Posted on Friday, November 22, 2002

Is there a win-win solution for public, Meralco?

By Patricia L. Adversario, Senior Reporter

Any attempt to estimate how much each customer of the Manila Electric Company (Meralco) will get by way of refund is premature, and at best, confusing because regulatory officials have yet to determine the exact refund amount and the timeframe within which the company needs to pay the refund.

Computations vary, depending on the period for computing the refund, and whether the provisional rate increase that was granted to Meralco in 1994 amounts to a return higher than 12 percent. Refund estimates range from P8 billion to P28 billion.

Meralco is still drafting various refund schemes based on the given range of  P8 billion to P28 billion, Meralco Senior Vice President and Finance Chief Daniel D. Tagaza said in an interview.

Only after the Energy Regulatory Commission (ERC) determines the amount to be refunded and the timeframe within which it will be paid out will Meralco propose a refund scheme.

“We will meet with ERC and hope to come up with a win-win solution that would enable Meralco to serve its customers’ requirements and still provide customers the benefit of the refund,” Tagaza said.

There are no indications as yet from the ERC on the refund period. ERC commissioner and acting chair Leticia V. Ibay said based on previous practice, it covers the same length of time the refundable amount was incurred.

This means that if the refundable amount was incurred over four years, the refund period will also be four years or less depending on the kilowatt-hour (kWh) consumption.

“I don’t know if the commission will also adopt this, but we will look at what’s reasonable to both parties,” said Ibay. The current commission is largely composed of recent appoint­ments. Ibay herself was appointed only last year.

Meralco officials said an P8-billion refund to be paid out in four years would be “reasonable.” Meralco President Jesus P. Francisco said if the income tax is allowed as an operating expense, then Meralco’s return on rate base (RORB) did not exceed 12 percent.

The RORB refers to the value with which a utility company is allowed to earn a particular rate of return from operation and maintenance expenses and cost of depreciation. Utility firms are allowed a 12-percent return.

But the new Supreme Court decision disallows the computation of income tax as an operating expense.

Operating expenses are amounts incurred in business operations to generate income. Operating expenses are also used to determine what would be a “just and reaso­nable rate” to allow a utility firm to recoup its expenses.

In Meralco’s case, the court said it failed to justify why its income tax should be treated as an opera­ting expense. The court said consumers should not bear the cost of income tax paid by utilities because the public did not benefit from the taxes paid by the utility firms.

Under the new method, Meral­co’s return exceeded 12 percent after it obtained a rate increase in 1994.

The court’s decision could be interpreted to mean that Meralco would have to refund everything to bring its RORB below 12 percent, said Francisco.

He contends that from 1999, Meralco’s return dropped below 12 percent. Under the new method, the total refund should only be P8 billion. But if the refund is for all of Meralco’s sales up to 2002, then the amount could reach P28 billion.

Francisco hopes the ERC will give them four years within which to pay the refund since the period covered for the overcharge was from February 1994 to February 1998.

“Assuming there are no further rate adjustments during this period, the refund will be taken from our bottom line. Within the 12-percent allowable RORB and using the new formula, we’ll be able to safely handle that, although we’d have problems in cash flow in the next 12 months,” he said.

Tagaza said constraints on cash flow would depend on the level of capital expenditure (capex) that will allow Meralco to continue and maintain its service to customers. The capex amount will depend on how the ERC decides to implement the court’s decision.

If Meralco has to refund P28 billion, it would be reasonable to give it eight years within which to pay its customers, said Tagaza. “At roughly P3 billion a year, that would be manageable.”

“If the government wants us to continue being a viable enterprise, then they will give us a longer timeframe. If we have our way, we’d rather have an eight-year timeframe within which to pay the refund, maintain a respectable cash flow and continue our level of service to customers,” he said. 

Meralco hopes to maintain an average sales growth of more than seven percent year on year during the refund period.

Tagaza said this growth would tide them over even if they obtain a lower than expected rate adjustment. Average sales growth in the last five years had been six percent.

Meralco will also seek rate adjustments to cover the cost of its refund, said Tagaza. The company has a pending petition for a rate increase with the ERC.

Even if the petition for a rate adjustment couldn’t be more untimely, he said that utility firms are entitled to seek rate adjustments if their RORB rates fall below 12 percent.

Using the new formula, Meral­co’s current RORB is from five to six percent. With the rate adjustment, it hopes to improve it to eight percent. “We have a co­venant to maintain with our creditors. Otherwise, we can’t obtain credit.”

Another source will come from cost-cutting measures on controllable sources of expenditures like contracting out more services when possible.

Meralco’s chief finance officer also intends to rein in the company’s capital expenditure (capex) level. At the start of the year, the capex was pegged at P8 billion. But at the middle of the year, it has had to adjust its capex budget to P6 billion. For the first three quarters of this year, sales slipped six percent from the previous same period.

