Topics: Metro Manila, Pasig City, Meralco Pages: 6 (1896 words) Published: October 2, 2011
Chapter 1
A. Rationale of the Study
The Manila Electric Company (Meralco) operates the electricity distribution franchise in Metro Manila and the entire provinces of Bulacan, Rizal, and Cavite; and portions of Laguna, Quezon, Batangas and Pampanga. With over 4.8 million customers and 30,247 GWh of energy sales in 2010, it is one of Southeast Asia’s largest distribution utility. The franchise area of Meralco is home to 25.5 million people, roughly a quarter of the entire Philippine population of 94 million, and it is within Meralco's service area where almost half of the country's Gross Domestic Product (GDP) is produced, one-third from Metro Manila alone. Consequently, 54% of the total electricity usage in the Philippines, or almost three-fourths of all electricity used in Luzon, is consumed in the Meralco area.

Meralco also has majority ownership on Rockwell Land Corporation, known for its upscale real estate developments in Makati City, Pasig and Ortigas. Other subsidiaries of include  Meralco Industrial Engineering Services Corporation, Corporate Information Solutions, Inc., Meralco Energy, Inc., e-Meralco Ventures, Inc., Meralco Financial Services Corporation, and Clark Electric Distribution Corporation, all of which play a supporting role on the distribution business.

Brief History

The company was organized as the Manila Electric Railroad and Light Company 108 years ago in 1903 to provide electric light and power and an electric street railway system to Manila and its suburbs. The facilities that Meralco built to provide these two services represented for many years the largest single investment of American private capital and know-how in the whole of East Asia.

Since the 1960’s, the company was dominated by the Lopez Group through its subsidiary First Philippine Holdings Inc. However, a series of internal and external events in the mid-2000s triggered a change in ownership in Meralco. The table below summarizes the current ownership structure of the company.

Shareholder| Percentage of Ownership| Remarks|
Beacon Electric| 34.8| Holding company 50% owned by Piltel and MPIC| PLDT Group| 6.1| |
First Pacific Total| 40.9| Controlling shareholder with voting agreement with the Lopez Group| San Miguel Group| 34.9| Owns or controls over 3,000 MW of generation capacity through SMC Global Power Inc.| Lopez Group| 9.5| Founding owners of Meralco who have been selling down; controls power companies First Gen and EDC| Others| 4.7| |

Free float (PCD Nominee)| 10.0| |
Total| 100.0| |
Source: Meralco SEC Form 17-A 2010

The Rationale of the Study

Last January 20, 2011, Meralco Chairman Manuel Pangilinan announced that the company is moving into power generation, with an initial plan to construct a peaking power plant in Calamba, Laguna with a rated capacity of 150MW. The plant is expected to be operational by the first-half of 2012 at an indicative cost range of US$120m to US$150m to run on mixed fuel. Mr. Pangilinan further disclosed that the company intends to put-up a 1,500 MW portfolio of greenfield power plants. This plan of the company should be a long-term positive, not so much in terms of earnings contribution, but more because it should cap total power costs to the customers of Meralco. Consumer groups have erroneously blamed rising power rates solely to Meralco, not realising that much of the recent increases came from the generation rates, not distribution rates that Meralco earns from. However, the plan carries two risk: First, is on what will be the corporate vehicle that should implement the plan given the existing ownership mix of the company (considering EPIRA rules). Second, is on what kind/s of power plant should Meralco build so as to maximise its capital expenditures and minimise opportunity cost. The two risks stated above shall be the focus of this paper. The research and the strategic proposals that are in this paper shall be limited to...
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