(Second of two parts)

In its preliminary review, the Energy Regulatory Commission (ERC) disallowed the expenses of National Grid Corporation of the Philippines (NGCP) amounting to P3.7 billion, which it said were “improperly documented or not recoverable for customers.”

The biggest items disallowed were for public relations, corporate social responsibility (CSR), and advertising expenses. 

NGCP’s advertising expenses, for example, reached P130 billion from 2016 to 2020. It argued that these expenses were “not for marketing purposes” but for “information dissemination.” 

The ERC, however, demanded proof of the need to spend such an amount on ads. 

“There is a test of reasonableness [in assessing these expense items]. If these were spent on full-page ads saying ‘Bawal humawak ng livewire,’ [we must ask]: reasonable ba ‘yung full-page ad saying that?” ERC Chair Monalisa Dimalanta said in a news conference last November, in which she announced the results of the commission’s preliminary review. 

In a news conference held right after the ERC’s own, NGCP Assistant Vice President Cynthia Alabanza said it was “unfair” for the regulator to “retroactively” apply new rules.

“Before you join a game, you need to know the rules. And to retroactively apply rules while you’re in a game, that’s unfair,” Alabanza said in Filipino. “I’m wondering why they released [the result] when it is still raw. It’s like if we had 100 steps to take to the finish line, we’re still in step two.” 

To let the public know

Dimalanta said in the ERC news conference that it was necessary to release the initial findings. “I think we owe it to the public to let them know what is happening [in the review] and to provide guidance on what is allowed and disallowed [in the expenses of NGCP].” 

Alfredo Non, who served as ERC commissioner from 2012 to 2018, said there should have been “clearer guidelines” on what spending items were “acceptable.” 

“As far as I am concerned, the ERC has not released guidelines on how regulated entities may spend on CSR, or salaries,” he said. 

But Non acknowledged that during his time, the ERC disallowed salary increases for a government-controlled corporation. 

“When the Philippine Electricity Market Corp. asked [earlier] for higher market fees, because that’s how they cover their budget for salary increases, we disallowed it. Because they refused to show documents of their payroll,” he said, adding: 

“So if NGCP shows documents, then they should be allowed.” 

NGCP’s reply to the ERC findings is expected to have addressed these issues.

According to the ERC, the disallowances were intended to protect consumers.

“It’s not that the commission is prohibiting [regulated entities], for example, from increasing the salaries of their employees, or giving donations, or engaging in CSR [activities],” Dimalanta said in the ERC’s November news conference. 

“What we’re saying is, you can’t recover that from the rates [you impose on consumers]. You recover that from your profits,” she said. 

The ERC had previously ruled, in cases involving power distribution utilities, that CSR expenses should not be charged to consumers.

In its 78-page order, it also highlighted that the NGCP, as a public utility, is mandated to incur only “necessary and efficient costs,” with expenses kept “at a minimum.”

To send a clear message

Adoracion Navarro, senior research fellow at the state think-tank Philippine Institute for Development Studies (PIDS) said the ERC’s moves are intended to send a clear message to NGCP and other regulated entities to practice discipline.

“If before, [the NGCP] got away with [disallowed expenses], then the regulator is now setting more discipline,” Navarro, a former deputy director general at the National Economic and Development Authority, told the PCIJ.

“The regulator is now just enforcing that we have to stick with the principles or the rules,” she said. 

A former energy official who asked not to be named said the ERC is making sure that NGCP is “not shortchanging the industry and the Filipino people.” 

The official said that the entire rate-setting process is supposed to determine which expenses are considered prudent, and that it’s up to NGCP to justify its revenue requirements.

The ERC is “wary,” the official said. “It just wants to make sure that NGCP is functioning at its optimum efficiency, and that it is not shortchanging the industry and the Filipino people.” 

“The concession agreement is a privilege, and that comes with attendant responsibilities,” the official added. 

Will there be refunds?

The ERC is expected to release its final determination of the rates in the first quarter of 2024.

Will there be cash refunds? According to the ERC, refunds are possible but not guaranteed.

“What we’re seeing are just telltale signs. Because they are claiming this much, and we are deciding that they can only recover this much, then there could be a downward adjustment [on their allowable revenue], or a refund,” Dimalanta said in November.

