Government Service Insurance System GSIS stand on the By WINSTON F. GARCIA President and General...

Government Service Insurance System

GSISGSISstandstand

on theon the

ByWINSTON F. GARCIA

President and General Manager

meralcomeralcoissue


Major shareholders’ profile

GSIS owns 26.5% of Meralco

Together with other GFIs – SSS, Landbank, Philhealth and Pag-ibig – government accounts for 36.9% of Meralco shares


Major shareholders’ profile Lopez holding company ,

FPHC, Union Fenosa and the Meralco pension fund own/ control 33.4% of Meralco


Major shareholders’ profile Lopez group controls the

management, while GSIS and other GFIs assume a minority role

GSIS has 1.5 million members, 1/3 of which are MERALCO consumers.


GSIS issues (as a shareholder) vs Lopez-

controlled management

1. Insensitive to shareholders rights to profit sharing.

- by end of 2007 unappropriated surplus reached PhP13.8 Billion.


GSIS issues (as a shareholder) vs Lopez-controlled management

a) No dividend declaration from 2001 to 2006

b) Only PhP500 Million was declared as dividends in 2008



2. Lack of Good Corporate Governance

Self-dealing transactions worth P55 billion yearly are confidential and beyond stockholders’ scrutiny

-




Representatives of the Lopez Group, including the Chairman, participate actively in approving their self-dealing transactions

-




Access to other transactions and documents of the company are severely restricted


Issues transcending shareholder concerns

Why does Meralco charge the highest electricity rate in the country?

- Meralco rates are 20% to 30%

more than the rest of the country


To illustrate:

P10.20

P8.89

P6.50 P6.4

4P5.87

P7.63

P7.456.9

2

0123456789

101112

Meralco VECO DavaoLight

Pampanga

ResdlComml

P10.20

P8.89 P6.5

0 P6.44 P5.8

7

P7.45 P7.0

3P6.92

* Based on May 2008 Billing.


To illustrate:

01

2

3

4

5

6

7

8

910

Bohol Baguio Bataan Bacolod

Resdl Comml

P7.63P7.45

P7.50

P5.63P4.92

P5.43P5.22 P5.21

* Based on May 2008 Billing.


Anomalous because:

Meralco is the biggest DU in the country, accounting for 60% of power produced in the country, with 4.4 million customers

- By economies of scale and volume discount, Meralco should be

cheaper.


Meralco’s Excuses Lifeline subsidies to the poor household consumers - Fallacy because: a. Other DUs extend the same.

b. Subsidy is less than 1% of the bill or roughly P0.05 to P0.06 centavos per kwh.

-


Meralco’s Excuses Taxes

- Fallacy because:

Other DUs pay the same rate of taxes.

-


Meralco’s Excuses High Cost of Napocor Rates - Fallacy because: a. Other DUs sourced 80% to 90% of their power from Napocor.

b. Meralco sourced only 35% to 40% of its power needs from Napocor.

-


Attributable Causes

Immoral and onerous IPP power supply contracts (Sta. Rita, San Lorenzo and Quezon Power)

-


Attributable Causes Backgrounder:

- In 1997, Lopez-controlled management entered into contracts with Lopez-controlled companies to supply more than 50% of its power needs.

- All cost of contracts were agreed to be passed on to consumers.

- Contracts were implemented in 2002.

-


Attributable Causes Burdensome and immoral provisions:

a. Lease of plants as capital recovery cost (capacity, fixed operating and transmission line fees)

- Contracts are BOOs and not BOTs

- Guaranteed purchase of all produced power

-


Attributable Causes Burdensome and immoral provisions:

a. Lease of plants as capital recovery cost (capacity, fixed operating and transmission line fees)

- Lease is grossly overpriced ($978/kw for Ilijan vs. $2,100/kw for Lopez Plants)

- Cost to consumers : P108 billion (from 2002 to 2007) or an average of P18 billion per year

