Meralco’s Self-Dealing is Rent-Seeking on its Distribution Franchise. It is Abuse of Market Power and Harmful to Consumers.

David Celestra Tan, MSK
13 November 2016

Meralco has a franchise and monopoly for the distribution of electricity in the mega area of Metro-Manila and adjoining provinces. Its distribution franchise though did not come with the right to also monopolize power generation. Yet it is on its way to owning through its own generation company, Meralco PowerGen at least 90% of its energy needs. That it is able to do by rent-seeking on its distribution franchise.

Meralco, that serves the largest commercial and industrial hub of the Philippines, has a power demand of 6,000mw and energy requirement of 30 Billion kwh a year. That’s equivalent to 75% of the energy needs of Luzon and by now about 64% of the whole country. It is a lot of buying power! (pun or no pun!). A hulking 800 pound gorilla in the power sector.

Meralco is supposed to be a regulated public service monopoly operating under government fiat. As a Monopoly it is protected from many business risks. Forex and head-on competition in its service area. If it is hit by a typhoon, all repair costs are passed on to the consumers. Power is stolen from it or it loses due its own inefficiency and it is passed on to the consumers as systems loss. Its own expansion under the PBR scheme is charged to the consumers in advance. For all those market risk privileges and guaranteed legal return on investment, its government granted franchise requires that in return it serves the public interest at least cost and not abuse its market power.

Generation Gate Keeper

Its market power and domination by themselves are not evil. In fact they can be used for the public good if only Meralco would be satisfied with its guaranteed legal profits as a public service utility franchise holder and dedicate itself to providing electricity to the public in the “least cost” manner. This can be achieved only if it buys that market volume on arms length basis and transparent and competitive manner. But Meralco is a gentle giant that is not to be. Power generation is so lucrative especially if you negotiate with yourself. I guess the MVP Group cannot help itself. The Epira Law assigned the ERC regulators to protect the consumers and assure competitive and prevent market abuses and cartelization.

The Epira Law under Section 45 allowed Meralco to contract up to 50% of its energy needs with an affiliated company and the law is silent on whether competitive bidding is required although it can do so if it is faithful to its mandate for least cost power. Consequently, Meralco effectively got the power to choose who they will buy from. The veritable gatekeeper to their 6,000mw market power. And since they are the largest market in the whole country, effectively they get to choose who gets into the power generation business. That is true market power.

No Power Supply Contract, No Project. And they are rent-seeking to the fierce extent that even the Lopez Group never dared to go.

Wikipedia says Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity. In Meralco’s case it is getting unwarranted benefit in power generation projects that it awards for free as a result of its control of the Meralco market as the franchised distribution utility monopoly.

Power Generation Franchise

The foundation of any power generation project is the long term power supply contract. That’s the equivalent of a power generation franchise. In this case it is not the Congress giving the franchise but Meralco at its own discretion by its market power as the distribution utility buyer. Who is really the buyer of the generation supply, Meralco or the consumers? Technically it is really the consumers buying because they are the ones paying the negotiated rates. If something goes wrong with the contract, and if Meralco overcontracts, all the cost consequences are paid for the consumers. Meralco is only acting as buying agent for the consumers. It has serious conflict of interest in buying that power from itself.

Truly independent power generation companies take years and lots of research, pre-engineering, economic and financial packaging work, project development and marketing expenses to win a contract. In the case of Meralco, it can bring to the table the power supply contract in its back pocket because it is the distribution utility with full discretion to choose its projects and partners.

The “Carried Interest” Quid Pro Quo

In the power generation industry the party who brings to the table the power generation contract (or franchise) brings something very valuable and gets compensated either in cash or shares. Of course it has economic value. If its shares ownership of the project company, it is called “carried interest” or free equity. This can range from 15% to 25% of the project ownership. It is on higher side if the power supply contract got sweetheart terms and rates.

The MVP Group is obviously fully aware of this value. Perhaps it was one of the value propositions when the MVP group bought Meralco from the Lopez Group. It is evident that they intended all along to exploit this market power to dominate power generation since early on they already organized the not so subtly named Meralco PowerGen with an openly announced target of 3,000mw.

Given the MVP Group’s legendary “deal making” toughness, we can bet they will exact the highest free equity or economic rent from each Meralco contract they give out.

