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

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 Pacific’s 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.

Revenge of the Consumers – Options Now to Reducing Power Costs