Look who’s happy and all smiles

A press release published last Friday (Philippine STAR, Sept. 19, 2003) caught my eye. The heading read, "Meralco sees big savings from changes in IPP deals." It was rather fitting supplement to the Biz Links column for that day entitled "Sparks in the dimming power sector." Another glow of hope in the power sector, I thought, as I decided to review some papers on the subject of Meralco and its dealings with National Power Corp. (Napocor) and other independent power producers.

Let’s start with the Meralco-Napocor dispute and its recent settlement.

A commitment not honored

To briefly recall what the 10-year power supply dispute is all about, in 1994, Napocor and Meralco entered into a power supply agreement for the government-owned power firm to provide 70 percent of Meralco’s total power demand. Set to expire in December 2004, the deal binds Meralco to purchase 3,600 megawatts of electricity from Napocor on a monthly basis.

Meralco, however, unilaterally revoked the contract three years ago when it started buying less electricity from Napocor and instead purchased power from its newly operational sister company, First Gas Power Corp., and other independent power producers (IPPs),

Since Meralco accounts for a large chunk of Napocor’s sales, the state-owned power company started losing revenues. This was compounded by the overall reduction of energy consumption nationwide resulting from the economic downturn.

What ensued was a full-scale row, with Napocor claiming P27 billion in lost revenues and Meralco counter-claiming P7 billion in "damages" for not being allowed to use the transmission highway when buying electricity from other IPPs.

Win-win for whom?

To resolve the impasse, the energy department mediated a compromise agreement between the two warring parties. According to rumors, however, the Palace handprints were all over the agreement papers.

The terms called for Meralco to indemnify Napocor about P20 billion as payment for the supply contract’s modification from 2002 until 2004. Part of the negotiated settlement is for Meralco to buy and have full access to the total production of power plants of its choice, which of course includes First Gas’s facility in San Lorenzo, Batangas.

On the surface, the deal looks good. But let’s go deeper to see who gets what.

The National Government. At first glance, the government may be happy that the financially crippled Napocor gets a payment of P20 billion to tide it over its debt payment problems in the meantime.

The government also gets another bonus with the fact that all the natural gas-fired power plants will be optimally utilized. By giving Meralco full access to all the First Gas facilities in Batangas, for instance, consumption of the Malampaya natural gas is maximized. The government, therefore, can expect heftier royalty shares from higher gas production.

Napocor. Predictably, Napocor will not be too happy. With Meralco free to choose which company to buy electricity from, the state-owned power company will be saddled with even higher costs because it will be forced buy less power from its own IPPs. If Napocor passes on resultant higher rates, definitely the electricity users outside the Meralco franchise will not be happy.

Napocor, however, may be adopting a nonchalant stance on the recently signed agreement with Meralco. On the throes of privatization, it will just be too relieved to pass on future burdens to prospective buyers (assuming there are some kind souls lurking around).

Meralco. After the initial shock of the Supreme Court decision ordering the P30-billion refund, good things started to happen to Meralco apart from the settlement of its dispute with Napocor. For one, we saw both houses of Congress approving a new 25-year, but this time a consolidated "mega" franchise for Meralco.

Already, it is anticipating profits of P1 billion by the end of the year. In case you failed to notice, Meralco was allowed by the Energy Regulatory Commission (ERC) to charge a distribution rate hike in June.

Additionally, ERC allowed Meralco to change how it computes rate increase from the 15-percent return on rate base (RORB) to a 15-percent weighted average cost of capital (WACC) basis. All these developments effectively nullified the cost burden of the Supreme Court’s order to roll back its charges.

The negotiated settlement with Napocor also enabled Meralco to happily extricate itself from its over-commitment. Furthermore, under the arrangement, Meralco was given the flexibility to purchase its power requirements. It can, therefore, ensure that the power plants of its choice (which includes its sister company, First Gas) will operate profitably at full capacity.

How about the consumer?

Waiting for the punch line? Here it is. After all has been said and done, it will be the public – Meralco’s customers and the taxpayers – who will eventually have to bear again the brunt of this compromise agreement.

Submitted to ERC for approval (which is expected to be given) is an arrangement whereby the P20-billion penalty Meralco has to pay Napocor would be passed on to Meralco customers over a five-year period.

Meralco after all has argued that any increase resulting from the penalties will be offset by lower rates from the alteration in the Napocor-Meralco 10-year contract. That’s the whole point of the above-mentioned press release.

Who’s happy?

Meralco owners and stockholders are all smiles nowadays. They made a point that they are in business and they should be allowed to make profits while government, if it wants, should take care of subsidies. Their message was apparently heard loud and clear.

In the meantime, for us consumers waiting in the wings, we can only fearfully anticipate the ERC decision.

"Open Skies" controversy on TV

Isyung kalakalan at iba pa on IBC-13 News (5 p.m. and 10:30 p.m., Monday to Friday) presents once again starting today discussions regarding the controversial "open sky" policy. Will the "open sky" policy be implemented beginning 1st October 2003? Concerns are being raised by local airlines on the anticipated entry of American airline companies if the Philippine skies are opened. Is there another deal with the US in exchange for more support and aid to the government? Or is this the boon that local air travelers are waiting for? Watch it.

"Breaking Barriers" with SSS prexy

"Breaking Barriers" on IBC-13 (every Wednesday, 10 p.m.) will continue discussions with Social Security System (SSS) president and CEO Cora dela Paz. Join us as we break barriers to gain a better understanding of the real financial condition of SSS and the options available to bail out the distressed financial institution. The future of millions of private employees is at stake as the current leadership struggles. Watch it.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns or telecasts of "Isyung Kalakalan at iba pa," you may visit my website at http://www.bizlinks.linkedge.biz.