Meralco - Strategy Analysis - Jelle

Figure 7. Degree of turbulence of Meralco's environment (Lynch, 2015)The electricity supply chain is static, in a sense that the flow of power from generatorsto substations, powerlines, and finally the end-users is done through mature technologies andalready established infrastructure. Although there are technological advances such as smartgrids and distributed generation (to be discussed in the PESTEL analysis in Section II.C), thebasic structure will not change. Despite this, the changeability of the Philippine power sectoris high. This is because of three major factors: (1) The Electric Power Industry Reform Act of2001 (EPIRA) (See Section II.C), is still in the process of being fully implemented. Thisestablished the spot and retail electricity markets. And since these markets are not yet fullydeveloped, the rules and regulations governing them are still changing. (2) The Philippines’economy is growing fast, which affects the energy consumption, and the balance betweenelectricity supply and demand. (3) There is a greater push for renewable energy. Althoughthe country still relies mainly on coal to meet its increasing energy demand, policies such asthe Feed-in-Tariff have been put in place to support renewables. This directly affectselectricity prices in the Philippines (Philippine Electricity Market Corporation, 2016) (Lynch,2015).The predictability of changes in the industry is moderate to high. The provisions ofEPIRA are already determined. It is the execution schedule and market details that arevariable. And whenever revisions are made to market rules, they first go through publicconsultation. The Philippines’ economy is forecasted by several agencies like the BangkoSentral ng Pilipinas (Central Bank of the Philippines), World Bank, Asian Development Bank,etc. Finally, any development in technology is closely monitored by companies both in thePhilippines and abroad. Of course, all of these are subject to the country’s political stability,which is also rated by agencies such as The Economist Intelligence Unit.Given these, the degree of turbulence of the environment is concluded to be moderate.There is high changeability, but this is accompanied by high predictability. Meralco’scorporate strategy is a mix of prescriptive and emergent. Prescriptive, because the corebusiness is essentially the same as it was 100 years ago. Thus, it continues using the “formula”

that has been working for it. At the same time, the company must be able to adapt to thechanging policies, economy, and technology. Strategies must be put in place to make the mostout of the growing economy, while protecting the company’s dominance in the market.C. PESTEL AnalysisDemographicsMeralco operates in the Philippines, a relatively small, densely-populated,developing, archipelagic country in Southeast Asia. The country has a land area of 300,000km2, but a population of 92 million people, and with a GDP (in current US , as of 2014) of 285billion, growing at 6.1%. Majority of Meralco’s customers are in Metro Manila, the country’scapital. Although the National Capital Region only accounts for 0.2% of the country’s totalland mass, it houses 13% of the country’s population and contributes 36% of the country’sGDP (2.1 percentage points out of its 6.1% GDP growth rate). Compared with distributionutilities in other parts of the country, Meralco’s clientele have more purchasing power(Philippines Statistics Authority, 2016).Political and Sociological 16,697 1,352 397 277Figure 8. Segregation of Filipino families by income class (Rappler, 2015)

