For decades, regulators and economists have relied on sophisticated formulas—such as the Optimized Depreciated Replacement Cost (ODRC), the Weighted Average Cost of Capital (WACC), and the Capital Asset Pricing Model (CAPM)—to determine electricity rates.
These models, however, have detached pricing from reality. Instead of reflecting actual costs, they inflate the “Regulated Asset Base” of utilities and guarantee returns that burden consumers.
Court ruling exposes flaw
The recent Supreme Court decision in G.R. No. 226443 highlights this flaw. By declaring the ODRC scheme illegal, the Court ruled that it fails to ensure “least-cost” power and instead shifts costs from utilities to consumers. In effect, Filipinos have been paying more for infrastructure than it actually costs to build — plus interest.
This ruling should be a turning point. Utilities must now revert to the actual accounting values of their assets, a change that could significantly reduce electricity prices. But the key question remains: how far back should refunds go, and will regulators have then courage to demand them?
Equally problematic is the reliance on CAPM and WACC in calculating equity returns.
As Nobel laureates Eugene Fama and Kenneth French showed as early as 1992, CAPM is “useless for precisely what it was developed to do.” In practice, the numbers produced by these formulas are arbitrary. Worse, in the case of regulated utilities, the supposed “risk”; is determined by the regulator itself—creating a circular logic where the Energy Regulatory Commission (ERC) both defines and justifies the returns.
Clarity, not complexity
Performance-Based Regulation (PBR), intended to incentivize efficiency, also falls short when benchmarks are set too high. Instead of rewarding real improvements, it allows utilities to profit from inflated baselines, again at the expense of consumers.
The implications are enormous. If we “de-financialize” this regulatory framework and return to actual cost-based accounting, I estimate the Philippines could save as much as P350 billion annually.
That amount is nearly equivalent to congressional budget insertions—a staggering figure when you consider that ordinary workers struggle daily to pay their power bills.
What we need is not more mathematical sleight of hand, but clarity and accountability.
Fair deal for Filipinos
Regulators must recognize that electricity is a basic necessity, not a speculative asset class. As a community, we must demand economic tools that balance investor returns with consumer welfare, rather than tipping the scales in favor of shareholders.
At UPLB, we are proposing a new course on utility economics to ensure that future policymakers, regulators, and industry leaders understand these concepts—not as abstract formulas, but as real-world levers that shape the lives of millions.
The call is urgent: de-financialize electricity regulation, bring rates back to reality, and give Filipino consumers the fair deal they deserve.
A power industry expert with over 40 years in experience as chief executive officer in firms ranging from banking, power, and advisory services.
