RETURN ON RATE BASE

halaga ng krudo
halaga ng krudo

Return on Investment (ROI) is the old formula of computing how much an investor gets from his investment where we look at the quotient of net income over total capital. The higher the ROI, the profitable the business.

But this method of computation is inapplicable to power plants selling electricity to distributors who in turn sell to consumers like you and me. Given an unabated ROI, these Independent Power Producers would milk us dry. Thus, they conceived of the RETURN ON RATE BASE (RORB) where the government could legally intervene in its determination.

Under Executive Order No. 86, the RORB has been fixed at 12%. While this particular EO No. 86 governs the RORB of the National Power Corporation, arguably this likewise reins in other similarly situated Electric Power Industry Participant as shall be defined later.

In finding for the RORB what is critical is the valuation of the rate base. The rate base is the valuation of the total eligible assets.

What are the eligible assets of an Independent Power Producer?

The fixed assets such as the land owned by the IPP where the power plant and all its appurtenances are erected like the multi-million dollar electrostatic precipitator, the generators and turbines, the coal depositories and the coal reserves at any given time, the chimneys, the transport vehicles, the office buildings and  dormitories, and the like. All these are lumped in the term eligible assets.

What then is the formula in finding the RORB?

Asset is a component of
Return on Rate Base (RORB)
———————————-

Quezon Power Ltd. as an Independent Power Producer (IPP) does not have full discretion in its pricing, otherwise, the consumers suffer. Republic Act 9136 governs every player in the Power Industry. An IPP is an Electric Power Industry Participant [{Rule 4(h)} Implementing Rules and Regulations of RA 9136] which refers to a “person or entity engaged in the generation, x x x or supply of electricity.”

Under the same Rules and Regulations implementing the Electric Power Industry Reform Act (EPIRA), an IPP as an Electric Power Industry Participant must prepare and submit for approval by the ERC its Business Separation and Unbundling Plan (BSUP) on or before 31 December 2002.

C) The BSUP shall contain among others, the following information:

i) A complete description of the separation of books and records, including but not limited to, sources of revenues, costs as allocated, assets transferred, and information systems separation (Rules and Regulations Implementing EPIRA, emphasis ours).

QPL must therefore submit to ERC its books and records containing the valuation of its eligible assets. Upon its submission of its sources of revenues, QPL opens itself up in regard to the determination of the actual commissioning of the power plant. This report reveals the data of when exactly QPL received payment from its singular customer, Meralco, for the delivery of power, whether for testing or pursuant to commercial and contractual undertaking. When QPL got paid for delivery of initial power for tests purposes, common sense tells us that it partakes of commercial enterprise. To state otherwise simply taxes credulity.

ERC FORMULA
OF RORB
———————–

The Office of the Solicitor General argues as if it has not heard of the term “Return on Rate Base” or RORB when it opposed the petition of the Sentro ng Gabay Legal sa Quezon questioning the alleged Arbitral Resolutions of the Secretary of Finance. Under Republic Act 9316 (Electric Power Industry Reform Act of 2001), the same provides:
xxxx        xxxx        xxxx

f) In the public interest, establish and enforce a methodology for setting transmission and distribution wheeling rates and retail rates for the captive market of a distribution utility, taking into account all relevant considerations, including the efficiency or inefficiency of the regulated entities. The rates must be such as to allow the recovery of just and reasonable costs and a reasonable return on rate base (RORB) to enable the entity to operate viably. The rate-setting methodology so adopted and applied must ensure a reasonable price of electricity. The rates prescribed shall be non-discriminatory. To achieve this objective and to ensure the complete removal of cross subsidies, the cap on the recoverable rate of system losses prescribed in Section 10 of Republic Act No. 7832, is hereby amended and shall be replaced by caps which shall be determined by the ERC based on load density, sales mix, cost of service, delivery voltage and other technical considerations it may promulgate. The ERC shall determine such form of rate-setting methodology, which shall promote efficiency. In case the rate setting methodology used is RORB, it shall be subject to the following guidelines:

(i)    For purposes of determining the rate base, TRANSCO or any distribution utility may be allowed to revalue its eligible assets not more than once every three (3) years by an independent appraisal company: Provided, however, That ERC may give an exemption in case of unusual devaluation: Provided, further, That the ERC shall exert efforts to minimize price shocks in order to protect the consumers;

