Business World Online
Posted on May 15, 2011 11:13:28 PM
BY EMILIA NARNI J. DAVID, Reporter
FOCUSIN 2001, the Electric Power Industry Reform Act (EPIRA) was enacted in a bid to improve operating efficiencies, cut down on power costs and limit losses for the cash-strapped government, then the dominant player.
With the state making it a policy to get out of the industry, the law also spurred another development: businesses diversifying into power generation.
Experts see this as a positive move -- one that will help address the country’s power shortages -- but also say it could be a risky foray for inexperienced businesses looking to take advantage of an earnings opportunity.
"There is a huge gap in that sector. While it is highly capital intensive ... [the market has a] stable return of equity," 2TradeAsia.com analyst Grace C. Cerdenia said.
A 300-megawatt (MW) supply shortfall has been projected for Luzon for 2011-2012, with another 11,900 MW to be needed up to 2030, the Energy department has said. For the Visayas, 2,150 MW of additional power is needed until 2030 and for Mindanao the requirement is a slightly higher 2,500 MW.
The supply gap has meant high power prices. A study by distribution utility Manila Electric Co. (Meralco) presented earlier this year showed the Philippines with the highest electricity rates in Asia, beating even Japan. The average retail rate of electricity in the country was set at $0.181 per kilowatt-hour (kWh) or P7/kWh compared to $0.17/kWh in Japan.
After losing initial bids to take over state-owned power firms, San Miguel is now the biggest power trader in the country, having won independent power producer administration (IPPA) contracts for the 1,20-MW Sual coal-fired power plant, 345-MW San Roque hydropower plant, 1,200-MW Ilijian natural gas power plant and the 620-MW Limay diesel power plant.
More recently, Ayala Corp. -- has real estate, telecommunications and banking as its main businesses -- announced a bid to build a portfolio of over 1,000 MW from both renewable and traditional energy sources. Earlier this year the firm said it was taking a 50% stake in NorthWind Power Development Corp., which owns and operates the 33-MW wind farm in Ilocos Norte.
Electricity distributor Meralco, already a veteran in the industry, for its part has announced plans to build its own power plants aside from tapping affiliate firms. Similarly, oil importer and retailer Eastern Petroleum wants to build a clean coal fired plant in Bataan.
Firms claim their interest in the sector is driven by a desire to help lower power costs in the country.
"Part of Meralco’s over-all objective is ensuring that there will be adequate, affordable and cost competitive power supply," Meralco Senior Vice-President Alfredo S. Panlilo, Sr. said in a text message.
Eastern Petroleum President Ferdinand L. Martinez, for his part, said in a telephone interview: "Power is one of the most strategic sectors and as a concerned business, Eastern Petroleum is motivated to hopefully bring down rates because our rates are very high."
"The government is putting into place rules and policies to ensure a level playing field. The commission is also approving competitive prices that reflect true cost of power and allows investors to get a reasonable return of investment while providing reasonable rates for consumers," Energy Regulatory Commission (ERC) Executive Director Francis Saturnino C. Juan said in a separate telephone interview.
The EPIRA or Republic Act 9136 mandated the privatization of state-owned power assets in preparation for open access, a scheme that will pit generation firms against each other without the competition posed by government-subsidized plants.
So far 70% of the country’s power generation assets have been privatized. IPPA contracts have also been privatized to about 68-70%; the figure is still being finalized by the ERC. Open access begins once the regulator has declared 70% of all generating assets and IPPAs as privatized.
Under this regime, end-users can choose where to directly source their electricity and otherwise, investors would have to compete against cheaper power sold by the government.
Power rates in Mindanao, for instance, are roughly 75% cheaper than those in Luzon, based on National Power Corp. data, due admittedly to many factors but mainly since generating plants in the south are still government-owned and subsidized.
San Miguel sold 40% of its beer business and its Australian dairy firm National Foods, citing the need to diversify from a saturated market. San Miguel Brewery, Inc. posted flat income growth in 2009 and just a 3% uptick 2010 since the beer unit was spun off in 2008. Its food and beverage subsidiary, San Miguel Pure Foods Co., Inc., recorded shrinking net incomes in 2007 and 2008 before rebounding in 2009 and 2010.
