Meralco bares rate hike from tax reform

January 10, 2018

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THE Manila Electric Co. (Meralco) expects an 8-centavo increase in electricity cost per kilowatt-hour (/kWh) this year with the application of new taxes on coal, oil and power transmission, a company official said yesterday, adding that part of the increment will be implemented in phases.

“Total is 8 centavos,” Lawrence S. Fernandez, Meralco vice-president and head of utility economics, told reporters when asked to quantify how much more consumers will pay with the enforcement of new taxes under Republic Act No. 10963 or Tax Reform for Acceleration and Inclusion (TRAIN) Act.

“[That’s the] full impact… for Meralco customers this year.”

Mr. Fernandez said Meralco derived its computation using power dispatch levels in November 2017, which saw a third of Meralco’s requirements come from coal-fired power plants and a smaller portion from an oil-fired facility.

He said that the excise taxes on coal and oil would translate to an additional 1 centavo/kWh which will be implemented on a staggered basis since it would depend on power generators’ existing stock of fuel.

RA 10963 provides for a P50 per metric ton (/MT) excise tax on coal that will rise to P100/MT next year and further to P150/MT starting 2020, besides subjecting imported coal to the value added tax.

The law also provides a P2.50 per liter excise tax on oil that rises to P4.50 per liter next year and further to P6 per liter starting 2020.

The bigger impact would come from a 7 centavos/kWh increase in transmission charge, Mr. Fernandez added.

The staggered one-centavo increase could start in February, but if grid operator National Grid Corporation of the Philippines (NGCP) were to include in its January billing the tax on power transmission, next month’s rate increase would even be bigger, he said.

Mr. Fernandez said that since TRAIN took effect on Jan. 1, Meralco expects its January bill from NGCP to reflect the 12% value-added tax (VAT). He said TRAIN had repealed the VAT exemption granted to NGCP by RA 9511, which gave it the franchise to engage in the business of transmitting electricity through a high-voltage network of interconnected transmission lines, substations and related facilities.

Meralco’s controlling stakeholder, Beacon Electric Asset Holdings, Inc., is partly owned by PLDT, Inc. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has interest in BusinessWorld through the Philippine Star Group, which it controls.

Electricity contributes 4.51% to the theoretical basket of basic goods and services used by a typical Filipino household on which annual inflation is computed.

ESTIMATED INFLATION IMPACT
ING Bank N.V. Manila expects inflation to pick up by 3.7% this year on the back of rising crude prices, coupled with the impact of TRAIN.

The forecast is higher than the 3.4% given by the Bangko Sentral ng Pilipinas (BSP), coming from a 3.2% reading in 2017. This, however, will still fall within BSP’s 2-4% target band for 2018.

“We believe that inflation pressures in 2018 would be more intense,” ING economist Jose Mario I. Cuyegkeng said in a market report yesterday.

“We estimate that the direct impact of the tax reform-related excise taxes would result to a 0.8-1 percentage point (ppt) increase.”

RA 10963 reduces personal income taxes for those earning below P2 million, alongside a simpler system for computing donor and estate taxes.

Foregone revenues will be offset by the removal of some VAT exemptions; increased tax rates for fuel, automobiles, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not in the stock exchange, and stock transactions; as well as new taxes for sugar-sweetened drinks and cosmetic surgery.

Second-round effects that will be felt through rising transport fares as well as higher wages and production costs would also drive prices up by another percentage point, Mr. Cuyegkeng added.

The inflation uptrend is expected to prod the BSP to raise rates twice this year, even as these will lag behind the United States where three tightening moves are expected from the Federal Reserve.

Central bank officials said they expect new taxes to add less than 1 ppt to inflation this year, even as they said the BSP is ready to adjust policy tools should the pace pick up beyond expectation.

BOND YIELDS RISING
Faster inflation is also expected to exert upward pressure on interest rates, with yields at the secondary market already trading higher in 2018’s first trading week.

Higher rates fetched for US Treasuries and higher funding requirements from domestic capital markets are also spurring a pickup in rates.

“Market had become more wary of inflation expectations and had priced this in with spreads to inflation rising by 20bps (basis points) in 2H 2017 from 1H 2017… [W]ith inflation rising in 2017 to 3.2% from 1.8% in 2016, market had shaken off some complacency and started to exact a higher inflation premium,” ING Bank said in the report.

Previously, players had asked for “modest” yields as inflation stood favorable, even settling below the target range at 1.8% in 2016. However, the pickup in prices last year and future prospects made them change tack.

Expectations of additional rate hikes by the Fed are also triggering higher rates sought by market players.

Still, this is seen countered by ample funding held by the Bureau of the Treasury, giving the government space to be more discerning of bond bids.

Mr. Cuyegkeng said two retail Treasury bond offers last year generated “substantial cash” for the government worth P430 billion. A $1-billion global note offer expected this month would also boost public coffers.

“Government cash position is healthy for most of 1H 2018. This would allow government to manage bond yields at auctions,” the bank analyst said.

“We expect this cash position to have a positive effect on local bond market.”

The Treasury rejected all bids at yesterday’s offer of 10-year bonds as yields sought by market players were higher than expected. — Victor V. Saulon and Melissa Luz T. Lopez