(ii)    Interest expenses are not allowable deductions from permissible return on rate base;

(iii)    In determining eligible cost of services that will be passed on to the end-users, the ERC shall establish minimum efficiency performance standards for TRANSCO and distribution utilities including systems losses, interruption frequency rates, and collection efficiency;

(iv)    Further, in determining rate base, TRANSCO or any distribution utility shall not be allowed to include management inefficiencies like cost of project delays not excused by force majeure, penalties and related interest during construction applicable to these unexcused delays; and

(v)    Any significant operating costs or project investments of TRANSCO and distribution utilities which shall become part of the rate base shall be subject to the verification of the ERC to ensure that the contracting and procurement of the equipment, assets and services have been subjected to transparent and accepted industry procurement and purchasing practices to protect the public interest (SECTION 43, REPUBLIC ACT NO. 9136 OTHERWISE KNOWN AS AN ACT ORDAINING REFORMS IN THE ELECTRIC POWER INDUSTRY, AMENDING FOR THE PURPOSE CERTAIN LAWS AND FOR OTHER PURPOSES, emphasis ours).

While an IPP is recognized as a foreign investment that must be assured of profitable existence, the law fixes the reasonable rate of return on investment based on the recovery of reasonable and just costs “to enable the entity to operate viably.”

Under the Rules and Regulations issued by the Energy Regulatory Commission:

Section 5.  Ratemaking Design and Methodology.

(a)    The ERC shall, in the public interest, establish and enforce a methodology for setting transmission and distribution wheeling rates and Retail Rates for the Captive Market of a Distribution Utility, taking into account all relevant considerations, including the efficiency or inefficiency of the regulated entities, as well as the expansion or improvement of the Transmission facilities pursuant to a plan approved by the ERC under Section 10 of Rule 6 on Transmission Sector, and the Distribution Utilities under Rule 7 on Distribution Sector. The rates must be such as to allow the recovery of just and reasonable costs and a reasonable RORB to enable the entity to operate viably. The ERC may adopt alternative forms of internationally-accepted rate-setting methodology as it may deem appropriate. The rate-setting methodology so adopted and applied must ensure a reasonable price of electricity. The rates prescribed shall be non-discriminatory and shall take into consideration, among others, the franchise tax. To achieve this objective and to ensure the complete removal of cross subsidies, the cap on the recoverable rate of system losses prescribed in Section 10 of Republic Act No. 7832, is hereby amended and shall be replaced by caps which shall be determined by the ERC based on load density, sales mix, cost of service, delivery voltage and other technical considerations it may promulgate. The ERC shall determine such form of rate-setting methodology, which shall promote efficiency. In case the rate setting methodology used is RORB, it shall be subject to the following guidelines:

(i)    For purposes of determining the rate base, the TRANSCO or its Buyer or Concessionaire or any Distribution Utility may be allowed to revalue its eligible assets not more than once every three (3) years by an independent appraisal company: Provided, however, That ERC may give an exemption in case of unusual devaluation; Provided, further, That the ERC shall exert efforts to minimize price shocks in order to protect the consumers;

(ii)    Interest expenses are not allowable deductions from permissible RORB (emphasis ours)

As an illustration, the ERC has explained the formula in arriving at the RORB where the determinant factor is the valuation of the eligible assets of the power plant.  In its letter to the staff of Senator Juan Ponce Enrile, ERC explained RORB in this wise:

November 12, 2004

ATTY. CAROLE C. QUIROLGICO
Deputy Chief of Staff
Office of Senator Juan Ponce Enrile
Room 503, Senate of the Philippines
GSIS Financial Center, Pasay City

Dear Atty. Quirolgico:

This has reference to your letter dated November 09, 2004 requesting for the definition, formula and components of RORB, together with the breakdown of MERALCO Rate Base. Please find below the definition and explanation, to wit:

a)    Return on Rate Base (RORB) refers to the rate setting methodology as determined by the ERC whereby TRANSCO or its Buyer or Concessionaire and Distribution Utilities are allowed to recover just and reasonable costs and earn a reasonable return so as to enable such entities to operate viably.

b)    Formula in computing RORB, components and definition:

RORB =    Rate of Return (ROR) X Rate Base

where:

(i)    ROR is a percentage of the rate base which the utility is entitled to earn for interest, dividend payments and related requirements.