-


Attributable Causes b. Take or pay provision

- Volume and rate are agreed by self- dealing parties without public participation

- Amount passed on to consumers for unused gas totaled:

in 2006 – P7.06 billion in 2007 – P4.89 billion

-


Attributable Causes c. Contractual Rate Fixing

- Violates the provisions of EPIRA and its franchise

Section 23 of EPIRA and Section 4 of the Meralco franchise impose the obligation to supply electricity to its captive market in the least cost manner

-


Attributable Causes c. Contractual Rate Fixing

- To illustrate, NAPOCOR’s TOU rate as approved by ERC during off-peak ranges from P1.87 to P2.719/kwh.

- Yet the contract obliges Meralco to buy power during

off-peak hours at a higher rate from Lopez plants.

-


Computation of the Generation Charge

Based on April 2008 supply month preliminary bills of power suppliers(A) (B) (C ) (D=B+C) (E=D/ A)

gWh (million kWh) Purchased

Basic Generation Cost (million Php)

Total Generation Cost for the

Month (million Php)

Average Gen Cost (Apr 2008) (Php/ kWh)

NPC and WESM

NPC TSC 950.38 4,446.47 (4.89) 4,441.58 4.6735

WESM 295.60 2,140.95 28.74 2,169.69 7.3400

Subtotal 1,245.98 6,587.42 23.85 6,611.27 5.3061

IPPs

QPPL 232.84 1,002.88 (0.60) 1,002.28 4.3046 Sta. Rita 669.16 2,990.33 2,990.33 4.4688 San Lorenzo 340.34 1,529.87 1,529.87 4.4951 Sub-total 1,242.34 5,523.08 (0.60) 5,522.48 4.4452

TOTAL 2,488.32 12,110.50 23.25 12,133.75 4.8763

Other Adjustments -0.0009

SourceOther Cost

Adjustments (million Php)

Avg. gen. cost = P4.87/kwh


Attributable Causes

- NAPOCOR and WESM rates appear higher because 80%-90% of their power were purchased during peak hours.

- IPP power were purchased at uniform rates whether peak or off- peak.

-


Simulation 1: 50-50 distribution between NPC and IPPs (peak and off-peak) (A) (B=E*A+C) (C ) (D=B+C) (E)

% to Total kWh

purchased




Month (million Php)

Average Gen Cost (Apr 2008)

(Php/ kWh)

Peak

NPC 50.07% 25.07% 623.86 3,382.23 (4.89) 3,377.34 5.4136

IPPs 49.93% 25.00% 622.12 2,765.45 2,765.45 4.4452

Sub-total 50.07% 1,245.98 6,147.68 (4.89) 6,142.79 4.9301

Off-peakNPC 50.07% 25.00% 622.04 1,259.34 (4.88) 1,254.47 2.0167

IPPs 49.93% 24.93% 620.30 2,757.37 2,757.37 4.4452 Sub-total 49.93% 1,242.34 4,016.72 (4.88) 4,011.84 3.2293

TOTAL 100.00% 2,488.32 10,164.40 (9.77) 10,154.64 4.0809


SourceOther Cost


Reduction of 16% in gen. cost from P4.87/kwh to P4.08/kwh


Simulation 2: 70% NPC, 30% IPPs

% to Total kWh

purchased




(Php/kWh)

Peak

NPC 70.00% 35.05% 872.19 4,721.67 5.4136

IPPs 30.00% 15.02% 373.79 1,661.76 4.4457

Sub-total 50.07% 1,245.98 6,383.43 5.1232

Off-peakNPC 70.00% 34.95% 869.64 1,753.80 2.0167

IPPs 30.00% 14.98% 372.70 1,656.91 4.4457 Sub-total 49.93% 1,242.34 3,410.71 2.7454

TOTAL 100.00% 2,488.32 9,794.14 3.9360


Source

Reduction of 19% in generation cost, from P4.87/ kwh to P3.93/kwh


Simulation 3: 100% NPC(A) (B=E*A+C) (C ) (D=B+C) (E)

