The Performance Based Rating (PBR) Methodology as applied by Meralco A presentation by Romeo Junia to the Freedom from Debt Coalition (FDC) Task Force on Power May 2012

MERALCO AND OTHER UTILITY ISSUES PHILIPPINE ELECTRICITY RATES, ESPECIALLY IN THE MERALCO FRANCHISE AREA, ARE THE HIGHEST IN ASIA AND THE FIFTH HIGHEST IN THE WORLD. 1. TONGA, AS OF 6/1/11, US CENTS 2. DENMARK, AS OF 11/1/11, US CENTS 3. GERMANY, AS OF 11/1/11, US CENTS 4. BRAZIL, AS OF 1/11/11, US CENTS 5. PHILIPPINES, AS OF 3/1/10, US CENTS.

THE WORLD’S HIGHEST AT TODAY’S RATE OF P13.40 PKWH FOR SOME MERALCO CUSTOMER CLASSES, OR THE EQUIVALENT OF 44 US CENTS, WE WOULD BE THE SECOND-HIGHEST IF NOT THE HIGHEST RATE IN THE WORLD. OTHER COMPARABLE RATES ARE: – USA, US CENTS – UK, US CENTS – SINGAPORE, 22 US CENTS – THAILAND, 9.79 US CENTS – ITALY/IRELAND, 28 US CENTS.

HOW IT HAPPENED HOW DID ALL THESE BECOME POSSIBLE? ALL THESE HAPPENED WHEN ERC ADOPTED A RATE SETTING METHODOLOGY CALLED “PERFORMANCE BASED REGULATION”, OR PBR, ABANDONING “RETURN ON RATE BASE” OR RORB.

UNDER RORB – UTILITY HAD TO INVEST FIRST BEFORE IT COULD COLLECT ITS COSTS AND ITS INVESTMENTS. IT WAS A RECOVERY MECHANISM. – WHILE THERE WAS PREVIOUSLY NO CLEAR CRITERIA UNDER RORB AND UTILITIES COULD JUST CHARGE ANYTHING TO THE CUSTOMERS, THE SC REFUND ORDER IN LUALHATI VS MERALCO SET VERY CLEAR GUIDELINES AND CRITERIA FOR COST RECOVERY. UNFORTUNATELY, ERC SHIFTED TO PBR RIGHT AFTER THAT LANDMARK DECISION FOR CONSUMERS. – RETURN ON ASSETS WAS CAPPED AT 12%.

UNDER PBR – MERALCO SUBMITS ITS 4-YEAR BUDGET OR ANNUAL REVENUE REQUIREMENT. THIS IS THE SO-CALLED RATE RESET PROCESS. – ERC APPROVES THE 4-YEAR BUDGET IN ONE SWEEP. – ARR IS CONVERTED, YEARLY, INTO THE MAXIMUM AVERAGE PRICE OR MAP AND TRANSLATED INTO DIFFERENT RATES FOR DIFFERENT CUSTOMER CLASSES. THIS IS WHERE DISCRIMINATORY RATES ARE INSTITUTED AND DISTORTED COSTS AND PRICES IN THE ARR ARE PERPETUATED. – THE PROCESS IS VERY TECHNICAL AND LITIGIUOUS RESULTING IN MERE TOKEN COMPLIANCE WITH PROCEDURAL AND SUBSTANTIVE DUE PROCESS FOR CONSUMERS. – RATES UNDER PBR HAVE REACHED THE ROOF – FROM P0.70 PKWH UNDER RORB TO P PKWH UNDER PBR. – UNDER PBR, MERALCO’S NET EARNINGS INCREASED FROM P3.2 BILLION TO P14BILLION IN JUST FOUR YEARS. – THE 12% CAP ON RETURN ON CAPITAL HAS BEEN LIFTED.

TRACKING MERALCO’S RATE: – FEB., RORB - P0.70 PKWH – JUNE, RATE UNBUNDLING, P PKWH – INITIAL SHIFT TO PBR – JULY, PBR (1 ST & 2 ND REGULATORY PERIODS) – MAY, PBR RATE, P PKWH – APRIL PBR, RY 2010 MAP, P PKWH – JANUARY PBR RY 2011 MAP, P PKWH – JUNE, PBR RY 2012 MAP, P1.60PKWH – JUNE, PBR RY 2013, P PKWH.

