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NGCP told to ‘practice discipline’ to protect consumers

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Energy industry regulators are urging utilities, especially monopolies like the National Grid Corporation of the Philippines, to charge only reasonable expenses to consumer electric bills.

BY ELYSSA LOPEZ / Philippine Center for Investigative Journalism

Second of two parts

Part 1: Philippine power transmission monopoly NGCP questions rate review amid calls for refund

In its preliminary review, the Energy Regulatory Commission (ERC) disallowed expenses of the National Grid Corporation of the Philippines (NGCP) totalling P3.7 billion, which it said were “improperly documented or not recoverable for customers.”

The biggest items disallowed were for public relations, corporate social responsibility (CSR), and advertising-related expenses. 

NGCP’s advertising expenses, for example, reached P130 billion from 2016 to 2020. 

The NGCP argued that its advertising expenses were “not for marketing purposes” but for “information dissemination.” The ERC however demanded proof of the need to spend such an amount on ads. 

“There is a test of reasonableness [in assessing these expense items]. If these were spent on full-page ads saying: “Bawal humawak ng livewire,” [we must ask]: reasonable ba ‘yung full-page ad saying that?” ERC Chairperson Monalisa Dimalanta said in a news conference in November where she announced the results of the commission’s preliminary review. 

In a separate news conference in November, NGCP Assistant Vice President Cynthia Alabanza said it was “unfair” for the regulator to “retroactively” apply new rules.

“Before you join a game, you need to know the rules. And to retroactively apply rules while you’re in a game, that’s unfair,” Alabanza said in Filipino. 

“I’m wondering why they released it when it is still raw. It’s like if we had 100 steps to take to the finish line, we’re still in step two,” she said in Filipino in a press conference held right after ERC’s media conference. 

Dimalanta said it was necessary to release the initial findings. 

“I think we owe it to the public to let them know what is happening [in the review] and to provide guidance on what is allowed and disallowed [in the expenses of the NGCP],” she said in the press conference in November.

Alfredo Non, who served as ERC commissioner from 2012 to 2018, said there should have been “clearer guidelines” on what spending items were “acceptable.” 

“As far as I am concerned, the ERC has not released guidelines on how regulated entities may spend on CSR, or salaries,” he said. 

The former commissioner, however, did acknowledge that, during his time, the ERC had disallowed salary increases for a government-controlled corporation. 

“When the Philippine Electricity Market Corporation asked before for higher market fees because that’s how they cover their budget, for salary increases, we disallowed it. Because they refused to show documents of their payroll,” he said. 

“So if NGCP shows documents, then they should be allowed,” he added. 

NGCP’s reply to the ERC findings, which has not been made public as of this writing, is expected to have addressed these issues.

ERC said the disallowances were intended to protect consumers.

“It’s not that the commission is prohibiting them (regulated entities), for example, from increasing the salaries of their employees, or giving donations, or engaging in CSR [activities],” Dimalanta said in the ERC’s November news conference. 

“What we’re saying is, you can’t recover that from the rates [you impose on consumers]. You recover that from your profits,” she said. 

The ERC had previously ruled, in cases involving power distribution utilities, that CSR expenses should not be charged to consumers.

In its 78-page order, the ERC also highlighted that the NGCP, as a public utility, is mandated to incur only “necessary and efficient costs,” with expenses kept “at a minimum.”

Adoracion Navarro, senior research fellow at the state think-tank Philippine Institute for Development Studies (PIDS) said ERC’s moves are intended to send a clear message to NGCP and other entities regulated to practice discipline.

“If before, they (the NGCP) got away with spending on these (disallowed expenses), then the regulator is now setting more discipline,” Navarro told PCIJ. She is a former deputy director general at the National Economic and Development Authority.

“The regulator is now just enforcing that we have to stick with the principles or the rules,” Navarro said. 

ERC is making sure that NGCP is “not shortchanging the industry and the Filipino people,” according to a former energy official who asked not to be named.

The official said the entire rate-setting process is supposed to determine which expenses are considered prudent, and it’s up to the NGCP to justify its revenue requirements.

“Because how the commission works is… it is wary. It just wants to make sure that NGCP is functioning at its optimum efficiency, and that it is not shortchanging the industry and the Filipino people,” the official said.

“The concession agreement is a privilege, and that comes with attendant responsibilities,” the official added. 

 Will there be refunds? 

The ERC is expected to release its final determination of the rates in the first quarter of 2024.

Will there be cash refunds? The ERC said it is possible but it’s not guaranteed.

“What we’re seeing are just telltale signs, because they are claiming this much, and we are deciding that they can only recover this much, then there could be a downward adjustment [on their allowable revenue], or a refund,” Dimalanta said in November.

Instead of cash refunds, the ERC is inclined to implement a “reduction of transmission rates,” according to Sen. Sherwin Gatchalian at a Senate hearing to discuss ERC’s budget. He defended the budget of ERC during last year’s budget deliberations. 

“In terms of modality, it’s easier to reduce the rates, and easier for the regulator to monitor and apply, and to supervise [that kind of] implementation,” he said during the hearing last Nov. 13, 2023.

