By Ricardo G. Barcelona and Monalisa Dimalanta (Part 2)

Meralco, Cooperatives, and Asymmetric Profit Impact

The financial impact of disallowing inefficient system losses will be asymmetric. The current debate is framed by caps set by the Energy Regulatory Commission (ERC) of 5.50% since 2021 for private distribution utilities and higher limits for electric cooperatives. Meralco — the Manila Electric Company, the country's largest private distribution utility, serving over seven million customers across Metro Manila and surrounding provinces — has reported system losses of roughly 5.68% of throughput. After recognizing efficient technical losses and VAT pass-through treatment, the immediate profit exposure of efficiently managed utilities is materially different from that of suppliers whose losses exceed efficient benchmarks. Because the cap shifts costs above the threshold onto the utility rather than consumers, operators already near or above the limit face the greatest financial pressure to reduce losses.

Electric cooperatives — member-owned distribution entities that serve most provincial and rural areas outside Meralco's franchise — present the harder reform challenge because performance is uneven. Some operate near efficient-utility standards; others have combined high losses, weak governance, and limited accountability. Where losses reflect theft, poor management, or governance failure, those costs should not be shifted indefinitely to consumers. A system cannot permanently reward high losses with full cost recovery and expect efficiency to emerge later.

Financial discipline is restored only when economic incentives operate. Where governance failure makes a utility persistently inefficient, failure must be an available policy outcome: distressed cooperatives may be rehabilitated, acquired, merged, or restructured, and lenders that financed weak entities should bear appropriate losses through haircuts, debt restructuring, or asset-sale recovery. Cooperative reform should therefore be viewed less as an ownership debate and more as a performance-accountability mechanism: the institutional form must make losses visible, assign responsibility, and permit correction before consumers are asked to pay.

Governance Reform for Electric Cooperatives

The root of the governance problem in the cooperative model is the conflation of ownership and customer access. Membership is often a prerequisite to service, yet members frequently do not hold a transferable economic interest that can be monetized, disciplined, or used to effectively influence professional governance. Reform should unbundle customers' right to receive electricity from shareholders' ownership rights.

A credible reform pathway would, on one hand, respect and protect the right to access electricity and, on the other hand, convert cooperative membership into transferable shares, transform cooperatives into corporations governed under the rules of the Securities and Exchange Commission, elect qualified boards under existing corporate governance standards, and hold those boards and officers accountable for turnaround, restructuring, merger, or sale decisions.

Shareholder transition should be managed deliberately. Cooperative members-turned-shareholders will need practical financial guidance, basic investor protection, and clear disclosure of their options, but the reform objective should remain commercial accountability: shareholders, not regulators or political actors, should ultimately decide whether to sell, acquire, or hold their shares. Board candidates should meet minimum qualification standards, including independence and professional competence requirements consistent with modern corporate-governance practice. Strategic decisions should rest with accountable boards and management teams, not with regulators, local government units, or agencies whose role should be policy oversight rather than day-to-day commercial management.

A transition mechanism is necessary because restructuring will leave residual liabilities and stranded obligations. Those liabilities should be managed for a defined period by an entity with asset-sale and liability-resolution capability, similar to the Power Sector and Assets Liabilities Management (PSALM) Corp. — the state-owned entity created under EPIRA to absorb and liquidate the National Power Corporation's legacy debts and stranded assets — or a time-bound successor mechanism, while the long-term role of the National Electrification Administration (NEA) is reassessed and evolved once cooperative restructuring is substantially complete.

EPIRA Reform Priorities

EPIRA — Republic Act No. 9136, enacted in 2001 — restructured the Philippine power industry by separating generation, transmission, distribution, and supply, privatizing state-owned generation assets, and creating the institutional framework for competition. Two decades on, the analysis leads to one EPIRA reform principle: consumers should fund efficient delivery, while power suppliers and financiers bear avoidable failure. The reform agenda should focus on five priorities: benchmarked loss recovery, genuine wholesale-market discipline, accountable cooperative restructuring, contestable grid investment where monopoly performance fails, and a regulator built for market monitoring rather than passive cost approval.

First, WESM — the Wholesale Electricity Spot Market, the country's trading platform for electricity, which began operations in Luzon in 2006 and was later extended to the Visayas (2011) and Mindanao (2017) — should be reinforced as a wholesale market that discovers prices, dispatches supply efficiently, and exposes poor performance. Reform should preserve merit-order discipline while reviewing interventions that distort dispatch, pricing, or entry unless they can be justified by transparent reliability, security, or transition objectives. Preferential rules should therefore be tested against their market effect. Where low-cost renewable supply already wins dispatch on economic merit, preference may be redundant. Where preference is retained for policy reasons, it should be paired with transparent cost impact, grid-flexibility planning, and periodic review for continued relevance.

