Allegations of inflated costs hound nation’s largest electric distributor
Last of three parts
IN the first two parts of this week’s special report that came out Monday and Wednesday, two ways in which public utilities pass financial costs and risks to their customers were revealed: In the case of Metro Manila’s two water concessionaires, Maynilad and Manila Water, regulatory accommodation has permitted them to recover the costs of corporate taxes and losses due to foreign exchange rate fluctuations. In the case of renewable energy producers, high costs of development are compensated with feed-in-tariffs (FIT), which is not in itself an unconventional arrangement; the manner in which those levies collected from customers are to be handled, however, has provoked a great deal of criticism.
This final installment of The Manila Times’ focus on utility rates turns its attention to a potentially bigger case of questionable “cost cushioning” on the part of Manila Electric Co., the Philippines’ largest electric distributor. According to some critics, Meralco allegedly inflated costs and asset values in the process of calculating its maximum average price, MAP, the base rate reflected on customers’ bills as the “distribution charge,” Meralco’s main source of revenue.
Reading the MAP
Calculating “maximum average price” (MAP) is a complex exercise. It may prove to be difficult to grasp for the average consumer without some knowledge of accounting. For a reasonably reader-friendly explanation of the cost determination process and the controversy surrounding the MAP approved for Meralco by the Energy Regulatory Commission (ERC), readers may wish to refer to Manila Times columnist Rigoberto Tiglao’s column from January 15, 2014, “High Meralco rates due to ERC-approved ‘maximum average prices.’”
MAP is the maximum price Meralco is allowed to charge for distribution; it (or any other electric distributor) hypothetically could charge less than the MAP, but, as Tiglao’s column pointed out, it generally does not. That is because unlike generation charges, transmission charges, and various subsidies and taxes, distribution is not a ‘pass-through’ charge that Meralco is simply collecting from its customers on behalf of another business or agency; distribution is Meralco’s core business and the main source of its revenue, so it naturally would wish to maximize that as much as it is permitted to do so.
Since 2009, when the base MAP rate was set at P1.28 per kilowatt-hour under the then-new performance-based regulation (PBR) standards, the MAP has steadily increased each year: P1.49/kWh in 2010, P1.60/kWh in 2011, P1.633/kWh in 2012-2013, and P1.6474/kWh for 2014. The distribution charge is scaled for different classes of customers; for customers using less electricity, in general, those using 200 kWh or less per month, the distribution charge is about P1.23/kWh. For a customer with a consumption of 500 kWh per month, the distribution charge is P2.41/kWh (as of the January 2015 billing). Across the range of different customer classes, the average charge should be less than or equal to the ERC-approved MAP rate.
The underlying value that determines the MAP is the valuation of Meralco’s assets, because that is the base from which a reasonable rate of return on capital is calculated. However, because valuing assets is a complex process, the current procedure for calculating MAP involves a bit of a shortcut. For example, in its application to the ERC for the 2014 MAP, Meralco arrived at its figure of P1.6510/kWh (which was eventually slightly reduced by the ERC) by a formula based on the MAP for the previous year, and taking into account the “change in the weighted index” (essentially an inflation/deflation factor), a performance incentive factor (based on Meralco’s meeting targets related to minimizing outages and system loss, as well as other factors), and over- or under-recovery of revenues and taxes. A full asset valuation calculation is usually done by the company for general accounting purposes anyway, according to a Meralco source, but is only used to update MAP calculations if a significant change in value is detected.
According to a long-running case that in 2011 resulted in the filing of a complaint before the Ombudsman against officials of the ERC and Meralco, the utility giant overstated its asset valuation by 500 to 942 percent, resulting in a grossly inflated MAP; for the years 2008 through 2011, the amount Meralco customers were overcharged, according to numerous filings with the ERC, was at least P3.25 billion.
Among the allegations made are 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, and that the company violated provisions in the Electric Power Industry Reform Act (Epira) of 2001 in purchasing equipment such as utility poles and connectors from its own subsidiaries, rather than subjecting those to competitive bidding as required by the Epira law. One example given in the complaint to ERC (ERC case 2014-029) is 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 according to the difference in the exchange rate.
Whether Meralco acted improperly on its own or not—so far, neither the ERC nor the courts have entertained that charge—one obvious source of controversy, as Tiglao explained in his exposé last year, is the seemingly arbitrary change in methodology approved by the ERC for determining asset values; in 2006, the basis for valuation was changed from “historical cost” or book value to “replacement cost,” which in most cases results in higher valuations. As the petition to the ERC points out, under a replacement cost scheme sunk costs for assets that no longer generate revenue are not disregarded, which also unrealistically boosts asset values. This change in procedure immediately doubled the value of the regulated asset base (RAB) of Meralco from P48 billion to P96 billion, the complaint alleges, increasing the company’s asset base “by almost P50 billion without Meralco investing a single centavo.”
Lack of clarity
In his earlier column, Tiglao noted that the Epira law did not necessarily specify the change in valuation methodology for calculating the MAP from book to replacement value. That is indeed true, but the problem rather may be that it is not specifically prohibited, either. Where specific guidance is absent from the law, the ERC may otherwise exercise its regulatory responsibilities as it deems reasonable.
The dilemma of legal ambiguity is also at the heart of the dispute over feed-in-tariff levies from customers to support the development of renewable energy, and is also the source of consumer criticism of the Metropolitan Waterworks and Sewerage System (MWSS) in regulating water rates. In some cases, the lack of specific guidelines leads to regulatory errors.
In the case of the two Metro Manila water concessionaires, for instance, authorization from the MWSS to impose a foreign currency differential adjustment (FCDA) as a separate billing line item for customers was not accompanied with instructions to drop the currency exchange rate adjustment (CERA) that is embedded as a P1 charge in the basic customer water rate; the order to adjust rates to eliminate the CERA followed the authorization for the FCDA by several weeks or several months, depending on who one asks. Likewise, the controversy that erupted at the beginning of this month over the imminent P0.0406/kWh customer charge for FIT is due to perhaps too much flexibility being permitted regulators to design a program to manage it, resulting in charges to customers that could be interpreted to be contrary to the relevant laws’ intent.
These ambiguities have also proven fatal to most efforts by consumer advocates, because it has proved difficult to present clear legal arguments; as one Supreme Court official recently observed (in connection with the failed effort to secure a temporary restraining order against the increase in light rail fares), unfairness to consumers is always objectionable, but it is not always illegal.
In the wake of recent issues concerning power rates and the prospects of electricity shortages, perhaps within the next few months, calls for a comprehensive review or even scrapping of the Epira law have been frequently made, and the same could be, and has been said of laws such as the Water Crisis Act that govern other utilities. The point made by activist Arnold Padilla with respect to water rates perhaps suggests a direction these reviews could take: Tighter guidelines for the creation of concession agreements and franchises for service providers would remove many of the “gray areas” that result in arrangements that are perceived to be disadvantageous to consumers.