The figure above shows the country’s socio-economic structure as of 2015 (Albert,Gaspar, & Raymundo, 2015). The Philippines is low- and middle-class heavy, with highdisparity between each social class. As of 2012, its GINI (a measure of inequality; the closerto zero, the more economically equal the country is) is 43, the 14th highest in the world (WorldBank, 2016). Meanwhile, 21% of the country still has no access to electricity (InternationalEnergy Agency, 2015) . Meralco is owned by the biggest conglomerates in the country, andnaturally, has the economic and political power. Its customers, however, are from the middleand lower-classes. Thus, its service must be made affordable for everyone. Otherwise, thiscan result to power pilferage by Filipinos who can’t afford to pay electric bills. Already,Meralco allots 6.5% system loss charge for these losses (Metro Pacific InvestmentsCorporation, 2015).EconomicThe Philippines defied global trends, with a Gross Domestic Product (GDP) growth of5.8% in 2015, making it one of the fastest-growing developing countries in Asia together withIndia, China, and Vietnam. Despite being lower than 2014’s 6.1% GDP growth and the targetgrowth of 7%-8%, this performance is decent, given the environment: a global economicdecline, aggravated by local concerns like El Niño. The country was able to overcome thesechallenges through high government spending aided by robust private investments,encouraging favorable ratings from top credit rating agencies: Standard & Poor’s reaffirmed the Philippines’ BBB Stable rating, the highest ratingever recorded in the country’s history Fitch Ratings rated the Philippines a BBB- Positive Investment Grade rating Moody’s rated the Philippines with a BAA2 Stable Investment Grade ratingDespite the decline in growth of remittances from Overseas Filipino Workers (OFWs), severalfactors such as the continued growth of the Business Process Outsourcing (BPO) industry andthe Services sector led to more positive results: Record-low unemployment rate at 5.6% Record-low inflation rate at 1.4% 6.2% growth in household consumption Highest Consumer Confidence Index in Southeast AsiaA growing economy results to growing electricity demand, thus signifying a larger growthpotential for Meralco (Meralco, 2016).

Figure 9. [Left] The growing Philippine economy (Schnabel, 2016) accompanied by [Right] growing electricity demand(Philippine Electricity Market Corporation, 2016)LegalAs with any public utility, the electricity sector is highly regulated by the governmentthrough the Energy Regulatory Commission (ERC), an independent quasi-judicial regulatorybody. Its main responsibilities are to ensure consumer education and protection, and topromote the competitive operations in the electricity market (Energy RegulatoryCommission, 2017). The commission approves prices of bilateral contracts betweenelectricity suppliers and retail customers, and also monitors the electricity bill charged toend-users.Feed-in-Tariff (FIT)Pursuant to the Renewable Energy Act of 2008 (Republic Act No. 9513), The ERCissued a resolution adopting FIT rules in 2010. The FIT system is a policy guaranteeing a fixedpayment per kilowatt-hour for wind, solar, ocean, run-of-river, and biomass generators. Tosupport this program, ERC approved the collection of a FIT-Allowance (FIT-All) charge ofPhP0.0406 per kWh from all consumers nationwide, in addition to the regular electricity bills.This fee is collected through distribution utilities like Meralco, and is passed on to theRenewable Energy producers (Meralco, 2016).Electric Power Industry Reform Act (EPIRA)The most important legislation, however, that restructured the electricity sector wasthe Electric Power Industry Reform Act of 2001 (Republic Act No. 9136). Its main goals were: To ensure and accelerate the total electrification of the country, by encouragingprivate investment in the industry To ensure affordability of electricity, by encouraging free and fair competitionthrough the establishment of the wholesale and retail electricity markets and theEnergy Regulatory Commission (Senate and House of Representatives of thePhilippines, 2001)Philippine Electricity Supply Chain

Before EPIRA, all power generation and transmission facilities were owned by thestate-owned National Power Corporation (NPC). Meralco, a distribution utility, thus onlysourced its electricity from the government. All end-users (residential homes and industrialfacilities alike) sourced their power from their local electric cooperatives and distributionutilities. In this case, all electricity consumers inside Meralco’s franchise area (Metro Manila)got their power from Meralco.Through EPIRA, (i) power plants were privatized by auctioning them to the highestbidders; (ii) the company’s power transmission network was franchised to the National GridCorporation of the Philippines (NGCP) – a consortium comprised of Monte Oro GridResources Corporation (owned by a Filipino conglomerate) and the State Grid Corporation ofChina (National Grid Corporation of the Philippines, 2016); (iii) the Philippine ElectricityMarket Corporation, a company supervised by the country’s Energy Secretary, wasestablished in 2006 to (iv) operate the Wholesale Electricity Spot Market, which started in2010 and (v) the Retail Competition and Open Access (RCOA) in 2013 – through whichconsumers with an average load of 1 MW of greater are free to purchase electricity fromelectricity suppliers aside from their local providers (Philippine Electricity MarketCorporation, 2016).For Meralco, this opened the opportunity to vertically integrate with other parts ofthe supply chain. As stated earlier, its power generation arm, MGen, is currently constructingthree generation facilities. Its retail arm, MPower, has half the market share. EPIRA also gaveMeralco the liberty to source its power from a variety of private generators, and even fromthe market – whatever suits its strategy. The establishment of RCOA expanded Meralco’scustomer reach as it can now provide power to contestable customers (mostly industrialfacilities which use more than 1 MW of electricity) outside Metro Manila.Venture in powergenerationSingle supplierMonopoly indistributionCaptive customersMany suppliersVenture in retailelectricity supplyCaptive customersContestablecustomersFigure 10. The electricity supply chain before and after EPIRA (Philippine Electricity MarketCorporation, 2016)

