TAKEOVER OF ELECTRIC COOPERATIVES – DOE NEEDS TO ESTABLISH RULES…QUICKLY. (Part 1)

David Celestra Tan, MSK
19 July 2019

Part 1

The acquisition of the electric distribution franchises seems to have become the new frontier of the big conglomerates for insane profit growth after they have all conquered power generation, water, telephone, condo building, roads and highways, and soon airports. We are sure it has not been escaping their corporate growth strategists the 25% annual return on equity of Meralco that the ERC’s PBR rules are allowing. That acquiring the franchise for the Distribution monopoly is also the ticket to the generation monopoly.

Due to the absence of clear rules of entry and engagement, it is going to be a wild wild west. Rules of takeover have actually not been necessary although there have been attempts at take overs of electric cooperatives in the past. Until recently, the takeovers by the private sector were mostly welcome and/or necessary. Like those of troubled Pelco by Meralco, Aleco by San Miguel. Others were patient and civil – years of attempts by Aboitiz on Daneco, Meralco on Batelec I and II in Batangas. Aboitiz attempts at gaining a foothold in Ceneco in Bacolod, the 2nd largest electric coop in the country.  Meralco, as if they don’t already lord over 73% of Luzon, had announced its desire to expand its franchise area to neighboring provinces of Pampanga, Tarlac, Batangas, Mindoro, and rest of Laguna.

There has been no shortage of Governors and Congressmen willing to sell their electric coops to those willing to make a deal. Still the overtures remained subtle and civil….until recently.

Wake Up Call

The wake up call that maybe clear rules are necessary is the recent bold and succeeding attempt of MORE of the Razon Group to takeover private DU Panay Electric Company (PECO) that serves metro Iloilo. And after having whet their appetite, MORE is now going after the franchise for the main island of Palawan, one of the world’s most beautiful islands and hence a prestigious service area. Things however can get ugly unless rules of entry and engagement are established quickly by the government.

The Paleco electric cooperative in Puerto Princesa is under siege. Brownouts had reportedly gotten worse despite the NEA takeover. Government officials seem bent on making the coop look “ailing”. The City Government, a known ally of the Governor who is an open supporter of the disenfranchisement of Paleco,  had sued it and seeking the resignation of all the board of directors. Service will deteriorate and soon the world’s most beautiful island would also be one of its darkest….and hottest in the daytime without aircon!

The Epira Law of 2001 had tasked the Department of Energy to supervise the restructuring of the power sector. It is incumbent upon the DOE that ground rules for the entry of the private sector into the electric coops and/or the takeover of their franchises can be made in an orderly manner or in a way that serves the public interest.  After all, electric service is an essential public utility and every care should be taken by the government that they don’t fall into chaos…all in the name of a franchise takeover.

Existing Rules for Entry of the Private Sector into Troubled EC’s

Actually there are already rules for the entry of the private sector into really troubled electric coops that need private investment – This has been the Investment Management Contracts or IMC that was promulgated by the DOE with funding from the World Bank way back in 2004 a couple of years after the EPIRA law was passed in 2001.

This wonderful IMC program for an organized entry of the private investment and management sector to rehabilitate financially ailing electric coops however did not prove appealing to even troubled coops after they saw an “MC” agreement that took over Zambales Electric without an investment and collected fat fees for “management”. That deal stigmatized the IMC program. (We understand the Management Contract or MC option in the rules where there could be a management takeover without making an investment was surreptitiously inserted by a consultant and the DOE did not catch it)

One recent successful entry of a private investor under the IMC rules was the takeover of Zamboanga Electric Coop by Crown Investment Holdings and Desco in 2018. Zamcelco had been suffering from 22% systems losses and was P1.2 billion in debt. Crown-Desco pumped in P2.5 billion with P1.2 billion paying for debts and the balance of 1.3 billion for rehab and working capital. The new managers are working on reducing the systems loss down to the regulatory limit of 13% and have reportedly discovered that its power supplier WMPC has been charging it 50mw of capacity fees when its peak demand had been only half or 25mw. Now Zamcelco is seeking a P441 million refund.  Aboitiz apparently lost out in the bidding for the IMC and the Meralco group backed out early.

The Dangerous Trend Towards the Franchise Grab

It appears the IMC route is too inconvenient, too slow, or too unsure to some players. They have elected to go the “franchise grab” scheme through friendly members of the Legislative Franchising Committee.  Except they are trying to grab DU franchises that are not yet up for grabs.  One such case is More Reedbank application for the franchise for Palawan service area when the incumbent PALECO’s franchise is still valid for nine (9) more years.  And Paleco, while having solvable problems, is far from being ailing or bankrupt as defined in the applicable law which is RA 10531. The franchise application of More Reedbank is sponsored by two congressmen of Palawan.

Another case is the franchise application by a supposed farmworkers cooperative “GamboaHermanos” to provide electric service for the whole island of Negros. (Can you believe it!) Amazingly, the franchise application was approved in one reading according to the papers by the Legislative Franchising Committee.

People point at MOREs apparent success in taking over the franchise of PECO in Iloilo City by lobbying in the Legislative Franchising Committee and winning a Franchise from Congress. PECO’s case is different. First its Franchise was actually expiring, and the LFC can argue that it was just exercising its right to grant a franchise. Second difference is PECO is a private distribution utility and the rules for required rehabilitation under NEA Law 10531 do not apply.

 

Happy SONA!

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com.ph

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