BASE CALCULATION RATE COMPONENTS, USING A 200 KWH CUSTOMER AS BASE CASE: TOTAL BILL: P2,462.00/ JUL-AUGUST 2012 BILLING – GENERATION P1, % – TRANSMISSION % – SYSTEM LOSS % – DISTRIBUTION (MERALCO) % – SUBSIDIES % – GOV’T. TAXES % – UNVERSAL CHARGES %

MERALCO COUNT FOR CUSTOMERS IN THE KWH CLASS BASED ON DOCUMENTS SUBMITTED BY MERALCO IN ERC CASE , FOR MAP 2012 – 1,268,332 – THE BIGGEST CUSTOMER CLUSTER.

GENERATION: – DE-REGULATED – COMPETETIVE – PASS-THROUGH COST – MERALCO HAS APPLIED FOR ERC APPROVAL OF ALLEGED UNDER RECOVERY FOR GENERATION, FOR YEAR 2011 ONLY, AMOUNTING TO P1.8 BILLION. IT IS ALSO ASKING FOR 8.9% INTEREST AMOUNTING TO P162MILLION. – UNTIL THERE IS A SURPLUS IN SUPPLY, THERE WILL BE NO TRUE COMPETITION IN THIS SECTOR. – NOTE THAT THE COA REPORT OF DECEMBER 2009 INDICATED THAT MERALCO MAY HAVE OVERCHARGED P2.7BILLION IN ITS GENERATION RATES.

TRANSMISSION: – REGULATED MONOPOLY – SUBJECT TO THE SAME REGULATION AS MERALCO UNDER PBR – WHEN POWER RATE WAS BUNDLED UNDER NPC, THIS WAS BARELY P0.60 PKWH – ANCILLARY CHARGES ARE COLLECTED FROM CONSUMERS AND THERE SHOULD BE VERIFICATION IF THIS HAS BASIS.

SYSTEM LOSS: – ORIGINALLY CAPPED BY LAW UNDER RA 7832, THE ANTI PILFERAGE LAW. – MERALCO CURRENTLY REPORTS 7.13% SYSTEM LOSS. – SL INCLUDES GENERATION COMPONENT, DESPITE THE FACT THAT SL IS ESSENTIALLY LINE LOSS. – UNDER A 200 KWH HOUSEHOLD, IF THE 7.13% SL IS APPLIED TO MERALCO DISTRIBUTION RATE ONLY (P462.53), THE SL CHARGE WILL ONLY BE P33.07 PKWH INSTEAD OF P155.54, OR A SAVINGS OF P AT ANNUAL SALES OF 30BILLION KWH, THAT MEANS P36.7 BILLION LESS CHARGES TO CONSUMERS.

DISTRIBUTION: – PBR IS REVENUE-SETTING, NOT COST RECOVERY AS MANDATED BY EPIRA. – CONSUMERS ARE STILL QUESTIONING THE ARR FOR THE 3 RD REGULATORY PERIOD. MR. URIEL BORJA HAS BROUGHT THIS UP TO THE SUPREME COURT. – MR. GENARO LUALHATI SAYS THE REGULATORY ASSET BASE OF MERALCO IS BLOATED BY P39 BILLION. – MR BORJA SAYS THE CAPITAL EXPENSE PROGRAM IS OVERPRICED – BY AS MUCH AS 500% TO 900%. – MERALCO APPLIED FOR P18BILLION UNDER-RECOVERY FROM THE 2 ND REGULATORY PERIOD. ERC GRANTED P20BILLION. – MERALCO APPLIED FOR P2.04BILLION REGULATORY LIAISON AND COMPLIANCE, ERC GRANTED P2.2BILLION. – RETURN ON RATE BASE NOW CALLED WACC OR WEIGHTED AVERAGE COST OF CAPITAL IS 14.97%. AT ONE TIME THIS WAS 15.5%. CAP UNDER RORB WAS 12%. – RAB IS NOW P126BILLION. THIS RESULTED FROM APPRAISAL INCREASE AND CAPEX COLLECTIONS FROM CONSUMERS, NOT INVESTMENT OR EQUITY INFUSION BY THE OWNERS. THIS HAS RESULTED IN A HIGH RETURN ON CAPITAL THAT THE OWNERS DID NOT PUT IN. RETUIRN SHOULD BE BASED ON EQUITY RATHER THAN RAB. – MERALCO IS GIVEN/ADVANCED BY CONSUMERS ITS WORKING CAPITAL, AND CONSUMERS ARE EVEN CHARGED INTEREST OR CARRYING COST FOR THAT CAPITAL. – ACCORDING TO MR LUALHATI’S COMPUTATION, MERALCO’S DISTRIBUTION RATE SHOULD ONLY BE P0.90 PKWH, THUS MERALCO SHOULD REFUND CONSUMERS P21BILLION. – THE SO-CALLED RATE TRANSLATION RESULTS IN RESIDENTIAL CUSTOMERS PAYING MORE THAN COMMEFRCIAL-INDUTRIAL CUSTOMERS, AT MORE OR LESS DOUBLE THEIR RATE. – THERE ARE INTRA-CLASS SUBSIDIES THAT RESULT IN DISCRIMINATORY PRICING. PRICE ALLOCATION IS BY REGULATORY FIAT AND NOT COST OF SERVICE.

