The national-grid headache

Written by Marvin A. Tort / Sway

TUESDAY, 28 SEPTEMBER 2010 12:58

Yesterday’s newspaper head: “Rate hike eyed for grid damage; consumers to shoulder costs of Ondoy, Pepeng and bomb attacks.” And this is from the private operator of the country’s power transmission lines, the National Grid Corp. of the Philippines or NGCP, which just a few months back couldn’t fully explain why Metro Manila suffered several days of darkness.

Yesterday’s newspaper head: “Rate hike eyed for grid damage; consumers to shoulder costs of Ondoy, Pepeng and bomb attacks.” And this is from the private operator of the country’s power transmission lines, the National Grid Corp. of the Philippines or NGCP, which just a few months back couldn’t fully explain why Metro Manila suffered several days of darkness.

One cannot help but wonder whether the NGCP is serious in asking permission from regulators to make power consumers pay for at least P172.8 million in damage to power transmission lines caused by Tropical Storms Ondoy and Pepeng, as well as terrorist bombings in 2009, claiming these were “force majeure” events not covered by its insurance.

One hopes that regulators will not actually be swayed by this argument. Sadly, however, it seems the law does allow such extraordinary expenses to be passed on to power consumers. In fact, the law even provides for a grace period to make such claims. As such, the Energy Regulatory Commission or ERC may have no choice but to consider the requested rate increase.

As petitioned by the NGCP, the proposed rate increase will be imposed over four years, from 2011 to 2015. The grid operator reportedly wants an additional P0.0604 per kilowatt-hour (kWh) monthly in 2011, P0.2004/kWh in 2012, P0.3084/kWh in 2013, P0.2945/kWh in 2014, and P0.2968/kWh in 2015, as “Force-Majeure Event Pass-Through Cost” to power consumers.

Luckily for power consumers in the Visayas, the proposed rate increase will cover only Luzon and Mindanao. The NGCP pointed to damaged substations and transmission lines in Metro Manila and in Luzon after Ondoy and Pepeng in September and October 2009, and then the bombing of transmission towers in Kauswagan and Linamon, Lanao del Norte, as well as the Agus 5-Aurora and the Abaga-Aurora transmission lines shortly thereafter.

But while the NGCP request appears reasonable, and in all probability allowed by law, is it not that damage from flooding and terrorist bombing are among the risks related to its business operation? Is it the public’s fault that the NGCP does not have comprehensive insurance—or reinsurance—coverage to guard against all types of external shocks, such as flooding and bombing?

Take the case of private-car owners without Acts of God (AOG) coverage. Many of them suffered extensive loss from Ondoy and Pepeng, too, and had no recourse but to either junk their cars or have them repaired at their own cost. As for those with AOG coverage, at least they had some financial support to cover the cost of repairs. But, of course, this was at the cost of the premium of the additional insurance coverage.

In the case of the NGCP, it should have taken sufficient insurance coverage to guard against force-majeure damage. And the public should not be made to shoulder the cost of repairs to its facilities. Nor should the public be made to shoulder the cost of the NGCP’s insurance premium. Perhaps, just to push the argument, the public can be made to share in these costs if it also shares in the company’s profits. But obviously, this is not the case.

Under the law, government assets must be insured with the state-run Government Service Insurance System (GSIS). And since the transmission lines are still owned by the government, since the NGCP merely operates the transmission lines, then the lines were insured by the GSIS. However, the NGCP claims not all transmission assets can be insured by the GSIS, thus justifying the need to recover part of the damage from the public through a rate increase.

The argument, it seems, is that if the NGCP, as line operator, is made to pay for the repairs as a result of force-majeure events, then it should be fairly allowed to recover the cost of such repairs—either the line owner, in this case the government, pays back the NGCP, or the NGCP is allowed to recover such cost from the public directly, through a rate increase.

A news report quoted Mutya Alabanza, the NGCP spokesman, as saying, “We are entitled to apply for force-majeure event recovery. The insurance covers only a certain percent of the transmission assets, which are government property. Mostly, these are in substations and a certain radius from it. Due to the nature of the transmission business, the NGCP cannot recover the cost [of damage] through a cost and mark-up scheme, so we either have to recover through our performance base or a reasonable pass-through.”

And by reasonable pass-through, the NGCP refers to a higher rate in the next four years, from 2011 to 2015, by around six centavos per kWh in the first year, and by an average of 30 centavos per kWh in the following three years. For households that consume 600 kWh monthly, that’s another P18 in their monthly power bill. While the amount is not that much, and may be collected legally, it remains uncertain whether it is moral. Seen from the NGCP’s point of view, as a business investor, then it rightfully deserves compensation.

But perhaps there is a better way to resolve this matter, and to prevent a similar situation in the future. After all, typhoons and floods come and go, and terrorist bombings will continue until political unrest is finally quelled. Mindanao has been a battleground for decades now, and the unrest there is not expected to end soon. Regulators should consider how to better insulate the public from extraordinary rate increases.

One option is to allow the NGCP to insure the entire transmission system from force-majeure damage, with the premium cost perhaps to be partly subsidized through a pass-through rate increase. And if this means granting the NGCP exemption from mandatory GSIS coverage, then so be it. Or the GSIS should be made to get reinsurance support so that it can sufficiently cover all power-transmission assets owned by the government. Or maybe this is too simplistic a solution and that the parties will rather keep the status quo?