The MVP Groups ability to exact favorable and lucrative benefits from power generators seeking contracts with Meralco is rent-seeking on the public service distribution franchise that the government granted to Meralco. This is inimical to the public interest since the net result is the consumers would be paying more than what they should have without the economic rent to the MVP group.

In the case of electric coops in Mindanao, consumer groups there are complaining of their EC’s management and board of directors for negotiating high rates on generation contracts. In this case it is unlikely they will get carried interest but other benefits for their power to award the contract. Such is the evil that a serious CSP implementation will prevent.

In the 460mw expansion of the Mauban coal power complex, insiders is reported to have shared that the Thailand owners originally approached Meralco for a power supply contract with a price of P3.80 per kwh. By the end of the negotiations, the project became owned 51% by Meralco PowerGen with a new sweetheart price of P4.30 per kwh. The ERC approved it at P4.26 per kwh still higher than the 3.78 per kwh that the Northern Coops got for only 135mw.

The seven (7) midnight power supply contracts signed by Meralco totaling 3,551mw with five (5) partners are all controlled by Meralco PowerGen with 51% (except the 49% in the JV with Ramon Ang of San Miguel). Most of them were signed in one day on April 26, 2016 with similar language, pricing formula, and legal template.

Those 3,551mw coal plants will have a total project cost of about US$10 Billion (or Pesos 480 Billion). It will probably be financed 75% instead of the normal 70% because of its sweetheart prices and contract terms. So its equity of 25% will be equivalent to $2.5 billion. Do you think the MVP Group will invest 51% (Php 61.2 Billion) of that equity in cash as power generation investors are supposed to? They will not put that valuable power supply contract on the table for free. If they do, their vaunted deal-making shrewdness will not be legendary. Mostly like the MVP Group will only invest in the range of 26% out of the 51% it would control in the project companies. That’s a P31 Billion benefit or economic rent right off the bat.

So why does it matter to Meralco consumers?

Because rent-seeking and free equity or undue benefit will result to higher rates to the consumers. That $10 billion project will officially become $10.6375 Billion or it was a $9.3 Billion project that became $10 billion? That is equivalent to 6.375% of the project cost.

And that is only the cost to consumers of the rent-seeking privilege. Add to that the profits and overcharge due to the sweetheart relationship between Meralco and Meralco PowerGen, the total cost to the consumers is mind-boggling.

In fact even if the MVP Group does not get free equity, the fact that they choose their own power generation company to the exclusion of other non-affiliated projects to contract with Meralco and they negotiate sweetheart terms and prices is still rent-seeking according to the economists definition. Wikipedia also notes that rent-seeking is another form of corruption.

Rent-seeking is an abuse of market power and harmful to consumers.

Matuwid na Singil Sa Kuryente Consumer Alliance Inc.
Matuwid.org

David Celestra Tan is a CPA and utility economist. He was among the pioneers in the private power generation sector and a founder and former President of the Philippine Independent Power Producers Assn. (PIPPA). Towards retirement he is seeking to contribute his knowledge in power strategy and policy towards the national goal of competitive and consumer friendly power sector. His way of giving back to the community. Other than as a consumer he will not benefit financially, directly or indirectly, from any business with Meralco. Para sa Bayan lang po ito.

span style=”font-size: medium;”>Authors notes:

Rentseeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. (Investopedia)

Wikipedia says Rent-seeking is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity. The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free.[5]

Cutting Electricity Rates The Right Way

David Celestra Tan, MSK
9 July 2016

When the subject of reducing power rates come up, Meralco gratuitously suggests “reduce the VAT taxes”. When there was pressure to reduce generation rates, they suggested that the government should eliminate the taxes on Malampaya natural gas that First Gen is using.

This is a classic case of “NIMBY” self-interest, “Not In My BackYard” is an acronym used to refer to host communities’ position that power generation plants are okey to build as long as they are “not in my backyard”. In reducing power rates, Meralco’s wisdom seems “NIMPO”, “Not In My Pocket”.

What is worse than not cutting the country’s electricity rates? Cutting it the wrong way! The key is knowing where to look and be guided by the right conscience and motives.

Looking in the right places. Let us count the right ways.

1. Power Generation
As Meralco itself is saying, this cost component in your monthly electric bill consist of 60% of the total bill and therefore the logical place to start.