Instead of cash refunds, the ERC is inclined to implement a “reduction of transmission rates,” Sen. Sherwin Gatchalian said at a Senate hearing held on Nov. 13, 2023, to discuss the commission’s budget. He defended the ERC budget during last year’s budget deliberations. 

“In terms of modality, it’s easier to reduce the rates, and easier for the regulator to monitor and apply, and to supervise [that kind of] implementation,” Gatchalian said during the hearing. 

How much that reduction would be reflected in consumers’ electricity bills has yet to be determined, he said, but added that it would be “significant.” 

Non said it was the release of the partial results that “created a wrong impression that there would be refunds.”

The release of ERC’s final review of NGCP’s fourth regulatory period was initially expected as early as August 2023. Instead, a preliminary review was released three months later, in November, around the time that Congress was deliberating on the national budget. 

“It’s budget season. [The ERC] had to show to Congress that they were doing their jobs,” said the former energy official who spoke with the PCIJ. 

The Senate approved an P888-million budget for the ERC, higher than the P611 million originally proposed by the Department of Budget and Management.

Under scrutiny and criticism

NGCP faced scrutiny amid heavy criticism of its performance as the country’s grid operator.

Its NGCP officials have been called to many hearings held at the House of Representatives and the Senate since parts of Luzon were subject to rotational power outages in the summer of 2021. It does not help that the Luzon grid also suffers from yellow and red alerts every year once the hot season sets in.  

NGCP is responsible for building more transmission lines, but many of its projects are delayed. Power producers have previously lamented delays in their connections to the grid. 

President Ferdinand Marcos Jr. himself reprimanded NGCP during his second State of the Nation Address in July 2023 over these delays.

“We are conducting a performance review of our private concessionaire, NGCP. We look to NGCP to complete all of its deliverables, starting with the vital Mindanao-Visayas and the Cebu-Negros-Panay interconnections,” Marcos said in his speech.

Last month, Marcos again took a swipe at NGCP for failing to prevent a total power blackout on Panay Island that lasted three days.

“This incident emphasized the vital role of these interconnection projects. We cannot afford to have another round of this costly interruption, not only in Panay Island but anywhere in the country,” he said in an NGCP event announcing the completion of the Mindanao-Visayas interconnection.

Marcos pushed for the completion of remaining critical interconnection lines, including the Cebu-Negros-Panay backbone project during the event.

“We look forward to your assurances in the promised completion of the 230 kV Cebu-Negros-Panay backbone project by March of this year,” he said. 

The ownership structure of NGCP has also been a subject of security concern because it is 40% owned by China’s State Grid Corporation. Lawmakers have expressed fears that Beijing could use NGCP for sabotage in case of heightened conflict over the West Philippine Sea.

NGCP said this is not a concern because “only Filipinos are manning [NGCP] substations.” The remaining 60% stake is split between businessmen Henry Sy Jr. and Robert Coyiuto Jr.

Financial muscle

On the other hand, there are concerns that cutting NGCP’s profits could affect its ability to expand transmission lines. 

NGCP needs the financial muscle to develop the country’s transmission grid and prevent massive blackouts. It also needs to modernize the grid to support renewable energy suppliers, according to experts.

In a 2023 report, the think tank Climate Analytics estimated that the Philippines would need transmission lines to accommodate 163 gigawatts (GW) of energy, taking into account the variable nature of proposed and committed renewable energy projects.

NGCP’s Alabanza also said as much. She said transmission planning would be critical to the green energy push.

“So if [the ERC] limits our ability to recover our bonafide expenses, then it would have an impact,” she said.

Non warned of consequences if the ERC’s preliminary review is upheld. He said NGCP’s investors could be “forced to pull out” if the effects of the review put a dent in the company’s financial ability to operate. 

“If I were NGCP, I would fight it out [in court], because the basis for you to continue is a going concern. And if the effect of the review is too significant, then I may pull out [of the concession agreement,” he said.

Whatever the outcome, the ERC’s final review of NGCP’s rates will inevitably have consequences on the energy industry. It will also translate to real costs that Filipino consumers will bear.