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    Southeast Asia
     Jun 10, 2008
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Power politics in the Philippines
By Joel D Adriano

MANILA - A battle for control of the Manila Electric Company (Meralco), the Philippines' dominant power distributor, goes to the heart of the country's severe economic inefficiencies and underscores the still strong control a handful of business families have long asserted over the national economy.

On one side is the powerful Lopez family, franchise owner and largest shareholder of Meralco with a 33.4% stake held through its First Philippine Holdings Corp (FPHC). As a five-member voting block, the Lopez clan maintains the largest number of seats on the power distribution company's 11-member board.

On the other side is the government, which holds four board seats


and maintains a 33% stake in the company, including a 23% stake held by the Government Service Insurance System (GSIS). The final two board positions are now held by independents, and both sides to the struggle appear to be trying to assert influence over these pivotal votes.

Tensions came to a head late last month when the Securities and Exchange Commission (SEC) ordered an injunction against the holding of a shareholder meeting, which the Lopez-controlled board went ahead with nonetheless. The complaint was filed by GSIS president Winston Garcia to guard against new Lopez family proxies being voted onto the board, according to news reports. Manuel "Manolo" Lopez maintained his chief executive position with the company after the contested meeting.

Garcia said he plans to contest the legality of that meeting and in the same news reports accused the Lopez family of "unconscionably high power rates, padded by billions of pesos in questionable pass-on rates". He has also publicly vowed to seek a change in Meralco management, lower electricity tariffs and file fraud charges against the company for allegedly overcharging consumers.

Oscar Lopez, FPHC's chairman and chief executive, has denied the charges and challenged the government to buy out his family's share in Meralco, which at current market prices would amount to about 35 billion pesos (US$795 million). The government has repeatedly said it does not aim to seize outright control of the power company but rather wants to lower electricity rates to help Filipinos cope with inflation as well as reduce the cost of doing business in the country, a perennial complaint of foreign investors.
The political controversy has beaten down Meralco's share price, which fell as low as 59 pesos last week, down from a high of 116 pesos last year. Many analysts still have a "sell" on the stock. "The ongoing quarrel leaves a bad taste for investors," said Olan Caperina of BPI Asset Management Inc, a local fund. Despite a 4.6% increase in electricity sales, Meralco's net income tumbled by about two-thirds to 4.04 billion pesos last year, from 13.88 billion pesos the previous year.

The SEC injunction represents the latest round in a growing row over the real causes of the Philippines' perennially high power rates, which critics say undermine overall economic efficiency and the country's ability to attract and retain foreign investment. The Philippines has the second-highest electricity rates in Southeast Asia, trailing only Cambodia.

Exceptionally high power rates were cited as one reason why Intel Philippines, one of the country's biggest foreign investors and largest employers, with over 5,000 workers, plans to close down its Philippine operations and divert the company's investments to lower-cost Vietnam and Malaysia. A recent government survey showed that the high cost of electricity is one of the main reasons why foreign investors are reluctant to locate their businesses in the Philippines.

Consumer groups such as the National Association of Electricity Consumers for Reforms, or Nasecor, pin the blame on Meralco, which controls about 75% of the power distribution in Luzon province, which includes the capital city of Manila. Luzon also accounts for 75% of all energy demand in the Philippines and is home to 87% of the country's current installed generation capacity.

Shocking discrepancies
According to the Heads of ASEAN Power Utilities/Authorities, a consultative group attached to the 10-member Association of Southeast Asian Nations, the average cost of electricity in the Philippines last year was 17.5 US cents per kilowatt-hour (kWh). That is more than three times the 5.38 per kWh cost in Vietnam, and is markedly higher then the 6.77 per kWh cost in Indonesia, 7.67 per kWh in Malaysia and 8.50 per kWh in Thailand. Even high-cost Singapore recorded cheaper power rates at 13.07 per kWh.

The problem, analysts say, is both structural and political. In the early 1990s, the Philippines faced an economic growth-stunting energy crisis, in which installed capacity failed to keep pace with surging demand. To cope, then president Fidel Ramos fast-tracked energy-related investments, including big ticket outlays for so-called independent power producers (IPPs). Energy investments surged to $2 billion in 1995 from only $250 million in 1991.

By 1998, foreign-owned IPPs accounted for 4,800 megawatts of generating capacity and accounted for $6 billion in total investments, including outlays from big international energy firms such as Mirant Corporation, Enron, CalEnergy, Marubeni and Kepco. Over that seven-year period, the government signed over 40 take-or-pay contracts, where it committed to take certain amounts of energy from IPPs, and the national power crisis ebbed.

Investments in IPPs nonetheless remained strong to meet anticipated higher future demand. When the 1997-98 financial crisis hit, the World Bank and others warned that overinvestment in IPPs and the government's locked-in commitment to take-or-pay contracts could result in very high electricity rates. Ten years later, and those forecasted high rates have become a drag on growth and investment, some economic analysts say.

An official at the Department of Energy (DOE), who requested anonymity because he was not cleared to speak publicly on the matter, said the reason for the Philippines' comparatively higher rates is a mix of market and non-market factors, partially because other ASEAN countries have more competitive power markets, and partially because their respective governments subsidize electricity prices where Manila does not.

Complaints over increase
Some wonder if that's about to change. The current furor over high electricity rates began after President Gloria Macapagal-Arroyo ordered the state-owned National Power Corporation (NPC), a power generator, to look into complaints filed against Meralco by the Federation of Philippine Industries over what the business group viewed as an unjustified 0.52 centavo increase in generation charges levied by Meralco in April.

To be sure, Meralco's generation charges are a complicated - some say opaque - calculation. Rates differ depending on from where and when the power was sourced. A typical Meralco power bill includes variable rates from different power suppliers, including NPC, three independent power producers (IPPs), as well as spot market rates known as the Wholesale Electricity Spot Market (WESM).

Before the Electric Power Industry Reform Act of 2001, there were only three items on Filipinos' monthly electricity bills, namely: basic charges, purchased power agreement and an exchange rate adjustment for the price of imported fuels. Now generation charges are the largest of eight different charges in a typical Meralco bill, including transmission, systems lost, distribution, subsidies, taxes, universal charges and other charges.

Because the fees are lumped together, consumers have long complained its unclear how much they are paying for each line item, including the actual cost of the electricity itself. Moreover questions have been raised about the pricing of power bought from two specific IPPs, known as the Santa Rita and San Lorenzo power stations, both of which are also owned by the Lopez family.
Political charges
What started as a minor accounting inquiry into Meralco's pricing policies has since morphed into a full-blown political controversy, as critics and politicians level various price-fixing allegations against the company. On May, 12 congress launched a joint 

Continued 1 2 

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