The P226-B Meralco windfall

CROSSINGS
Butch Junia
7/4-7/10/2011



The Energy Regulatory Commission (ERC) has given Meralco a P226.6 Billion windfall consisting of operating expenses and dividends amounting to P189.5B and capital expenses of P37.1B, all chargeable to us under PBR or Parusa sa Bayan Rates.

For that, ERC has authorized Meralco to charge us in regulatory year 2011-2012, a so-called Maximum Average Price of P1.5828 pkwh which, when “translated” into actual rates for different customer classes will have some residential households paying distribution rates of more than P4 pkwh while large industrial customers could be paying only P0.26 pkwh, a clear case of discriminatory pricing.

This questionable pricing was challenged by Mang Naro Lualhati at ERC but going into that now would be getting ahead of our story, so let’s save that for later.

Bundled Rate
In tagging this ERC godsend for Meralco, I had a tough time finding just the right word for it.

Granted under very liberal terms, was it a gift or plain largesse? Exacted from us under service that’s presumably regulated, would it be a tribute? Could it be a dowry, divorce from Meralco service being virtually impossible?

I guess being an unearned or sudden gain or advantage, the multi-billion peso ERC decision was simply a windfall, or manna to be collected annually over a four-year period – 2012 to 2015 – under Performance Based Regulation (PBR), ERC’s rate-setting methodology that has made our electricity rates among the highest in Asia and the world.

Mind you, this ERC rate grant under Case No. 2010-069 RC is for distribution, supply and metering (DSM) charges only, excluding Meralco’s pass-through generation and transmission charges which in 2010, for instance, amounted to P195.4 Billion.

Our bundled rate under the Meralco franchise today reaches P10.33pkwh for some residential customers, from only P4.20 pkwh before all these reforms that included PBR.

Equitable Approach
That windfall comes from the so-called 3^rd regulatory period of PBR, with P79.06 B earmarked for return on capital or interest and dividends computed at 14.97% of Meralco’s Rolled-over Regulatory Asset Base (RAB) plus the Working Capital, using what ERC calls the Weighted Average Cost of Capital or WACC, which might as well be called Whack!, considering the wallop consumers get from this ERC concoction.

As approved by ERC, Meralco’s RAB for 2012 is P126.7B; for 2013, P130.9B; for 2014, P134.1B, and, for 2015, P136.8B.

The bulk of the 14.97% return on capital comes from this asset base.

Consumers, however, have asked ERC to first determine how much of the RAB came from the investors or their equity, and which portions were acquired directly from our rate payments and/or loans that we paid for from our rates.

The stockholders’ dividends should be limited to the portions of the assets acquired from investor equity, while the rest of the return on capital should be applied to reducing the rates.

This should be the equitable approach, as the consumers whose rate payments were used for acquiring the assets, in effect, own those assets and should be the beneficiaries of its fruits.

Dramatic Rise
According to Mang Naro, the appraised value of Meralco’s asset base in 2007 was P84B, as reported by the Commission on Audit to ERC in December, 2009.

The dramatic rise in Meralco’s RAB came not from actual investments by the owners or stockholders but from a re-appraisal of assets after 2007.

In fact, the other significant source of Meralco’s capex funds was its captive customers who had to pay for Meralco’s capital investments under successive regulatory periods in PBR.

Every year under the 1^st and 2^nd regulatory periods of PBR, consumers were charged hefty fees for capital expenses which investors and owners of the utility did not have to provide anymore.

Thus, for the years 2007 to 2011, Meralco customers were charged P39B for capital expenditures, an expense Meralco’s investors were not only able to avoid but worst, they even earned 15.5% WACC on this as it was rolled-over to the Regulatory Asset Base.

Ito ang tunay na guisa sa sariling mantika!

ONs and OFs
Before PBR, this return on capital was capped at 12% by jurisprudence and by law, specifically the Public Service Act.

A long line of Supreme Court decisions clearly set the limit for the reasonable return recoverable by a utility at 12% as the maximum.

In most cases, an 8% return was sufficient, considering the monopoly character of the business and the zero market risk.

Under PBR, that ceiling was shattered thus Meralco’s cost of dividends is now much higher than its operating expense or the direct cost for providing us the distribution service – P19.1 B vs  P13.9 B, respectively, for the year 2012 only.

