Pinoys sentenced to electrocution

Herman Tiu Laurel
2/6-12/2012



The mother of the country’s democracy, Corazon C. Aquino is also gave birth to unabated rise in cost of utility services, making the cost of electricity in the Philippines the most expensive in Asia and among highest in the world.

Philippine consumers are in a constant state of electrocution, says consumer groups fighting Meralco and its accomplices in the government occupying high positions at the Department of Energy (DOE) and the Energy Regulatory Commission (ERC).

The rise in cost of electricity was started by former Pres. Corazon C. Aquino. After EDSA 1, Aquino dismantled all energy projects including the Bataan Nuclear Power Plant. Power development took low priority in the middle of celebrations for the recaptured democracy after the fall of the dictator Ferdinand Marcos.

Pres. Fidel V. Ramos faced the consequences of neglect on power development that have plunged the country into outbreaks of blackouts. His solution was the infamous 32 IPP contracts in addition to the nine IPPs signed up by Pres. Cory. Pres. GMA signed up one IPP in her administration.

The second phase of the electrocution that revved up the electric rate shock began in the wake of the 2001 Edsa II power shift to Gloria Arroyo, that’s when her first IPP contract IMPSA was signed around 10 days after her Edsa Shrine swearing in.

The worse part came in May of that year when Congress, prodded by the ADB, demand for passage of the EPIRA (Electric Power Industry Reform Act) in exchange for a $ 300-million standby loan, was lobbied through the lame duck Congress smoothened by a P 500,000 “payola” per solon – which party list congressman Magtubo exposed but was suppressed.

EPIRA created a new, quasi-judicial, independent (literally its own republic in practice) ERC (Energy Regulatory Commission) which two years later, in 2003, will challenge by circumvention even the constitutional and legal authority and orders of the Supreme Court increasing allowable profit margin of Meralco from 12% to over 16% and defied the EPIRA itself in exempting Meralco from bidding for its billions of pesos of purchases.

We can divide our electricity to BC and AD, “Before Cory” when the electricity generation, transmission and distribution business were primarily the business of government and the public could protest and complain and expect the government agencies to respond to public pressure.

The came the “Aquino Decades” when a power oligarch was appointed as head the Napocor in the person of Ernesto Aboitiz and the posthaste power crises started which coincidentally was a boon to the Aboitiz Corporation’s power unit importing and selling power generators.

Privatization of power generation with contracts of Cory Aquino with IPPs started in the early year of this A.D. but the really onerous IPPs came in the Fidel Ramos era when contracts were signd with wild abandon exceeding even power projection requirement made by ADB which warned against over-contracting power supply.

Ramos was so bullish on his Philippines 2000, but the 1997 Asian Financial Crisis crashed that had stuck the government with IPP contracts.

For over a decade now, Filipino power consumers have been paying IPP contract power supply that it has never used, but since these contracts were BOT and most are now transferred to state ownership, the opportunity for government to use these generating assets to produce cheap should have come, but it cannot be so.

The EPIRA forbids government from entering into power generation, transmission and distribution ever again, so we have a ridiculous situation today that IPP operators before turning over their power plants to government are now buying those same power plants 10 times less than acquisition cost which they will turn around again and revalue 10 times higher to generate and sell high priced electricity.

This is happening today for instance in Mindanao, as our fellow power consumer crusader and one of the owners of Iligan Light and Power reports, where four former Alcantara IPPs now owned by government will be sold dirt cheap and bought by the Alcantara group itself.

Many power consumers take their power bills for granted and just pay up every month after some grumbling. Even the desire to understand how the rates are charged by studying the breakdown of charges on the bill boggles many minds, what more the 35 pages of the EPIRA and thousands of pages of ERC rule and regulations, decisions, rulings, and thousands of pages of applications for rate base increases from power companies such as Meralco.

To understand the whole caboodle the consumer must simplify the issues and this begins with the power rate.

We can find the bottom line in the EPIRA committing in Chapter I, Sec. 2 (b) Declaration of Policy, to “ensure the quality, reliability, security and affordability of the supply of electric power.

The word “affordable” is a clear statement in favor of the poorest consumers’ interest. EPIRA also states in the same section the promise to “…ensure transparent and reasonable prices of electricity.” So the question is what are “reasonable prices?”

The EPIRA sets the basis for setting a very high rate in the RORB (Return-On-Rate-Base) of 12% for a captive market.