Several Ayala core businesses -- Ayala Land, Inc. and Globe Telecom, Inc. -- have also exhibited slowing profit growth. Ayala Land, for instance, grew its net income by 13.63% in 2007 and then posted a slower 9.71% growth the next year before recording a 16.06% drop in profits in 2009. From this low base, profits have since rebounded and grew by 35.13%. Globe’s net income growth of 12.71% seen in 2007, meanwhile, hasn’t been matched since.
Astro C. del Castillo, managing director of brokerage firm First Grade Holdings, Inc., pointed to the experience in the telecommunications industry where rates dropped when competition was opened up.
"There are common denominators in many of the players entering the sector. They are companies that have industrial subsidiaries or real estate. By entering the power sector and engaging in competition... [this] makes power more accessible and... benefits these other businesses," Mr. del Castillo said.
Recently, Ayala-led Philippine Integrated Energy Solution, Inc. was granted a retail electricity supplier license. The company will mainly market electricity to other Ayala companies.
"There is an opportunity that we feel is out there by organizing a company that can retail power for malls, our technoparks and those with supply requirements with a big base," Ayala Land Chief Finance Officer Jaime E. Ysmael said in a chance interview.
But with entering a new sector there are always uncertainties.
"The risk is that many of them are first-timers and they will need to hire experts to help them along which is an extra cost for them," Mr. del Castillo said.
Standard & Poor’s just last week downgraded its credit outlook for San Miguel to negative from stable, citing concerns over the firm’s heavy spending for diversification.
San Miguel Chief Operating Officer Ramon S. Ang, however, pointed out: "[Our surge in first quarter profits] is a result of an unexperienced company. What more if we finally learn the business? The truth is new businesses can be improved. You learn what your mistakes are and adjust".
Competition, however, can also lead to dominance and consumers could end up at the losing end.
Pete L. Ilagan, President of the National Association of Electricity Consumers for Reform, warned that profit-driven firms -- which have snapped up many of the state’s power assets -- may "cartelize" power rates.
"Competition can be abused because these companies may decide to keep prices only at a certain level. Education of consumers is needed," he said.
Experts see this as a positive move -- one that will help address the country’s power shortages -- but also say it could be a risky foray for inexperienced businesses looking to take advantage of an earnings opportunity.
"There is a huge gap in that sector. While it is highly capital intensive ... [the market has a] stable return of equity," 2TradeAsia.com analyst Grace C. Cerdenia said.
A 300-megawatt (MW) supply shortfall has been projected for Luzon for 2011-2012, with another 11,900 MW to be needed up to 2030, the Energy department has said. For the Visayas, 2,150 MW of additional power is needed until 2030 and for Mindanao the requirement is a slightly higher 2,500 MW.
The supply gap has meant high power prices. A study by distribution utility Manila Electric Co. (Meralco) presented earlier this year showed the Philippines with the highest electricity rates in Asia, beating even Japan. The average retail rate of electricity in the country was set at $0.181 per kilowatt-hour (kWh) or P7/kWh compared to $0.17/kWh in Japan.
Diversifying firms
Among the country’s conglomerates, San Miguel Corp. has arguably made the biggest splash, announcing four years ago that it was looking to expand beyond the food and beverage business where it had made its mark,After losing initial bids to take over state-owned power firms, San Miguel is now the biggest power trader in the country, having won independent power producer administration (IPPA) contracts for the 1,20-MW Sual coal-fired power plant, 345-MW San Roque hydropower plant, 1,200-MW Ilijian natural gas power plant and the 620-MW Limay diesel power plant.
More recently, Ayala Corp. -- has real estate, telecommunications and banking as its main businesses -- announced a bid to build a portfolio of over 1,000 MW from both renewable and traditional energy sources. Earlier this year the firm said it was taking a 50% stake in NorthWind Power Development Corp., which owns and operates the 33-MW wind farm in Ilocos Norte.
Electricity distributor Meralco, already a veteran in the industry, for its part has announced plans to build its own power plants aside from tapping affiliate firms. Similarly, oil importer and retailer Eastern Petroleum wants to build a clean coal fired plant in Bataan.
Firms claim their interest in the sector is driven by a desire to help lower power costs in the country.
"Part of Meralco’s over-all objective is ensuring that there will be adequate, affordable and cost competitive power supply," Meralco Senior Vice-President Alfredo S. Panlilo, Sr. said in a text message.
