Regulatory Capture of the ERC (Opinion)

Regulatory Capture of the ERC (Opinion)

"Regulatory capture is a form of government failure that occurs when a
regulatory agency, created to act in the public interest, instead advances
the commercial or political concerns of special interest groups that
dominate the industry or sector it is charged with regulating. When
regulatory capture occurs the interests of firms or political groups are
prioritized over the interests of the public, leading to a net loss to
society as a whole." (Wikipedia)

In the last year of the regime of the President Benigno Aquino III, many
watchers of the electric power industry in the Philippines, prominently Boo
Chanco of the Philippine Star, found that the Energy Regulatory Agency is a
"captured agency", apparently having suffered "regulatory capture", as this
form of corruption is known.

When a new chairman from the academe was appointed by President PNOY, there
were hopes that the regulatory capture of the ERC would be ended. However,
after more than a year in the chairmanship of Jose Vicente B. Salazar, there
is no sign that the ERC has been freed from its regulatory capture.

Two unmistakable evidences of the regulatory capture of the ERC can be
cited: (a) the approval by the ERC of the exorbitantly-priced power purchase
agreements (PPA) between the FDC-Misamis coal plant in Villanueva, Misamis
Oriental and the Bukidnon Second Electric Cooperative, Inc. (BUSECO) and
some other electric cooperatives in Mindanao; and (b) the approval by the
ERC of the increase in the rates of the Mt. Apo Geothermal Power Plant from
2.87 pesos per kilowatt-hour to 5.18 pesos per kWh.

1. If the ERC were not corrupt, it should not have approved the rate of 5.40
pesos per kWh for the power purchase agreements between the FDC coal plant
and the Mindanao electric cooperatives.

1.1 BUSECO and the other electric cooperatives did not carry out a
least-cost acquisition (LCA) process, by conducting public bidding for
example, prior to entering into the PPA with FDC-Misamis.

The EPIRA requires distribution utility companies to carry out LCA in the
procurement of power supplies for their customers; and, before the PPAs with
FDC, all DUs have been complying with this EPIRA requirement.

To prove compliance with the LCA requirement, all DUs certify to their
having done so in their applications for approval by the ERC of their PPAs,
and such a certification was made by all the ECs who contracted for the
unreasonably-priced generation of the FDC coal plant. However, no LCA
process was carried out by the electric cooperatives who contracted with
FDC.

It is the responsibility of the ERC to ensure that the DUs it regulates
actually comply with the EPIRA requirement for LCA. The ERC was remiss on
this responsibility in the case of the PPAs with FDC simply because
regulatory capture makes the ERC favor the DUs and the generating companies
against the customers of the regulated corporations.

1.2 The ERC approved the rate of 5.40 pesos per kWh for the FDC-Misamis coal
plant, when it approved earlier PPA rates for coal plants in Mindanao at a
little more than 4.00 pesos per kWh - the PPAs with the GNP coal plant in
Lanao del Norte and the SMPC coal plant in Davao.

The three coal plants with different rates were all of the same type and
similar ratings, so the differences in their rates should not vary by more
than ten or twenty centavos. A difference in rate of one peso or more is
unreasonable.

Hence, regulatory capture is the most likely explanation for the approval by
ERC of the exorbitantly-priced generation of the FDC coal plant. Of course,
it could be that the ERC is simply incompetent in the determination of
reasonable rates for electric power generation. But that is not likely.

2. If the ERC were not corrupt it should not have approved the increase in
the rates of the Mt. Apo Geothermal Power Plant from 2.87 pesos per
kilowatt-hour to 5.18 pesos per kWh.

2.1 The normal process for approving an increase in the rate of an existing
plant under ERC regulation is for an application to be submitted (by PSALM,
who owns the contract for the generation of Mt. Apo) to the ERC petitioning
for the rate increase.

The ERC allowed this normal procedure to be bypassed, and instead approved
the rate increase through an application for the approval of the rates for
the PPAs between the electric cooperatives and FDC-Misamis (who won the
bidding for the IPP Administration contract for the generation of the Mt.
Apo GPP).

In approving the PPA rate, the ERC completely ignored the fact that the Mt.
Apo GPP is an existing power plant with a rate of 2.87 pesos per kWh duly
approved by the ERC in 2004. The ERC pretended that the petition submitted
by FDC-Misamis was for the approval of the rates for a PPA for the power
generation of a new power plant.

The only reasonable explanation for the gross violations by the ERC of
standard procedures for rate increases for regulated power plants is
regulatory capture. Again, incompetence on the part of the ERC commissioners
could be the reason for the regulatory travesty committed by the ERC, but
that also is not likely.

2.2 Even if we grant the legitimacy of the application for approval of PPA
rates for Mt. Apo, that will not excuse the ERC because the ERC pretended to
be ignorant of the major rules governing the IPPA-process of the PSALM, in
particular the requirement that the IPPA-ization of any power plant should
NOT result in changes in the contract prices and contract quantities of
existing PPAs of the power plant being privatized.

Prior to the IPPA, the generation of the Mt. Apo GPP was contracted to all
customers of the PSALM in Mindanao at the rate of 2.87 pesos per kWh. These
contracts were arbitrarily cancelled by the PSALM, and new contracts were
made with a number of ECs at the price of 5.40 pesos per kWh (reduced by ERC
to 5.18 pesos per kWh later).

Either the ERC commissioners were totally ignorant of the IPPA scam being
carried out by the PSALM, or else the ERC is a captured agency.

In closing it should be mentioned that the IPPA scam of the Mt. Apo GPP
strongly indicates that the PSALM also has been corrupted by the generating
companies it does business with. And since it is the DOE that supervises the
PSALM, the past DOE administration could have been involved in the IPPA
scam.

This is highly probable because the scam resulted in more than two billion
pesos being stolen to date from Mindanao power consumers, and in the
stealing of another 15 billion pesos over the next nine years unless the
ongoing scam is stopped. The exculpatory explanation is that the DOE
officers were ignorant about the IPPA scam being carried out by the PSALM.

The national government of President Rodrigo Duterte is promising to bring
down to affordable levels the rates for electricity. That will not happen
unless the regulatory capture of the ERC is ended. (David A. Tauli is the
president of the Mindanao Coalition of Power Consumers)

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Ref: http://www.kagay-an.com/regulatory-capture-erc/

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com