Most of Meralco’s power generation supply have been negotiated. About 60% from affiliated generators, 30% from non-affiliates and 10% from WESM and other suppliers. Among coal suppliers, the price Meralco pays to affiliates is 21 % higher than non-affiliates. In natural Gas, Meralco had been paying for many years 15 to 20% higher than the non-affiliated Ilijan power plant of Kepco although there has been parity among them lately.

In the last known comparable figures, Meralco negotiated with its affiliate Meralco PowerGen a rate of P4.35 per kwh for the 400mw Mauban coal expansion, In the same time frame, eight (8) electric coops in Northern Luzon banded together and bidded out a combined 135mw of power generation supply. They got P3.78 per kwh or 15% lower. That’s approximately P1.5 billion a year in higher pass-on charges to consumers. And that is one contract.

If we add the impact of their generous take or pay, downtime, and fuel rate provisions, the true pass on charges to Meralco consumers of these negotiated contracts are actually much higher.

And things will get worse because every single new power supply deal signed and announced by Meralco to the tune of 3,000mw are with “friends and family”, signed when the consumers were not watching during the elections.

If we truly want to reduce power rates, these negotiated sweetheart deals must stop. There is supposed to be a new DOE policy on requiring competitive selection process or CSP but it seems bedeviled in the implementation at the regulatory level.

President Duterte’s government can do something about arresting the rampaging monopolization of the generation sector. That should start with repealing Rule 11 of the Epira law IRR (implementing rules and regulations) that effectively redefined the anti-monopoly and pro-competition aspirations of the mother law that it is supposed to be implementing. It provided the cathedral sized loophole for monopolization of the generation sector. Its a farce and betrayal that had long been waiting for a champion to rectify. Someone will have to step up for the people.

There cannot be a true power cost reduction program if generation that is its largest component of the consumers bill are not reformed. Generation rates appear to be comparatively lower now that world fuel prices are low. Wait until coal and oil prices go back up and see Meralco’s rates pound the consumers. Let us not be misled. Let us act before it is too late.

Lack of a true competitive process at the bilateral contract level will not be compensated by putting wistles and bells like RCOA and RES.

2. Systems Loss Charges, P0.4273 per kwh in your July bill.
This is the cousin of the generation charge because its rise and fall depends on the generation rate. This is supposed to be limited to 8.5% and Meralco claims its average is under 8%. But the residential and commercial customers that pay 60% of the revenue of Meralco are being charged more than 10%. (Look at your bill in the back. Divide the systems loss charge per kwh by the generation charge per kwh)

Worse is that the computation is actually non-transparent under the methodology allowed by the old ERC. For many years the residential and commercial customers were being charged 13 to 15% systems loss! Now at 10% it is still higher by 1.5% than 8.5%. We estimate the difference is about P500M to P1 billion a year.

ERC’s loose methodology on systems loss computation must be revised to make it more transparent and eliminate opportunity charges. And the limit has to be 8.5% to all consumers. The devil has been in the averaging.

3. Transmission Charges, now at P0.8398 per kwh
The current national concessionaire, NGCP, and joint venture of the China Grid and SM, is entitled to a fair return on their investments. They have a big financial, technical, logistical, and operational challenge in their hands keeping up with the growth of the economy and the unwieldy power generation development.

What should not belong to NGCP is the power to establish rules and transmission development policy. The Epira law provided that this will stay as a function of the government agency Transco and not sold as part of the concession. You cannot have one private make the rules and be the beneficiary of the rules. This was a consequence of a glitch in the wording of the NGCP Concession law that confused the right of NGCP to act as System Operator and right to operate its system. The former is a rule maker. The latter is a technical and operational function.

This conflict will result to higher transmission rates and will result to a disjointed transmission development plan. Let NGCP concentrate on being a builder and operator of the transmission system. Transco should even step up and handle the right of way issues which a government agency can do better.
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The devil that is PBR.

Technically these are supposed to be the only revenues of Meralco as the electricity distributor. Everything else is pass on that Meralco likes to say they only act as collectors.

These charges are determined under a methodology called “Performance Based Rate” making or “PBR”. This methodology is actually a violation of the Epira laws provision in Section 25 that “retail rates” must be based on “full recovery of prudent and reasonable economic costs incurred”. PBR allows Meralco a return on projected investments that under the ERC rules do not even need to be actually “incurred”.

We estimate that this results to an overcharge of P0.50 per kwh on distribution wheeling rates or more than P10 billion a year.