How much that reduction would translate into consumers’ electricity bills has yet to be determined, he said. But he assured the public that it would be “significant.” 

Non said it was the release of the partial results that “created a wrong impression that there would be refunds.”

The release of ERC’s final review of NGCP’s fourth regulatory period was initially expected as early as August 2023. Instead, a preliminary review was released in November 2023, around the time that Congress was deliberating the national budget. 

“It’s budget season. They (ERC) had to show to Congress and the Senate that they were doing their jobs,” the energy official who spoke with PCIJ said. 

The Senate approved an P888-million budget for the ERC, higher than the P611 million originally proposed by the Department of Budget and Management.

 NGCP in hot water 

NGCP faced scrutiny amid heavy criticisms against its performance as the country’s grid operator.

NGCP officials have been called to many House and Senate hearings since parts of Luzon were subject to rotational brownouts in the Summer of 2021. It does not help that the Luzon grid suffers from yellow and red alerts every year, once the hot season comes, too.  

NGCP is responsible for building more transmission lines, but many of its projects are delayed. Power producers have previously lamented delays in their connections to the grid. 

President Ferdinand Marcos Jr. himself gave NGCP a reprimand during his second State of the Nation Address in July 2023 over these delays.

“We are conducting a performance review of our private concessionaire, the NGCP. We look to NGCP to complete all of its deliverables, starting with the vital Mindanao-Visayas and the Cebu-Negros-Panay interconnections,” Marcos said in his 2023 SONA speech.

In January 2024, Marcos again took a swipe at the NGCP for failing to prevent a massive power outage in Panay Island, which caused its residents to suffer from total blackout for three days.

“This incident emphasized the vital role of these interconnection projects. We cannot afford to have another round of this costly interruption, not only in Panay Island but anywhere in the country,” Marcos said in an NGCP event announcing the completion of the Mindanao-Visayas interconnection.

Marcos pushed for the completion of remaining critical interconnection lines, including the Cebu-Negros-Panay backbone project during the event.

“So, we look forward to your assurances in the promised completion of the 230 kV Cebu-Negros-Panay backbone project by March of this year,” he said. 

The ownership structure of NGCP has also been a subject of security concern because it is 40% owned by the State Grid Corporation of China. Lawmakers have expressed fears that Beijing could use the NGCP for sabotage in case of a conflict over the disputed waters of the West Philippine Sea.

NGCP said this is not a concern because “only Filipinos are manning the (NGCP) substations.” 

On the other hand, there are concerns that cutting NGCP’s profits could affect its ability to expand the country’s transmission lines. 

The NGCP needs the financial muscle to develop the country’s transmission grid and prevent massive blackouts. The NGCP also needs to modernize the grid to support renewable energy suppliers, according to experts.

In a 2023 report, the Climate Analytics think tank estimated that the country would need transmission lines to accommodate 163 gigawatts (GW) of energy, taking into account the variable nature of proposed and committed renewable energy projects.

NGCP’s Ablanza said as much. She said transmission planning would be critical to the green energy push.

“So if they (the ERC) limit our ability to recover our bonafide expenses, then it would have an impact,” she said.

Non warned of the consequences if ERC’s preliminary review is upheld. He said the NGCP’s investors could be “forced to pull out” if the effects of the review put a dent in the company’s financial ability to operate. 

“If I were NGCP, I would fight it out [in court], because the basis for you to continue is a going concern. And if the effect of the review is too significant, then I may pull out [of the concession agreement,” he said.

Whatever the outcome, ERC’s final review of NGCP’s rates will inevitably have consequences on the energy industry. It will also translate to real costs that Filipino consumers will bear. END

Philippine power transmission monopoly NGCP questions rate review amid calls for refund

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Delays in the rate review process mean the National Grid Corporation of the Philippines will continue to charge transmission rates that critics have described as ‘excessive.’

BY ELYSSA LOPEZ / Philippine Center for Investigative Journalism

First of two parts


The Supreme Court petition filed by the National Grid Corporation of the Philippines (NGCP) to halt a long-delayed review of its rates could keep power costs high and delay potential refunds to consumers.

NGCP is a private monopoly that operates the country’s power transmission lines — the grid — linking power generators to distribution utilities such as Meralco and electric cooperatives nationwide. Costs incurred by the NGCP are passed on to consumers as part of their electric bills, accounting for about 10% of the total bill based on estimates.

The NGCP suffered a setback in November last year when the Energy Regulatory Commission (ERC), in a preliminary review of its rates from 2016 to 2022, the fourth regulatory period (RP), cut its allowable expenditures by half. 

The amount included disallowances worth  P3.7 billion, which were spent for public relations and advertising costs, among others, that ERC said should not be charged to consumers.

Senators have been among the most vocal in calling for the ERC to order refunds to consumers.

But the NGCP questioned before the Supreme Court new rules adopted by the ERC when it reviewed the rates of the transmission operator. It sought a temporary restraining order (TRO) on the ERC proceedings. 

NGCP lawyer Jerome Versoza announced this move in December 2023, as the ERC began proceedings for the fifth RP covering the years 2023 to 2027. 