Note, too, that in addition to the P79-B return ON capital, Meralco was given a P23.26B return OF capital, alternately called regulatory depreciation. Between the ON and the OF, that’s a total of P102.6B, and given Meralco’s projected sales of 125.86B kwh for that period, that will be a total charge of P0.815 pkwh for Meralco’s 4.8 Million customers covering a total population of 19 million.

On the interest and dividends alone, Meralco is making money hand over fist from the capital we have to provide Meralco because of ERC’s PBR, its so-called internationally accepted rate-setting methodology, a claim disputed by consumers.

Estimates & Forecasts
PBR, according to Pete Ilagan of the National Association of Electricity Consumers for Reforms (Nasecore), is a revenue-fixing platform or mechanism rather than a rate-setting methodology.

At the instance of ERC, and under ERC’s guidance called an Issue Paper, the utility files its Annual Revenue Requirement for four (4) years.

What are submitted, according to Nasecore, are estimates and forecasts of capital and operating expenses, return on capital, depreciation, taxes, sales, customer growth, including economic indicators.

Instead of cost recovery or rates to recoup expenses incurred, utilities like Meralco now charge us rates to finance estimated and forecasted costs, including the forecasted capital expense which in Meralco’s case was applied for at P54B  and approved by ERC for P37 B, despite findings of the consultants (we paid for) that it should only be P31B.

Just and Reasonable Cost
Moreover, the RORB criteria for cost recovery, notably the prudence, necessity and consumer benefits from the claimed expenses and the actual use or usefulness of recoverable assets, are totally forgotten in favor of esoteric indices that have no direct relevance to the service provided.

In that context, PBR is contrary to EPIRA’s mandate on cost recovery.

Sec. 25 of the Electric Power Industry Reform Act (EPIRA) provides that, “retail rates charged by distribution utilities xxx shall be xxx based on the principle of full recovery of prudent and reasonable economic costs xxx.” (Emphasis supplied.)

Sec. 43 (f) of EPIRA, famously quoted by ERC as basis for its PBR, states in part: “The rates must be such as to allow recovery of just and reasonable costs xxx”. (Emphasis supplied.)

The law allows ERC to establish a rate setting methodology different from Return on Rate Base or RORB “to allow the recovery of just and reasonable costs” but adds: “The rate-setting methodology so adopted and applied must ensure a reasonable price of electricity.” This portion of Sec. 43 (f) is conveniently omitted by ERC when citing the justification for PBR.

Very clearly, Nasecore says, the law talks about “recovery” of expenses or costs already incurred and investments already made by the utility to deliver electricity at a reasonable price, not the collection of charges based on forecasts and estimates.

Worst than our advances for Meralco’s operating and capital expenditures and the guaranteed earnings under WACC for this 3^rd regulatory period, we are also being asked to pay Meralco P24 B in so-called under-recoveries for the 2^nd regulatory period.

Denied the Chance
And, how was this IOU arrived at?

Apparently, it was only on the mere say-so of Meralco. ERC denied Nasecore’s call for a regulatory audit by our Commission on Audit (COA) and thwarted every attempt of Nasecore and the other consumers to look into the performance of Meralco for the 2^nd regulatory period.

Petitions of Nasecore for Meralco to produce documents required for submission under ERC’s rules were denied by ERC, denying consumers the chance to subject Meralco’s application to closer scrutiny.
By the way, a 2009 COA audit with very significant disallowances running into billions has not been acted upon by ERC up to this writing.

We cannot understand how ERC arrived at the P24B under-recovery by Meralco, after Meralco posted P12B net earnings in 2010, double the P6B in 2009. After the DSM rate of Meralco reached its highest in 2011 at P1.6464 pkwh.

Price Cap
This so-called Meralco under-recovery actually dramatizes everything that is wrong with the PBR that ERC imposes on us, which ERC claims to be price capped.

If it is a PBR “using a price cap” as claimed by ERC, how come everything that I have seen in the ERC decision has everything to do with revenues, not the price.

In fact, the under-recovery, if I understood it correctly, is premised on Meralco’s failure to attain the approved revenue requirements for the period.

We appeal to Congress, the LGU’s covered by the Meralco franchise, the academe, even the President, to seriously look into what is happening with ERC, PBR, WACC, etc, if we want an honest-to-goodness re-assessment of our dysfunctional electricity industry.

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