Update: The Emerging Truth About Meralco’s Interim Distribution Rate Reduction of P0.1883 per kwh

David Celestra Tan, MSK

17 July 2016

A year ago in July 2015 Meralco urgently petitioned the ERC to reduce its distribution rate by 10.4% to P1.3939 per kwh from P1.5822 that was approved for the Third Regulatory period of July 2011 to June 30, 2015.

Meralco’s media machinery went on overdrive trumpeting its voluntary rate reduction. Consumers were overjoyed. The Matuwid na Singil sa Kuryente Consumer Alliance (MSK) was nonetheless curious because it seems out of character for a Distribution Utility with a long culture of overcharging consumers and pushing the limit on profits, both regulated and unregulated. What gives?

A reduction is a reduction and welcome relief for consumers so your consumer group MSK endorsed the immediate provisional approval. Nonetheless we registered as an intervenor to find out if the P0.1883 voluntary rate reduction is the correct amount and sufficient. Last Friday, July 15, MSK finally had a chance after waiting for six months to cross-examine Meralco’s presented expert on rate setting Engineer Roderick Dennison N. Nacu, a Mechanical Engineer with an MBA degree from UP and a 21 year veteran of Meralco with the last 10 as Asst Vice President of the Rates and Pricing Office. Mr. Nacu is in charge of the preparation, supervision, and review of the calculation of Meralco’s proposed rates for each regulatory year.

Here are some of the truths emerging about the reduction that can be bothersome for the consumers.

1. Its not a voluntary rate reduction!

The P0.1883 per kwh is actually the component of Meralco’s rate for the Third Regulatory period of July 11 to June 30, 2015 that was allowed by the ERC to recover the under recovery from the Second Regulatory Period (July 2007 to June 2011).

Truth 1: That authority to recover the under recovery from the previous period actually expired on June 30, 2015. It was not therefore a voluntary rate reduction by Meralco as their media pronouncements were claiming. It would have been illegal for them to continue charging beyond June 30, 2015 and they should stop charging that component automatically. But wonderful PR spin don’t you agree?

Truth 2: There actually was no rate reduction from the Third Regulatory Period to the Fourth Regulatory Period. They are charging in the interim the same basic rate. (The reason it is interim is the ERC had not come out yet with the rules for the Fourth Regulatory Period of July 2015 to June 2019. The existing methodology is PBR. MSK has also petitioned ERC to rescind it because it is illegal and contrary to Section 25 of the Epira Law. Read our article on the subject)

Truth 3? Asked if the P0.1883 per kwh reduction is what he, as the rate setting expert of Meralco, had recommended to the Management of Meralco for approval, Mr. Nacu demurred and said only that he submitted many figures. In a way, saying the P0.1883 per kwh was a choice of Meralco’s top management. The amount was discretionary? Hmmm.

2. Chance of over recovering the under recovery of 2nd Regulatory Period

Mr. Nacu, in his sworn affidavit, said in computing the P0.1883 per kwh recovery, “Meralco used the norminal values of the under recoveries for the four-year period….. and divided it by the Forecast Energy Sales from RY 2012 to 2015….. to arrive at Php0.1883 per kwh”.

This means if Meralco’s actual energy sales (kwh) for 2012 to 2015 are higher than the forecast, Meralco would be over recovering the nominal amount of previous under recovery. Asked about it in the cross-examination, Mr. Nacu said under the ERC’s rules, what is being approved is the rate. If Meralco sales grew higher than the forecasted energy volume used , Meralco keeps the additional revenue. Mr. Nacu added that it was ERC who determined that forecasted energy volume, clearly trying to pass responsibility to ERC.

(Before I was improperly interrupted by Meralco’s lawyer Francis Dino S. Antonio, I was going to ask Mr. Nacu if ERC’s approval was based on Meralco’s application or if the ERC comes up with its own forecast of energy volume as he was implying?)

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Anyway, Is this true Chairman Salazar? Is ERC allowing Meralco to overrecover the underrecovery? In the past, Meralco is known to petition for recovery of under recovery. Would they petition to refund any over recovery? Mr. Nacu said Meralco keeps any additional revenue from higher sales. We thought Meralco’s return on investment is regulated?

Meralco’s annual energy sales grew from 30,592 gwh in 2011 to 37,124 gwh in 2015 or a total increase of 21.13% for the four (4) year period. We believe ERC’s forecast is only 3% per year or a total of 12% only for the four years. That’s an excess of 9.13%.( In fact it is not unusual for Meralco to announce energy sales growth of 10% in one month).

3. Meralco profits or return on investment is no longer regulated

That is one of the rude awakenings that consumers is getting from the hearings at ERC. Meralco’s Mr. Nacu said in cross-examination that under PBR rate methodology, it is a price setting methodology, and not a return on investment regulating system. The approval is on the rate. If however, Meralco’s actual energy sales grew higher than forecasted and used for calculating the per kwh rate, Meralco keeps the additional revenue. The profits of Meralco is no longer regulated.

One more compelling reason the Performance Based Rate Setting price method (PBR) must be rescinded. It is anti-consumer and anti-Filipino. MSK had actually filed a petition with the ERC for a rules change to revert back to Return on Rate base which is actually more transparent and fair. We don’t know when the ERC will show any interest.

We are forgetting that power (including telephone and water) are public services only provided by the private sector as franchises. The monopoly is granted by the government and most business risks are passed on to the consumers. Profits must be regulated.

Good news from this ERC proceedings.