Meralco shows way in sourcing ‘clean energy’

Can you choose a ‘clean energy’ supplier for your electrical power needs? Theoretically, yes, even if you are tapping the transmission grid.

 Manila Electric Company (PSE: MER), the country’s biggest power distributor that supplies Metro Manila and environs with electricity is showing the ‘clean energy’ path by planning to source part of its electricity load from two more methane-gas recovery plants.

 In a recent press briefing, Meralco president Jose P. De Jesus said the distribution company will source electricity from the methane gas fired plants to be owned and constructed by Montalban Methane Power Corp. (MMPC) which already owns the pioneering plant at the Montalban (Rodriguez) dump site. The new plants will be situated in Malabon and Sta. Rosa, Laguna.

 Recently, Meralco has already signed a contract with MMPC for the latter to supply it with up to 8 MW of power. The supply arrangement would allow Meralco to source relatively cheaper electricity from MMPC as the generated power would be tapped directly into sub-transmission lines already owned by the firm, thereby bypassing the wheeling charges imposed by the grid operator.

 What is more significant though, is that it allows Meralco “to increase its capacity and alleviate global warming through the reduction of carbon emissions during electricity generation.” Part of the statement may be public relations efforts, but the step it is taking would be a prototype of what steps distribution firms should be taking in the future.

 Sourcing from renewable energy sources is now actually embodied in the recently passed Renewable Energy Law under the heading renewable portfolio standards (RPS). Under this concept, a distribution company is compelled to source a percentage of its electricity supply from renewable energy generators (solar, wind, geothermal, biomass) by a given time, say after ten years.

 Our own renewable energy law do not have specific guidelines on how this is to be achieved as the implementing rules and regulations (IRR) have yet to be hammered out. Of course, these rules are not straightforward to craft.

 Some questions that need to be answered are: (1) what is the appropriate percentage? (2) What would be the timeline for the distribution company to achieve the target percentage? (3) Are there available sources for the distributors to reasonably meet the law’s requirements? (4)Will the prices be competitive enough against traditional sources? (5) Would these renewable energy sources be in the “right places?” And so on.

 These questions are inextricably intertwined and need to be addressed to the satisfaction of all the stakeholders from the government, the generator, the distributor and the consuming public.

 Now that Meralco has actually conscientiously contracted a portion of its distribution needs from a renewable energy source, it would be interesting to watch how this arrangement would pan out. Our energy regulatory bodies, especially the recently-convened National Renewable Energy Board which is tasked to oversee the implementation of the renewable energy law, should study in detail the nuances of this experiment—as well as of others, including that of the Bangui Bay wind farm and the biomass projects in the Visayas—to come up with a sound and equitable renewable portfolio standards.

The success of this particular provision could determine whether we would be getting cleaner power or more of the polluting energy sources we already have in the future.

The battle for Meralco: will it matter to you or me?

The Manila Electric Company, or Meralco (PSE: MER) has been in the limelight in the last few days owing to the ramp up of its share prices from around P60 a few weeks back to a record high of P126 a share last Friday. That day coincides with the cut-off date for soliciting of valuable proxies for voting during the upcoming stockholders meeting.

It is no longer a secret then that there appears to be a bitter struggle for control of Meralco. The battle lines are clearly drawn.

The protagonists are the following: On one side is the embattled Lopez group, the incumbent majority shareholder of the Company until recently. On the other side is the SMC group which has acquired a total of about 38% of the Company’s shares, as against the Lopez’ 33.4%, by the end of last year.

Enter Manny V. Pangilinan (known simply by his initials MVP), head of PLDT and First Pacific of Hong Kong, who appears to be on the side of the Lopezes. Last week, MVP’s group disclosed that it has acquired 37 million shares, equivalent to 3% ownership, of Meralco. Talks in financial circles have it that MVP has been acquiring shares from the market and from various institutional shareholders. This could have been the main cause of rapid appreciation of Meralco shares in the last few days.

Meralco of course has long been in the radar screen of MVP. He had tried to acquire a large chunk of Meralco from Union Fenosa, Lopez group’s erstwhile partner in Meralco, before but failed. Meralco also fits well with PLDT’s plan to use a large swath of the former’s fiber optic network for high speed communications. Besides, many of PLDT’s lines ride on Meralco’s power poles; so it is to the best interest of PLDT to have at least a friendly owner in Meralco.

