOA (retail competition and open access) rules where it is forcing large electric users to be part of the open access market. The option of open access includes the right of the end user NOT to bother with the complexities and risks of open access and to just stay as captive consumers of the DU. Why force them?
Hundreds of thousands of larger electric users will become part of that RCOA market and ERC rules say if there are disputes the ERC will be the arbiter. The ERC already has problems resolving the various applications of the country’s 135 distribution utilities, applications of own use generators, rate approvals, permits to operate, and approvals to built point to point grid connection facilities by power generators. Some say there are about 350 applications at the ERC that are unresolved. This can quadruple easily with disputes in retail open access contracts, something the ERC is creating by its own rules and guaranteed to require more manpower to handle.
If it wants to introduce competition for the benefit of the captive consumers, do it with bulk power supply competition thru true CSP and not by asking each user to undertake their market trading. ERC must understand that many businessmen, while can benefit from lower power costs, would rather focus on their main businesses and not be distracted by the complex rules of its retail power supply.
4. Quasi-Judicial Method Instead of Market mechanisms
With the new Chairman not enamored by the ERC’s judicial process, he can revisit ERC’s philosophy of using quasi-judicial processes in performing its mandate of protecting the consumers and reducing rates. Instead they must adopt market mechanisms and competition towards the pursuit of “least cost power” for consumers.
It must provide consumers easier avenues to communicate their concerns and not have to go through a formal judicial process that require the cost and expertise of lawyers. Justice must be more important than the formalities of the process.
5. The ERC Chairman has a full plate
Remaking the ERC is a tough job but having an uncompromised Chairman, and a non-politico at that, is a great start. Chairman Salazar has a full plate though.
There is the challenge of closing the avenues for market manipulation in the wholesale spot market and unhesitatingly punish the offenders. Many of the big players have been caught manipulating the market in the WESM fiasco of 2013. Now consumers are watching whether we as a nation have it in us to punish the offenders whoever they are. Implementing the CSP would be a daunting challenge. Meralco would be fighting hard to arrogate for its subsidiary Meralco PowerGen the monopoly of its 3000mw power supply.
Chairman Salazar will be under tremendous political and corruptive pressure.
There is of course no argument that whatever regulatory methodology the ERC adopts, it must be efficiently structured so that it can dispense with such regulatory function in a responsive, judicious, and timely manner that is true to its mandate.
So far we like what we are seeing in what Chair Salazar is doing. With a clear heart for the consumers, we have faith that he will see rightly.
We wish him well for the New Year. We hope though that we are not mistaking hulk for effectiveness.
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