CounterPoint: Meralco: Smarter Than Most of Us… and Outsmarting the Government?
David Celestra Tan, MSK
10 December 2020
These are our clarifications to some of the noteworthy points raised by Mr. Ben Kritz in his column.
1.Viewpoint:
“First of all, the allegations were originally raised back in August, but received virtually no attention at that time. ….The entire issue was comprehensively ignored by every other media outlet.”
Clarification 1:
Truth unnoticed is still truth
MSK’s findings and advocacies are based on data and facts that are interpreted and correlated according to a deep knowledge of the industry, shaped by disciplines that need to be brought in to shed light on why there seem to be overcharges, and guided only by the true desire to protect the public interest.
The validity of issues and their merits are intrinsic. We only mean to bring these issues to the attention of the ERC and the Government and the Public in the hopes that they can be addressed.
2. Viewpoint:
“If one goes through the financial statement and the accompanying accounting and audit notes, it quickly becomes obvious that the supposed discrepancy is simply a function of normal methods of aggregating revenues, and contract balances, assets and liabilities.
What Meralco reported in its audited financial statements is correct, and what it reported to the ERC is also correct; that the two figures are different is because they are generated by two different sets of accounting rules: one applicable to corporate accounting and one applicable to regulatory reporting. Neither of which is, as far as I know, taught in high school.”
Clarification 2:
MSK had recognized in its report that the purposes of audit for financial statements as done by SGV may be different from regulatory rules. In fact, on the discrepancy of purchased power in 2019 when Meralco reported to ERC their total purchase of P174.859 Billion but reported in its annual reports that it sold P241.092 billion we have considered that the “purchased power” in the audited financial statement as reflected in the annual report included not only the cost of buying power but may be including the transmission charges from NGCP, an big item that we did not see reported separately in the financial statements. We can grant that this could be part of the explanation for the discrepancy in the amount of power purchases.
What needs to be explained is the volume of energy purchased and sold. That is quantity in kwh. To ERC, Meralco reported for 2019 33.565 Billion kwh purchased from its power suppliers including WESM, but reported 46.871 billion in its Annual Report, a 13 billion kwh difference. Why? Should be the same truth, whether to regulators or auditors. Why is there a discrepancy and why was it being done?
NGCP, the transmission services company, could not deliver more power in kwh to Meralco than what Meralco purchased. It is possible that Meralco could be buying power from embedded sources that don’t go through NGCP’s system. However, that volume cannot be too big.
There are not supposed to be discrepancies, and if there are, especially of this magnitude, prudence on the part of the regulators, policy makers, and the fourth state that is the media, and all stakeholders should take care and demand to know more in the public interest. Most likely, it is a consequence of something being hidden, a symptom that should not be ignored without peril. As Mr. Kritz said, where there is smoke, there is fire.
The quantity of Meralco’s purchased power cannot be different from regulators and from auditors. Meralco is a regulated business. These numbers are necessary to insure that they not making more returns and profits than allowed. An ERC approval does not mean that the rates are being implemented by Meralco properly and honestly at any given year, or even month.
3. Viewpoint:
“The version of Meralco’s 2019 annual report that I downloaded from the company’s website was complete and up to date, including all the required commentary from the company’s independent auditors. If the MSK “researchers” (again, I’m pretty sure this is just one guy) were, for some reason, unable to obtain a piece of information that was considered key to their conclusions, they ought to have waited until that information was available. That’s something I learned in high school, but education may be different here.”
Clarification 3:
MSK wanted to look at the audited financial statements of Meralco for 2019 although the audited figures were already reflected in the 2019 Annual Report.
What we were interested in checking are the Notes in the audit report that explain each item in the financial statements. In our case, how the sales and purchase power cost are computed and what are included in them.
Let us show you what we mean:
a) In Audit report of 2018
Purchased Power Cost (generation costs) – This is where the SGV Audit report and its notes were curiously kind of circuitous and vague.
Note 23 that is supposed to explain Revenues and Purchased Power only said “The Company disaggregates its revenue information in the same manner as it reports its segment information.”
b) “Segment Information” in Note 6 in turn says
(1) Each operating segment of the MERALCO Group engages in business activities from which revenues are earned and expenses are incurred (including revenues and expenses relating to transactions with other business segments within the MERALCO Group.
