Cut Meralco rates first; refund later

What gives? Meralco at first cried it would go under if the SupremeCourt orders it to refund customers P28 billion in disputed billings. Now that the tribunal did order a refund, Meralco president Jesus Francisco is saying the amount will reach only P8 billion.

The reduced computation could be a misreading the ruling. For, the Supreme Court included a line allowing Meralco a slight rate increase of 1.7 centavos per kilowatt-hour effective February 1998. Whatever, the two computations only distract the public from the more pressing issue. That is, that Meralco must first cut its current billings. Refund can come later.

The increase was for another reason, separate from what the dispute was all about. The wording is clear. The tribunal reversed a 1998 decision of the Court of Appeals, which had reversed a 1994 decision of the Energy Regulatory Board. In effect, the tribunal upheld the ERB line that Meralco cannot pass on its income taxes to customers. Thus, it must refund 16.7 centavos per kwh in overcharges from 1994 onwards. More than that, it must stop the ticking meter and roll back its present charges by the same amount.

It took Meralco only 25 days in 1998 to reflect both the 1.7-centavo and 16.7-centavo increases in its billings, after it got the favorable decision from the Appellate Court. With the Supreme Court ruling, it should take Meralco only 25 days to reflect the 16.7-centavo rollback in its next billing cycle. All it has to do is reverse the billing process. Customers immediately will enjoy the benefits of the ruling.

The refund would be an administrative nightmare, whether it’s P8 or P28 billion. That’s why several formulas are being suggested this early. For one, former senator Juan Ponce Enrile says the refund should cover only households and not big industrial-commercial customers. After all, those businesses already have made profits by deducting their electricity bills as operating expenses before paying income taxes. Residential customers had no such relief.

Militant groups want an instant cash refund to benefit low-income homes: P3,500 for those consuming 200 kwh a month, and P5,200 for those using 300 kwh. Of Meralco’s 3.9 million customers, 3.1 million would be covered by the lump sum payment.

Meralco says a lump sum would drive it bankrupt. Creditors will tighten the screws. Long blackouts would ensue when the utility runs out of operating cash. Its share prices, in fact, dropped 40 percent to an eight-year low when the Supreme Court ruling came out.

Middle-class groups have an answer: equity conversion. By issuing stock shares in lieu of cash, Meralco would not dry up. At the same time, middle-income homes that consumed 500 kwh or more would also enjoy the refund, even if in the form of lower stock dividends, though for a longer period. After all, the middle-class subsidized the cheaper electricity rates of working-class homes.

The moderate Trade Union Congress of the Philippines adopted the same line, but with a twist. It wants part-ownership of Meralco through the equity conversion by voting consumer representatives into the board. That way, it can prevent bankruptcy while watching the utility managers. It would also save the Social Security System’s 10-percent investments in Meralco. SSS members consist of all private employees nationwide, not just those living in Meralco franchise areas in Greater Manila.

A government takeover of Meralco is clearly out of the question. That would be necessary only if Meralco keels over. Then again, no monopoly ever goes under – unless it messes up really big. Meralco didn’t mess up; only some of its owners and managers did.

The law allows utilities a 12-percent return on rate base (RORB). The RORB is a cap on - but also a virtual guarantee of – profit. It is anchored on the fact that utilities are regulated. Because they are regulated, they also enjoy monopolies in their franchise areas. Unregulated industries can rake in all the profits they want, although tempered by free competition and the capacity of the market to absorb their prices. Regulated Meralco exclusively distributes electricity in Metro Manila and adjacent provinces. It has the right to cut off connections from a customer who doesn’t pay. To maximize its 12-percent RORB, it must strive for cost-efficiency.

Trouble is, Meralco began in 1994 to include income taxes as part of operating expenses or rate base. Thus, the 16.7-centavo per kwh increase that consumer groups questioned before the ERB and, later, the Supreme Court. It argued that if 35-percent taxes are paid only after computing the 12-percent profit cap, its real RORB would only be 7.8 percent. It cited US practice that allows electricity firms to include all forms of taxes as part of operating expenses.

A study by energy officials during the Ramos Presidency shows that Meralco was comparing apples and oranges. At that time, the utility was raking in 13-14 percent RORB, when unregulated industries were making only seven-percent profit at best. The officials noted that the US does allow taxes as part of operating expenses, but limits return on equity (ROE) to no more than 11 percent. It computes ROE on the weighted average cost of capital (WACC), a method different from the RORB formula. If the WACC method were used on Meralco, its after-tax profit would not only be 7.8 percent but 11.8 percent - close to its desired 12 percent under the RP way, but much higher than the 11 percent allowed in the US way that it was citing.

With an immediate rate rollback and a subsequent refund, Meralco would thus still enjoy that 11.8-percent guaranteed profit. More so since Congress is about to extend its franchise for another 25 years.

Meralco, meanwhile, has a petition for a 30-centavo rate increase pending before the Energy Regulatory Commission that replaced the ERB. That petition also includes income taxes as part of RORB. In fact, Meralco admits that with such computation, its RORB would rise to 15.79 percent if the ERC allows it. A rollback under the Supreme Court ruling should mean a recomputation of figures in the rate petition.

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