ERC ruling doubled Meralco asset base, petitioner alleges

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Bid and invoice documents from Iligan Light and Power, Inc. (ILPI) show that lower prices could be obtained for equipment bought by the Manila Electric Co. (Meralco).

Uriel Borja, a former director of ILPI and Mindanao Energy Generating Corp. who has intervened in cases involving Meralco in the Energy Regulatory Commission (ERC), filed the documents with regulators to provide further evidence of overcharging.

For a 40/50 megavolt ampere (MVA) transformer, used by Meralco in several applications, the price quoted by ILPI supplier Shihlin Electric Philippines was P14.74 million. The price forecast by Meralco in its capital expenditure plan was nearly four times higher at P51.051 million.

While it was not specified in that instance where the higher-priced transformer was being sourced, Borja provided documentation on a similar transaction involving a 30/40 MVA transformer, wherein the Philippine Electric Co. (First Philec) – whose parent company is First Philippine Holdings, and so at that time was a sister company to Meralco – quoted ILPI a price of P71.4 million for a Shihlin transformer, but Shihlin Philippines offered a price of P49 million.


The implication of those documented discrepancies is that other capital expenditures by Meralco may have been similarly inflated. Some possible examples from the company’s detailed capex justification for the years 2012 through 2015 include the procurement of a spare 33-MVA transformer unit at P51.05 million; the installation of a new 83-MVA transformer and related equipment in Malabon in 2012 for a total cost of P123.71 million; and the installation of another 83-MVA transformer in Dasmarinas, Cavite, for P102.66 million.

The reason capital expenditures are critical is that they form the basis for calculating asset values later as part of the exercise to establish the Maximum Average Price or MAP.

Under the current system, replacement cost rather than historical cost, or book value, is used for determining asset values, a change that was approved by the ERC in 2006 and which in most cases results in higher valuations.

This change in procedure immediately doubled the value of the regulated asset base (RAB) of Meralco from P48 billion to P96 billion, Borja’s complaint alleged, increasing the company’s asset base “by almost P50 billion without Meralco investing a single centavo.”

Meralco and ERC views

Although Meralco has not responded to an invitation by The Manila Times to review and comment on points raised in this article, it has previously responded to issues raised by Borja and others on its petitions to the ERC for approval of capital expenditures for 2016. The ERC also addressed the matter in an order dated April 12.

As to the matter of varying prices of transformers, Meralco pointed out that there was no benchmark rate, as the equipment itself varied according to application, capacity, and voltage levels.

One example, although not highlighted in its response to Borja’s allegations, was an 83-MVA transformer installed on an emergency basis at the North Port Substation and the subject of an ERC filing just four days earlier, on April 8; the price that Meralco provided for that unit, inclusive of transport and needed supplies, was P54.67 million pesos, significantly less than the two similar installations in Malabon and Dasmarinas described above.

The ERC also noted, “More importantly, Meralco emphasized that the proposed costs for said power transformers were derived using the Moving Average Price for previous purchases of similar power transformers. These previous purchases underwent competitive bidding, hence, the costs of these assets are based on current market price.”

The ERC also clarified that calculation of the RAB, which is part of the larger formulation of the MAP, and calculation of estimated capex are separate, parallel activities, in effect implying that questioning valuations in one area (such as challenging the capex estimate) did not necessarily raise a question about the other.

ERC’s final word was that, “A perusal of the evidence presented herein showed that the approval of Meralco’s application for authority to implement the proposed capital expenditure program for Regulatory Year (RY) 2016 is in accordance with the provisions of Republic Act No. 9136 (the Epira law) and the “Resolution Amending the Rules for Approval of Regulated Entities’ Capital Expenditure Projects.”

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