DOE: Meralco rate hike unjustifiable

Excessive and unjustifiable.

This was how the Department of Energy (DOE) described the latest petition of electricity distributor Manila Electric Co. (Meralco) for a P1.12 per kilowatt-hour unbundled rate increase.

"In our opinion, the rate increase is excessive and unjustifiable," Energy Secretary Vincent Perez said yesterday during a press conference to announce the results of a DOE study on the petition.

"We have briefed President Arroyo about this and she is expected to make a statement urging the Energy Regulatory Commission (ERC) to look at this carefully," Perez said.

The study discovered that Meralco’s petition incorporated a number of expenses.

DOE said inclusion of non-utility expenses only bloated the rate that the electricity distributor has to recover, an amount which will eventually be passed on to consumers.

Apart from the expenses, Perez also zeroed in on items such as the allowable return-on-rate-base (RORB), system loss cap, two-month cash working capital on purchased power related income, plants held for further use, and customer deposits.

On the matter of allowable RORB, Perez said Meralco had included in its petition a proposed increase in allowable return of 15.97 percent in the amount of P16.3 billion.

At the moment, the maximum RORB is set at 12 percent. However, Perez pointed out that under the Electric Industry Reform Act of 2001, the RORB in not quantified, stating only that there should be "a reasonable rate of return."

"At the heart of it all is balancing return on investment and return on equity (ROE) with consumer welfare," he said.

He said Meralco included in its petition a 17.92 percent ROE, which is the highest among all utilities, which use an average ROE of only 12 percent.

On the matter of systems loss cap, Perez said Meralco used 11.5 percent for the formulation of systems losses, instead of the 9.5-percent cap under Republic Act 7832. However, this has been repealed by the Electric Industry Reform Act of 2001, which states the cap shall be determined by the ERC.

On the two-month cash working capital on purchased power, the DOE chief noted that distribution utilities can collect 40 to 45 days, contrary to Meralco’s claim of two months.

On related income, Perez said the law states that up to 50 percent of the net income derived from related business undertakings shall be used to reduce distribution wheeling charges.

"This is not the case for Meralco. The company derives around P700 million from related businesses like pole rentals to various cable companies. But they seem to forget to allocate 50 percent of this earning which could lower electricity cost of customers," he said.

Perez said Meralco also included in its rate hike petition the two-month deposit, which is imposed based on the projected consumption of the customer.

"(The) deposit is supposed to earn a non-compounded interest, but is payable only if a customer terminates Meralco’s services, which is highly unlikely in most cases. (It) is therefore in the nature of forced capital contribution and should be recognized as such," he said.

Earlier this month, President Arroyo ordered the DOE to conduct a comprehensive review of Meralco’s petition. Perez said the study was not intended to intervene with the decision of the ERC.

ERC chairwoman Fe Barin said they welcome the assessment made by the DOE.

"This is a democratic country. Anybody can say what they want to say. They can conduct their own review. As far as the ERC is concerned, we are still studying Meralco’s application. We haven’t finished the public hearings on said petition," she said.

Barin said that as a member of the quasi-judicial body, she cannot make any statements unless the decision of the ERC board is released.

"There are no inconsistencies (between) what the DOE is doing (and) what we are doing. But we are a quasi-judicial body. I cannot speak for the other members of the board," she said.

Under the law, all distribution utilities are required to unbundle their billing for greater transparency.

With rates in the electric bill itemized, customers will know how much of their payments goes to generation, transmission and related ancillary service, distribution, supply and other related charges for the service.