Consumer groups’ appeals to the ERC to review this had been falling on deaf ears. This is another of those anomalous charges that any true effort at reducing rates will have to address.

5. VAT Taxes
The EPIRA law of 2001 exempted power generation from VAT taxes in evident pursuit of the law’s declared policy objective of making the Philippines globally competitive. When the GMA government went cash strapped after the 2004 elections, the EVAT law was passed where power generation is imposed a 12% VAT, increasing the electric rates by P0.67 per kwh. This made the country even more uncompetitive as a manufacturing country. May be the new government can balance this by reducing the 12% VAT to say 6% to kind of share the burden of supporting government between the electric consumers and the other sectors of society. This will reduce electricity rates by 0.33 per kwh, not small peanuts.

6. Universal Charges for Renewable Energy – FIT-ALL. Now at 0.1240 per kwh
After snowing the consumers with a “promotional rate” of 0.045 per kwh at the start of the feed-in tariff program, it jumped to the current 0.1240. Even at that level, many RE power producers are not being paid their full FIT rates. The current confusion in the RE sector and the strong lobby of the solar groups and the NREB for more subsidized solar power will easily push this to P0.25 per kwh.

This doesn’t count the extra transmission charges and NGCP’s purchase of frequency regulating reserves to manage the grid disruptions caused for the intermittent RE, solar and wind. Hopefully the leadership and patriotic grounding of new Energy Secretary Al Cusi can put a rhyme and reason in this wayward program. Clean energy is not necessarily intermittent RE.

7. Universal Charges for Stranded Contracts UC-SCC now at P0.1938 per kwh
These charges need closer scrutiny and some rationalization. The component that resulted from failed government policies of the past should not be dumped on the consumers. The component for failure of PSALM management should similarly not be passed on to the consumers. There needs to be a clear accounting of the proceeds of privatization that are supposed to pay for all these. These charges appear to have gone beyond the true stranded contract costs.

8. Universal Charges for Missionary Subsidy, now P0.1561 per kwh
The abuses in this program have been going under the radar, first because they are in the “remote” areas and secondly they wave flag of missionary. This started at 0.035 per kwh. A bidder in one island that won with a bid of P9.38 per kwh, jacked up the rate to 12.80 per kwh even before the project is started. In another island, the same bidder won with a bid of P7.15 per kwh but now currently getting P13.00 per kwh, or an increase of P5.85 per kwh in missionary subsidy. Now there are more negotiated bids through another farce called swiss challenge bidding that the DOE has been tolerating.
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The place to start is the DOE itself that recently endorsed a new 25mw contract in an island that has only 40mw in demand and with existing power supply of 55mw already. Reportedly the swiss challenge bidding was held without prior DOE approval as provided for under the CSP rules, but the DOE nonetheless issued a certificate of compliance of the contract to the CSP rules.

All these things are increasing instead of decreasing the missionary subsidies that are being passed on to the national electric consumers.

9. WESM rules ,br>The WESM price is the sword of Damocles that hang over the head of Meralco consumers. This market needs to be a reduced to a market for excess supply and demand. The current rule on determining “market settling price” defined as the highest price dispatched for the day is anti-consumer. Offerors must be paid as they bid.

Unless reformed, this can periodically harass the consumers with high market rates.

10. Line Rental Charges
This is one of those charges that are passed on to the consumers but kind of mysterious. This appears to be line congestion costs. Deserves close scrutiny and rationalization.

Cause oriented members of the Matuwid na Singil sa Kuryente Consumer Alliance actually has a P3 Campaign seeking to reduce Meralco’s rate by P3 per kwh. At that time, Meralcos rate was P12 per kwh. The organization hoped to reduce generation rate by P1.50 per kwh and the other P1.50 to come from the other charges to consumers.

The current reduction in the generation charge by more than P1.50 is not a result of making the sector competitive but by the lucky drop in the world oil and fuel prices. In other words, when world oil normalizes, we will see the generation rates of Meralco to go back up.

Let us cut the power costs in the country in the right way!

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org

Comments on the Draft Implementing Guidelines of Section 3 of the DOE Department Circular No DC2015-06-0008

 

 

Page 8

Where does an 800 lb Gorilla Sit? Anywhere it wants to!

