On electricity rates

Egay Uy

THE methodology in coming out with the electric rates of distribution utilities was modified when the electric power industry was restructured by the Electric Power Industry Reform Act in 2001.

What used to be the return-onate base (Rorb) methodology, under which the electric distribution utilities (DUs) were guaranteed a return of 12 percent on a historical rate base, the Epira changed it into the performance-based rate-making methodology.

Under the performance-based rate-making, the rates of DUs are based on forecast capex for the regulatory period plus other factors such as operating costs and interest rate.

Then each regulatory year within a four-year regulatory period, rates are reset by the regulator.  Since public hearings are conducted on the matter, it will serve the interest of consumers best if they or we take an active role in these hearings.

What is important, to my mind, is for the forecasts of the DUs to be assessed at the end of each regulatory year to check on under-forecasting or worse, over-forecasting because the latter will result in overpayments made by end-users.  There are of course correcting measures to address this but this has to be explained fully to the end-users.

Also under the performance-based rate-making, there used to be a hype of rewarding distribution utilities if they meet certain service standards.  But the catch is the DUs themselves must propose their own performance standards for the ERC to approve.

Opposite to the rewards is the penalty which the utilities will be slapped with if they fail to meet their own standards.  What was not clearly made part of the hype was that the supposed “penalties” were already embedded in the power rates that every end-user of power pays.

Simply stated, the reward is actually pre-paid to the DUs by the end-users through the approved rates.  If the utilities meet the standards, they keep the earmarked amount.  If they fail, which they seldom do, they pay the customers affected by the failure to meet the standard a certain amount.

And it is difficult for end-users to be compensated as penalties imposed on utilities because penalties are based on a system-wide failure of the DU to perform not on a per affected customer basis.

There is a need therefore for DUs, like Cepalco, to be transparent with their rates to its consumers.  Probably it will help consumers understand if DUs regularly published their rates, the mix of their power sources and their respective charges, and a comparison between their capex forecasts on a year to year basis.

(Egay Uy is co-chair of the City Price Coordinating Council, chair of the Regulatory and Complaint Board, and chair of the Joint Inspection Team of Cagayan de Oro. He is a retired senior executive of the Cagayan Electric Power and Light Co..)