Whatever the outcome of the current tussle, it is certain that Meralco will end up to be owned by one or two powerful groups. And either of the two groups has fondness for monopolies or businesses with dominant positions in their respective business sectors, for which Meralco is a prime example.

Meralco is the sole franchise holder of electricity distribution in Metro Manila and surrounding provinces. Its franchise covers some 25 cities and 86 municipalities and has some 4.5 million customers.

The Lopez group has been increasing its power generation assets in recent years through First Gen Corporation (PSE: FGEN) by acquiring plants and assets from the government. Its aggressiveness however, has cost it dearly, and the group has piled up huge debt, which it finds difficulty in servicing on time, if we are to go by its recent actions.

It has been raising cash by selling assets like its toll way business, the Pantabangan-Masiway hydro asset to its subsidiary Energy Development Corporation (PSE: EDC), and (unsuccessfully) a chunk of Red Vulcan Holdings which is the vehicle it used in acquiring EDC. In addition is has been trying to raise cash from the debt market.

With its precarious financials, will the Lopez group eventually sell out to MVP?

Meralco has been considered the crown jewel of its empire, but head of the Lopez clan has been quoted to blurt out, “they can have it!” referring to Meralco at the height of Winston Garcia’s GSIS failed takeover of the electricity distributor a year ago.

At an acceptable price, any of the chunks of the Lopez empire appears to be for sale.

It used to be that ownership of Meralco—with the exception of the Lopez family—is restricted to 10% to one entity, by virtue of its being considered a vital service provider.

At the pace the Meralco drama is unfolding, it is just a matter of time, which could be sooner than later, that it would end up in the hands of a single dominant group. Which can be frightening to consumers considering the monopolistic status of Meralco in electricity distribution.

In the end, it will not matter much to customers who will end up owning Meralco. Both protagonists are of similar stripes and are likely to run Meralco in much the same way.

Perhaps it is fitting to revisit the original restriction on ownership sans the Lopezes to make Meralco a truly public company—and perhaps it could then give more accountability to the consumers.

Note added: Tuesday, March 10, 2009—Meralco shareholders named Beneficial Trust Fund and New Gallant Limited reported yesterday their combined 113,313,389 shares of Meralco. An apt name if this pair belongs to a gallant white knight in a shining armor.

San Miguel buys into Meralco

Food giant San Miguel Corporation (PSE:SMC) finally gets a foot on energy’s door.

In a disclosure to the Philippine Stock Exchange (PSE) San Miguel said it had entered into an agreement with the Government Service Insurance System (GSIS) to acquire 300,963,189 shares in electricity distributor Meralco (PSE:MER) held by the latter.

It has agreed to pay P90 per share for Meralco, more than double the firm’s closing price of P44.50 yesterday, at the very day that the stock market suffered its worst-ever percentage drop.

Under pressure from its shareholders to deliver decent returns, SMC has said that it is spreading its wings out of its comfort zone that is food, to venture into high-growth areas such as mining, infrastructure and power.

The same report also said it was eyeing a stake in Petron Corp. (PSE: PCOR) and had initiated talks with the Ashmore Group, which earlier this year took control of the refiner.

What do beer and electricity have in common? Nothing, really, except that alcohol can at least be used to power vehicles. But energy needs a lot of cash to move forward—and SMC has lots of it.

But will SMC deliver its promised superior returns with its new foray?

Meralco is in a highly regulated industry where margins, through the return on-rate-base (RORB) scheme, are capped. In addition, issues concerning Meralco’s business are highly politicized; there’s not much leeway to increase profits. If ever, Meralco’s profit drivers would be outside its core business such as those in services. Or if Meralco chooses to expand its franchise by acquiring ailing distribution cooperatives like the Albay Electric Cooperative (ALECO) or others contiguous to its franchise area.

Its interest in Petron would be good for the latter since the government would then be completely out of the refiner and fuel retailer. Petron would be less subject to political interference.

Meralco is also pleased to get a monkey off its back; its nemesis in the person of GSIS head Winston Garcia. Now, it can concentrate more on delivering power.

