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By Patricia L. Adversario,
Senior Reporter
First of 2 parts
CONSIDER this the next time you pay your utility
bills:
There’s a chance you may also be paying for
Rotary Club membership fees, going away presents for visiting
guests, allowances for traffic aides and policemen as well as the
meals and snacks served during staff and board meetings of your
public utility.
Reports from the Commission on Audit (COA) on
the Manila Electric Co. (Meralco) and other public utilities show
that apart from income tax, other equally significant costs had been
added as operating expense in their financial statements.
These costs would be passed on to consumers if
these were not disallowed in audit.
Computing the actual rate of return is based on
three major accounts. These include: the net book value of property
and equipment used in the operation during the period in review; the
total operating expenses incurred under normal circumstances which
benefit the consumers; and the actual revenue realized during the
period in review.
A basic rule is that only actual expenses
incurred in the operation of the utility that benefit consumers
should form part of direct and/or related costs of operation. Only
these expenses are to be considered in determining reasonable and
just rates.
Operating expenses refer to amounts incurred in
business operations to generate income. These are also used to
determine what would be a “just and reasonable rate” to allow a
utility firm to recoup its expenses.
But other items that utilities claim to be part
of the “ordinary conduct of their business,” but don’t benefit
or serve the consumer often creep into the three major accounts to
justify high electricity rates.
“It has been the practice of most public
utilities, including Meralco, to include these items as part of
their operating expense even if previous audit by COA on these
utilities have disallowed such expenses,” said Nelia Villeza,
supervisor of the COA team that conducted a special audit on Meralco
from Feb. 1, 1994 to Jan. 31, 1995.
That COA report was the basis of the recent
Supreme Court (SC) decision ordering Meralco to refund its consumers
at least P28 billion after it disallowed the computation of income
tax as an operating expense.
The Supreme Court ruled that consumers should
not bear the cost of income tax paid by utilities because they did
not benefit from the taxes paid by the utility firms.
As the COA report bears out, it’s not only
income tax that consumers could be made to shoulder if such cost
items are not disallowed in audit. Auditors explain that a high book
value of property and equipment increases the return. This raises
the rate base and also increases the allowable return, resulting in
higher cost of electricity.
A high operating expense increases the cost of
producing electricity. The utility can then charge high rates to
recoup its costs.
But low revenues can also lead to high
electricity rates. If a utility claims to have little or no revenue,
it can either justify a low refund, or none at all, to its
customers. By claiming a deficient income, the utility can also
justify high electricity rates.
One principle in ratemaking is that only
property and equipment deemed necessary, useful and actually used to
service the needs of customers are entitled to a rate of return. Any
property that does not meet this criterion should be excluded from
the rate base.
In the COA audit report on Meralco, however,
various items of property and equipment either used by affiliates,
held for future use, or those not essential to the operation were
included in the rate base.
The report cited as an example the Meralco
Theater which, COA said, is not necessary in distributing power to
customers. The theater, it noted, was mostly used for film showing,
presentations and theatrical performances, and was rented out to
other organizations.
As such, the theater cannot be considered a
property incidental to electric operation and Meralco could still
render efficient service without maintaining the property, the
Energy Regulatory Board (ERB) said in its decision dated February
1998.
The ERB also excluded from the rate base various
lots with a total value of P240.9 million -- the Rockwell Thermal
Power Plant, Long Ranger Helicopter, construction work in progress
and offices held by Meralco affiliates.
COA’s Villeza said increasing the book value
is also achieved when the utility implements frequent appraisals on
its property and equipment.
Government auditors usually take these
appraisals at face value because they assume that the appraisers
contracted by utilities are independent.
Continued tomorrow
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