By David Celestra Tan
Co-convenor, Matuwid na Singil sa Kuryente Consumer Alliance Inc.
18 August 2014

Wikipedia says “800 pound gorilla” is an American English expression for a person or organization so powerful that it can act without regard to the rights of others or the law. The phrase is rooted in a riddle:

“Where does an 800 lb. gorilla sit?”

The answer:

“Anywhere it wants to.”

This highlights the disparity of power between the “800 lb. gorilla” and everything else.

The term can describe a powerful geopolitical and military force, or, in business, a powerful corporate entity that has such a large majority percentage of whatever market they compete within that they can use that strength to crush would-be competitors. (The metaphor includes an inherent bit of hyperbole; the highest weight yet recorded for an actual obese gorilla is 600 lb (270 kg). The average weight is 400 lb.)

A truly competitive power market cannot exist with the presence of an 800lb gorilla in the middle.

Sadly such is the situation in the Philippine power sector that the Epira law tried to deregulate with aspirations for a competitive market, the holy grail of market-based power cost reduction.   There was such a 500lb gorilla in the old structure that was already dominant enough and had the motivations and political and financial wherewithal to assure that the new Epira Law that was passed in 2001 allowed it to become an 800lb gorilla in the market place. And they succeeded under a profligate government that oversaw the implementation of the deregulation and privatization until 2010.

The Epira I Law has been a fiasco for the government and the consumers. It has been less its imperfections but its imperfect implementation. Enough though has been said about that.

When Meralco got its Mega Franchise renewal in 2003 officially consolidating the original Lopez areas with the 100% additional areas annexed by the Marcos regime, it became the 800lb gorilla in the power market place. The watered down versions of cross-ownership and anti-monopoly and anti-competitive provisions of the Epira Law insured that the giant gorilla is free to roam the power landscape and to impose its will on all the players especially on the captive consumers, who are charged the negotiated amount they want, with the supposed regulators who should protect the public, appear to be merely rubberstamping the rate setting methodologies and Meralco’s rate applications.

It would have been good if as part of the strategy to reform the power sector and create structural competition, that the government only gave back to the Lopez group their rightful original Meralco franchise area, and auction off to another franchise holder the Martial law areas annexed by the government like big parts of Batangas, Laguna, Quezon, Bulacan, and Rizal.A bidding for Meralco II would have generated a lot of revenue for the government andcreated geographical competition in the distribution market. But that’s water under the bridge.

As the 800lb Gorilla controlling 74% of the Luzon power market and representing the largest and most viable market for power generation suppliers, everyone had to kowtow to Meralco. And they cannot openly compete with them because Meralco even under the Lopez Group had their own power generation business, courtesy of Section 45 of the Epira Law.Essentially, whoever controls the 800lb Meralco gets to say who gets to play in the power generation market for the long term.The Lopez group got back big time into power generation through the 1500mw First Gas Power, sustained in its early start up two years by the PPA charges. That was parlayed into EDC, now the largest geothermal generator in the country.

(Meralco, then and now, likes to say with a straight face that it doesn’t make money in power supply and only acting as collector).

Nonetheless, this market dominance and cross-ownership only matter because of the adverse impact on the consumers cost of electricity.

While there are technically many players it has become a Meralco fraternity, cooperating and appear to be coordinating in the market in their market trading schemes. The Energy Regulatory Commission that was supposed to provide the public a level of protection against abuse and manipulation and the Philippine Electricity Market Corp. that is supposed to do the same in the Spot Market, have failed the public.

This is worse than taxation where at least the peoples representatives vote before new taxes are imposed and the process of collection has accountability and level of control and transparency.

Not the current power sector. And it is getting worse for the country and consumers.

The disruptive power of an 800lb Gorilla extends beyond the free interplay of supply, demand, and competition in the power sector, and into the socio-political, governance, and media sectors of the nation and people.

That 800lb Gorilla had actually been sold and apparently part of the sales pitch was it can actually be turned into a 1000lb Gorilla and even create another 800lb Gorilla in the generation sector. It should be noted that none of the estimated P50 billion paid to acquire the majority shares of Meralco was infused to the utility itself but to its previous controlling shareholders.

Meralco is now being run as a pure for-profit organization, not the public utility provider that it should. By their stock market pronouncements, its profit goals is maximization without regard to the limits in a fair investment and fair return for a regulated public utility.  It announced it is expanding into the provinces evidently eyeing electric cooperatives specially Pampanga, Zambales, Tarlac,  Batangas, Quezon, Palawan, and Mindoro. (it can become so big, Wikipedia will have to invent another weight class for the market Gorilla!)  Epira I is dying if not yet dead.