Net Operating Income
ROR    = —————————————
Rate base or total invested capital

(ii)    Rate Base is the sum of the net fixed assets in service (Property, Plant and Equipment less Accumulated Depreciation), Allowance for Working Capital, Plant Held for Future Use, Construction Work Progress (CWIP) and Materials and Supplies Inventory.

Cash Working Capital is computed as follows:

Total Operating Expenses (excluding Purchase Power Cost)        PhPxxx
Less: Non-Allowable Expenses                 PhPxxx
System Loss in Excess of Cap                   xxx     xxx
Operating Expenses for Ratemaking                                            xxx
Less: Taxes and Non-Cash Outlay                                                ___xxx
Total___xxx

Cash Working Capital (multiply by 2/12)                              PhPxxx

Notes: 1. Cash Working Capital for Purchased Power Cost (PPC) is determined based on the utility’s lead-lag. Lead-lag is the average number of days to collect from customer less average number of days before payment is made to NPC.
2.    Private Utilities are allowed to recover System Loss up to 9.5% of total purchases and actual company use or 1%, whichever is lower.

(iii)    Net Operating income refers to the operating revenue less operating expenses that the utility incurs to provide electric service.

c)    MERALCO’s Rate Base consists of the Net Plant in Service, Materials and Supplies, Allowance for Cash Working Capital and Construction Work in Progress. For details, please refer to pg. 77 of the Commission’s Decision in ERC Case No. 2001-646 dated March 20, 2003.
We hope the information provided serves your purpose.

Very truly yours,

ATTY. FRUCTUOSO C. LAGUNZAD JR.
Executive Director III (emphasis ours)

The bigger the RATE BASE, the more manageable the statutory RORB. The trouble however with QPL is that its RATE BASE is exaggerated. The ROR becomes artificial and may in reality exceeds the statutory ceiling of 12%. While it complies with E.O. No. 86, QPL maliciously hides its accurate value of its total assets to avoid paying the correct RPT.

QPL SEC RECORDS AS
OF 1999 AND 2000
—————————

An annual Financial Statement filed by any corporation with the Securities and Exchange Commission is a voluntary admission made under oath by any juridical person as to the value of its net fixed assets in service; otherwise, its responsible officials expose themselves to perjury. A balance sheet is a statement of its valuation of its assets and its liabilities. In the absence of any appraisal, QPL’s own valuation shall be used. In other words, the valuation made by respondent QPL in its Financial Statements filed before the Securities and Exchange Commission more than suffices as a valuation that can be used by the Municipal Assessor.

The  Secretary of Finance, when it allegedly assumed jurisdiction on the alleged arbitration between June 24, 2002 when the Court a quo referred the Submission to Arbitrate, and August 30, 2002 when the questioned Resolution was issued and on January 22, 2003 where the good Secretary fixed the total cost of the plant at FIFTEEN BILLION SIX HUNDRED TWO MILLION SEVEN HUNDRED TWENTY ONE THOUSAND FIVE HUNDRED EIGHTY NINE AND 53/100 (P15,602,721,589.53) PESOS he had the opportunity and the documents at his disposal to evaluate the financial statements filed by QPL before the SEC, an administrative body, under its administrative supervision. Had he scrutinized the Financial Statements of QPL before the SEC, he would have noted that QPL volunteered the following valuation of its assets.

YEAR                         VALUATION

1999(filed on April 21, 2000)    P29,776,133,192.00

2000 (filed on April 27, 2001)   P42,560,179,898.00

If the Secretary did not consider QPL’s own valuation, then his conclusions in his subject Resolutions are flawed. He is tasked in the protection of the interest of the government by exacting the correct taxes based on exact and accurate figures. His hands are not tied just because QPL supplied valuation data circa December 2000. He cannot feign ignorance on those aforesaid Financial Statements by claiming that they were non-existent in 2000 when the Municipal Assessor made his own valuation.

QPL RECOUPS ITS
INVESTMENT THRU
DEPRECIATION COST
———————————

It should likewise be noted that QPL for the years 1999 and 2000 deducted P1, 000,000,000.00 (PHP500,000,000.00 a year) OR US$20,000,000.00 as depreciation FROM ITS GROSS INCOMES forr those years. In other words, QPL by then admits that its entire assets are subject to wear and tear and provisions therefor have to be subtracted. On the average, from 1999, QPL has already taken away PhP 2.5B or US$50,000,000.00 from its eligible assets as depreciation and counting! If QPL succeeded in frustrating the province’s collection effort of the rightful RPT from QPL, by the end of 25 years, Quezon holds an empty bag.

