Meralco diversifies in response to Philippine power reforms

Meralco, the largest energy utility in the Philippines, will carry out a restructuring and establish a new ventures division in response to the country’s newly signed power bill. Company president, Manuel Lopez, who intends to diversify activity away from utility-based business, will oversee the expansion into areas such as financial services.

Meralco has the exclusive franchise to sell power in Manila, the Philippine capital – a deal set to run for at least another three years. But the country’s power industry reform bill will eventually break up existing monopolies and seeks to cut industrial power tariffs, which are among the highest in Asia. Cross subsidies are to be removed and competition introduced in power generation and distribution.

Meralco is braced for the entrance of several competitors: the financial barriers to entry are low because there will be no need to replicate the distribution lines.

Meralco has recognized its dependence on its core activity, which suffered a 25 per cent profits decline last year after regulators refused to raise tariffs.

Meralco hopes to follow the footsteps of minority shareholder Union Fenosa, one of Spain’s biggest energy companies. Union Fenosa generates half its revenue from non-utility activities only five years after deregulation, Mr Lopez says.

The first step in the restructuring is to split the group into separate units focusing on the traditional transmission or wires business; electricity retailing; back office functions; and new ventures. New ventures could include issuance of credit cards, processing money transfers from overseas Filipinos, and billing and collection services. Meralco hopes to capitalise on its huge customer base, which, at 3.7 million, is the biggest of any Philippine utility.

The Philippines has just passed its power reform bill, which seeks to introduce competition and reduce prices to consumers. The reforms are also aimed at attracting overseas investment and foreign interest is likely when the state-owned generator National Power Corporation is sold off.

Under the reforms, distributors will retain a monopoly on power lines, but will have to grant access to rivals at a levy fixed by the government. Distributors, of which Meralco is the biggest, will retain a monopoly on small customers – those needing no greater capacity than 1 MW – which account for about three-quarters of customers.

The reforms will also widen the potential market. Customers that will come up for grabs include companies generating their own power or sourcing it directly from National Power – neither method will be viable once cross-subsidies are phased out. These represent at least one-fifth of Meralco’s post-reform market.

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