Is ERC up to the job?

The incompetence of our government in regulating the power industry is a significant cause of our woes. While the current leadership of the Energy Regulatory Commission (ERC) has been trying hard to clean up the inherited mess, sins of the past will hurt us for some time.

Just look at recent ERC orders. Last week, the ERC ordered Meralco to refund P9.5 billion to its consumers even while explaining that Meralco is not at fault because previous commissions failed to act on Meralco’s rate reset petitions.

Together with the refund order, the ERC also allowed Meralco to collect over P8.7 billion in under-recoveries covering the period of 2011-2022. Again, ERC said this is because previous commissions failed to resolve these under recoveries incurred by Meralco.

So, with a refund of P0.59/kwh and an under recovery of P0.08/kwh, Meralco consumers will have a reduction of P0.51/kwh for residential consumers.

Apparently, past ERC commissioners simply failed to do the only publicly significant work they have been mandated to do, which is to conduct timely rate resets. They failed to meet several reset periods for over seven years.

This failure led to unverified provisional pricing, massive overcollections and sudden multi-billion-peso retroactive refunds and true-up charges for consumers.

ERC’s failure forced distribution utilities to continue charging provisional rates without periodic performance-based reviews. This has resulted in continuous unverified overcollections from end-users.

Every time ERC allows regulatory periods to lapse, accounts could not be reconciled in real-time, preventing consumers from immediately enjoying lowest-cost adjustments mandated by law.

ERC has lately been issuing delayed true-up and refund orders such as the multi-billion-peso refunds imposed on utilities like Meralco because initial collections exceeded what was later deemed appropriate.

Then, there are also accumulated under-recoveries and fuel cost adjustments from the unreviewed years (e.g., covering 2011 to 2022). That’s why ERC also recently approved additional collection charges alongside refund installments.

The sad thing is, all the past ERC commissioners faced no sanctions for their failures. The Ombudsman should still make them accountable for the mess they were responsible for and for which the public has suffered from.

Perhaps the reason for the ERC’s failure is inadequate staffing. Lawyers with political connections but no energy economics backgrounds have been appointed to ERC. Their mandate is huge but they lack the brainpower to compute and ask the right questions.

Conducting a rate reset under the PBR framework requires intricate economic modeling, calculating the Weighted Average Cost of Capital, and vetting corporate capital expenditures. A deep bench of in-house technical specialists is needed.

The good news is, the current ERC chairman Francis Saturnino Juan has overhauled rate reset rules to timely align power rates with market realities and prevent future multi-year regulatory lapses. Some 34 rule-making resolutions have been issued to modernize the country’s rate-setting framework.

However, the problem with staffing remains and the backlog of cases is deep. Maybe digitalization and AI will lighten the laborious computations needed to rule on every petition filed by all the utilities the ERC covers.

Then again, the problems we face with our energy sector goes beyond ERC. DOE and other agencies including LGUs have been contributing to the mess.

For example, we all know that our biggest problem is power supply. The thin reserve is why we get these yellow and red alerts. That’s also why we get higher power rates under our market-based pricing mechanism in the electricity spot market.

But the regulatory environment for putting up power plants isn’t encouraging for potential investors. Permits from national and local government units are difficult to get. And right-of-way problems to connect power plants to the transmission grid also take so much time to clear.

Take the case of the Australia-based Energy World Corp. that almost went bankrupt after it heeded the call of our government to put up a 650 MW power plant and LNG terminal. They have taken delivery of a Siemens manufactured power plant which remained idle in delivery crates in Pagbilao, Quezon for ten years and was eventually re-exported last June, unused.

The project was killed by local supply chain bottlenecks, extreme global fuel price volatility and local resistance to zoning and land classification.

To bypass bureaucratic red tape, the DOE certified the terminal and its adjacent 650 MW plant as an “Energy Project of National Significance” under Executive Order 30.

But even an Executive Order from then President Duterte was not good enough. EWC also struggled for years to secure the right to tap into the power grid.

The Pagbilao area is a massive hub for other power infrastructure (such as the existing Pagbilao coal-fired plants). Transmission capacity in the Quezon corridor was heavily congested. Existing local generation players have already taken up room on the grid. EWC had to navigate complex grid-sharing disputes and “wheeling” layout coordination involving multiple entities.

Industry analysts pointed out that the absence of backing from a powerful, politically connected local joint-venture partner is a major reason why EWC struggled so hard to clear bureaucratic hurdles and secure local grid connection approvals.

Ultimately, the plant became a stranded asset. And to think that EWC was responding to the DOE’s call to fast-track its project. Imagine how many yellow and red alerts that 650 MW of baseload capacity from a brand-new power plant could have averted!

That’s how to attract and manage foreign investment. We’re hopeless.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco