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In 2007, the Lopez family of First Philippine
Holdings Corp., Meralco and ABS-CBN Broadcasting Corp. determined
that profits are to be generated and their wealth enhanced through
one simple strategy—heavy investment in power and tolllways.
Electricity and infrastructure
are two of the major crippling inadequacies in the Philippines, two
factors why investments cannot be greater nor more robust than they
already are. You meet the need for electricity and infra and you
make money.
Thus, the Lopezes increased their
holdings in Meralco, vastly expanded their portfolio of power
plants, and acquired more tollways contracts.
However, the Lopezes didn’t
reckon early enough with one imponderable: A hostile administration
like Gloria Arroyo’s and a nosy and brashy investor like President
Winston Garcia of the Government Service Insurance System (GSIS).
True, there was ABS-CBN to soften the tandem. But what do you do
when an official’s public image has been pummeled to such low
point it can go nowhere but up?
Now, the Lopezes find themselves
in a dilemma. Do they surrender or shoot it out till the last man
standing?
In 2007, the Lopezes became the
single biggest stockholder of Meralco, the country’s largest
electricity distributor and a monopoly. Through First Holdings, the
Lopezes increased their holdings to 33.4 percent from 17.7 percent.
They bought the 6.6 percent of the Meralco Pension Fund for P8.3
billion, and the 9.1 percent of the Spanish investor Union Fenosa
for $250 million (P10.5 billion at P42 to $1). Valued in 2007 at
P18.8 billion, the 15.7 percent is now worth below P12 billion.
Why Meralco? The family has
always considered Meralco their crown jewel, the proud symbol of
their economic might and political influence. While 33.4 percent
seems like a minority, it has veto power because you need a 70
percent vote to buy and sell assets in a company. First Holdings
also has 30 percent of Panay Electric, the fifth largest electricity
distributor.
Meanwhile, the state Energy
Regulatory Commission (ERC) is, on paper, an independent body.
Between the public consumers and the private owners of Meralco, ERC
should take the side of the public.
Last year, the ERC decided to be
friendly to Meralco. It agreed to a new system of fixing electricity
prices called performance-based rate setting (PBR) mechanism
beginning mid-2008. In simple terms, PBR assured Meralco yearly rate
increases guaranteeing the utility handsome profits or a return of
12.8 centavos for every P100 of average cost of capital. This is
significantly higher than the 8 percent to 12 percent return under
the old return on rate base (RORB), the practice for 80 years. Also,
under RORB, rate increases were subjected to public hearings which
could be high profile and politically unpalatable.
PBR is based on Meralco’s
forecast of electricity demand, operational expenses and capital
expenditures. ERC then prescribes distribution rates which increase
annually over a four-year period, from 2008 to 2011, to cover cost
increases due to inflation and the peso depreciation. In effect,
Meralco could single-handedly determine what it could charge the
public its so-called distribution rate. Imagine there is a price
control body and you (the regulated) determine the ceilings set by
that agency. In terms of profit potential, that’s a mind-boggling
sweetheart deal. If the ERC takes time to decide the PBR rate, the
delay will be charged to future rate increases. There is a built-in
penalty for inefficiency and the consumer pays for it.
With increased profits from
Meralco, the Lopezes could pour excess cash into other businesses,
like Rockwell, to generate even more profits.
At the same time, the Lopezes
increased ten-fold their holdings in power generation. Through First
Gen, owned 66.2 percent by First Holdings, the Lopez family is the
largest Filipino independent power producer with an installed
capacity of 2,582.4 megawatts or 16 percent of the country’s
generating capacity. Of every 100 megawatts, 6.25 mw is provided by
the Lopezes.
The two biggest Lopez power
plants are the 1,000-megawatt Santa Rita and the 500-megawatt San
Lorenzo which are on their eighth and sixth year, respectively, of
their 25-year purchase power agreement with Meralco. The plants rely
on natural gas piped in from the Malampaya gas field in Palawan.
In December, the family bought a
40-percent economic interest and 60-percent voting rights in the
state-owned geothermal company PNOC Energy Development Corp.
It paid P58 billion, three times EDC’s IPO price. EDC is the
Philippines’ largest and the country the second biggest geothermal
producer in the world. It has seven geothermal steam fields and an
installed capacity of 1,198 mw.
First Holdings will manage the
94-kilometer Subic Clark Tarlac Expressway, Phase 2 of the Manila
North tollways to connect the 84-kilometer NLEX to C-5 and Port
Area, part of the C6 Expressway, and the 88-kilometer Tarlac-La
Union expressway.
In all these deals, the Lopez
family will have to talk turkey with the government. In the
meantime, with little capital, the family has overborrowed. Much of
their liabilities carry government guarantees or invested with state
generosity.
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