Prestidigitation 2

CROSSINGS
Butch Junia
7/25-31/2011



The Energy Regulatory Commission (ERC) has pulled another fast one, a sleight of hand.

I never thought I could have this title again this soon. But ERC is simply obliging.

ERC dismissed the Commission on Audit (COA) Report that Meralco had overcharged us by as much P15 Billion in test years 2004 and 2007 by what consumer advocate Pete Ilagan calls a “sweeping statement that the COA applied the disallowances under Meralco’s PBR (Performance Based Rate) to its RORB (Return on Rate Base) application, hence a violation of the principle of retroactive ratemaking.”

In other words, without going into the merits and the weight of the COA findings, ERC decided that the Report “is not supported be established rules on rate making.”

But who made those rules, and what are those rules supposed to achieve?

Rules not Protecting
Consumers ERC makes and unmakes the rules in rate-setting, as the empowered regulator.

However, that rate-setting power is not absolute, as the law also requires that the rate resulting from any rate-setting methodology adopted by ERC must be such as to allow a reasonable return to the investor or utility, on the one hand, and a just rate to the consumer, on the other hand.

If ERC insists that the COA Report is not supported by its established rules, then those rules do not protect us.

To put it bluntly, the rules simply legitimize the overcharges discovered by COA.

Something must be Very Wrong
When we consider that Meralco’s distribution, supply and metering charges have gone up from P0.76 pkwh under RORB to P1.6464 pkwh under PBR, and Meralco’s profits increased fourfold in just three years under PBR, from P2.7B in 2008, to P6B in 2009, to P12B in 2010, something must be very wrong with those rules that ERC raises against the COA Report.

If applying the RORB rule will result in a reasonable return for the investor and a just rate for the consumer, then by all means, let us adopt those rules.

Not only would that be reasonable and logical, it would actually be consistent with what the Electric Power Industry Reform Act or EPIRA ordains ERC to do for us and for Meralco.

System for Abuse
Actually, RORB was also a system for abuse and excessive rates in the past. Before the Supreme Court decision in 2002 and 2003 in LAMP and Genaro Lualhati vs. Meralco, RORB was the utility’s weapon of choice for hitting us with high rates.

Without any caps on system loss, and with no criteria for recoverable asset and no objective measure for recovery of operating cost, RORB yielded very comfortable returns for utilities.

At that time, all costs, regardless of nature, intent or application, could be charged to captive customers.

Every asset, regardless, was likewise recoverable or chargeable to customers.

What Happened to the Refund?
The word among utilities at that time was that if you needed a new car go for the top of the line.

If you needed to redo the office, go high end. When you buy equipment, get the most expensive, because everything would simply be passed on to the captive customer, and it would also improve your RORB position.

But it all changed under a consumer-minded chairman of the Energy Regulatory Board, the Honorable Neptali Franco, and under then SC Associate Justice Reynato Puno, who penned the decision that led to the Meralco refund of over P30B.

Incidentally, many are still wondering what actually happened with that refund.

Did Meralco’s investors/owners actually return to us the overcharges? Or did we simply pay ourselves our refund from the monthly payments we were making to Meralco at the time the refund was supposedly being made?

I have always maintained that if the refunds came from Meralco’s cash flow, not from retained earnings or new capital put in by investors, then we simply were paying ourselves our refund.

But that will have to be for another Crossing.

Passing on Charges
That Supreme Court decision set the guidelines and criteria for cost recovery or the passing on of charges to the customers.

For assets, they should be used or useful, and the rate of return is capped at 12%.

For operating costs, they should be reasonable, prudent, necessary, and redounding to the benefit of the consumer or captive customer.

In other words, not only is the nature of the expense looked into, even its impact or benefit to the customer is taken into consideration.

Meralco’s corporate income tax, which we used to pay for, was disallowed by the Court and Meralco has supposedly complied with the Order.

As early as March 20, 2003, in ERC Cases Nos. 2001-646 and 2001-900, the Meralco rate unbundling decision, ERC under Acting Chairman Leticia V. Ibay said: “The Commission recognizes that if income tax is not allowed as a recoverable item, then the 12% cap on rate of return established in current jurisprudence may no longer be reasonable.”

Not Recoverable Cost
As if on cue, in September 2008, in its Regulatory Reset Issue Paper on PBR, ERC again said: “If corporate income tax was not considered a recoverable cost, an equivalent revenue outcome would be achieved by allowing a corresponding pre-tax Regulatory WACC (Weighted Average Cost of Capital) to be earned on the asset base.” At that time, the WACC was set at 15.5%.

I guess we now have reason to think that the dictum set by the Supreme Court that the one who enjoys the income – the investor – must pay the tax on that income, may not be honored by ERC, after all.

Timing is Relevant
Anyway, to go back to the COA report, the timing of the ERC decision, and the gaps, need some looking into.

The SC order for the COA audit was issued December 6, 2006.

But the formal request to COA was not made until sometime in 2008 and only after some prodding from Pete Ilagan and his group.

The COA Report was dated November 5, 2009, received by ERC in December, 2009, but acted upon by ERC only this month, again only after so much prodding, this time from Mang Naro Lualhati and Pete Ilagan.

Why do I think the timing is relevant? As COA itself said in its Report, the ERC could take its findings into account in the ratesetting actions of ERC.

Exclusions
Here’s a sampling of those findings on disallowed claimed assets and expenses:

• Baliwag substation not found at the site during inspection.
• Balintawak substation unaccounted
• Land and land rights the location of which could not be provided
• Materials and supplies already part of OPEX
• Funding allocation benefitted entire Lopez Group
• Expensive and unnecessary advertising expense
• PCIB Special Account
• Employee pension and other benefits.

These exclusions, though just my pick from the long lists, are very relevant and pertinent to the so-called Final Determination of ERC on the Annual Revenue Requirement application of Meralco under ERC Case no 2010-069RC.

This is the case of the P226B Meralco windfall. These exclusions are also relevant to ERCs Final Position on Meralco’s application for the so-called “rate translation” under the pseudo-science of rate-setting in PBR. This is now docketed as ERC Case No. 2011-088RC.

Have you kept track, so far, of the deft movements from case to case? Are the rules quite clear or simply opaque?

More on the cases, retroactive rate-setting and the COA Report in our next Crossing.

(Email crsng_47@hotmail.com)