Meralco accused of bloating assets

5

First of two parts

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UTILITY giant Manila Electric Co. (Meralco) has for years overstated the value of its assets and replacement costs for equipment and facilities, leading to unjustifiably high allowable rates that it can charge electricity consumers, critics have charged in documents obtained by The Manila Times.

In a July 11 letter to President Rodrigo Duterte, Uriel Borja, a former director of Iligan Light and Power Co. and Mindanao Energy Generating Corp., raised a number of issues, including his allegation that Meralco as well as the National Grid Corp. of the Philippines had engaged in inflating the value of their assets in calculations of their Maximum Allowable Revenue, which in turn resulted in higher rates charged to customers.

Borja has intervened in numerous cases before the Energy Regulatory Commission (ERC) dating back to 2010, and is one of several plaintiffs who brought a case before the Ombudsman against members of the ERC for decisions made in Meralco’s favor.

He is also the petitioner in a case before the Supreme Court seeking to overturn a Court of Appeals decision rejecting his plea for a restraining order and court review of the ERC’s approval of Meralco’s rate calculation for 2011 to 2015.

Power rates higher than rest of Asean

In a background summary attached to his letter to the President, Borja explained that the average cost per kilowatt-hour (kWh) of electricity in the Philippines was $0.1822, significantly higher than those of Asean neighbors Indonesia ($0.10/kWh), Vietnam ($0.06-$0.10/kWh), Thailand ($0.07/kWh) and Malaysia ($0.06/kWh).

At an average consumption of 692 kWh per person in 2013, according to World Bank data, the approximately $690 per year this cost represents about 25 percent of per capita income of $2,765, Borja pointed out.

Borja cited a number of reasons for high power rates in the Philippines, including similarities in the Electric Power Industry Reform Act of 2001 (Epira) and California’s deregulation law, which took effect in 1998 and was widely seen as the reason for a sharp increase in electricity rates and widespread power shortages in that state in 2000 to 2001.

A more specific culprit, however, is the manner in which electric rates are set under the Performance-Based Regulation (PBR) framework implemented by the ERC for the industry in 2009.

Rate-setting mechanism

Under the PBR system used in the Philippines, which is similar to the framework commonly used to set utility rates in other countries, the regulator sets a level of Maximum Allowable Revenue (MAR) a utility distributor such as Meralco can earn.

It establishes a number of performance benchmarks, for example, keeping outages or system loss below certain levels, that the distributor must meet to collect the MAR. This is typically set for a multi-year period – currently, a period (the “fourth regulatory period”) from July 1, 2015 to June 30, 2019 – and reviewed periodically.

The MAR in turn determines the Maximum Average Price (MAP), which is the rate per kWh that Meralco can charge its customers. For the latest regulatory year (2015), the MAP for Meralco was P1.6878/kWh.

To determine the MAR and MAP, a complex set of calculations is carried out that takes into consideration the value of the company’s assets, its planned capital expenditures for the regulatory period, and its expected operating expenses for the regulatory period, as well as other factors such as foreign exchange rate forecasts.

Raising or lowering the value of any of those factors, therefore, raises or lowers the maximum average price, the rate per kilowatt-hour that customers pay. The rate is not the same for all customers, provided the average rate across all customer classes matches the MAP rate.

Those using less electricity, typically not more than 200 kWh per month, are charged a much lower rate than the MAP, while heavy consumers using 500 kWh or more per month are charged per-kilowatt hour rates higher than the MAP.

Long-standing complaints

Most of the outstanding cases filed either at the ERC, Ombudsman, or the courts accusing Meralco of inflating the value of its assets and capital expenditures cover the years prior to the start of the current fourth regulatory period, some citing discrepancies as far back as 2006.

In the case filed by Borja and others against ERC and Meralco officials before the Ombudsman in 2011, the degree of overvaluation of existing Meralco assets prior to 2008 is estimated to be between 500 percent and an incredible 942 percent, which resulted in a grossly inflated MAP. According to various filings with the ERC, the amount Meralco customers were allegedly overcharged between the years 2008 and 2011 was at least P3.25 billion.

Among the allegations made were that Meralco disregarded the gain in value of the peso (from P53 to the US dollar in 2006 to P44 in 2010), which led to much higher than actual costs being used in determining the MAP rate.

The company was also said to have violated provisions in the Epira in purchasing equipment such as utility poles and connectors from its own subsidiaries, rather than subjecting those to competitive bidding as required by the law.

One example given in the complaint to ERC (ERC Case 2014-029) was the price of an 83 MVA transformer, listed by Meralco in 2010 at P44 million according to the 2006 ERC valuation guidelines, but with an actual value of just P25 million based on the difference in the exchange rate.

(To be continued)

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5 Comments

  1. Ignacio Balbutin on

    The filipino people especially the poor were abused by Meralco for so long a time. We hope President can look into these abuses and even invite foreign investors who can provide lower rates and without hitches or blackouts. We are the only country in Asia who is still suffering from brownouts. It will surely affect the sentiment of the investors if this will not be corrected.

  2. Lets stop this meralco from collecting money to the consumer. Its better to open the BNPP to provide cheaper electricity.

  3. The problem of high electricity costs has been around for a long time, and a thorough examination of our electrical bill will show that this is from the Generation Charge. Meralco is just a distribution company (and whose Distribution Charge has remained stable) to the generation coimpanies which are now being investigated for collusion. The WESM is hardly a free market; in practice, it is controlled by a cartel of generation companies who are able to not only dictate prices but synchronise ‘maintenance’ interruptions in the face of our ever-increasing demand. It is from them that this inflated Generation Charge comes from. And all of a sudden we have this Uriel Borja – who is a representative of the power generation sector, mind you – placing the blame on a distribution company for something as obscure as valuation of assets and replacement costs. The bloated Generation Charge is based on the inflated rates gencos charge Merlaco. But that’s okay for the gencos, because the public’s kneejerk reaction is to shoot the messenger, or in this case, the case, the bill collector.
    Meralco today may not be perfect, but it is far better than the time of state ownership when brownouts became a daily purgatory. Today, despite high demand and low supply from opportunist and colluding gencos, it is in better shape than it ever was. Rather than blame the distributor let’s put in more players in the power genration field and increase our generation capacity to break the hold of the colluding gencos around our necks.

    • Complaints and counterclaims abound in a society where transparency and accountability have yet to gain solid ground. Customers have the right to know and redress of valid grievance as much as MERALCO to clarify and lay down facts to defend itself. But equally important, if not more, is government’s response to these averments and counter-allegations. It has, either through ERC or DOE, to investigate and determine the truth amidst opposing claims by adverse parties. And resolve these issues timely, fairly and clearly. Better still, continuously and effectively educate the consuming public on important issues affecting them and our power and energy sector. A well-informed public is good for business and governance.

  4. I have seen glimpses of this fiasco from brief news stories back then but those instances were not as clearly explained as the above. Congratulations Manila Times, Ben Kritz and Uriel Borja. The country needs more of your kind.