Omerta: Meralco's charities examined Opinion
Written by Butch del Castillo
Monday, 27 October 2008 21:27

As promised, this column will reproduce the full text of the letter of the leader of the National Association of Electricity Consumers for Reforms Inc., Pete Ilagan, concerning the generous donations of the Manila Electric Co. (Meralco) to certain charities and educational institutions. It seems that while the Lopezes, who control the Meralco, are trying to come across as socially conscious and benevolent benefactors, it is the customers of Meralco who ultimately shoulder the cost of their generosity. Ilagan fully deserves to be described as the nemesis of the Lopez-controlled Meralco. With his success rate in foiling Meralco, which ever so often asks for a rate increase, I wouldn't be surprised if the Meralco management by now regards him as Public Enemy No. 1.

His letter is as follows:

Dear Mr. del Castillo,
This is a rejoinder to the letter of Mr. Elpi Cuna, Meralco spokesman, published by the BusinessMirror in its October 10 issue, and the commentary of your fellow (BusinessMirror) columnist, Mr. Dean de la Paz, in the October 17 issue. Both Mr. Cuna's letter and Mr. de la Paz's commentary were reactions to your October 17 column entitled "Meralco donations are charged to us."

Your column centered on Nasecore's petition to the Energy Regulatory Commission (ERC) inquiring whether the donations made by Meralco of seven school buildings to Gawad Kalinga, the cash donation of P3 million to the College of Engineering of the University of the Philippines (UP) and the donation of land to the Ateneo School of Medicine and Public Health were all authorized by the ERC.

In Nasecore's letter to the ERC, we pointed out that a previous donation made by Meralco of a 3,000-square-meter property to the local government of barangay Evangelista in Baras town, Rizal, was allowed by the ERC after Meralco had asked for its permission.

But, before anything else, we would like to thank Mr. Cuna for not denying that the assets mentioned were donated, or given away for free.

We had only one reason for bringing up the issue of donations with the ERC. We believe that any property or asset given away by Meralco, whose existence as a public utility is imbued with public interest, adversely affects the interest of Meralco customers. Had these assets not belonged to Meralco, we would have not wasted our time looking into the matter. Mr. Cuna claimed that the land where Medical City now stands was not part of Meralco's rate base. But he failed to mention that this piece of land used to be part of the rate base, and was removed eventually from its distribution rate base under CY 2003 ERC-approved Meralco unbundled rates. For the benefit of Meralco's 4.4 million customers, "rate base" means the total value of all acquired assets approved by the former Energy Regulatory Board (forerunner of the ERC) or by the ERC. The assumption was that such assets—including the land, equipment and buildings—were intended to be used in the business of distributing electricity to its customers. Approval of any asset acquisition means the distribution rate imposed by Meralco on its customers will have to be adjusted to guarantee recovery of the investment, which is also given a guaranteed profit through the return-on-rate-base (RORB) formula.

Thus, whether these assets are part or no longer part of its rate base, the fact remains that these assets were once part of Meralco's rate base, the acquisition value of which was recovered through the ERC-approved RORB formula, translated into distribution rates that had been passed on to customers until such time that these assets were removed from the rate base.

Knowing that Meralco donations, whether in cash or in real estate, do not, in any way, benefit its customers, we deemed it wise to seek clarification from the ERC.

It is very sad that Mr. Cuna conveniently dismisses our concern by saying that these asset donations are not part of the rate base. How can that be when there are only two ways to have these assets officially removed from the rate base? Either way, ERC approval is required. As a regulated utility, Meralco knows that it cannot arbitrarily or unilaterally remove any asset from its rate base. It knows that it needs ERC approval whenever it makes a donation. It sought such approval when it gave away a property to barrio Evangelista in Rizal.

On its P3-million cash donation to the UP College of Engineering, Meralco explains that the funding came from Meralco officers and employees. Based on its announcements and updates on its web site, it explains that only part of it came from officers and employees, and that the rest of the amount came from Meralco Millennium Foundation Inc. and the Meralco Management and Leadership Development Center Foundation Inc., both of which, we suspect, are largely funded by Meralco.

Now, on the commentary of Mr. de la Paz on the same subject, the explanation would have been clear had he used the RORB formula alone and not confused it with the other formulas, such as the generation rate adjustment mechanism (GRAM, which pertains to adjustments relative to generation costs) and the performance-based regulation (PBR).

What we understand quite clearly is that when Meralco gives away any of its assets, whether in the form of land or in cash, it becomes part of the operating expense. Operating expense affects the net operating income (NOI). This account is the sole numerator in the RORB (profit) formula, which is: RORB equals NOI over rate base. This is what Mr. de la Paz does not seem to understand.

Example: If the RORB is equal to the NOI of P12 billion over a rate base of P100 billion, the RORB is 12 percent. A Meralco donation, in cash or kind, with a value of P2 billion will be treated as an operating expense, and this will result in a corresponding decrease in the NOI, which will be deducted from the rate base. This will have the ultimate effect of a reduced RORB.

Clearly, the RORB percentage diminished by such donations would have an effect on Meralco rates. Meralco would now have a reason to apply for a new rate increase because of its reduced net operating income, or reduced RORB.

Net effect is, while being hailed by charitable organizations and educational institutions as a benevolent patron, Meralco customers ultimately shoulder the cost of its boundless generosity.

But more than the likelihood of an application for a new rate increase, such generous donations deprive Meralco customers of additional capital that could have been realized had such assets been sold instead. The proceeds from the sale of those assets could have been plowed back to reduce, not increase, its operational costs.

Mr. de la Paz concedes that donations reduce Meralco's net operating income. Yet he says these are not revenues that affect the RORB, GRAM and PBR. He should also understand that not only revenues but also donations become operating expenses. Operating expenses reduce the NOI and, inevitably, the RORB.

An understanding of basic arithmetic is what is needed, in short. Back to Mr. Cuna, allow me to address an issue he has raised, which is an attempt to impugn my integrity. As a top executive of Meralco, Mr. Cuna would have the public believe that my group had received a P5-million windfall in the course of our unrelenting campaign for lower Meralco rates.

Indeed, a P5 million approved by the ERC in 2006 was for a nationwide consumer-education program based on a motion by Nasecore under ERC Case 2006-048RC. It was for a stronger consumer-sector component in the regulatory system governing electricity-distribution firms. A well-informed public would help the ERC in its regulatory powers. The fund came from the 2006 allocation for the Philippine Electricity Market Corp., (PEMC) operator of the WESM, where Meralco and the Philippine Rural Electric Cooperatives Association are represented in the board. Meralco did not object to funding this campaign. These two also did not oppose the petition filed by Nasecore before the ERC, where they stood as interveners.

The nationwide education drive was going very well when disbursements from the fund were suddenly discontinued at the behest of Meralco, which sits in the PEMC board. Less than P1.8 million was drawn by the Nasecore from the fund—an amount that it fully accounted for and fully liquidated through receipts for several seminars and symposia in key cities of the country.

The funding was cut short apparently in retaliation for our relentless efforts to expose Meralco's excesses.

The sudden reference to this fund seemed like the start of a smear job or demolition campaign on my person and Nasecore's advocacy. But we are not in any way perturbed. For as long as we continue to get the support of the public and upright journalists in the media, we will continue to aggressively carry on with this campaign.

We would like to assure our fellow consumers, through your column, that despite attempts to undermine our efforts, Nasecore will not waver in our commitment to ensure consumer empowerment and meaningful reforms in the ongoing restructuring of the power industry.

Reference:
Pete Ilagan
President
NASECORE
Mobile - 09178461299

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