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P53-B NGCP repay overdue

Instead of the regulatory reset to determine the appropriate, just and reasonable MAR, ERC granted NGCP an “Interim MAR” which increased the 2015 figure to P43.1 billion and P43.8 billion in 2016.

Raffy Ayeng

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A series of maneuvers regarding the fixed revenues allowed for transmission network concessionaire National Grid Corp. of the Philippines (NGCP) along with the apparent collusion of regulator Energy Regulatory Commission (ERC) resulted in excess charges of about P53.3 billion until 2020, the refunding of which would benefit electricity users reeling from backlogs in bill payments during the health emergency.

ERC’s complicity was the result of its act to sit on the so-called 4th Regulatory Period reset to determine the reasonable maximum allowable revenue (MAR) that NGCP is entitled to charge customers from 2016 to 2020. The 5th reset for 2021  which supposedly started already also remains hanging.

Instead of the regulatory reset to determine the appropriate, just and reasonable MAR, ERC granted NGCP an “Interim MAR” which increased the 2015 figure to P43.1 billion and P43.8 billion in 2016.

NGCP then filed a petition with ERC on 29 October 2019 to raise its Interim MAR to P58.8 billion for 2020 or an increase in its annual revenue by P15 billion that it considers as a pass-on cost to consumers.

In 2020, ERC granted an IMAR increase to P47.1 billion which was lower than the NGCP petition but was still P3.3 billion more than the previous rate.

The ERC decision was published in April 2020 when everybody was anxious about a spreading pandemic and amid the community quarantines that dislocated the economy.

Based on NGCP’s own report, the demand for electricity during the quarantine period decreased by 25 to 30 percent on average monthly.

With the fixed MAR, the transmission rate must have increased by 33 t0 43 percent during the period despite the drastic reduction in demand because the MAR is a guaranteed annual revenue of NGCP regardless of the demand.

The additional P3.3 billion in NGCP’s IMAR granted by ERC, thus increased the burden to consumers during the period of uncertainty.

ERC based the computation to increase the IMAR only on consumer demand and the concessionaire’s additional capital expenditures.

Missed, likely intentional, were the other important and significant factors that should have been included in determining transmission rates in accordance with ERC’s own rules and regulations such as the annual depreciation of assets that are subtracted from the regulatory asset base (RAB) and the level of Weighted Average Cost of Capital (WACC) which in turn is the multiplier to RAB in establishing the level of return on capital or profit of NGCP and chargeable to consumers.

WACC for the 3rd regulatory period covering 2011 to 2015 was 15.04 percent putting the profit component at 66 percent of the total rate while the rest are made up of return of capital, operation expenses and taxes.

WACC for the 4th regulatory period between 2016 and 2020 was supposed to decrease as a result of the strong economy that reduced the risk free rate, which is based on government debt instruments, went down from about 10 percent in 2010 to four percent in 2015. Market risk premium drastically reduced too.

The reduction in the country and market risk premiums even excluding other factors such as depreciation should have reduced NGCP’s WACC in 2016 to about 7 percent that would translate to a reduction of about P50 billion of MAR for the five-year period of 2016 to 2020.

That amount, according to an industry expert, should be returned to electricity users since these constitute overcharges.

 

Corporate greed vs personal greed

Power industry expert Professor Rowaldo Del Mundo also stressed that power rates of the country remains high because of both “corporate greed” and “personal greed.” He stressed that corporate greed may lead more to higher power rates compared to personal greed in power supply procurements.

He cited the example of what happened in Mindanao in 2012, when he mentored and organized small electric cooperatives to jointly procure power as if a single entity to achieve economies of scale.

They aggregated 300 megawatts (MW) in demand which was subjected to competitive procurement process as a way of challenging the P5.50 generation charge imposed by the leading private producers.

“That resulted for Mindanao a generation charge at only P4.09 per KWH. Our target was P4.20 but we got it at only P4.09 through the competitive process.

What I am saying kung may totoong competition o mag CSP (competitive selection process), it will be an effective antidote for cross ownership in the EPIRA Law,” he emphasized.

Moreover, Del Mundo explained that the pursuit for higher profits beyond just and reasonable may be considered corporate greed.

The EPIRA’s cross-ownership which allows DUs to contract its own affiliates tempts the owners of DUs to also put up power generation plants and contract themselves at high prices.

“Let’s just take the example of the 300 MW power supply and you will see how big super profit here is. 300MW multiplied by 1,000 (to convert in kilowatt) x 8,760 (no. of hours a year) x .8 (80 percent of the time, since power plant cannot operate 24/7 on 300 MW) x P1 (super profit) = P2.1B (a year) x 20 years which is the usual contract for a power plant equals P42 billion. And how many 300MW we have in 15,000 MW demand? You have 50.

That’s how much super profit corporations can rake in at the expense of consumers with just a P1 increase in electricity prices above the just and reasonable rate.

That’s why I said corporate greed, the pursuit of super profit beyond just and reasonable is a form of corruption in the private sector, is much more difficult to detect compared to corruption in public sector due to “personal greed”. And the problem is that the super profit is legal and can be passed on to consumers because the contracts are approved by government. This is not to say personal greed is better than corporate greed. We must fight and get rid both” he said.

Del Mundo shared that when he demonstrated the CSP in Central Luzon in 2015 before the policy of DoE mandating all DUs to procure power supply only through CSP, a power plant in Luzon, the biggest grid in the country, if contracted through CSP giving 10.4 percent WACC, with a 16 percent return of investment (ROI), the headline generation charge is only P3.90 per kilowatthour (kwh) compared to the contract of DUs at that time which pegged generation charge at P5 per kWh.

After the CSP, the electric cooperatives signed a lowered rate at P3.70. This was followed by ECs in northern Luzon which signed a power supply agreement after conducting CSP at P3.33 per kWh.

Senator Risa Hontiveros recently issued an ultimatum to the ERC to act on the “anomalous and exorbitant” rate of the WACC, which have been adding up to the consumer’s electricity bill for five long years.

The senator said the agency has been remiss in lowering the charge for WACC to fair and realistic levels since 2015.
Hontiveros insisted that WACC rates should have been lowered much earlier in order to temper other new arising issues of power rate hike and adjustments amid the pandemic.

 

Possible collusion

National Association of Electricity Consumers for Reforms Inc. (NASECORE) national president Pete Ilagan, meanwhile, said it is apparent that NGCP was favored and that there’s possible collusion between the NGCP and ERC.

“The lack of regulatory audit is tantamount to waiving consumer protection which gives undue advantage and favor to NGCP. Best proof is NGCP’s P1.2 B entertainment expenses exposed by Sen. Hontiveros,” he said.

Ilagan also said the success of the EPIRA Law lies largely on the diligence of ERC in exercising its regulatory powers in ensuring the quality, reliability, security and affordable supply of electricity.

“Thus, ERC’s negligence naturally results in blackouts and high rates affording utilities excessive profits. ERC should rise up to champion the interest of the electricity consumers. It’s high time for President Rodrigo Duterte to intervene over the matter, to ensure consumer protection,” Ilagan told Daily Tribune.

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