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.

tiglao.manilatimes@gmail.com
www.rigobertotiglao.com and www.trigger.ph

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17 Comments

  1. This Meralco & ERC system amounts to a blatant SCAM that should put the masterminds in prison. They deceived the Filipino People into thinking that their accounting standards followed international principles and pricing was based on cost and expenses.

    They should reap the punishment similar to that of Bernie Madoff Investment Scam !

    • Why SCAM ? What the owners want is to go get their Net Income and let the Filipino People be exploited to expand Meralco into the future without touching the bigger part of their Net Income. In other words, they made sure there was overpricing.

  2. The law says the ERC Chairman should be a lawyer – isn’t that sufficient – to have one lawyer in the commission? Why stock up with ERC with so many lawyers who are not Finance people – who cannot understand the complicated pricing formulas for utilities. How can we expect non-finance experts to compute correctly or be able to competently argue against the army of utility finance experts entities like meralco send over to the ERC to argue their case?!? This is basic common sense.

  3. victor hernandez on

    Greed, precisely, through manipulative computational technique with spurious objective.Maximum Average Price is a simplistic base for price determination, although it could be used one of the factors to consider. Besides averaging prices always result to statistically “false” average. Replacement cost is only relevant when one is considering to sell the assets, which in this case, it will not because it is an ongoing business. Determination of price, a reasonable one, should consider the consumer affordability, and a reasonable profit. Firm externalities are risks of the business, and cannot be totally passed on to consumers, A competent and skillful management is aware of that.Besides, there is a limit to return of investment of a utllity company: if I remember right, it is 12%. These are just a few major factors, which ERC has to consider in granting the reasonable price. I hope P-Noy will make good about his promise to punish profit-opportunists.We call on the technocrats of government, and academic of state university to study the appropriate computational technique to arrive at reasonable return of investors in a busineness enterprise imbued with public good & public utility, and responsibility.

  4. The ERC and the the DOE must have needed electro-shock therapy when they drafted the Electric Power Industry Reform Act. Couldn’t they see they were giving the producers carte blanche allowing each production of up to 25% of our requirements? Or that WESM was not being run like the spot market it was designed to be?

    Thank goodness the SC cut through all the misdirection and demanded that the producers be included as respondents in the petition. Some solons are beginning to see the real culprits and are asking that the generators be stopped from collecting from Meralco in their self-righteous indignation.

    Regardless of the outcome, the TRO will eventually be lifted, the bills will have to be paid. But no judicial decision can arrest eventual brownouts.

  5. Mr. Tiglao, please continue your crusade against the abuses of Meralco and Pnoy. I like to think that the reason the Lopezes hated PGMA was because they could not get what they wanted —which easily they got from Pnoy!

  6. ANOTHER LOPEZ/AQUINOS POWER PLANT IN BATANGAS
    This manufactured president in Malacanang is fully cognizant of what is going on particularly on electricity power rate increase being exerted by the Generators Consortium via Meralco, water rates hikes, Fuel hikes, privatization of government hospitals, fuels smuggling and discrepancies. This Malacanang tenant will never go or act contrary to the interest of his political patrons and traditional Milking-Cows. By the way the groundbreaking of San Gabriel Power Plant is of another power plant owned by the Lopezes/Aquino. No wonder they will fight up to end to obstruct the activation of Bataan Nuclear Plant

  7. Kudos Mr. Tiglao, these greedy cabal might have thought that they have succeeded in concocting a very convoluted and complicated set up that nobody will be able to figure out what they arrogantly front as justification for their outrageous rates and profits. The did not count on guys like you. Keep it up something is bound to fall.

  8. Meralco and other power generators will always win their case. Don’t be naive, the monied group always win here. It was only during Marcos time that that tables were turned over the oligarch.

  9. Asirit was Cebu Provincial Board member from 2001 to 2004, when Magpale (sister of Rene Almendras and now Vice Gov of Cebu and Acting Gov of Cebu when they suspended Gwen Garcia) finished her three terms as legislator. She then became the chief of staff of then congressman and later Department of Tourism secretary Ace Durano, before joining the DOE. Duranos and Almendrases are cousins. Pnoy and Almendras were very close college batchmates and friends at the Ateneo de Manila – Pnoy even was a wedding cord sponsor of Almendras after college. Gloria Yap Taruc was also a batchmate of Pnoy – they took up the same course, Economics. That is how independent the ERC is. This country badly needs a revolution!

    • Bonifacio Bangayan Claudio on

      The oligarchs will find ways to bury “Another man in the grave” when someone stands up for the welfare of the society’s majority poor… Revolution cannot come from the masses for they are “weak”… But who among the “strong” will stand up against his “colleagues” for the sake of the wretched poor children of Inang Bayan? A Magsaysay and a Marcos – such men of valor and patriotism “sa isip, sa salita, at sa gawa” – are hard to come by to initiate a revolution at the “top”… God bless the Philippines…

  10. So the cat is out of the bag- puro bata pala ni Tuwid Boy ang nasa ERC except Dukot kaya sagutin ni Pinoy ang ginawa ng ERC na ang profit goal eh base sa Asset na di pa binibile na siyempre eh doble ang taas ng halaga duon sa nasa libro. Lintik na basehan iyan masahol pa sa hold-up dapat kasuhan ng graft and corruption lahat ang ERC Commissioners na nag approve niyan. Ang bola eh nasa kamay ni Tuwid Boy.

  11. Gloria M. Kuizon on

    Please do not stop hammering on this subject, Mr. Tiglao. The latest news that President BS Aquino has spoken about curbing Meralco and the power producers (some of which are Meralco-owned or Meralco sister companies. shoul;d not stop you and The Manila Times from continuing to expose the greed of these power-industry businessmen and corporations.
    More power, Mr. Former Ambassador and Cabinet Member of Former President Gloria Arroyo, whose regime was very corrupt but more competently did its work to serve the people and the nation than the present one.
    May God bless you and make you less anti-God than you are now.

    G. M. Kuizon
    Novaliches, QC.

  12. The people should start an initiative to repeal those laws that created these monsters if no legistlator would want to do it. These discussions would not make an impact if the people would not act accordingly.