“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).
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.
David A. Tauli
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)