ERC assures power stakeholders of fair pricing decisions - Adopts tested pricing methodology
The Energy Regulatory Commission (ERC) assured the electric industry stakeholders that the Commission has strictly observed fairness in rendering its electricity rates decisions.
ERC stressed that its primary regulatory responsibility is to balance the interest of the consumers and the investors in deciding the rates application by electric utilities.
“We are always guided by the just and reasonable standard in electricity ratemaking. The bottom line figures we arrived at in our decisions were a result of thorough and judicious evaluation,” the Commission said.
The Commission also pointed out that it has religiously complied with the legal requirement that all parties to the case must be accorded due process. “There was a time when we had to defer action in one unbundling case because we need to hear the view of one cause oriented group,” the Commission added.
ERC issued this statement in answer to the Foundation for National Development’s (FND) call for ERC to rationalize electricity rates and do away with artificially low prices.
Earlier, FND issued a statement through the newspapers that “it was President Gloria Macapagal Arroyo herself who initiated the policy of keeping artificial prices when she lowered electricity rates on May 1 last year, then borrowed $500 million to make up for the deficit.”
In reply, ERC said that this is a judgment call by President Arroyo in her effort to lessen the impact of increasing Purchased Power Adjustment (PPA) charges on the consumers at that time.
In addition, the Power Act requires ERC to set lifeline rates for marginalized or low-income electricity consumers. Lifeline users are being subsidized by non-lifeline users, which include the residential, commercial and industrial customers.
In its Meralco unbundling decision, ERC adopted a socialized pricing mechanism to mitigate the impact of a rate increase on electricity users consuming 300kWh or below.
Other than those mentioned above, ERC was upfront in stating that its policy is to set the rates to levels that are closer to real economic cost of providing electricity service to utility consumers. In its unbundling decisions, ERC used the calendar year 2000 as the test year, which at that time was the year closest to the effectivity of the Power Act in 2001.
In its recent decisions, ERC adopted the Weighted Average Cost of Capital (WACC) instead of the 12% Rate of Return on Rate Base (RORB). According to the Commission, the maximum ceiling of 12% RORB is no longer reasonable because of the Supreme Court decision that income tax is not allowed as a recoverable item for rate making purposes.
WACC provides a return sufficient to maintain financial integrity of the company, and compensate investors for certain risks that they assumed. The return varies over time to reflect changing economic conditions. ERC applied the principle of conservatism in its decision by adopting the capital stock at cost instead of the market price.
Reacting to Department of Energy’s (DOE) position paper, which was concurred in by the Department of Finance, Department of Budget and Management, and the National Economic and Development Authority, ERC recognized the need to shift from RORB to an alternative ratemaking methodology, such as Performance-Based Ratemaking (PBR).
ERC is now seriously considering the adoption of PBR for the distribution sector. Earlier, the Commission adopted the PBR for setting the transmission wheeling rates.
ERC Chairman Sanchez, in a previous interview, said that the shift to PBR is envisioned to improve utility operations and will benefit consumers in the long run by providing affordable electricity rates and higher quality service.
August 25, 2003