Realistically, we cannot do anything about Meralco’s market dominance as a distribution utility. Too late for that (for now!).  We at least should not allow it to become a King Kong.

The only thing we can really do now is to kneel down and pray for divine intervention, that this giant gorilla can somehow be séanced with a true public service epiphany and  become a gentle giant.

This it cannot be if it also becomes a giant gorilla in the power generation sector.

So what is worse than having an 800lb gorilla in the distribution market?

Another 800lb Gorilla in the power generation market.

And what is worse than that?

When the two of them are brothers and sisters!

And what is even worse than that?

If the two gorillas can morph into one.

Growing another 800lb Gorilla in the generation sector.

That the Metro Pacific group fully expected to expand big time into power generation using its control of the Meralco distribution market was clear from day one of their negotiations with the Lopez group and most likely part of the Lopez sellers pitch. They cited in their website the opportunities in the generation sector as part of the reason for the majority stake in Meralco.

Sources in the other independent power generators including the acquirers of the large hydro projects shared that they approached Meralco about long term contracts but it was clear Meralco is only looking at them as short and medium term suppliers.   Metro Pacific immediately formed Meralco PowerGen with declared intentions of building a 3,000 mw portfolio of coal and natural gas projects, which are undoubtedly majority owned by it. The self-negotiated power supply contracts are for 25 years with sweetheart prices and guaranteed payments, running or not.

This would be on top of the power generation portfolio of the Lopez Group that is enjoying sweetheart contracts with the Meralco that they used to control. In addition to the 1500mw Sta. Rita and San Lorenzo natural gas plants, they are adding 500mw San Gabriel and perhaps aiming to make it 1,000mw.

Between Metro Pacifics ambitions for a 3,000mw power generation projects and the Lopez groups 2,500mw, the two groups will monopolize 85% of the 6,500mw Meralco within 10 years. All with negotiated power supply contracts.

Given the legal and political realities of the situation, it may be too late to avoid the new Meralco getting significantly into power generation. The 400mw Mauban expansion is far along and maybe also Redondo (600mw) and Pagbilao (500mw). Realistically these projects may also be needed to assure power development from 2015 to 2016.

But maybe Meralco can be convinced to limit themselves to this 1,500mw (25% of Meralco’s power demand), keep the negotiated rates and terms in the P4 per kwh range,and cooperate in putting the country on the road to a truly competitive power generation sector with a controlled level of cross-ownership.Sort of being a cuddly 400lb gorilla instead of an overpowering and menacing 800lbs.

The rest and Meralco’s future needs can be subject to open competitive bidding.

If the profit margins in the regulated distribution business is too limiting for the corporate profit objectives of Metro Pacific perhaps they can choose to be really big in the unregulated power generation sector and give way to another business group who can be happy with the guaranteed but regulated profits in the distribution side.Profits that are based on fair investment, fair return.

Epira I dismantled the monopoly of Napocor in power generation AND transmission. Now what is emerging is a private sector monopoly in power distribution AND generation. Back to where we were before martial law and further away from a competitive power market that will bring down power costs to the consumers. Are we coming full circle?

There is a need for the government to take a stand on this matter. It is chilling that there is no quiver whatsoever from the government side on this issue of monopolization, unbridled cross-ownership, and the continuing lack of true competition in the generation sector.  The DOE, ERC, Malacanang, Congress. Nada?

Why do we think a giant gorilla will impose its will and get away with high rates to the consumers?

Because they can!

Future Articles:

Yes, Meralco Can Be A Gentle Giant (Alternate Link here)
Revenge of the Consumers – Options Now to Reducing Power Costs

Meralco Can Be a Gentle Giant of a Utility

David Celestra Tan
14 September 2014

Electricity Consumers of Metro-Manila and the Calabarzon area will have to reconcile with the reality that we have a distribution utility that dominates 74% of the Luzon electricity use and 62% of the national consumption.

This size and domination by itself is not necessarily bad for the consumers. In fact the 800lb giant can use its market size and power to serve the best interest of consumers.

Meralco can be a giant of a utility that is gentle to its customers in a true pursuit of its obligation as a public service utility franchise holder to provide power in the least cost manner.