This is exactly what MIRANT is doing. It dodges payment of RPT while at the same time deducts Php1B from its gross income as annual depreciation. From this ploy, MIRANT has already set aside US$200,000,000.00 enough to initiate alleged expansion of its capacity of 750 megawatts to 1050 megawatts, or an additional 300 megawatts. Clearly, we are being fried out of our own meager fat.

For the added information of the Honorable Supreme Court, while we submit that this matter is appropriate, the province of Quezon has another power plant in the town of Pagbilao valued at US$1B and is in operation for the last seven years. It has announced recently that its expansion is on the drawing board. The sad news? Again the sitting provincial officials of Quezon do not bother to collect the RPT thereon for the last seven years, while MIRANT PHILIPPINES, INC.  has been raking PhP8,000,000,000.00 net profit a year. The uncollected land taxes on Mirant have reached Php5B already. As to what arrangement the province of Quezon has struck with Mirant, the people of Quezon are in the dark.

VOODO ACCOUNTING
SYSTEM?
—————————–

What then is QPL’s purpose in declaring its net fixed assets in service in 1999 at TWENTY NINE BILLION SEVEN HUNDRED SEVENTY SIX MILLION ONE HUNDRED THIRTY THREE THOUSAND ONE HUNDRED NINETY TWO (P29,776,133,192.00) PESOS and in 2000 at FORTY TWO BILLION FIVE HUNDRED SIXTY MILLION ONE HUNDRED SEVENTY NINE THOUSAND EIGHT HUNDRED NINETY EIGHT (P42,560,179,898.00) PESOS in its books? Do we smell here an ENRON-like financial shenanigan? Why allow QPL to mess up with an accounting system by declaring different figures? We could only figure out its unhampered liberty of depreciation deduction annually. Without the blown up figures, there is no way by which it can justify the yearly windfall of depreciation.

In its Complaint before the Regional Trial Court of Mauban, QPL blatantly declared under oath that its assets valuation is only FIFTEEN BILLION ONE HUNDRED FIFTY FIVE MILLION NINE HUNDRED FIFTY ONE THOUSAND THREE HUNDRED SEVENTY EIGHT (P15,155,951,378.00) PESOS (p.4 OSG’s Comments).

EXAGERRATED
RATE BASE
————————-

The reason why we have expensive power rate, to the detriment of the consumer, is because of bloated RATE BASE. Where does QPL get its rate base? From its Financial Statements on file with the SEC! These figures are part of the books and records of an IPP that have to be submitted to the ERC in the determination of its BSUP on or before December 31, 2002.  Yet, when the obscure Municipal Assessor of Mauban, Quezon had the cheek to secure copies thereof from SEC, QPL protested to the Governor of Quezon Province! The Municipal Assessor, after submitting his assessments, was forthwith removed from his position and replaced by a subaltern of the Mayor of Mauban, Quezon. While this archipelagic country is small, there are some corners thereof which are practically cornered by some corrupt tyrants out to make these LGUs their kingdom. Never mind if its people remain poor as long their pocket is greased and their retirement and their dynasties assured. And that is the reason why we humbly knock on the portals of the Honorable Supreme Court to grant its succor on the graft-ridden province of Quezon and direct the criminal prosecution of the perpetrators before the Ombudsman.

Under its jurisdictio plenum we beseech that the Honorable Supreme Court is not bound by the pleadings and evidence of both parties prior to or on the date of the filing of the original action below if there are subsequent compelling evidence against the interest of one party, in this case respondent QPL, that validate the claim, position, or theory of petitioner (Sentro ng Gabay Legal sa Quezon) on the valuation of the totality of the assets of the petitioner, the pith issue in that case.

Where the Supreme Court decides in favor of the Intervenor, its disposition becomes even more compelling if it awards the Intervenor some reliefs like the imposition of attorney’s fees based on quantum meruit to teach QPL and other similarly situated foreign investors some lessons for maliciously breaking the host country’s tax laws.

Sonny Pulgar
KATATASPULONG
www.sonnypulgar.com

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