"This is in response to your column entitled ‘Still no stopping Winston G’ that came out in Malaya on November 14, 2008. You raised a couple of issues there pertaining to Meralco that I would like to answer here point for point. You mention that Meralco power rates are more expensive compared to other distribution utilities (DUs). I beg to disagree. Meralco’s distribution rates have been structured to favor small consumers through socialized pricing. As such, small consumers are charged lower distribution rates while those consuming more are charged relatively higher rates.

"For example, a Meralco residential customer consuming 200 kWh/month is given a distribution charge of only P1.37/kWh. For a consumer using 200 kWh/month or less, the distribution rate in Cebu is P1.47/kWh, in Davao P1.64/kWh, and in Cagayan de Oro P2.04/kWh - all higher than Meralco’s distribution charge. Meralco residential customers using up to 200 kWh/month account for 77 percent of all its residential customers. I also would like to state that there are at least 37 other distribution utilities that have higher residential rates than Meralco.

"On your other point, meanwhile, that Meralco should drop its ‘onerous’ contracts with its Independent Power Producers (IPPs), may I be allowed to explain why we, in the first place, entered into these contracts with the IPPs and why such contracts cannot be rescinded as easily as you are suggesting?

"First, it is not true that IPP provisions are onerous. These contracts have been subjected to public hearings by both the then Energy Regulatory Board (ERB) and its successor, the Energy Regulatory Commission (ERC). Meralco’s IPP contracts were duly certified, evaluated, and approved by the government in ERB Case Nos. 97-03 and 99-62 and ERC Case No. 2004-74.

"In 1997, Meralco’s contracts with First Gas were reviewed and upheld by a Board Committee. Later in 2004, the First Gas contracts were reviewed again by a Board Committee, the results of which were then submitted to the ERC, subjected to public hearings, and the contract amendments were eventually approved by the ERC.

"It may also be recalled that under Executive Order (EO) No. 215, the business of electric power generation was opened to the private sector, thereby allowing the government to meet future power demands without much financial cost, and thus avert a threatening crisis of widespread and continuous blackouts in the country.

"For this purpose, the government, through the NPC, decided to enter into purchase power contracts with different Independent Power Producers (IPPs). However, to encourage the IPPs to establish and operate generating plants in our country, and assure them of reasonable return on or recovery of their investment, the government deemed it necessary to include certain provisions in the contract which would guarantee the IPPs of a ‘minimum energy off-take’, or a minimum payment for generated power. This provision is what is popularly referred to as the ‘take-or-pay’ provision.

"The take-or-pay provisions are internationally-accepted commercial arrangements, and are also contained in the contracts of NPC with its own IPPs, which greatly outnumber Meralco’s IPPs. The IPP contracts were approved by the ERB on the fundamental justification that the cost of power from such IPPs were shown to be cheaper than the contemporary rates of NPC.(?!?!) In fact, the IPP proponents have had to obtain accreditation from the NPC and DOE before they could construct their power plants. The accredited IPP projects were made part of NPC’s Power Development Program and the DOE’s Philippine Energy Plan.

"On your other point, such contracts with the IPPs can not just be scrapped on a whim because such contracts were done with an arm’s-length negotiation (not ‘sweetheart deals’), have undergone public hearings, and have been approved by government regulators.

"You also made mention about ‘questionable deals with the Lopezes’. Meralco does, not, either with Lopez companies or non-Lopez companies, engage in questionable deals. If you’re suggesting that Meralco sources most of its power and other operational needs from sister companies, that is not true. In 2007, related party transactions, including power purchases from First Gas, accounted for only 30% of total goods and services purchased. This is down from 34% in 2006.

"Further, a summary of Meralco’s major equipment purchases since 2007 shows that, while Meralco purchase some of its requirements for meters, transformers, and computer equipment from related companies, none of its requirements for the following are supplied by a related company: wires and cables; poles; distribution type switchgear and accessories; substation equipment, hardware, and accessories; vehicles, transportation materials, and accessories, and; insulators and electrical insulating materials.

"All equipment purchases including those for meters and distribution transformers (DTs) undergo competitive bidding. Awards are based on lowest evaluated cost. It just so happens that Gepmici and Philiex are affiliates, but they are also the only local manufacturers of meters and DTs. Having these two local manufacturers support the "Buy Filipino" movement, otherwise, the entire Philippine electric industry will be fully reliant on imported equipment. Having local manufacturers provides local supply stability, promotes employment and also supports the sourcing operations of electric cooperatives and other private distribution utilities - not just Meralco.

"Self-dealing contracts per se are not prohibited under the law. These contracts are invalidated only if the same are proven to be unfair and unreasonable. All contracts with affiliates or sister companies of Meralco were negotiated at arm’s length, to ensure that only the most reasonable costs are charged to the company. Further, all contracts that would affect the consumers of Meralco are required to be approved by the ERC and all the costs of said contracts are subject to the strict evaluation by the ERC to determine the reasonableness thereof for purposes of pass-through to consumers.

"On the 30-billion refund, meanwhile, that you’re urging one of the senators to ‘press Meralco to complete’, may I inform you that we are continuously processing and giving the refund and that we are well within the timetable given us to complete the refund. Meralco, moreover, is not ‘violating with impunity both the terms of its franchise and the EPIRA,’ as you stated. For the record, we never disregarded any moral and legal norms as you claimed in your column. I find your statement most unfair.

"Please allow me, too, to enlighten you on the issue of system loss, which you attempted to discuss in your column. Local distribution utilities are among the most transparent in presenting their system losses. Unlike other utility services (e.g., electricity transmission, water, telephone, cable, etc.), local distribution utilities present system loss charges as separate and verifiable quantities. Meralco’s System Loss Charge computations, along with supporting documents, are submitted monthly to ERC for verification. No charges are imposed on the customer unless with explicit approval of the ERC.

"The results of Meralco’s system loss reduction efforts attest to how serious it is against electricity pilferage. In 2007, Meralco attained its lowest system loss in 27 years. Meralco’s system loss in 2007 was only 9.65%, down from 21.01% in its high in 1986. Despite its residential-biased sales mix, this performance still places Meralco in the 15th percentile rank of local distribution utilities with the lowest system losses.

"In the same year, Meralco was able to collect a total of P789 million from electricity pilferers, which was used to lower customer’s distribution charges by 3 centavos. The discount is reflected as a reduction in the Generation Charge. In the past 10 years, Meralco has already refunded to its customers an estimated P7.5 billion in pilferage recoveries. For comparison, Meralco’s total pilferage recoveries in 2007 (P789 million) was 24 times the combined pilferage recoveries of the 120 electric cooperatives in the country for the same period.

"Major system loss reduction efforts of Meralco include a comprehensive drive to review and update business processes, promoting the consumption of large customers, increasing the productivity and effectiveness of apprehending crews, and providing additional protection to its distribution and metering facilities. Meralco owes much of its success from different local government units, community associations, and concerned citizens who share the objective of promoting public safety and order.

"Meralco welcomes an objective review of system losses in the Philippines. As a regulated entity, Meralco is vitally interested in how it could best serve the interest of its customers in a manner that would be both cost-effective and sustainable, while remaining within the bounds of laws and regulations. Any review of applicable laws and regulations that would ensure long-run benefits (in terms of better service quality and cost) to all distribution utility customers in the country would positively reflect both on the local economy and the entities that provide power for it."– Elpi O. Cuna, Vice President and Head, Corporate Communication, Meralco