  1. It can use its tremendous market power by exacting the best generation pass-on cost for its customers by doing the following:

a.  Subjecting to open competitive bidding its power supply contracts. This will open the market for more independent private investments in power generation, more competitive technologies, and more competitive rates.

b.  Proactively strategizing its power supply and energy mix with focus on a continuing search for lower cost solutions for its customers. They should strategize base-load, intermediate, peaking, and reserve power. They would be working hard to integrate the approximately 2,000mw of existing cheaper and cleaner hydro power facilities in Luzon in their energy mix and would push for development of all feasible hydro resources. Meralco would be working hand in hand with the DOE in the search for “best for the country and consumers” power development.

c.  Meralco would be diligently administering its power supply contracts to avoid undue costs to the consumers. They would be monitoring downtime compliances and make the IPP’s responsible for replacement power. They would be paying them only for actual energy delivered and not when they are not operating. They would be involved in fuel procurement and assure adherence to fuel efficiencies.

In November and December 2013 the generation rate of one of its coal generators spiked by 20% when there was no evident upheaval in the international prices of coal. And Meralco did not even raise a hoot. They would be using their market power to insure that their coal IPP’s would step up generation and capacity availability during the Malampaya natural gas shutdown. They would be insuring that the procurement of the replacement distillate fuel by its three natural gas power suppliers were at truly competitive manners.

d.  By doing all these, the giant Meralco can actually reduce its average generation cost from the current P5.50 per kwh to P4.00 per kwh within 3 to 4 years.

They would be reducing their true systems loss charges to residential and commercial consumers which is their biggest market segment, down to 8.5% instead of the current 12 to 14%.

  1. Meralco would be judicious in their distribution charges starting with a fair accounting of rate base and would ask for rates only on investment incurred, as opposed to the current PBR practice where their rate counts promised investments not yet made and may not actually be made.
  2. Meralco investors would recognize that its business is a public service utility that has been granted a government market protection as an electricity distribution business monopoly in its franchise area. Cost of power is critical to the standard of living of its customers and the business competitiveness of the country. In return for such protected market monopoly, it must be satisfied with the fair and reasonable return on its investments incurred with straight forward accounting of assets base.
  3. Overall it must conduct business on arms-length basis, devoid of conflict of interest, with singular focus to insuring the best service and least cost for its captive customers.

The new owners of Meralco may have a different profitability expectation from the business model of the previous owners and hence have valued their purchase price of Meralco at those lofty levels. Maybe they can rework their investment economics on the distribution side if they are allowed a level of investment in the generation side to say a compromise limit of 25% of price competitive generation.

Actually, Meralco is not alien to doing what it takes to win customers, help them reduce their energy costs, and overall treating them well. They have been showing an impressive amount of ingenuity and innovation in taking care of their industrial customers, who are now charged a rate of P9 per kwh with a systems loss charge of only 3.5%, compared to P12.00 for its captive residential and commercial customers and a systems loss of 12% instead of 8.5% even in the highly concentrated areas of Makati, Manila, and Ortigas.

Of course by being a straight forward public service utility that is dedicated to serving the customers in the least cost manner and doing business on arms length basis, the stockholders of Meralco may not exact as much profit at the expense of the consumers. As a protected franchiser with monopoly in power distribution, they are nonetheless guaranteed a fair and reasonable return on investment, the moderation of which those investing in Meralco will have to accept as a business model coming in.

Investment here however can be viewed two ways. Is it the investment in the utility itself by the stockholders or it is the amount of money they agreed to buy their control of Meralco which most likely factored in a premium for projected opportunity profits in rate base and power generation sweetheart contracts. Somewhere there is a balance where investments in the utility itself can be allowed a regulated fair and reasonable returns without abusing the customers. As DU, Meralco should get its returns from the distribution services and incurred investments and should not be from making money in power generation where their self-negotiated contracts would be in conflict with their obligation to the customers to supply power in the least cost manner.

The opportunity to make money is as sacred a right as democracy and religion. It is actually an engine that is a critical part of what makes civilizations and societies dynamic. However, we must make our money the old fashioned way, by earning it, especially for those who elect to be in the public services sector where the customers are captive and do not have a choice. In my book, “earning it” in the distribution utility business means making money while providing a very good service at a truly competitive price, something that can be assured only if its subjected to open competitive bidding in the market place.

Meralco can be a gentle giant of a utility if it wants to. Let’s hope we can see a transformation in our lifetime.