(2) The Power segment consists of (a) electricity distribution, (b) power generation and (c) RES. Electricity distribution – This is principally electricity distribution and supply of power on a pass through basis covering all captive customers in the MERALCO
c) The SGV Audit Report went to great lengths to discuss the power generation activities of the Meralco group and the web of sister companies and joint ventures but did not explain how the Power Generation Cost figure that they were certifying to in the audited statements, was audited and verified. SGV auditors however will not go out on a limb just like that. I am sure SGV was provided by Meralco power generation invoices and even payments totaling P241.032 Billion for 2019. Something good enough for SGV to accept. We are just wondering why they could not have certified to their verification so clearly.
d) We wanted to look at the 2019 Audited FS to see if they have a better explanation than 2018. To explain, the accuracy of Sales, Purchases, and Profits are material factors in the accuracy of the financial statements. And in the case of Meralco, how much they are really making as a regulated entity is relevant to the consumers. Sales of P300 Billion and Purchases of P241 billion are too significant and needs solid documentation and audit. So it was a let down that it was not given sufficient explanation. And the length and breadth of Meralco’s power company joint ventures and subsidiaries do not give assurance of the accuracy and propriety of the numbers. Hence our questions and request for audit.
e) As we mentioned in the original article, validating the quantities of power purchased and cross referencing them with the ERC filings may not be part of SGV audit mandate from Meralco.
4. On the “Where there is smoke, there is fire” Department,
There is something that is really bothersome for the consumers.
If we correlate two verifiable numbers instead, the audited gross profit of Meralco of P69.066 billion for 2019 and divide it by the verified quantity of energy sales from the ERC report which is 33.565 Billion kwh, Meralco’s average DSM revenue is P2.0577 per kwh, which is 49% higher than its supposed approved DSM average rate of P1.38 per kwh. In fact a good 50% of Meralcos customers are paying P2.98 per kwh in DSM charges.
This deserves a regulatory audit unless we don’t really care.
5. On the small matter of Meralco’s missing Audit Report for 2019.
We swear we checked again yesterday the Meralco website. The audit report of SGV for 2019 is still not posted and it is now December 11, 2020.
We looked in the “Disclosures” section where the rest of the audit reports are and it’s only up to 2018.
In any case, we only wanted to look at the Notes to see if there are better explanations than 2018 of the sales and purchased power figures. It is unusual that a Meralco audit report will not be posted.
6. Audit of Meralco data blackboxes.
There are many things that only Meralco knows apparently that needs validation. Like how much are Meralco’s sales in value and quantity to each customer class. Is it really 30% residential, 40% commercial, and 30% industrial? How about if it is really 35% to the higher rate residential, and only 25% to the lower rate industrial. The 40% commercial consist of a broad range of customers. These will have significant impacts on the revenue of Meralco and the rates being charged to the consumers.
Was there really ever a study done by the ERC on why there is a big discrepancy between the purchased power in ERC reports and the purchased power reported by Meralco to its stockholders? And have they validated that those are legal?
We hope these clarifications help the Meralco consumers get enlightened on the issues.
7. Meralco Then and Now
Let us remember that the MSK analyses of Meralco annual reports from 2008 to 2019, showed that the practice of reporting higher power purchases than what was actually bought, only started in 2011 after the MVP Group took over Meralco in 2010. Under the Lopez group that owned and managed the country’s largest utility for generations, Meralco reported even less power sold than purchased as a result of systems losses.
Finally, let us remember that purchased power is only a pass-on charge in both amount and quantity and something that our regulators should be insuring is observed. Meralco absolutely cannot sell more power than it buys. So why is there a 13 billion kwh a year in reported sales? And why are we not looking into it?
Admittedly for now these are just smokes and our analyses only assay tests. But MSK is not just pointing at the smoke belching all over the Meralco seams, the opaque, the translucent, and the transparent. We have pored over and analyzed the available official numbers, have determined them to be really toxic, and feared to be consequences of smoldering serious fire.
MSK is only a smoke detector and fire alarm. People would be at risk if the firemen that is the regulators, do not respond.
Meralco has probably a hundred people involved in regulatory compliance. All their salaries and perks are paid for under the hundreds of millions a year that ERC allow them to charge to the consumers as part of “regulatory compliance”. Is it too much to ask if part of that money is spent explaining to the people why there are discrepancies? After all, all these things are being charged to us every month.
If it is OK for smoke to come out of our garage or bathroom, at least tell us why. If there are perfectly valid reasons, why can’t Meralco just tell its customers? Why always hide under ERC’s protection? Why be evasive? Why attack the messengers?
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