Consumer To ERC: Rule for NGCP Is Rule For Meralco

"Outage Outtakes" by Butch L. Junia

The recent order from the current Energy Regulatory Commission (ERC) disallowing major claims of recoverable revenue by the National Grid Corporation of the Philippines (NGCP) seems to be a significant departure from the utility bias of the previous ERC.

The consumers hope that the current ERC, guided by the "General Principles for the 4th RP" as enunciated in the Partial Determination, will revisit decisions of the previous ERC on Meralco rate applications. I Photo: Meralco

Under the leadership of current chairperson Mona Lisa Dimalanta, the ERC disallowed P3.7 billion of NGCP’s operating expenses, stating that they were "not justified by NGCP as being necessary to its operation as a Transmission utility or that the expense will redound to the service or benefit of the consumers."

Allowable CapEx was dramatically reduced from P145.7 billion to P15.3 billion, and the Weighted Average Cost of Capital (WACC) was recomputed from 12.15% to 10.71%, resulting in a less oppressive return on capital.

NGCP, the China-backed concessionaire operating the nation’s power transmission backbone, sought approval of P387.8 billion as revenue for 2016 to 2020. However, after a review of "actual or historical expenditures and project status," the ERC allowed only P183.4 billion, less than half of the application.

On November 7, 2023, the ERC released its Partial Initial Determination on NGCP’s application for approval of its Maximum Annual Revenue (MAR) for the 4th Regulatory Period filed on December 22, 2022.

This period, starting from RY 2016, is actually the 4th RP, but the previous ERC failed to issue the rules and undertake the rate reset, resulting in a rate holiday for utilities. This regulatory failure led to rates based on costs and charges that were not checked, reviewed, verified, or validated.

This apparent course correction by the current ERC is significant for the captive customers of utilities. According to the current ERC, the review of the 4th RP "is informed and guided by actual or historical expenditures, and project status, thereby allowing ERC to establish the necessity and efficiency of these actual expenditures."

The actual data will determine revenues that will reasonably compensate utilities for "prudent, reasonable, and economically efficient verified and validated costs."

Among the disallowed NGCP claims were Public Relations and Corporate Social Responsibility expenses amounting to P1.4 billion, Representation & Entertainment, P800 million; Advertising, P130 million; COVID Donation, P942 million; and Charitable Contributions, P33.8 million.

The consumers hope that the current ERC, guided by the "General Principles for the 4th RP" as enunciated in the Partial Determination, will revisit decisions of the previous ERC on Meralco rate applications.

If applied to the Meralco cases, the general principles will likely lead to disallowances in the same levels and volumes as NGCP. For instance, Meralco’s Interim Average Rate (IAR) granted in 2015 was made permanent in September 2022 without a single record of actual or historical expenditure being submitted by Meralco.

The IAR was the Smoothed Maximum Average Price (SMAP) for the 3rd RP that was approved in June 2011.

Carried over via the unverified, interim rate charge from the 3rd RP are the following costs, for 2016 to 2022: Regulatory Liaison & Compliance – P1.962 billion; advertising – P2.39 billion; employee pension & benefits – P8.931 billion. Efforts to obtain records of these expenditures have been routinely denied by ERC.

Based on Meralco’s 3rd RP Annual Revenue Requirement (ARR) carried forward, return on capital was P79.9 billion; return of capital – P23.3 billion; CapEx – P37 billion.

For the 5th RP (RY 2023 – RY 2026), the total amount applied is P503.7 billion, broken down as follows: CapEx – P167.7 billion; return on capital – P126.7 billion; operating and maintenance expense – P120.8 billion; regulatory depreciation – P62.5 billion; working capital allowance – P16 billion.

The measures of reasonableness, necessity, and benefit set out in the general principles will guide the review of the records of these expenditures when those records are submitted by Meralco upon the direction of ERC.

Fortunately for consumers, there is a long-standing case to which the current ERC can apply the principles enunciated in the NGCP case. The Motions for Reconsideration of the 4th RP rate reset disguised as AWAT True-up, ERC Case No. 2020-043RC, have been pending for over a year now.

That Decision was issued on June 16, 2022, by the previous ERC. The general principles applied in NGCP fit neatly and snugly the facts of this Meralco case.

In fact, the issues raised in ERC Case No. 2020-043RC are the issues resolved in ERC Case No. 2022-089RC. ERC will only need to apply the general principles even-handedly, fairly, and firmly.

Truly, consumer redemption is hard to come by, and we have to be ready to grab it in whatever form it comes. Thank you, current ERC! By the way, the immediate predecessor of Chairperson Dimalanta at the ERC helm was Agnes V.S.T. Devanadera. She ended her term in July 2022.

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