Tagaza also said that the company’s maintenance budget next year is likely to be the equivalent of its depreciation cost which is estimated to be less than P5 billion.

The company would have to review substation capacities and shift power load to those that are underutilized instead of building new ones. Or it may have to

maintain existing equipment and stations instead of investing in new units. 

The company may also have to cut back on projects that could be postponed such as the expansion of capacities of some substations. One new substation costs

P200 million to P300 million. The same amount of money can maintain 10 substations, said Tagaza.

“Still, there’s a limit to the maintenance. At some point, we know we cannot overstretch capacity. Otherwise, there could be an overload. But some substations are not fully loaded. So, we will have to review and inspect where we can shift power load,” he added.

The company has also begun negotiating with creditors for an extended credit line and two of its major creditors have expressed support, said Tagaza.

But Meralco will be in financial trouble if it were made to pay upfront P28 billion in one year. Tagaza said this would cut Meralco’s revenue by P3.75 billion a year, based on its annual sales of 22.5 billion kWh.

If that happens, Meralco will just maintain its capex at the depreciation level of about P4 billion. This amount allocates a capex that is just needed to maintain its services. The bulk of daily collections from customers can’t be used because that’s earmarked to buy power from Napocor. “Any excess will be used for maintenance and that’s a very small amount,” said Tagaza.

Rolando T Bacani, vice president for systems operations of National Transmission Corp. (Transco) said.

If Meralco does not allocate enough funds to improve the system, power supply could suffer, resulting in long service interruptions. 

As soon as Meralco’s supply of spare parts run out and there are not enough funds to replenish it, consumers will start feeling the effects of deterioration of service and supply, said Bacani.

More than the power interruptions, the bigger impact will be on perceptions of the investment climate in the country. “Power supply is a basic utility and if its supply is perceived to be unstable and politicized, foreign investors will think twice. Existing commercial establishments will put off any expansion plans. We’re more concerned about this than the impact on household consumers,” said Bacani.

To avoid this, who can step in to assume Meralco’s functions? At least two government agencies, the National Electrification Administration (NEA) and

Transco could assume the technical functions although they are hesitant standbys.

Diosdado Celso, engineering director of NEA, said their project supervisors and engineers could assume Meralco’s distribution functions in a crisis situation. Electric systems are standard systems and NEA also has enough manpower (over 700 employees) to man Meralco posts.

NEA administers the distribution system of 119 electric coo­peratives. Its functions include taking over the financial, technical and management operations of electric cooperatives that perform below par.

“But we can’t take over Meralco because it is technically efficient. It is also one of the best managed utilities,” said Celso. NEA’s ma­n­date also covers only electric cooperatives. Meralco is a listed corporation.”

Rolando T Bacani, Transco vice president for systems operations, also said that even if Transco can assume Meralco’s technical functions, the operation could present logistical and legal problems.

“Transco does not have enough skilled manpower and we would have to rely on Meralco’s work­force. This could present coordination problems. Transco does not also have the legal mandate unless President Macapagal-Arroyo in a crisis situation suspends the implementation of the Electric Power Industry Reform Act.”

Transco is the power transmission unit that was spun off from the National Power Corp. (Napocor).  

But he doesn’t foresee a crisis looming for Meralco. “Meralco will continue operating in spite of this problem because it is a service-oriented company.” He said Meralco is efficiently run; its ave­rage system loss of 12 percent is lower than most distribution utilities which incur an average system loss of 35 percent.

Meralco is Transco’s and Napocor’s major customer. Seventy percent of Napocor’s income comes from Meralco. “If they don’t pay us, we can’t maintain our service efficiently,” said Bacani.

“The government can’t afford to leave Meralco in a ditch. Whatever their problem is also our problem,” he said.

Any implication of the Meralco case on the power industry bears on the fact that the recent Sup­reme Court decision is the first explicit rule that disallows utility firms from passing on to their consumers their income tax expenses.

Meralco’s Francisco said that when the ERB in 1998 revoked income tax as part of operating expense, the decision came as a “surprise” because the board had approved rates that incorporated the income tax in 1994.

The change in rules highlights concerns about the stability in the regulatory environment. Ibay said the change was made to align with the recommendation of the Commission on Audit.

“Economic conditions change and nothing’s static. Stability of policy is  important. But changes in rules do not necessarily cause uncertainty if there’s a basis for those rules, there’s transparency in the rules, and everybody’s treated the same,” said Ibay.

A senior official in the power industry, however, who declined to be named, said he foresees difficulties in seeking approvals for rate increases in the years ahead. And this could affect the viability of utility firms.

“Regulatory policies should not be populist. With the looming elections, it’s very hard for regulators to act wisely. If they were to decide purely on the basis of financials, they should only look into ensuring the via­bility of utility firms so the same could provide their investors a reasonable return on their investments. It’s difficult when economic decisions are clouded by populist sentiments,” the official said.