For utilities whose delivery "nodes" are "congested," they would have to pay line rentals. These line rentals and market fees will be about P20 billion a year. I will come back to this later.
In 2004, the ERC adopted Performance-based Regulation (PBR) to set electricity tariffs for regulated entities such as transmission and distribution utilities. This replaced the Return-on-Rate Base (RORB) method, theoretically to incentivize utilities to be more efficient. The utilities could theoretically share the efficiency increase with the consumers.
PBR's 'building blocks'
PBR has the "building blocks" that ensure utilities have funds to undertake their capex and operational needs for the next regulatory period (five years). These building blocks include regulatory depreciation, return on capital based on the Regulatory Asset Base, Opex (operating expenses), corporate income tax, and other taxes.
In effect, the ERC assured these regulated utilities that not only would their expenses, Capex (capital expenditures), and Opex be covered but also their income and any taxes. I understand there have been some changes in the tax regime, but basically, this remains the fundamental structure that utilities enjoy under PBR.
Unlike the RORB, the PBR allows utilities to get their revenues and expenses ahead of their actual investments and costs. More importantly, the calculation of the return on capital – the utilities' profit – is based on a concept called Weighted Average Cost of Capital (WACC).
Flawed concept
The WACC is calculated based on another finance concept, the Capital Asset Pricing Model (CAPM). The regulated WACC at the time of the Transco bidding was 15.44 percent. The WACC was a significant basis for the offers by Transco bidders.
Imagine a 15.44-percent return on a monopoly. That was the regulatory framework that ERC adopted then. NGCP did not ask for this return; ERC gave it to them. So why criticize NGCP?
I have criticized the use of the CAPM for our regulatory framework. It is simply wrong to use it in a country like the Philippines. Not only is it wrong to use it here, but the way that it is used is also very wrong.
Project delays: A regulatory bottleneck?
Once a monopoly like NGCP obtains its tariffs, it must return to the ERC for approval to implement its projects. Remember, these projects are already part of the PBR. However, NGCP cannot implement these projects without the ERC's approval. It can implement these projects (and it has) without ERC approval, but NGCP carries regulatory risk. The ERC may later reject the actual Capex incurred, requiring NGCP to absorb the shortfall.
Based on my latest information, ERC has yet to approve about 112 NGCP projects. So, if the delay lies with ERC, why blame NGCP?
A power industry expert with over 40 years in experience as chief executive officer in firms ranging from banking, power, and advisory services.
