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.
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.
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.