SUBSIDIES: – RESIDENTIAL CUSTOMERS USING MORE THAN 100 KWH ARE PAYING THE LIFELINE SUBSIDY AND SENIOR CITIZEN DISCOUNT. THIS IS UNFAIR. – THIS SUBSIDY SHOULD BE BORNE OR PAID FOR BY GOVERNMENT FROM OUT OF THE VAT ON POWER.

GOVERNMENT TAXES: – VAT ON SYSTEM LOSS AND SUBSIDIES SHOULD BE REMOVED. HOW CAN LOSS AND AN INVOLUNTARY SUBSIDY BE TAXED? – VAT ON POWER SHOULD BE USED TO COVER THE LIFELINE SUBSIDY AND SENIOR CITIZEN DISCOUNT.

UNIVERSAL CHARGES: – WE SHOULD VERIFY IF PRIVATELY-OWNED DISTRIBUTION UTILITIES ARE CHARGING THEIR DEBTS TO THE UNIVERSAL CHARGE. – THERE SHOULD BE MONITORING OF THE POWER DEBTS AS THEY ARE SUPPOSED TO BE RETIRED FROM THIS AND THE PROCEEDS OF PRIVATIZATION.

MATTERS PENDING AT ERC: – MAP 2012: ERC CASE NO THERE HAS BEEN NO RULING ON THE MERITS BUT A SUPERVENING ORDER WAS ISSUED, RENDERING THE HEARING MOOT AND ACADEMIC. – MAP 2013: ERC CASE NO O54. NO HEARING ON THE MERIT BUT ALREADY IMPLEMENTED UNDER A PROVISIONAL AUTHORITY. THIS IS THE PROV AUTH THAT SUPERSEDED A PRIOR PROV AUTH (MAP 2012) WITH NEITHER CASE BEING RESOLVED ON THE MERIT. – APPLICATION FOR APPROVAL OF PRO-FORMA CONTRACT, ERC CASE NO , A VIRTUAL BLANK CHECK FOR MERALCO TO LEASE ASSETS. – APPLICATION FOR APPROVAL OF TWO POWER SUPPLY CONTRACTS – PANGEA AND SAN MIGUEL ENERGY. WE HAVE TO REVIEW THE DETAILS OF THE CONTRACTS. – APPLICATION FOR OVER/UNDER RECOVERY OF GENERATION, TRANSMISSION, SYSTEM LOSS, AND SUBSIDIES, FOR YEAR 2011 AND FOR FOUR PRIOR YEARS, UNDER A SEPARATE FILING. – APPLICATION TO SELL SAN MARCELINO PROPERTY, WE HAVE TO ESTABLISH OUR INTEREST IN THE PROCEEDS AND THE REGULATORY/TRANSPARENCY OF THE SALE ITSELF. – A VERY SIGNIFICANT CASE TO WATCH OUT FOR IS THE SETTLEMENT AGREEMENT, WHICH MERALCO MAY REVIVE ANY TIME SOON. AND WHICH WE COULD OR SHOULD BRING TO CRIMINAL JUSTICE ON OUR OWN.

WHAT CAN BE DONE: – IN THE CERA OVERCHARGES, WE OBTAINED A REFUND. – IN A COUPLE OF CASES AT THE APPELATE COURTS, INCLUDING THE SUPREME COURT, WE HAVE LOST AND WON. IN FACT, FDC ITSELF WON A SUPREME COURT DECISION THAT STRENGTHENED PROCEDURAL DUE PROCESS. WE JUST HAVE TO BE PERSISTENT. WE HAVE TO REGISTER OUR PROTESTS. WE HAVE TO ENTER OUR INTERVENTION. WE HAVE TO CHALLENGE AT EVERY TURN. – WE HAVE TO MATCH THE INTERVENTION IN THE ERC PROCEEDINGS WITH STREET/MASS ACTION. – CONTINUING EDUCATION OF THE CONSUMER, HEIGHTENED READINESS TO ENGAGE IN ALTERNATIVE FORUMS. – IN FACT, IF WE CAN CREATE A PEOPLE’S REGULATORY COMMISSION TO SHADOW AND TRACK THE ERC, WE WILL NOT JUST BE AIRING THE ISSUES, WE COULD EMBARRASS AND SHAME THE COMMISSIONERS BY CARICTURING THEM.