As its critical institutions tank before our eyes, we see that the Americans have just recently learned how the weaponization of legal processes can be applied against perceived adversaries. Spreading across its prosecutorial system, the insidious modus, a product of conflicts and the failure of leadership, sits well where autocracy governs with iron fists.

Consequently, fair play, due process and even decency are invariably dumped by the wayside.

Among weak, failing or non-existent democracies, this weaponization, technically defined as lawfare, is an aberrant phenomenon some might think Filipinos either own the exclusive franchise to or one sprouted from our toxic political topsoil.

And why not?

The dust had not yet settled and the toxic systemic consequences of the denial by our House of Representatives of the renewal of the ABS-CBN franchise had yet to gel when, already, congressional power brokers started flexing their muscles against other institutions similarly beholden to the plenary power of Congress. 

Set to expire by 2028, the spade work had started to either renew or deny the Manila Electric Company (Meralco) of its congressional franchise.

The call coincided with increasing scrutiny of the National Grid Corporation of the Philippines, the serial outages from the undersupply of both ancillary and market reserves provided by power plants and the astronomical spikes in power rates these caused. 

The attempt at sinister lawfare to break Meralco’s franchise into parts or otherwise outrightly deny its renewal was spawned from a most unlikely source. It was drawn from the ignorance of the concept of weighted average cost of capital (WACC) as a minimum measure for capital asset pricing. This was aggravated by more ignorance on distribution utility (DU) economics and its role in the electricity value chain.

[Vantage Point] Lawmakers push for Meralco’s early franchise renewal

A washed-out bit player took the podium at the grandstand. He echoed socialist propaganda, and the chorus line based their spiel on an outmoded utility pricing methodology. They insisted on resurrecting return on rate base (RORB) pricing over what they believe is a corporate-created WACC-centric rate method custom tailored simply to increase profits. 

Had they done their homework, they would have learned that the calculus behind the existing Performance Based Regulation (PBR) incorporates RORB using a strict Regulatory Assets Base (RAB) formula and WACC both as price tempering ratios that limit Meralco’s annual revenue requirements (ARR) among other separate operational and service performance-based formulae. 

The National Association of Regulatory Utility Commissioners (NARUC) of the United States had set the mathematics for computing a DU’s revenue requirements.

The ARR is simply the RAB multiplied by WACC. Regulators, likely compelled by their political umbilicals, debate the price per kilowatt/hour (P/kWh) and not ARR. Yet, the electricity price is simply the ratio of ARR over kilowatt/hour sales per year.

In essence, under PBR, RAB, ARR and WACC are limiting factors. WACC does not incentivize profits. It caps profits as well as asset expansion based on RAB, and a country- and economy-specific capital asset pricing model (CAPM) that computes for the return on equity (ROE) in WACC. 

Moreover, critics do not seem to understand that WACC applied in other economies cannot be applied in the Philippines. CAPM computes for a mathematical reality where two key components are domestic 10-year risk-free Philippine treasury rates and ROE from the local capital market.

Soaked in this alphabet soup, admittedly the question of Meralco’s franchise renewal is prompted by the unmitigating rise in electricity costs. 

But where lies the real problem?

First, these outages were caused by players in the upstream value chain from derated or off-line power plants.

Second, the high-power rates that enflame the franchise renewal opposition are based on the wrong numbers. Because energy officials and regulators had been violating the statutory terms of periodic pricing resets required by PBR, the current power rates, now ten years too late, are not only distorted, anachronistic and un-reflective of current costs and requisite capital expenditures (CAPEX), they are quite frankly wrong. Worsening regulatory dereliction, any belated upward price adjustments beyond Meralco’s contingency accounts lead to increased rates.

The belated price adjustments range from nearly P50 billion to as much as P160 billion depending on the historical or replacement method of CAPEX valuation whenever regulators miss resetting PBR. In grid management parlance, these create the “missing money problem” where inadequate capacity results from insufficient revenues to cover for CAPEX investment, plus un-addressed fixed or operating costs that impact negatively on long term reliability. 

That market design failures now compel as much as P160 billion as a remedial fix is ridiculous. At those amounts, the fiduciary fund pilferage in healthcare and the Pharmally scam are peanuts.

Incensed by the simultaneous failure of over 20 generating power plants earlier worsened by the derating of gas-powered sources, plus a foreseeable drought and misconceptions on the role of power plant-generated ancillary reserves, the widespread outages used as bases to question Meralco’s performance continue to unfairly focus on a patsy. 

Critics are unaware that alongside their bandwagon, there are special interest groups awaiting the dissolution of Meralco and, like circling buzzards, maneuvering to partake in the spoils. 

Characteristic of an industry steeped in technology, science and complex calculus, their polemic power plays and the polarization of arguments for and against the renewal follow ideological lines that ignore the math. 

Fundamentalist themes center on a distinctively socialist agenda. For pundits who imagine capital and profit as evil, their opposition simply aligns with their cookie-cutter anti-big business and anti-free enterprise clichés. However, for crony capitalists hoping for quick opportunities for hostile takeovers, they are simply being true to their nature. 

Their prayer for a non-renewal, however, traipses on technical questions of capital structures, DU pricing and economies of scale, and PBR’s CAPEX limits for expansion.

For renewal advocates, theirs is themed on the avoidance of business disruptions, uncertainties and economic volatilities. It is the proverbial “If it ain’t broke, don’t fix it”.

To analyze the Meralco franchise renewal, we must start from understanding what the correct numbers should be and judged, not against radical ideological biases or a distorted rate structure caused by violations of PBR reset protocols, but against PBR’s strictest statutory quantitative measures. These include critical efficiencies and operating performance and response benchmarks, especially important as critics claim competition or takeover will lower rates. 

The following PBR network and customer benchmarks which pricing benefits and value per peso result from relative scale and operational efficiencies invariably embedded in DU pricing must be arrayed against the Harvard Business School’s Porter’s Five Forces (PFF) test of competitive impact. 

Here are extra servings of alphabet soup and are critical PBR performance indicators that impact on pricing. In each of the System Average Interruption Frequency Index (SAIFI), System Average Interruption Duration Index (SAIDI) and Momentary Average Interruption Frequency Index (MAIFI), Meralco has performed higher than any other DU or DU cooperative. 

Likewise, against the Average Time to Process (ATP) and the Average Time to Connect (ATC) performance indices. These substantiate Meralco’s quantitative superiority on a PFF matrix.

Its PFF score is especially critical as partial or full hostile takeovers by either smaller utility cooperatives or an inexperienced start-up lurk in the shadows.

Splitting the Meralco franchise results in higher, not lower, power rates. Following PFF, negotiating new bilateral power supply agreements (PSA) to temper the astronomical rates at the spot market, and the ease of entry into the Luzon DU sub-industry would require massive build-up paid-in capital for start-ups and catch-up CAPEX expansion for competitive cooperatives. Start-up CAPEX and both straight-line and units-of-production depreciation amid today’s high-interest rate regime require higher power rates relative to marginal CAPEX for Meralco.

Congress should do the math. There is no shortage of analytical fact-based methods. One wonders why, given the tremendous responsibilities they carry, lawmakers tasked to grant a congressional franchise based on a total approach continue to act on the basis of colossal ignorance. – Rappler.com

Dean de la Paz is a former investment banker and managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance, and Mathematics professor. He collects Godzilla figures and antique tin robots.

Meralco rates surge in July 2024 as it starts collection of deferred costs