High Meralco rates due to ERC-approved ‘maximum average prices’

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‘It is not just the cost of power Meralco buys from generators that explain its high electricity prices.

As significant has been Meralco’s “distribution charges,” which actually includes such a cost as that for your electric meter. These account for 30 percent of the bill for a middle class consumption of 450 kilowatt-hours in a month, a bit smaller in share than the 45- percent cost of power (“generation costs”) it buys from generators.

It is the Energy Regulatory Commission (ERC) that determines how this distribution charges would cost by deciding on what is called the Maximum Average Price (MAP) Meralco can charge its customers. This is the highest rate, which the firm may impose, although of course, in practice, it is the rate Meralco adopts.

The MAP is converted into different distribution rates for each type of consumer. Thus, while the MAP from March 2012 to March this year was approved by the ERC at P1.633 per kilowatt-hour, the distribution charge for a household using up to 200 kwh per month is P1.96, while that consuming 400 kwh is P2.48.

The business of Meralco (and of other distribution firms) is actually a capitalist dream: it is a monopoly in its franchise area selling an essential product (electricity) to a captive market.
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Purportedly as a check to such firms’ greed, the state through the ERC regulates the firm’s price for its electricity rates, which would allow it not only a “reasonable” rate of profits, but also enough revenue to undertake its future operations.

But one can only imagine the consequences of such a system in a society like ours in which a greedy, strong elite can control one way or another a weak state.

The ERC decides on the MAP level, based on the firm’s presentation of data to justify the MAP it wants, and purportedly after the conduct of public hearings during which citizens purportedly present data to contest Meralco’s figures.

The ERC set the MAP for 2009, the first full year of its implementation under the new so-called Performance Based Regulation (PBR) at P1.28 per kilowatt-hour.

For some reason though, under this PBR that was supposed to make Meralco deliver its products more efficiently, the MAP under President Aquino jumped 16 percent to P1.49/kwh in 2010 and then to P1.60 in 2011, and then to P1.633 for regulatory year 2012-2013.

Those prices make up the reason why Meralco’s net profit rocketed from P6 billion in 2009 to P10 billion the succeeding year to an estimated P17.5 billion last year.

Coincidentally or not, it was in 2010 that Beacon Energy Holdings- chaired by Manuel V. Pangilinan but which the Indonesian tycoon Anthono Salim ultimately controls—started to buy into the firm that it now has tight control of Meralco. The Salim’s group strongest link to the Aquino government is through Albert del Rosario, who had been for many years director of the group’s holding company First Pacific, and resigned only in 2011 when he was appointed Foreign Secretary.

The ERC is supposed to be, according to the Electric Power Industry Reform Act of 2001, an “independent, quasi-judicial regulatory body” with its members having fixed terms, which supposedly insulates them from interference by the official who appointed them, the President.

You decide if the ERC is indeed independent from Aquino.

Other than its chairman Zenaida Ducut who was appointed by former President Gloria Arroyo in 2008 after three terms as Pampanga congresswoman, the other three were appointed by Aquino: Alfredo Non, whose only background I could gather was that he was president of a mining firm; Josefina Magpale-Asirit, a niece of Cabinet secretary and former energy department head Rene Almendras, and Gloria Yap-Taruc, who was Aquino’s assistant solicitor general.

Ducut’s cooperation seems to have been assured with pork-barrel accuser Benhur Luy, who has been under the protective custody of the justice department, accusing her of demanding a kickback for every pork barrel project she delivered to congressmen, in connivance with Janet Lim-Napoles.

It’s been easy though for Meralco to get the ERC agree to high MAP since 2010 because of a major change in the regulator’s method for computing the MAP.

Although computing the MAP is a complex process involving several variables, the figure that has mainly determined it is the valuation of Meralco’s assets.

This is due to the fact that the amount of pesos and centavos that would be its “reasonable rate of return on capital” would be computed by first determining the value of its assets.

Although not specified by the EPIRA, for some reason, the ERC had changed the old way of computing Meralco’s assets, from the “historical cost” or book value to a “replacement” cost.

That is, the value Meralco’s assets would no longer be determined by adding up what it spent to buy these assets (e.g., power lines, transformers, meters) but what it would spend to replace these assets.

With this new method, according to ERC data, Meralco’s assets were revalued by ERC from its book value of P48 billion in 2006 to its replacement cost of P168 billion.

Less depreciation and other factors, the value of Meralco’s assets that would be used to determine the reasonable return on its assets—the so-called Regulatory Asset Base—was computed starting in the First Regulatory Period (July 2007 to 2011) at P96.4 billion, or nearly double its book value of P48 billion.

To illustrate this, if I bought a car at P500,000 on Year 1, I’d calculate the reasonable return on my investment in five years using that P1 million cost of the vehicle (plus operating costs for gasoline and maintenance). And that would determine then my rental rates.

Instead, ERC’s method uses the cost of replacing that car—which likely had gone up to P700,000 in five years’ time—and therefore would require higher rate of return to recover that higher “investment,” and therefore higher rental rates.

The study produced by the US AID released April 2013 titled “Challenges in Pricing Electric Power Services in Selected Asean Countries” traced Meralco’s high rates to this new ERC method in computing the firm’s assets:

“While it is recognized that the objective of asset revaluation is to set the rate base that would support capital investments necessary for efficient production (or delivery of services), the contention is that the application of replacement cost should not have extended to assets that are already sunk because it does not create additional incentive for future capital investments.”

“It is argued that enticing a regulated firm to commit capital to a network utility requires only an assurance that it can secure returns on its investment over time at rates that are competitive with those offered by alternative investment opportunities.

“When an asset is considered sunk, it has no alternative use, or put differently, it cannot be transferred to another activity. As such, a sunk asset has zero economic value or opportunity cost and the investor no longer expects to secure returns for it. The regulator could have revalued such asset down to opportunity cost for purposes of computing the allowed revenue, but this result in lowering the asset base of the regulated firm below its historic costs or book value.

“To the extent that the regulator might be perceived as ‘expropriating’ the assets of the regulated firm if it revalues sunk asset to zero and thus deter future investments, it is not usually practiced.

“But revaluing sunk assets at replacement costs pointlessly creates windfall gains for the regulated firm at the expense of consumers.”

Check out Meralco’s profits since 2010. They certainly look like windfall gains.

The gall for ERC to have as its slogan: “Asia’s benchmark for excellence in power regulation.” Asia is rather laughing at it.