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Power grid operator NGCP billed P2.4B worth of CSR, PR expenses to consumers

Since January 2023, the Energy Regulatory Commission has held 14 hearings to determine how much the NGCP should charge customers. The result of the investigation could mean refunds or higher electricity bills in the coming years.

Philippine Center for Investigative Journalism
November 7, 2023

MANILA – As the sole public utility in charge of power transmission lines, the chief mandate of the National Grid Corporation of the Philippines (NGCP) is to ensure the reliability of the country’s electricity. So when a government representative found that the company had included corporate social responsibility (CSR) activities as part of 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), 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 the NGCP’s finances have grown 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. 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. 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,” Raymund Fontillas, financial controller of NGCP, told regulators.

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 such as natural calamities.

Since January 2023, the Energy Regulatory Commission (ERC) has held 14 hearings to determine how much the NGCP should charge customers for the period 2016 to 2022, the fourth round of regulatory reviews.

TransCo and distribution utilities like Meralco grilled the NGCP during the hearings, where the exchange between TransCo’s Laconico and NGCP’s Fontillas happened.

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 the NGCP had a regulatory review was in 2010, which determined the maximum allowable revenue it could earn for 2010 to 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 (RTWR) in 2022, which officially began the fourth regulatory review.

It does not mean the NGCP has stopped collecting fees from customers, however. The company 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.

This delay had been the subject of multiple Senate and House hearings, 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 the NGCP.

How much that 9% costs monthly is determined by the ERC, the quasi-judicial body in charge of regulating the energy sector.

Insurance bought from shareholder’s firm

The regulatory review hearings provided a venue for the NGCP to explain the expenses that had been questioned multiple times by critics.

NGCP expenses

Among other expenses questioned during the hearings were force majeure events (FMEs). For the fourth regulatory period, the 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 approval of ERC. Natural disasters such as typhoons, earthquakes, and landslides, or man-made disasters such as war or riots, are considered as FMEs.

Under the concession agreement between the NGCP and TransCo, the former is mandated to insure its assets. NGCP’s financial statements showed the company spent P2.8 billion in insurance payments from 2018 to 2021, which include 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 non-life insurers. Its chairman, Robert Coyiuto Jr., owns one of the shareholders of NGCP: Calaca High Power Corp.

Reeva Shane Viado, corporate financial analyst of the Power Sector Assets and Liabilities Management Corp. (PSALM), the state entity that restructured the energy sector, sought clarification during the hearing from NGCP if it had claimed any amount related to FMEs from its insurance providers.

“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.

The ERC also posed “clarificatory questions” regarding the compensation package of NGCP employees. In August, the commission asked 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 from 2016 to 2020, were the second biggest expense item during the review period.

Public records showed the 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 revealed that key management personnel had enjoyed “short-term benefits” that averaged P346 million from 2016 to 2020. The documents however were silent on what kind of benefits were paid to these employees.

Fourth regulatory review

With the delay in its regulatory review, the NGCP has been billing customers based on 2010 rates. A paper by University of the Philippines economics professor Joel Yu found that 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 the NGCP in operating the country’s transmission grid. The economy has since recovered.

The ERC uses a performance-based review in determining the NGCP’s wheeling rates. This means the company may obtain cash incentives in case it performs beyond the target criteria set by the commission. These criteria are supposed to be reviewed every regulatory period.

Because of delays in the review, the NGCP was allowed to recover an interim maximum annual revenue from 2016 to 2020 based on criteria set in 2010. In the ongoing review, the NGCP claimed that customers owed it P316 billion, or the total revenue requirement from 2016 to 2020.

Based on PCIJ’s analysis of available data, that amount was at least 28% higher than what the NGCP had charged customers during the review period.

ERC asked the 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 ERC has decided to catch up on the delay and extend the duration of the fourth regulatory period, 2016 to 2020, up to 2022, or from five years to seven years.

The 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 is set to be published soon.

How the ERC decides on which expenses the NGCP can pass on to consumers will result in either refunds or higher electricity bills in the coming years.