% to Total kWh

purchased




Month (million Php)


(Php/kWh)

NPC

Peak 50.07% 1,245.98 6,751.65 (6.41) 6,745.24 5.4136

Off-peak 49.93% 1,242.34 2,511.82 (6.39) 2,505.43 2.0167

TOTAL 100.00% 2,488.32 9,263.47 (12.80) 9,250.66 3.7176


SourceOther Cost


Reduction of 24% in generation cost, from P4.87/kwh to P3.71/kwh


Attributable Causes - More purchases from NAPOCOR have other cost reduction benefits.

a. Transmission line charges will be reduced.

-


Attributable Causes b. More electricity discounts for residential consumers. EPIRA mandates maximum of 30 centavos/kwh discount to residential customers for NAPOCOR power.

c. Multi-billion yearly lease rentals on Lopez plants passed on to consumers will have to be drastically reduced.

-


Attributable Causes Mismanagement

a. Bloated bureaucracy

- more than 6,000 regular employees - ratio of 4 officials for every 1 rank and file employee - costs P5.1 billion a year, or an average cost of P850,000 per employee

-


Attributable Causes b. Costly and unnecessary outsourcing of services mostly through subsidiaries

- Miescor * All engineering construction - Corporate Information Solutions, Inc. * e-transactions

-


Attributable Causes - Meralco Energy, Inc. * energy systems management

- Meralco Financial Services * Financial services provider - e-Meralco Ventures, Inc. * eBusiness Development

- Soluziana * JV in management and information technology

-


Attributable Causes

b. Costly and unnecessary outsourcing of services mostly through subsidiaries

- costs P2.95 billion in 2007

-


Attributable Causes c. Non-contributory pension plan

- monthly pension for life for every retiring executive and employee, including their survivors - exhorbitantly high pension cost passed on to consumers

-


Meralco’s pension costs:

0

1

2

3

4

2005 2006 2007

Cost ofpension

P1.58BP1.79B

P2.8B

In 2008, only P1.8 billion was approved by ERC.


Attributable Causes d. Non-competitive procurement process

- Lopez Group controls the supply of major Meralco purchases:

1. First Philippine Industrial Corporation * service fuel requirements

2. Philippine Electric Corporation * distribution and power transformers

-


Attributable Causes - Lopez Group controls the supply of major Meralco purchases:

3. First Electro Dynamics Corp. * ballasts & current transformers

4. First Sumiden Circuits, Inc. * flexible printed circuits

-


Attributable Causes e. Systems Loss

- Failure to curb system losses

-

0

15

16

17

18

2006 2007

P15.8B

P16.4B

P17.3B

2005


Attributable Causes - Lack of transparency

* Law allows recoverable systems loss if due to technical loss or pilferage.

* Yet, no accounting have been made on the occurrence of loss.

-


Attributable Causes - Abusive use of systems loss charges

* Own use is considered systems loss.

* Lease rentals are part of computing maximum allowable systems loss.

-


So, why does the Lopez-controlled Meralco management continue to charge its customers electricity rates which are more than 20% to 30% than what the rest of the country are paying?

-


Lopez Group sourced 80% to 90% of their business in Meralco and has been declaring record profits year in and year out.

- In 2007, FPHC, its holding company, declared 66% increase in its net profits despite multi-billion loans.

-


FPHC and its subsidiaries P 107.930 B

First Philippine Holdings Corp.

31.807

FGHC International Limited

1.462

FPH Fund Corporation 2.919

First Philippine Infrastructure

8.499

First Gen Corporation 63.243

ABS-CBN 5.109BENPRES Holdings 8.254 Bayan Telecomm 15.213 TOTAL P 136.506 B

Lopez Group Loans


Must we allow this situation to persist?

-


End of the Presentation


Government Service Insurance System GSIS stand on the By WINSTON F. GARCIA President and General...

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