power and water

[Vantage Point] Lawmakers push for Meralco’s early franchise renewal

Val A. Villanueva

This is AI generated summarization, which may have errors. For context, always refer to the full article.

[Vantage Point] Lawmakers push for Meralco’s early franchise renewal

Alejandro Edoria

Meralco serves consumers in Metro Manila, Calabarzon, Pampanga, and Bulacan. It provides service to all major electric cooperatives and distribution utilities.

The Manila Electric Company (Meralco) is seeking the early renewal of its franchise. It is getting the support of the business sector and three legislators from the lower chamber: Albay’s 2nd District Representative Joey Salceda and Cagayan de Oro 2nd District Representative Rufus Rodriguez, and former House Speaker Lord Allan Velasco.

The move to extend the power company’s legislative franchise ahead of its 2028 expiration is in conformity with the Section 24 rule of the House committee on legislative franchises which says that the proper time to seek for franchise extension is within five years. Meralco is the country’s largest private sector electric distribution utility company.

Salceda’s House Bill (HB) 9793 seeks to widen the extent of Meralco’s operations, a provision that is not covered under the company’s current franchise, Republic Act No. 9209 which was signed into law in June 2003. Other bills seeking the early extension of Meralco’s franchise are Rodriguez’s HB 9813 and Velasco’s HB 10317.

Salceda, chair of the House committee on ways and means, stressed that the franchise of the Manny V. Pangilinan-run power firm deserves to be extended beyond 2028 for another 25 years or until 2053. He reasoned that the company “has complied with the conditions of the franchise law…and that renewing [the franchise] for another 25 years is “good for power consumers and the economy in the long run.”

To sum up their respective arguments, the three legislators in effect believe that ceding the franchise renewal would allow Meralco’s growing number of customers to continue enjoying sufficient, reliable, and uninterrupted electricity service, while underscoring the company’s crucial role in electrifying not just households but also industrial and commercial customers which drive the country’s economic progress. With said extension, they assert that Meralco can implement long-term projects needed to further improve its service to Filipino consumers.

The business groups supporting Meralco’s franchise renewal are: the Management Association of the Philippines, Makati Business Club, Federation of Philippine Industries, Philippine Retailers Association, Private Hospitals Association, Bankers Association of the Philippines, Semiconductor and Electronics Industries of the Philippines, IT and Business Process Association, Philippine Iron and Steel Institute, Society of Electromechanical Contractors and Suppliers, British Chamber of Commerce, and AKO-OFW.

Slow it down, please

The Makabayan bloc wants the House to scrutinize the three bills with an eagle eye. It  cautions legislators not to rush the process since the franchise is not expiring anytime soon. Gabriela Representative Arlene Brosas asked House colleagues to carefully study the bills because doing so would give the company enough time to fully answer questions, issues, and controversies hounding its operations.

Brosas cites the suffering endured by some 7.63 million Meralco subscribers due to high electricity rates and unstable power supply. She emphasizes that in recent days, the country has suffered insufficient power leading to power interruption. Citing Meralco’s mandate under RA 9209, she says that Meralco was to supply power without interruption and at the least cost. The same law provides for franchise revocation for violations.  “Power rate increases are unabated, and these have a major impact on Filipinos especially those who have very low pay…. There’s always an excuse for the rate increases but the government is not doing anything to lower them,” Brosas says in Filipino.

Meralco serves consumers in Metro Manila, Calabarzon, Pampanga, and Bulacan. It provides service to all major electric cooperatives and distribution utilities or ECDUs. Salceda says outages suffered by the average Meralco consumer totals to “mere minutes in an entire year versus days or weeks’ worth of blackouts for other neighboring ECDUs.” 

The distribution company covers 39 cities and 72 municipalities. Salceda is grateful that with Meralco’s “bargaining position and strong financials, it is able to acquire power supply agreements in full compliance with rules on competitive selection.” He points out that systems loss charges by Meralco are “likewise among the lowest in the area – a product of the P220 billion that Meralco has invested over the past 20 years to enhance its electric service.”

Sta. Rosa City Representative Dan Fernandez however cites a number of reasons Congress should think twice before prematurely extending Meralco’s franchise. His main beef is related to higher power rates. He notes that Meralco’s power rates went up because of its non-adjustment of the weighted average cost of capital (WACC), which remains high at 14.97%. 

On November 7, 2023, Fernandez had already called out Meralco’s use of its WACC  in a privilege speech, alleging that the exorbitant WACC is being passed on to its customers. The WACC fixes the return a company should be getting to ensure the viability of its investments. A higher WACC would require the company to make more profits to ensure the sustainability of its operations. A lower WACC means that the company need not make too high a profit to sustain its investments.