Mr. Jojo Borja, a second generation power plant and distributor entrepreneur, says their business makes money even on as low a rate-of-return of 5%, and 12% is already more than sufficient.

The Puno Supreme Court (SC) affirmed the RORB of 12% in 2003 as part of a decision that also refunded the consumers the P 30-billion Meralco overcharge from a decade past.

As if in vengeance, the ERC went around this EPIRA and SC principle of “affordability” and “reasonable price” and formulated a new rate setting mechanism called PBR (Performance Based Rate) and required rate-of-return for power companies under the PBR to be “comparable to rates-of-return in investment source countries” and raised the rate-of-return to variously reported 15.6% but can reach 17% due to the “performance incentives” ERC gives.

Jojo Borja explains that under PBR, what their power company could earn in three months under the RORB, it would now take them a year: 4% to over 5% additional margin compounded every month.

This system, Borja explains, makes it shameful to be in the power enterprices because it is no longer hard earned money but a racket.

But the PBR is just the tip of the iceberg and underneath it are worse anomalies and one of them is the Capex (capital expenditure, such a transformers, substations, poles etc.).

Meralco claims it is necessary in order to provide and deliver the power to the public. This is where octagenarion Mr. Genaro “Gene” Lualhati (a.k.a. fondly as Mang Naro who helped win consumers’ P30-billion Meralco refund before) crusades, disputing Meralco’s capex claims approved by the ERC without question, raising the maximum average price (MAP) to almost 70% higher than it should be.

Lualhati saw the anomaly emanating from Meralco figures themselves. Lualhati recently stood before the ERC again and protested in the hearing.

The best account comes from another power crusader Butch Junia:

“Lualhati questioned the capital expense claims of Meralco in its ARR, citing the testimony of Meralco’s expert witness, a Michael Emmerton of PB Consultants and Asian Appraisal Inc., who confirmed under oath that the assets of Meralco are only 50% utilized.

Under PBR, customers pay in advance for all equipment and assets of Meralco, including some that are not used for power distribution services.

The 2012 capex of Meralco was bloated by P31.7 billion, Lualhati told ERC. That amount will eventually be added to Meralco’s Regulatory Asset Base (RAB) of P126 billion, which was also questioned by consumers for being bloated.

This RAB is funded directly from rate increases under capex but becomes the basis for Meralco’s return on capital set by ERC at 14.8% under PBR, higher than the 12% cap under RORB or Return on Rate Base. This resulted in a Meralco ROI of P19 b illion for 2012, plus a separate or additional P5.2 billion regulatory depreciation on the same asset base.

Junia, himself a consumer-oppositor and former columnist of this paper too, added another factor, that “Meralco’s operating expense (opex) requirement for 2012 is P13.9 billion, which means that the provision for its earnings and profits will cost consumers P5.1 billion more than the opex or actual cost of the service.

Junia pointed out that consistently for all the four years of the 3rd regulatory period (20011-2015) under PBR, the provision for Meralco’s return on investment and capital is higher than its cost of operations.

Proceeding from these excesses, power advocate group Nasecore, in a separate action filed last December at the Office of the Ombudsman, accused Meralco of “earning profits at the average of 56.3% per annum for years 2003 to 2009, which is 369% more than the reasonable return of 12%.”

The Ombudsman complaint against the entire ERC, which is based on a Commission on Audit review ordered by the Supreme Court in 2007, includes two commissioners who recently retired, and Ivanna dela Pena of Meralco,, Junia reported.

Junia, himself another consumer-oppositor and former columnist of this paper too, added that “Meralco’s operating expense (opex) requirement for 2012 is P13.9 billion, which means that the provision for its earnings and profits will cost consumers P5.1 billion more than the opex or actual cost of the service.”

Junia pointed out that consistently for all the four years of the 3rd regulatory period (20011-2015) under PBR, the provision for Meralco’s return on investment and capital is higher than its cost of operations.

Proceeding from these excesses, power advocate group Nasecore, in a separate action filed last December at the Office of the Ombudsman, accused Meralco of “earning profits at the average of 56.3% per annum for years 2003 to 2009, which is 369% more than the reasonable return of 12%”.

This Ombudsman complaint against the entire ERC, which is based on a Commission on Audit review ordered by the Supreme Court in 2007, includes two commissioners who recently retired, and Ivanna dela Pena of Meralco.

Here’s more. Under the PBR tip of the iceberg from Jojo Borja, whose family operates Iligan Light and Power, the asset claims of Meralco which it buys from a sister company, and approved by ERC, are astronomically overpriced.

