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

Government Service Insurance System 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

Government Service Insurance System Major shareholders’ profile  Lopez holding company, FPHC, Union Fenosa and the Meralco pension fund own/ control 33.4% of Meralco

Government Service Insurance System 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.

Government Service Insurance System 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.

Government Service Insurance System 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

Government Service Insurance System GSIS issues (as a shareholder) vs Lopez-controlled management 2. Lack of Good Corporate Governance  Self-dealing transactions worth P55 billion yearly are confidential and beyond stockholders’ scrutiny -

Government Service Insurance System GSIS issues (as a shareholder) vs Lopez-controlled management 2. Lack of Good Corporate Governance  Representatives of the Lopez Group, including the Chairman, participate actively in approving their self-dealing transactions -

Government Service Insurance System GSIS issues (as a shareholder) vs Lopez-controlled management 2. Lack of Good Corporate Governance  Access to other transactions and documents of the company are severely restricted

Government Service Insurance System 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

Government Service Insurance System To illustrate : P10.20 P8.89 P6.50 P6.44 P5.87 P7.63 P P10.20 P8.89 P6.50 P6.44 P5.87 P7.45 P7.03P6.92 * Based on May 2008 Billing.

Government Service Insurance System To illustrate: P7.63 P7.45 P7.50 P5.63 P4.92 P5.43 P5.22P5.21 * Based on May 2008 Billing.

Government Service Insurance System 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.

Government Service Insurance System 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. -

Government Service Insurance System Meralco’s Excuses  Taxes - Fallacy because: Other DUs pay the same rate of taxes. -

Government Service Insurance System 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. -

Government Service Insurance System Attributable Causes  Immoral and onerous IPP power supply contracts (Sta. Rita, San Lorenzo and Quezon Power) -

Government Service Insurance System 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

Government Service Insurance System 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 -

Government Service Insurance System 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 -

Government Service Insurance System 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 -

Government Service Insurance System 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 -

Government Service Insurance System 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. -

Government Service Insurance System Computation of the Generation Charge Based on April 2008 supply month preliminary bills of power suppliers Avg. gen. cost = P4.87/kwh

Government Service Insurance System 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. -

Government Service Insurance System Simulation 1: distribution between NPC and IPPs (peak and off-peak)  Reduction of 16% in gen. cost from P4.87/kwh to P4.08/kwh

Government Service Insurance System Simulation 2: 70% NPC, 30% IPPs  Reduction of 19% in generation cost, from P4.87/ kwh to P3.93/kwh

Government Service Insurance System Simulation 3: 100% NPC  Reduction of 24% in generation cost, from P4.87/kwh to P3.71/kwh

Government Service Insurance System Attributable Causes - More purchases from NAPOCOR have other cost reduction benefits. a. Transmission line charges will be reduced. -

Government Service Insurance System 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. -

Government Service Insurance System 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 -

Government Service Insurance System Attributable Causes b. Costly and unnecessary outsourcing of services mostly through subsidiaries - Miescor * All engineering construction - Corporate Information Solutions, Inc. * e-transactions -

Government Service Insurance System 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 -

Government Service Insurance System Attributable Causes b. Costly and unnecessary outsourcing of services mostly through subsidiaries - costs P2.95 billion in

Government Service Insurance System 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 -

Government Service Insurance System Meralco’s pension costs: P1.58B P1.79B P2.8B In 2008, only P1.8 billion was approved by ERC.

Government Service Insurance System 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 -

Government Service Insurance System 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 -

Government Service Insurance System Attributable Causes e. Systems Loss - Failure to curb system losses P15.8B P16.4B P17.3B 2005

Government Service Insurance System 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. -

Government Service Insurance System Attributable Causes - Abusive use of systems loss charges * Own use is considered systems loss. * Lease rentals are part of computing maximum allowable systems loss. -

Government Service Insurance System 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? -

Government Service Insurance System 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. -

Government Service Insurance System FPHC and its subsidiaries P B First Philippine Holdings Corp FGHC International Limited1.462 FPH Fund Corporation2.919 First Philippine Infrastructure8.499 First Gen Corporation ABS-CBN BENPRES Holdings Bayan Telecomm TOTAL P B Lopez Group Loans

Government Service Insurance System Must we allow this situation to persist? -

Government Service Insurance System End of the Presentation Government Service Insurance System