Since 2011, Fernandez says, Meralco has used the WACC as basis for rate of return of investment instead of return of rate base (RORB) which would have made power rates more reasonable.  He claims that Meralco’s 14.97% WACC set in 2010 was no longer accurate and should just be reduced to only 9.23% to ultimately lower the electric bills of consumers.

“They have not computed their weighted average cost of capital…never, since 2015 up to this year (2023). They have not computed their weighted cost of capital which was set at 14.97%. That is the percentage of their profit they base from since 2010… Since 2015 up to now, the ERC [Energy Regulatory Commission] has not recomputed, and that was due to the Asian crisis in 2010. But we did not have any financial crisis in 2014 and 2015, and the risk rate of the country, their financial requirements, indicators, are telling that the weighted average cost of capital is so low,” he says.

Cross ownership and EPIRA

Perhaps present-day regulators and legislators have lost sight of the harm done to the energy sector by the Electric Power Industry Reform Act. The EPIRA, passed on June 8, 2001, was supposed to be one of the landmark pro-market reforms envisioned to result in dependable and inexpensive electricity rates in the Philippines.

And yet, Section 34 of the EPIRA explicitly institutionalized the passing of every cost of utility companies even if such cost was caused by a faulty business decision on the part of the company, their own operating costs, and other costs not even related to power actually consumed by end-users.

On June 30, 2022, SAGIP representatives Caroline Tanchay and Rodante Marcoleta introduced HB 174 which seeks to prohibit cross-ownership among distribution utilities and generation companies. The bill intends to amend the current cross-ownership limitations in the EPIRA which some say have been circumvented by private power firms. The current provision promotes anti-consumer self-dealing transactions, encouraging sweetheart deals, and even more so under the current legal regime where the EPIRA does not prohibit cross-ownership between and among the power generation and distribution sectors. HB 174 remains in limbo to this day.

To me, this vile provision was sugarcoated in such a way as to make it easily digestible for consumers. And this is where EPIRA failed.

I vividly remember intense lobbying against cross-ownership that the law became toothless in the end. What was passed was only the prohibition of the transmission company from owning generation and distribution assets.

Let’s take a closer look at Section 45, which is supposed to promote market competition and preclude harmful cartel and market control. What resulted instead was that distribution utilities (the main consumers of power) were allowed to be part of mutual supply contracts with affiliated generators of up to 50% of their power requirements.

Earlier in the crafting of the law, a compromise was proposed calling for existing power-generating companies to be allowed up to 30% of generation to be bought from a sister company. Then Lopez-owned Meralco was lobbying for 35%. Why the provision was restored to 50% in the last two days of concluding the law at the bicameral conference committee remains a mystery to this day.

Section 45 therefore did not decree fair bidding for bilateral contracts. What resulted from this was the sweetened power supply agreements between those who control the demand of distribution utilities and the supply of their friendly generating companies (GENCOs).

This is a double-edged sword that slices the consumers two ways: the power cost and terms are not too competitive and truly independent power plant investors face barriers at entry. The provision limits power supply to those who control the distribution utilities, and discourages other supply and competitive options that could benefit the consumers.

Consumer groups are saying that while legally acceptable under EPIRA, Meralco buying power from its own power generation company does not speak well of the company, now under the MVP group. Records show that in February, Meralco reported that its net income in 2023 rose by 34% to P38 billion from P28.4 billion in 2022. The company attributed its financial gains to higher than normal energy sales and positive revenues from its power generation businesses.

Its Consolidated Core Net Income (CCNI) of P37.1 billion in 2023 is also a record. It reported that 64% of its CCNI came from its power distribution business while 26% came from its power generation business under Meralco PowerGen Corporation (MGen).

MGen chipped in P9.7 billion to Meralco’s CCNI, 80% higher than the P5.4 billion posted in the same period in 2022, driven by profits from PacificLight Power Pte. Ltd. (PacificLight), the recovery of Global Business Power Corporation (GBP), and the contribution of MGen Renewable Energy, Incorporated’s (MGreen) solar power projects. As of end-2023, MGen had a combined power generation capacity of 2,240 megawatts in the Philippines and in Singapore.

Meralco spokesperson and vice president for corporate communications Joe Zaldarriaga in a Viber message to Vantage Point says: “All the allegations thrown to Meralco on high rates, ownership and anti-competitive behavior were never proven, and as a highly regulated entity, it has always been strictly compliant of the laws and regulations governing its franchise. And while many of those questioning the renewal of Meralco’s franchise claim to speak for customers, numerous business, industry and customer groups have also chosen to speak for themselves and expressed their support by submitting their respective endorsements to the House.” – Rappler.com

Val A. Villanueva is a veteran business journalist. He was a former business editor of the Philippine Star and the Gokongwei-owned Manila Times. For comments, suggestions email him at mvala.v@gmail.com.

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