TechnologicalIn 2013, the ERC, the main government body in charge of regulating the electric grid,approved the standards enabling net-metering of renewable energy for customers withdistributed generation. Distributed generation refers to small generation entities who cansupply directly to the grid with a maximum capacity of 100 kW. Net-metering means thatconsumers who have installed capacities (e.g. solar panels) and generate more electricitythan they consume can sell this extra power to the grid. The Renewable Energy Act of 2008pioneered this net-metering concept, with the goal of encouraging end-users to participate inrenewable energy generation (Department of Energy (Philippines), 2008).Since the technology for solar photovoltaics is quite mature, solar providers havebeen offering the supply and installation of rooftop solar panels for as low as US 3,800 (SolarPhilippines, 2017). Meralco mitigates this risk by investing heavily in infrastructure toimprove efficiencies to the point of making self-generation uneconomical. In 2015, Meralco’scapital expenditure amounted to around US 228 million, most of which was dedicated toelectric capital projects like substations and transmission lines. As a result, the company’ssystem loss and interruption indexes have consistently been decreasing in the past five years(Meralco, 2016).Figure 11. Meralco's operational performance (Metro Pacific Investments Corporation, 2015)D. Key Factors for SuccessThree major factors are identified to thrive as an electricity distributor –infrastructure, size, and customers.Corporation: Infrastructure and CapitalDistribution lines are infrastructure that are impractical to build in parallel – becausethey are costly and logistically difficult to manage. Setting up the power lines first in anyregion gives the company an obvious competitive advantage. This was the case for Meralco.It was the first company to electrify Metro Manila, and so the company was able to captureall electricity consumers in Metro Manila for over 100 years. Connected to this is the capitalto develop infrastructure. The franchise area cannot be expanded without the money to build

and maintain the power lines. Meralco, being owned by the biggest conglomerates in thecountry, also has this advantage.Competition: Size and Market DominanceThe bigger the franchise area, the bigger the bargaining power of a distribution utilityis. This is the reason why smaller electric cooperatives in the rural parts of the Philippinesare aggregating when securing power supply agreements. They are able to buy power fromgenerators at lower prices or at more flexible terms, compared to when they negotiateindividually. On the other hand, generators are competing to obtain power supplyagreements with Meralco, because of its huge demand. In 2015, Meralco’s peak demandreached 6,298 MW (60% of the whole country’s peak demand for the same year). Securing acontract with Meralco meant securing the company’s income for a long period of time(Meralco, 2016) (Philippine Electricity Market Corporation, 2016).Size also increases the lobbying power of a company. Various organizations(Independent Power Producers’ Association, Retail Electricity Suppliers’ Association, etc.)protect the interest of different players in the power sector. Larger companies, who havegreate

In 2009, two other major conglomerates - PLDT Corporation and San Miguel Corporation, bought majority stocks from the Lopez family. Since then, the ownership of the company has evolved (Meralco, 2016). As of 2015, the major shareholders of the company