Borja is filing a joint affidavit that will prove the overstating and overpricing by Meralco. The other signatories include yours truly and aided by lawyers Bono Adaza and Alan Paguia,

To be submitted are pieces of evidence such as the “’Asset Valuation Subject to Performance Based Regulation of Meralco’… dated March 31, 2010 which was prepared by Asian Appraisal Company, Inc. (AACI).

It points to the overstating/overpricing by Meralco of its purchase of poles in the amount of P2.605 billion (overprice) and overhead conductors and devices in the amount of P520 million (overprice) or a total overprice of P3.125 billion.

The overstating/overpricing of equipment purchases was committed by Meralco and allowed by ERC in order to increase the asset base of Meralco which will be the basis for setting the rate/price of electricity …”

Borja, being a hands-on excutive of a power company, deals directly with OEM manufacturers of power equipment.

One ubiquitous component of power distribution systems is the power transformer which is installed in every electric post we see and this numbers to the tens of thousands.

Borja has visited the Taiwanese manufacturer of Meralco’s supplies and its sister company Philec where the real bottom price of transformers cost P250,000.00/MVA (megavolt amperes), but when it is sold by the distributor in the Philippines it is already P600,000.00/MVA.

The ERC-approved price for Meralco is P1.6 million MVA for an overprice of over 500%. This forms part of the asset base Meralco uses to submit its Capex.

This overpricing has been going on for decades now but under the PBR, with the high allowable rate-of-return and five year pre-approved power rates collected in advance, this magnifies the overprice even more.

And then there’s more to boggle the mind of the most electric-shocked consumers, the Meralco exemption from bidding for its purchases since 2006.

In Resolution No. 13, Series of 2006 signed by Commissioners Albano, Alcordo and Baric entitled “A Resolution Adopting the Guidelines to Govern the Submission, Evaluation, and Approval of Electric Capital Projects” on March 8 the ERC, our complaint states:

“…amended existing laws on bidding and usurping the power of Congress to legislate by effectively exempting from the bidding process the purchases of capital equipment of ‘Utilities who (sic) are under the Performance Based Rate (PBR) setting methodology thereby violating EPIRA’s “…(b) Sub-Section c of Section 2 which mandates the State ‘To ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability … and (c) Sub-section f of Section 2 …’To protect the public interest as is it is affected by the rates and services of electric utilities and other providers of electric power’”, among others.

So, the oveprircing of Meralco approved by the ERC will never be discovered as there will be no open, competitive bid to surface the costs of Meralco asset acquisitions.

Three last items among many more our present space does not allow us to lay out fully: Rate Translation and its discriminatory rates, Regulatory Liaison P 2.2-B item in the Capex application of Meralco that ERC granted,:

When the ERC approved the P 1.60/kwH for 2011 it does not mean that all Meralco consumers will now be charged for its distribution services, this is still translated into customer classes consisting of industrial/commercial and residential categories and furthermore classified under the kwH consumption categories: 99 kwh and below,199 kwh and below, 299 kwh and below and 400 and above.

According to Junia’s report which I quote here:

“For distribution services alone, he said, residential customers using over 400 kwh per month will be charged as much as P2.30 pkwh while industrial users will pay as low as P0.04 pkwh and P0.10 pkwh, or barely a fraction of the residential rate. This rate distortion will even be magnified further when the supply and metering charges are factored in because residential customers shoulder 91% and 85% of those costs, respectively…”

The impact of this rate translation is seen in the sales and consumption share, again from Junia:

“Residential customers will contribute 63.3% of the P3.96 billion revenues, with the non-residentials, i.e. the industrial and commercial customers, accounting for a mere 35.2%.

“In terms of consumption, residential customers will get or use only 37% of total energy sales of P2.495 billion kwh, while the lion’s share of 61% will be delivered to industrial and commercial customers, a clear case of their paying less for more.”

“As for the “Regulatory Liaison” budget, what kind of animal is this? ERC and Meralco have not explained its details to the public, which leads us to believe it is for “dangerous liaisons,” Juania asks:”

For 2012 alone, Meralco applied for P392.8 million under this item, but ERC awarded Meralco P438.5 million, or P47.6 million more.

All told, ERC added P146.8 milion to Meralco’s original application of P2.060 billion for regulatory liaison, Junia pointed out. The original amount is not explained in detail; the additional P146 million is also a mystery.”

(More in a future Part II.)