A new law in 2001 granted flexibility for the Philippines Energy Regulatory Commission to implement alternative forms of regulation for distribution utilities as a complement to traditional cost-based regulation. We estimate a cost benchmark model from Philippines' data of distribution utilities to explore "yardstick competition" as an alternative under which the regulated firms may be rewarded or punished based on their performance relative to their peers. Our model is based on technical and institutional considerations. System energy loss reduction is treated as an output and we find that such efforts by cooperatives have a lower impact on cost than privately-owned utilities. This result is probably due to the non-technical nature of network energy losses in areas served by cooperatives. Although geography appears to affect costs, we fail to find evidence of higher costs in the politically tense area known as the Autonomous Region of Muslim Mindanao.
Keywords: Utility regulation, Benchmarking, Alternative regulation, Yardstick competition
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The Philippines' Electric Power Industry Reform Act of 2001 (hereafter, "the Act") created the Energy Regulatory Commission (ERC) with authority and responsibilities never before held by predecessor regulatory agencies. The overall objectives of the Act are to increase the efficiency of the Philippines electric industry and strengthen the regulatory processes that govern the industry.
The structure of the electric power industry in the Philippines includes an upstream National Power Corporation (NPC) and a National Transmission Corporation (Transco), both of which are currently owned by the government. (Note 1) NPC controls the dominant share of power production in the nation through direct ownership of generation plants and long-term contracts with independent power producers (IPPs). Transco owns and controls the backbone transmission grid throughout most of the nation which allows for the sale and delivery of NPC and IPP power to electric distribution utilities (DUs). Each DU then delivers electricity to the end-use retail customers within its monopoly franchise area. With a few minor exceptions, the DUs are delivery and retail sales operations and do not own power generation facilities. The Philippines is a nation with thousands of islands but the majority of the DUs are connected to one of three Transco backbone grids. Of the 139 DUs in the nation, 19 are privately-owned companies and 120 are electric cooperatives. Figure 1 provides an example of the geography and service areas for 16 DUs in the Philippines.
Among the many mandates placed on the ERC and the electric industry, the Act required ERC approval of unbundled rates; that is, separate rate elements for each of the functional service components of the industry: generation, transmission, distribution, and supply. (Note 2) Shortly after its inception, the ERC, released a pro-forma model for unbundling and ordered the filing of unbundled cost-of-service rates by all 139 distribution utilities (DUs). Because of an expedited time schedule mandated by the Act to process so many rate cases, the ERC did not have time to consider alternatives to traditional cost-of-service regulation and instead focused on the new mandate of unbundling the costs. These rate cases, however, provide the source of the data used in the development of the cost benchmark model herein. (Note 3)
The Act did grant flexibility to the newly formed ERC to implement alternative forms of regulation as a substitute to traditional cost-of-service regulation. Indeed, ERC has adopted new rules for price-cap regulation of the state-owned Transco, known as the "Transmission Wheeling Rate Guidelines" (TWRG), and the agency also adopted the "Distribution Wheeling Rate Guidelines" (DWRG) as an optional form of revenue-cap regulation for privately-owned DUs. (Note 4) Whereas the TWRG was mandatory for Transco, the DWRG is an optional form of alternative regulation for the DUs. …