As the sole public utility in charge of power transmission lines, the National Grid Corporation of the Philippines (NGCP) is mandated to ensure the reliability of the country’s electricity supply. So when a government representative found that it had included corporate social responsibility (CSR) activities in its operating expenses, she sought an explanation.
“Are CSR expenses necessary for the provision of the transmission services by NGCP?” asked Marbeth Laconico, corporate secretary of the National Transmission Corporation (TransCo), said during a hearing called by regulators.
TransCo is the state entity that owns the power transmission grid, which brings power supply from generating plants to electricity distributors. NGCP, owned by a consortium of Filipino tycoons and the State Grid Corporation of China, won the concession deal to operate it after a public bidding in 2007.
Questions over NGCP’s finances have risen in recent years, as the transmission operator, a state-sanctioned monopoly, reported higher profitability. Last year, NGCP reported P34.7 billion in net income on nearly P62 billion in revenues. Its net profit margin grew to 56.15% from 47.6% year-on-year.
Yet based on its financial statements from 2016 to 2022, NGCP passed on to consumers P2.4 billion in expenses for “public relations and corporate social responsibility,” P46.2 million in “charitable donations,” and a donation of P942 million for a “Covid-19 Preventive Drive.”
“NGCP values not only the quality of [its] transmission service,” NGCP financial controller Raymund Fontillas told regulators. “We also like to put [a] premium [on] engaging with communities, which I suppose all companies are undertaking as part of their corporate social responsibility projects.”
Regulators have also sought explanations for the huge amount spent by the grid operator on salaries and benefits paid to employees, as well as expenses due to force majeure events (FMEs), such as natural calamities.
Since January 2023, the Energy Regulatory Commission (ERC) has held 14 hearings to determine how much NGCP should charge customers for the period 2016-2022, the fourth round of regulatory reviews.
TransCo and distribution utilities like Meralco grilled the grid operator during the hearings, where the exchange between TransCo’s Laconico and NGCP’s Fontillas occurred.
Transmission rates are supposed to be set every five years, the length of a regulatory period. But that has not happened in the past decade. The last time NGCP had a regulatory review was in 2010. The review determined the maximum allowable revenue it could earn for 2010-2015, the company’s third regulatory period.
The ERC did not call for a formal review of the rates until it issued the Amended Rules for Setting Transmission Wheeling Rates in 2022, which officially began the fourth regulatory review.
But that does not mean NGCP has stopped collecting fees from customers. It has maintained an average net profit margin of 47.83% from 2016 to 2022. Based on its financial statements, the company earned an average of P23 billion annually during the five-year period (See Table 1).
This delay had been the subject of multiple hearings at the Senate and the House of Representatives, on top of NGCP’s own delay in the construction of its interconnection projects that add to consumers’ monthly electricity payments.
At least 9% of what Filipinos pay for electricity goes to transmission charges. This means that for every P100 spent on the electricity bill, P9 goes to NGCP.
How much that 9% costs monthly is determined by the ERC, the quasi-judicial body in charge of regulating the energy sector.
The regulatory review hearings provided a venue for NGCP to explain the expenses that had been questioned multiple times by critics.
Among the other expenses questioned during the hearings were for FMEs. For the fourth regulatory period, NGCP is applying for P1.057 billion worth of FME claims, including related costs that occurred after 2010, or before the fourth regulatory period.
Such expenses can be passed on to consumers, subject to the ERC’s approval. Natural disasters such as typhoons, earthquakes, and landslides, or man-made disasters such as war or riots, are considered FMEs.
Under the concession agreement between NGCP and TransCo, the former is mandated to insure its assets. NGCP’s financial statements show that it spent P2.8 billion in insurance payments from 2018 to 2021, including industrial all-risk insurance, a type of policy that allows the policyholder to protect assets from risks other than fire.
Almost half of insurance policies during the period, or about P1.3 billion, were procured from Prudential Guarantee and Assurance Inc, one of the country’s largest nonlife insurers. Its chair, Robert Coyiuto Jr., owns one of the shareholders of NGCP: Calaca High Power Corp.
During a hearing, Reeva Shane Viado, corporate financial analyst of the Power Sector Assets and Liabilities Management Corp. (PSALM), asked NGCP if it had claimed any amount related to FMEs from its insurance providers.
PSALM is the state entity that restructured the energy sector.
“It is just our position… that if NGCP has already recovered any amount from its insurance providers, such amount should not be included in this revenue under the recovery proposal of NGCP,” Viado said.
The NGCP representative failed to respond to the question.
“Clarificatory questions” were also posed by the ERC regarding the compensation package of NGCP employees. In August, the commission directed NGCP to provide a detailed breakdown and explanation of salaries, wages, and employee benefits from 2016 to 2020.
Salaries and employee benefits, which totaled P20.9 billion in 2016-2020, were the second biggest expense item during the review period.
According to public records, NGCP employs about 4,700 employees. That means each employee earned P4.4 million a year on average, or about P371,000 a month.
Financial statements also reveal that key management personnel enjoyed “short-term benefits” that averaged P346 million in 2016-2020. But the documents are silent on what kind of benefits were paid to these employees.
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With the delay in its regulatory review, NGCP has been billing customers based on 2010 rates. In a paper, University of the Philippines economics professor Joel Yu said the company “continues to enjoy the rates of return determined by the ERC which are no longer reflective of the opportunity cost of capital.”
As the rates were determined based on prevailing market conditions — just after a financial crisis — a premium was placed on the risk taken by NGCP in operating the country’s transmission grid. The economy has since recovered.
The ERC uses a performance-based review in determining NGCP’s wheeling rates. This means NGCP may obtain cash incentives in case it performs beyond ERC target criteria, which are supposed to be reviewed every regulatory period.
Because of delays in the review, NGCP was allowed to recover an interim maximum annual revenue from 2016 to 2020 based on criteria set in 2010. In the ongoing review, NGCP claimed that customers owed it P316 billion, or the total revenue requirement during the period.
Based on an analysis of available data by the Philippine Center for Investigative Journalism, that amount was at least 28% higher than what NGCP had charged customers during the review period.
The ERC asked NGCP during the hearings how much the revenue requirement would translate to per-kilowatt-hour rates, but the grid operator was unable to reply.
The commission has decided to catch up on the delay and extend the duration of the fourth regulatory period up to 2022, or from five years to seven years.
NGCP opposed this, citing the five-year intervals followed in previous regulatory periods. In October, the ERC denied the plea, which means the decision on the fourth regulatory review may be published soon.
How the ERC decides on which expenses NGCP can pass on to consumers will result in either refunds or higher electricity bills in the coming years.