Power 101 : Monopolies and Monopoly Pricing #kuryentiis @meralco

by Butch L. Junia
Posted with permission. Originally from Column No. 8 OpinYon, Oct 11-17, 2010

In our previous columns, we covered various aspects of the power industry. We also addressed specific issues urgent and critical to consumer protection.

If any consumer can be described as ‘battered’, it is the electricity consumer, who has no choice in his service provider and with hardly any say on how much to pay for power.

To help construct the consumer perspective on power, we will run this series. We may not be able to provide many answers, but if we provoke questions, the purpose of the series is served.

Electricity distribution is considered a natural monopoly. It does not make sense for two utilities stringing up parallel and redundant lines or wires. We already have garish sights of hanging and bundled wires with just one distribution utility; imagine if we had two or three.

Until we develop the technology for wireless transmission of electricity, like voice and data conveyance via wireless cell phones and networks, we will remain stuck with the distribution monopolies that we have today, the biggest of which is Meralco.

Monopoly control is made legal by a legislative franchise that defines the franchise territory and authorizes the collection of monopoly rates, subject to review by a regulator. Under this system, the legislative is presumed to make informed franchise decisions and the regulator enjoys presumptive good faith in the exercise of its power to give reasonable returns to investors and secure reasonable rates for consumers. Of course, lobbying and regulatory capture can materially alter that equation.

Pricing of electricity is tricky business. Rates are set based on recoverable cost for providing the service, divided by kwh sales plus a reasonable return for the investment, pegged at the 12% cap set for utilities.

Under the Return On Rate Base (RORB) methodology, actual costs as verified and audited are the basis for rate determination. Utilities complained of the regulatory lag but for the consumers, increases went through a fine-toothed comb, especially as it went up in the judicial review process.

Under the Performance Based Regulation (PBR) which government is now enforcing, rates are set based on projected expenses, and utilities are granted annual increases derived from those estimates. Under RORB, utilities had been ordered to refund overcharges, major of which was the Supreme Court order that disallowed Meralco’s income tax as recoverable expense. Under PBR, that tax has become chargeable to us, and Meralco’s distribution rates have spiked to almost double.

While rate unbundling was supposed to facilitate consumer appreciation of electricity pricing, it has become instead, the launching pad and engine for multi-layered and collateral rate increases.

Under power industry reform, the rates were unbundled or broken down into service components, essentially aligned with the four major industry sectors – generation; transmission; distribution; and, electricity supply and metering.

Generation is primarily a pass-on cost, meaning the distribution utility should not earn or lose anything from it – revenue neutral. Ironically, the monthly fluctuations of generation rates have become the bases for Meralco’s occasional claim of rate reduction.

Transmission at high-voltage levels is a monopoly recently awarded by government to a private concessionaire, the National Grid Corp. of the Philippines. If Meralco lines are the ‘city streets’, the transmission lines are the highways and toll ways to carry bulk electricity, similar to the bulk carriers in the transport sector.

Distribution brings the high-voltage electricity down to consumable industrial and household levels, and is the only other remaining regulated monopoly in the power industry. This sector includes the Privately-owned Distribution Utilities, like Meralco, and the Rural Electric Cooperatives that serve the countryside.

Electricity supply and metering is a ‘new’ sector. A spin-off from distribution, this has been de-monopolized as an initial step towards establishing consumer choice in an industry inherently monopolistic. In the meantime that there is no open access and there are no significant players, this has remained ‘bundled’ with distribution.

In support of de-monopolization, the electricity trader called an ‘Aggregator’ was created under EPIRA. The Wholesale Electricity Spot Market (WESM) was established and open access at the transmission and distribution level was legally mandated. In theory, with a competitive generation market and enough Aggregators active in a trading platform like WESM, the market imbalances in the monopoly can be corrected and the captive customers given a measure of choice.

Of course, between that theory and actual practice is an impassable abyss. Today, aspirations to give captive customers of monopolies a reasonable and fair power rate remain elusive. Blame that on policy logjam and regulatory capture.

Lately, there have been talks of new investments in generation coming in. If the current system is not fixed and reforms are not implemented, the gains from new technology and higher efficiencies will not translate into lower rates for consumers. WESM watchers have questioned WESM’s settlement price, which they say is pegged at the highest quoted price for the day. This definitely defies the law of gravity and common sense.

Obviously, much need to be done, with no significant headway made.

Historical footnote. The early electricity providers were the electric and ice plants operating diesel-powered generators that would run only on some hours of the day. At least, that is how I remember it from our place in Tacloban City. Pres. Ferdinand Marcos later decreed the vertical integration of the industry, establishing the National Power Corp. as the sole generator, buyer and seller of electricity and monopoly operator of the transmission system. Under Pres. Corazon Aquino, at the height of the crippling blackouts, the NPC monopsony was dismantled and the generation sector de-monopolized.

Since then, sustained attempts at restructuring the industry and holding the monopolies at bay were undertaken by the other post-Marcos governments.

It was in 2001, however, with Pres. Gloria Macapagal Arroyo barely five months in office, that the Electric Power Industry Reform Act (EPIRA) was passed by an out-going, lame duck Congress. The EPIRA as adopted had gone through several permutations in at least three (3) earlier Congresses. A hodge-podge of compromises, EPIRA still has to yield consumer dividends, while monopoly utilities and generation companies have been posting remarkable growth in revenues and profits.

Consumer initiatives to fix the law have consistently fallen short, and the hapless consumers remain in dire need of the white knight.

Obviously, much still need to be done for consumers.