Catastrophic charges net fantastic profits

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This refers to the news report regarding Meralco chair Manuel V. Pangilinan’s announcement that Meralco has earmarked P11 billion for capital expenditures next year; that there is no need to raise new funds as it will be internally funded; and that Meralco is awash with cash, even more than PLDT. Meralco president Oscar A. Reyes added that the 2012 capital expenditures will be more than P9 billion.

How could that be, considering that Meralco, being a public utility, is allowed a return before tax of only 12 percent per annum? Based on my computation, Meralco’s return before tax on invested capital for last year, after the PBR (performance-based regulation)-twin increases granted to them by the Energy Regulatory Commission (ERC), surged astronomically to 145 percent, which is way beyond the 12-percent limit. Thus, from 2003 to 2011, Meralco has realized an excess income in the total sum of P90 billion.

Notably, Meralco’s stockholders received during the last two years windfall dividends equivalent to 69.5 and 78 percent of the company’s issued capital stock. According to our computation, Meralco should have earned a pre-tax income of only 12 percent or P1.8 billion in 2011; instead it earned 145 percent or P21.8 billion.

The allowable pre-tax income of P1.8 billion is based on 12 percent of the capital stock plus allowable-after-tax income from 2003 to 2010, minus the dividends paid during the period amounting to P15.05 billion, while the pre-tax of P21.8 billion actually earned by Meralco is based on its pre-tax income of P18.7 billion as shown on its financial statements plus the COA (Commision on Audit)-disallowed expenses of P3.1 billion (average for two test years).

Thus, for the last nine years from 2003, Meralco realized yearly excess profits in the amounts of P2.9 billion, P11.6 billion, P6.8 billion, P8 billion, P7.3 billion, P6.8 billion, P10.2 billion, P15.4 billion and P20.01 billion, for a total of P89 billion.

If Meralco would be allowed to use excess profits for capital expenditures, this would result in the increase of its rate base (cost of plant machineries and equipment) without infusing any fresh capital. It would also give Meralco a new reason to apply for another round of rate increase.

In short, Meralco will be using the previously generated overcharges in order to increase the rate of its future overcharges on the hapless consumers.

According to the Supreme Court, the rate must be “good to the stockholders and best to the consumers.” At present, Meralco’s rate is “fantastic to the stockholders but catastrophic to the consumers.”

In order to correct this anomalous situation, ERC should order Meralco to immediately rollback its rate to the unbundled rate level, and return to the consumers its excess profits (overcharges) of P89 billion (which we expect to climb to at least P110 billion by the end of this year).

—LEONARDO A. AURELIO, laa@amslaw.ph

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