I have mentioned in a previous blog that Ashmore is unlikely to end up with 90% of PCOR even with its right of first refusal when the government decides to unload its stake by November. Now that SMC is in the picture, Ashmore can very well exercise that option now, and offer some of the shares to SMC. It doesn’t have to be the whole of government’s 40% stake. A possibility would be for Ashmore to offer some 25% stake to SMC and keep the 65% which is still an absolute majority control.

To recall, SMC has been trying to get into the energy business. It has participated in the Transco bidding but lost out to eventual winner Monte Oro Resources. It had its eyes on Tiwi-Makban geothermal complex according to newspaper reports, but did not submit a bid.

Now, would you rate SMC a buy?

So far, SMC is sniffing at the more mature portion of the energy industry. Unless it is willing to get its feet dirty by going into “greenfield” energy projects, alternative energy development, mining or oil field development, SMC wouldn’t merit a ratings upgrade. I would rate it a HOLD. MER would still be a SELL.

What about PCOR? Now that its shares are also battered together with the rest of the market, I would also put it at HOLD, while watching how the SMC interest would pan out.

And maybe, an upgrade to a BUY?

(Disclaimer: These recommendations are not based on financials and not by an analyst. These are given as tongue-in-cheek recommendations. Consult your stockbroker for a more learned opinion. The author is not liable for losses as a result of these recommendations.)

DTI wants Meralco to lose P46-B

By J R Ruaya

The Department of Trade and Industry (DTI), most likely upon the prodding of the Palace, has just lodged a petition against Meralco before the Energy Regulatory Commission (ERC) seeking measures to lower power rates, the most striking of which is expanding special treatment to the marginalized.

DTI wants Meralco to extend preferential treatment to poor households and power intensive industries "without prejudice to other Meralco customers", which could only mean us, the average consumers who are diligently paying our power bills, and who are at present already subsidizing the "marginalized" and the power pilferers.

DTI wants Meralco to absorb all lifeline discounts and not pass on to "other customers" which means us, again.

DTI said that Meralco should refund the all the subsidies paid by the subsidizing customers in addition to expanding the coverage and increasing the discounts within its franchise area.

It even wants (not suggests) Meralco to buy more from the wholesale spot electricity market (WESM) at any given time. This suggestion is contrary to the spirit of the spot market, wherein the prices should be dictated by supply and demand.

How this could be done without impairing the viability of the distribution company, the DTI did not spell out. What is more frightening is the repercussions on the quality of service rendered as a result of these proposals.

What is clear though is that the distribution firm will likely post a loss of P46.124 billion once it implements government’s proposal to extend preferential treatment to poor families, according to a presentation of Meralco board member Christian Monsod.

Monsod said based on simulations made by Meralco, the P3.606 billion net income it posted last year would instead become a net loss of P46.124 billion after implementing the proposed measures.

Even if Meralco's projections are somewhat bloated, one cannot escape the fact that the utility firm would be severely affected financially. In the end all these costs would be shouldered by the paying customers.

But what is more fundamentally discomforting is the government's direction veering towards more subsidies, when most countries nowadays, including present and former communist countries like China, Cuba and Vietnam are weaning themselves from such policies.

Subsidies are a manifestation of what I termed "beggar economics"--looks palatable in the short term but devastating in the long term.

These also distort market prices, wherein the actual cost of an item or service is hidden, only to rear its ugly head at the most inopportune time--in a crisis.

Subsidies encourage inefficiency and discourage efficiency improvements.

Worse, the government wants to place the implementation of the subsidies on the hands of the private sector--a clear interference to private enterprises.

Investors have already pointed out that to lower power costs, there are other options which are within the orbit of government influence. The government may have to sacrifice short-term popularity in favor of long-lasting economic benefits.

Like for instance, it may have to lower taxes on indigenous resources like natural gas and geothermal. Swallow the bitter pill of less tax collection in favor of more benefits to the consumers.

It should not change the investment rules in midstream like amending the EPIRA without much analysis of the consequences

It can fast-track the privatization of government power generating assets so that there will be real competition in the power industry. In so doing, the prices at the spot market would reflect the actual supply and demand, and DTI would not have to order Meralco or any distributor to source its needs from the WESM, or peg the distribution charges.

It can hasten the interim open access regime in the industry.

All the government needs is stronger political will to effect the required reforms in the power industry, and not bend to populist whims.

Which is probably asking too much against the reality of depleted coffers, waning popularity, influence of vested interests and the upcoming 2010 elections.

Let us just pray.