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:

1. 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.
2. 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.
3. 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.

2. 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%.
3. 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.
4. 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.
5. 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.