Plea to split Meralco franchise raises alarm bells

November 27, 2023 Ryan Ponce Pacpaco 433 views

AN infrastructure-oriented thinktank is raising concerns on Congress proposals to split the Meralco franchise supposedly due to the failure of the Energy Regulatory Commission to recompute the power distributor’s weighted average cost of capital (WACC).

“While President Ferdinand Marcos Jr. and House Speaker Martin Romualdez have been tirelessly joining international conferences to stimulate foreign investments into the Philippines, some legislators are giving reasons why foreign investors should opt out of the country. The proposal to split the Meralco franchise, which continues to subsist until 2028, sends a signal to investors that there is not regulatory certainty under this government, and that it will change its rules to suit various interests.”

This was the statement of Terry Ridon, Infrawatch PH convenor and former House energy committee member.

WACC re-computation irrelevant to franchise split

Ridon, who completed the General Management Program at Harvard Business School, said the proposal to split the Meralco franchise has no relevancy to the failure of the Energy Regulatory Commission to recompute the WACC since 2015.

“While we support periodic WACC re-computation, particularly if it ensures the least cost to consumers, this re-computation has no relevancy to the call to split the Meralco franchise,” he said.

Ridon said the failure to re-compute the WACC is a default by the energy regulator, which should undertake periodic WACC reviews.

“Franchise revocation or subdivision is only relevant to the failure to re-compute the WACC if legislators can show that Meralco had purposely prevented the ERC from performing its function to undertake WACC review and re-computation. Absent this, there is absolutely no basis for Congress to even call for a splitting of the Meralco franchise.”

Franchise split weakens economies of scale

Ridon said calls to subdivide the Meralco franchise only serve the interests of power generators, who will benefit as a result of the weakened market power of a larger distribution utility.

“In negotiations with power supply contracts with generators, distribution utilities act as the advocates of the public interest in ensuring the least cost of power generation. With a split franchise, smaller distribution utilities lose the power of economies of scale in determining better pricing for generation costs. How then does this ensure the promise of the least cost of power under EPIRA?”

Ridon said the current size of Meralco is what has enabled it to provide the least cost of power to its consumers.

“While Meralco is not without its faults, its massive customer base has been its greatest strength in negotiating cheaper power rates with power generators. In fact, its size has enabled it to provide the lowest power rates in the country.”

Ridon said legislators should instead focus on electric cooperatives and distribution utilities that have massively failed in their mandate to provide not only the least cost of electricity, but also to provide reliable and stable energy supply.

“If legislators were truly interested in serving the public good, the first order of the day is to force electric cooperatives to do better. There can be no massive economic growth in the regions if large-scale industries cannot expect affordable, reliable and stable energy supply,” he said.