Department of Energy

[OPINION] Disinformation and the DOE

Dean de la Paz
[OPINION] Disinformation and the DOE

Illustration by Guia Abogado

'Part of the disinformation involves questions on NGCP’s entertainment expenses and the impact on tariffs should these be passed on and included in pricing'

Now on its second month since the public took notice of debilitating power outages, due mostly to the downtimes of critical baseload power plants feeding the Luzon grid, the blame game by the Department of Energy (DOE) against the National Grid Corporation of the Philippines (NGCP) continues. Admittedly there is a lot about the NGCP’s monopoly in operating the country’s transmission assets worth criticizing. From its capital structure where true management control by Chinese shareholders may exceed the statutory maximum allowed them, to questions of a lopsided deal ab initio in 2007.

Unfortunately, the toxic chemistry of fact and fiction in the DOE’s offensive betrays the competence of its officials overseeing the electric power industry – critical in an economy where links in any value chain are vulnerable to incompetent energy management.

One particular issue involves NGCP’s costs and expenses and how these affect its fees.

On those, the simplest to understand are assertions that NGCP’s large budget expenses might be passed on to consumers, thus raising overall power prices. While it is the simplest, it is also an example of disinformation that any competent and experienced energy official would understand. Hence the question of competence in the DOE’s blame game.

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For sophomoric accountancy students, perhaps the most familiar pricing model is to simply sum all costs, apply an acceptable margin, and divide by the number of whatever units of goods and services are provided.

The concept assumes all costs are recoverable. But this does not apply to the NGCP, who, as both a state franchise and a transmission utility, is heavily regulated by the Energy Regulatory Commission (ERC).

The ERC places several layers of caps on fees utilities can charge. On revenues, the topline of any income statement, the ERC imposes a  maximum allowable revenue cap. On recoverable costs and expenses, utilities are only allowed to recover costs of debt and equity based on its weighted average cost of capital (WACC). The WACC determines the maximum rate of return. Costs unrelated to debt or rates of return on equity (ROE) are not included.

Finally, a utility’s ROE is based on the capital asset pricing model (CAPM) that accounts for Philippine market risk and alternative returns had the utility invested elsewhere rather than on expansion. All inputs to the CAPM are specifically derived from the local market. These are verifiable.

It seems such financial hand-holding is needed for energy officials otherwise busy with vitriolic infighting and visceral politics in preparation for 2022. Costs and expenses in an income statement need to be differentiated to be understood and thereafter be treated accordingly before they enter a pricing model.

Part of the disinformation involved questions on NGCP’s entertainment expenses and the impact on tariffs should these be passed on and included in pricing.

On operating revenues, NGCP’s entertainment and public relations charges are not allowed. They are also not recoverable expenses and are thus burdened on NGCP’s shareholders and not the public. Such limits are further constrained by NGCP’s WACC. Entertainment and public relations costs are neither debt nor equity costs.

The math is clear. Experienced and knowledgeable energy officials know these utility pricing restrictions like the back of their hand. This brings us back to the question of competence at the DOE and ultimately the manner by which inexperienced officials are appointed to critical and highly technical posts under this government. –

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. 

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