ERC Decides National Power Corporation Rate Unbundling
The Energy Regulatory Commission (ERC) issued today its decision setting the unbundled National Power Corporation (NPC) generation rates and the transmission rates of the National Transmission Corporation (TRANSCO), the independent grid company created last year by the Electric Power Industry Reform Act of 2001. The ERC denied NPC’s application for an overall average rate increase of P 0.1719/kWh and finds cause to disallow additional amounts translating into an indicative P 0.07/kWh reduction below current average effective rates. Furthermore, the decision denies NPC’s inclusion of costs related to purchased power contracts not yet approved. The resulting RORB for NPC’s generation component is 5.89 % and 12% for its transmission component, with an overall total company rate of return of 8.24%.
The Energy Regulatory Commission (ERC) decided to first act on the unbundled rate application of the National Power Corporation (NPC) since NPC’s costs comprise more than 75% of the total electricity bill charged to customers by most distribution utilities, and the calculations of the unbundled distribution customer rates cannot be finalized without the unbundled NPC and TRANSCO rates.
The P0.07/kWh is a reduction in the cost of power purchased only from NPC by the distribution utilities. The ultimate impact to the end user of electricity will depend on the operating efficiency and the distribution related cost of each distribution utility.
For purposes of the transmission wheeling charge, the Commission concluded that substantial evidence exists to treat the Luzon regional grid and Visayas regional grid as one. Effectively, this will result in a decrease in the transmission charge in the Visayas grid by P0.50/kWh and a slight increase of P0.06/kWh in the Luzon grid. Otherwise, the charge for Visayas will go up by more than P1.00 per kWh. The benefits of this are: (1) to make the Visayas region more attractive to investors thereby increasing economic activities in this region; and (2) to spur decongestion of the Luzon region. This is consistent with the thrust of the government to alleviate poverty in the Visayas region. The transmission rates in Mindanao are comparable to that in Luzon/Visayas.
Key Adjustments to the NPC Application are as follows:
1. The net amount disallowed from rate base was P37.9 billion, including removal of non-utility plant, electric plant for disposal, and plant leased to others which failed to meet the “used and useful” standard. Other rate base amounts disallowed include the accumulated amortization of electric plant under capital lease and a portion of the cash working capital.
2. Items included as additions to the rate base by the Commission are: (1) Materials and Supplies and (2) Construction Work in Progress. Materials and supplies are necessary to the provision of reliable electricity service even if not physically in service. This is so because without immediate access to equipment held in inventory, an electric utility may have to wait for an unacceptable period of time for delivery of the assets necessary to correct an outage. Construction Work in Progress is a continuous process for NPC and was included so as not to discourage reasonable and necessary investments.
3. Expenses disallowed by the Commission amounted to more than P8 billion primarily consisting of depreciation and amortization, and purchased power. Depreciation expense based on revalued assets was disallowed because it allows said utility to recoup or amortize more than its original principal investment. This effectively forces the customers to finance the increment between original and replacement cost. Such being the case, investors should only be allowed depreciation expense based on original cost.
The Commission ordered the NPC and TRANSCO to implement the unbundled generation and transmission rates, as modified by the ERC, effective no later than September 26, 2002, and to file new applications for unbundled ancillary service rates, terms, and conditions no later than August 1, 2002. Said applications shall include all relevant data supporting the reasonableness of the capacity requirements and two sets of rates based on long run marginal costs and embedded costs, respectively. NPC is also directed to make a compliance filing to adjust the generation charge to current fuel and purchased power cost levels on or before July 25, 2002, but such amount shall not exceed any limits placed on NPC by the President of the Philippines. (Including the P0.40/kWh limit on NPC’s PPCA.)
The generation rates continue to be subject to periodic changes due to fluctuation in fuel and purchased power costs, but the transmission rates remain constant until such time as a new rate application is filed by TRANSCO and acted upon by the Commission.
Finally, the ERC adopted the scheme proposed by NPC for the removal of inter-grid and intra-grid cross subsidies. It bears emphasis that the approval of unbundled transmission and distribution wheeling charges and the initial implementation of the cross subsidy removal scheme are two of the conditions needed before retail competition and open access could take place.
June 26 , 2002