These 'sell-offs' are reportedly a result of 'facilitation' costs and a weak regulatory framework. The urgency of this situation cannot be overstated, as we are not only dealing with a poorly designed regulatory framework but also its poor implementation.
How can the Philippines hope to attract power sector investment when regulators routinely impose tariffs that push investors toward bankruptcy?"
I am aware of a couple of projects where the regulator initially approved a rate under a 'provisional authority,' only to set a lower 'final' rate years later—and worse, applied the reduction retroactively.
I know of a diesel power plant where the regulator approved a lower heat rate for one engine compared to another. This discrepancy might be justifiable if the engines differed in make, age, operating hours, or acquisition date. But in this case, both engines were identical—purchased, installed, and operated at the same time. There is no technical basis for the disparity in the heat rates, and the regulator offered no explanation.
Regulatory risk is the single most significant threat facing investors in the Philippine power sector — and it is a risk created by the regulator itself. Since the Energy Regulatory Commission uses the Capital Asset Pricing Model (CAPM), the mathematical proof is that the source of risk, as measured by beta, is driven by the ERC's decision. Using the CAPM puts ERC in a circular and conflicted situation. (Read: https://insiderph.com/insider-view-the-magic-of-rate-setting-why-power-rates-are-high)
It is crucial to note that, aside from a few professionals who understand the 'financialization' of the regulatory framework, most consumers and even national or local government officials remain in the dark.
A colleague's recent attempt to seek an explanation for the mathematical formula being used by an agency was met with a disappointing response: 'Naabutan na lang namin yan.' This lack of transparency is a significant issue that needs to be addressed.
I maintain that unless we can explain to an ordinary consumer how their tariff was calculated, we should never use these complicated formulas.
In his book, "The Road to Freedom," Joseph Stiglitz essentially argues that market mechanisms not properly governed by the government will lead to a wider disparity between the rich and the poor.
If we combine the use of "market forces" in the imperfect WESM with the complex formulas of the ERC, we have what I call arbitrary tariffs. Yet every kilowatt-hour traded under these conditions ultimately flows into the consumer's bill.
From the investor's end to the consumer's end, there is a clear lack of understanding. It is high time we prioritize consumer empowerment and ensure that every stakeholder in the power sector comprehends the processes. A reboot of the regulatory framework is not just a necessity, but a step towards achieving this goal.
A power industry expert with over 40 years in experience as chief executive officer in firms ranging from banking, power, and advisory services.