A TRO, if granted, would restrain “the honorable commission from continuing further proceedings with concern to the fourth RP application and the fifth RP application,” the NGCP lawyer said.

The fourth RP, covering the years 2016 to 2022, is the subject of the November preliminary review, whose final determination is expected in the first quarter of 2024. The fifth RP covers the current period, from 2023 to 2027. 

 ‘There is still no TRO’ 

Pete Ilagan, a consumer affairs advocate and former energy official, warned that a Supreme Court intervention would “delay the reset process, definitely.”

“But the bigger issue is the application for the fourth regulatory process is still pending, and it’s already past the period,” he said. “[It is] a clear case of regulatory failure.” 

During the December 2023 hearing, ERC presiding officer, Maria Corazon Gines, took note of Versoza’s manifestation, but proceeded with the pre-trial for the fifth review as the Supreme Court had yet to act on the NGCP’s plea. 

“As there is still no TRO or preliminary injunction, then we will continue with the proceedings,” she said.

NGCP’s counsels stayed in the room but did not comment during the two-hour proceedings.

The details of the NGCP petition remain under wraps. News organizations including the Philippine Center for Investigative Journalism (PCIJ) have repeatedly sought a copy from NGCP, but were denied. 

The PCIJ has also requested a copy from the ERC, but was refused. The regulator argued that the PCIJ was “not a party to the said case.” 

“The ERC is enjoined to observe the sub judice rule (which restricts comments and disclosures pertaining to judicial proceedings), consequently, [we are] constrained to deny your FOI (freedom of information) request,” it wrote in a letter to the PCIJ. 

NGCP has publicly questioned ERC’s preliminary review of its rates because the ERC — hobbled by internal issues and later on, the Covid-19 pandemic — changed the rules governing the review process.

READ: NGCP’s rate reset: A timeline

The ERC review, called the “rate reset,” is normally forward-looking and akin to a budget process. The ERC approves NGCP’s annual revenue requirement or ARR from which it can charge its expenditures.

The original timeframe of the fourth regulatory period covered five years – from 2016 to 2020.  The rate reset should have been done in 2015. However, a series of leadership changes in the ERC delayed the process.

ERC only started the review process in December 2022. ERC decided to look at NGCP’s actual expenses and added two more years to the fourth review period – 2016-2022 from the original 2016-2020 – to clear the backlog in time for the fifth review covering 2023 to 2027.

READ: What is the rate reset process?

Critics have found NGCP’s transmission rates, set in 2009, to be “excessive.”

The ERC’s preliminary review of NGCP’s rates from 2016 to 2022 cut NGCP’s revenue requirement, essentially, the transmission operator’s allowable expenses, to more than half. 

In its application, NGCP sought a revenue requirement worth P387.80 billion for 2016 to 2020, which meant an annual average of P129 billion. But the ERC, based on its initial review, found that allowable revenue should only be at P183 billion for the period, or about P36.67 billion a year.

The NGCP, from 2016 to 2020, operated on an interim maximum annual revenue (iMAR), approved by the ERC under a different leadership. 

This iMAR, said NGCP Assistant Vice President Cynthia Alabanza, was only an estimate but was approved by the ERC as there was no regulatory review at that time. 

“Just like when Congress hasn’t approved a government budget, the government would spend based on what was previously allowed. So that’s what we were doing… we were spending based on what was allowed [in the third regulatory period],” Alabanza said in Filipino in a news conference in November 2023. 

But the iMAR could be subject to review and may be revised, based on ERC rules. 

Majority of the ERC’s cuts in the preliminary review came from three major items: 

• net efficiency adjustment

• revenue under-recoveries

• net performance incentive

These three items were worth P104 billion during the five-year review period. 

The net efficiency adjustment is the incentive given to the NGCP for achieving “cost reductions in controllable costs,” while revenue under-recoveries are expense items not recovered during the previous regulatory period. 

ERC said a decision on both items would be made in the final determination of the review due this quarter. 

It is not, however, keen on granting a net performance incentive to the transmission operator. 

This incentive is based on a performance incentive scheme (PIS), a set of service and operational performance criteria, which is supposedly set before the beginning of every regulatory period. 

If the NGCP meets these criteria, it is rewarded with an incentive. Otherwise, penalties may be imposed. 

In its application for the fourth rate reset, the NGCP adopted the PIS set during the third regulatory period. But the ERC said it was “constrained from upholding this position.” 

“Considering that the PIS and its factors have not been established prior to the commencement of the fourth regulatory period, it follows that NGCP does not have the basis to enforce the incentives. Conversely, there appears to be no grounds for the imposition of penalties,” the November ERC order read. 

Former ERC commissioner Alfredo Non said the ERC position was debatable because the NGCP should be recognized for meeting the criteria for incentives in the previous regulatory period.

“It is not NGCP’s fault that ERC failed to provide parameters for the fourth regulatory period,” said Non, who was ERC commissioner from 2012 to 2018. 

ERC said the disallowances were intended to protect consumers. (CONTINUED)