Second, cross-ownership and market-share restrictions should be reviewed through the same discipline lens. Because generation, transmission, and distribution are already structurally separated, remaining limits should be regularly reviewed and calibrated against actual competition, system scale, and investment requirements across Luzon, Visayas, and Mindanao, rather than preserved as static constraints.

Third, grid investment should be treated as both a reliability issue and a market-access issue. Where the incumbent transmission operator — the National Grid Corporation of the Philippines (NGCP), which has held the grid concession since 2009 under a 25-year agreement — cannot or does not serve efficiently, qualified alternative grid investors/operators should be permitted to build and operate transmission assets, creating competitive pressure that can accelerate investment and improve performance. The telecom liberalization experience under President Fidel V. Ramos illustrates the point: credible entry can expand consumer choice, force incumbent response, and unlock investment that monopoly protection may delay or prevent.

Fourth, ERC reform should separate market design, monitoring, and enforcement from adjudication. A regulator designed mainly as a quasi-judicial body is poorly suited to the continuous work of building competitive institutions, monitoring market conduct, and correcting failures before they become consumer costs. Independent regulation should focus on transparent rules, competitive outcomes, and protection from political or incumbent capture.

A successor model for ERC should emphasize institutional discipline, technical competence, and independence. The Monetary Board offers a useful governance analogy: a focused body with a clear mandate, professional standards, and responsibility for system stability. Applied to power regulation, that model would make ERC responsible for competitive market functioning, energy-system resilience, and consumer welfare, while quasi-judicial functions would sit with properly mandated adjudicatory bodies such as the special courts of the judiciary or the Philippine Competition Commission. Any institution inheriting adjudicatory functions must be properly resourced, organized, and staffed.

EPIRA amendment should therefore be treated as market architecture, not regulatory housekeeping. Each amendment should be judged by whether it improves price discovery, dispatch discipline, loss accountability, investment entry, and risk allocation without converting consumer protection into another form of incumbent recovery.

From Crisis Management to Market Architecture

The Philippines — where retail electricity rates remain among the highest in Southeast Asia — should move beyond episodic disputes over VAT, tariff components, and the mechanics of system-loss recovery. Those issues matter, but they are symptoms. The central reform challenge is to build a disciplined market architecture in which efficiency is rewarded, inefficiency is penalized, and consumers are protected from the cost of avoidable failure.

A workable architecture must therefore review the accumulated interventions that shape dispatch, contracting, procurement, and investment behavior. Each intervention should now be tested against one executive question: does it strengthen market discipline, or does it preserve cost recovery for underperformance?

Several critical questions need resolution:
a.) How should WESM evolve from a residual market for surplus volumes into the principal mechanism for price discovery and volume allocation?
b.) How should the benefits of different cost structures across fossil fuel and low-carbon technologies be shared between investors and consumers?
c.) Are rigid long-term supply contracts still essential to attract capital once a functional spot market is in place?
d.) Is competitive supply procurement reducing power costs as intended, or is it producing unintended cost and contracting distortions?

Resolving those questions is essential because the market cannot deliver efficient outcomes if surrounding rules distort price discovery, mute investment signals, or shelter weak operators from consequence. EPIRA revision should therefore be drafted as a market-design exercise, led by technical, financial, legal, and regulatory expertise with a practical mandate to make incentives work.

The sequencing should be deliberate: define efficient technical-loss benchmarks; deny recovery for avoidable commercial losses; require credible loss-reduction plans from high-loss operators; restructure or consolidate failing cooperatives; separate regulatory monitoring from adjudication; and allow competitive grid entry where monopoly performance is inadequate.

The closing test is straightforward: regulate markets when they fail; do not enable incumbents to recover the cost of avoidable failure. In monopoly segments such as transmission and distribution, regulation should use simple, transparent, and verifiable formulas that reward efficiency, penalize avoidable losses, and convert operating gains into affordable power. In competitive segments, policy should protect price discovery and allow inefficient assets to exit.

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About the Authors

Ricardo G. Barcelona, FEI, PhD, was elected as a fellow at the Energy Institute, United Kingdom, and adjunct professor at the Asian Institute of Management, Philippines. He was head of energy practice at SBC Warburg and ABN Amro/Rothschild, London, United Kingdom, a top-rated analyst for European Utilities, and a member of the leading energy privatization group. He authored ground-breaking books — Energy Investment and Dynamic Decisions — published respectively in London, United Kingdom by Palgrave Macmillan and World Scientific Publishing Europe. Contact him through LinkedIn.

Monalisa Dimalanta is the former chairperson and CEO of the Energy Regulatory Commission (August 2022-August 2025). She is presently a columnist at BusinessWorld, senior partner of PJS Law, a professor at the Ateneo Law School, and advisor at the Institute for Climate and Sustainable Cities. She was also chairperson of the National Renewable Energy Board (Philippines) from 2019 to 2021. Contact her through LinkedIn.