Eastern Petroleum President Ferdinand L. Martinez, for his part, said in a telephone interview: "Power is one of the most strategic sectors and as a concerned business, Eastern Petroleum is motivated to hopefully bring down rates because our rates are very high."
Free market promised
But it also helps that the policy environment now promises firms a return on their investment."The government is putting into place rules and policies to ensure a level playing field. The commission is also approving competitive prices that reflect true cost of power and allows investors to get a reasonable return of investment while providing reasonable rates for consumers," Energy Regulatory Commission (ERC) Executive Director Francis Saturnino C. Juan said in a separate telephone interview.
The EPIRA or Republic Act 9136 mandated the privatization of state-owned power assets in preparation for open access, a scheme that will pit generation firms against each other without the competition posed by government-subsidized plants.
So far 70% of the country’s power generation assets have been privatized. IPPA contracts have also been privatized to about 68-70%; the figure is still being finalized by the ERC. Open access begins once the regulator has declared 70% of all generating assets and IPPAs as privatized.
Under this regime, end-users can choose where to directly source their electricity and otherwise, investors would have to compete against cheaper power sold by the government.
Power rates in Mindanao, for instance, are roughly 75% cheaper than those in Luzon, based on National Power Corp. data, due admittedly to many factors but mainly since generating plants in the south are still government-owned and subsidized.
Slowing core businesses
In some cases, the power industry is also seen as providing fresh revenue opportunities for companies grappling with maturing businesses.San Miguel sold 40% of its beer business and its Australian dairy firm National Foods, citing the need to diversify from a saturated market. San Miguel Brewery, Inc. posted flat income growth in 2009 and just a 3% uptick 2010 since the beer unit was spun off in 2008. Its food and beverage subsidiary, San Miguel Pure Foods Co., Inc., recorded shrinking net incomes in 2007 and 2008 before rebounding in 2009 and 2010.
Several Ayala core businesses -- Ayala Land, Inc. and Globe Telecom, Inc. -- have also exhibited slowing profit growth. Ayala Land, for instance, grew its net income by 13.63% in 2007 and then posted a slower 9.71% growth the next year before recording a 16.06% drop in profits in 2009. From this low base, profits have since rebounded and grew by 35.13%. Globe’s net income growth of 12.71% seen in 2007, meanwhile, hasn’t been matched since.
Pros and Cons
Observers have aired mixed reactions to the trend of businesses diversifying into power generation. Some camps laud the entry of more players while others worry over a lack of expertise in the field and the risk that the industry will be controlled by just a few giants.Astro C. del Castillo, managing director of brokerage firm First Grade Holdings, Inc., pointed to the experience in the telecommunications industry where rates dropped when competition was opened up.
"There are common denominators in many of the players entering the sector. They are companies that have industrial subsidiaries or real estate. By entering the power sector and engaging in competition... [this] makes power more accessible and... benefits these other businesses," Mr. del Castillo said.
Recently, Ayala-led Philippine Integrated Energy Solution, Inc. was granted a retail electricity supplier license. The company will mainly market electricity to other Ayala companies.
"There is an opportunity that we feel is out there by organizing a company that can retail power for malls, our technoparks and those with supply requirements with a big base," Ayala Land Chief Finance Officer Jaime E. Ysmael said in a chance interview.
But with entering a new sector there are always uncertainties.
"The risk is that many of them are first-timers and they will need to hire experts to help them along which is an extra cost for them," Mr. del Castillo said.
Standard & Poor’s just last week downgraded its credit outlook for San Miguel to negative from stable, citing concerns over the firm’s heavy spending for diversification.
San Miguel Chief Operating Officer Ramon S. Ang, however, pointed out: "[Our surge in first quarter profits] is a result of an unexperienced company. What more if we finally learn the business? The truth is new businesses can be improved. You learn what your mistakes are and adjust".
Competition, however, can also lead to dominance and consumers could end up at the losing end.
Pete L. Ilagan, President of the National Association of Electricity Consumers for Reform, warned that profit-driven firms -- which have snapped up many of the state’s power assets -- may "cartelize" power rates.
"Competition can be abused because these companies may decide to keep prices only at a certain level. Education of consumers is needed," he said.
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