NOTE: This was a 2-part exclusive explainer series I wrote as part of my comprehensive coverage of how the Lopez family handled an adversary, GSIS chief Winston Garcia, in the boardroom of a ‘crown jewel,’ Meralco. The first part discussed the personality differences and gripes between the two camps, while the second part is a big picture take on energy prices, a key complaint of Garcia against the Lopezes.

Eventually, the Lopezes would lose control of the country’s biggest power distibutor.

This was published on May 9, 2008 on the news sites of ABS-CBN and Newsbreak, but the links are both dead now. There have been many changes and challenges within the Lopez family itself, as well as in the boardrooms of the companies they run. I hope that sharing this piece of history provides context to the never-ending evolution of the Lopez family.

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(First of two parts)

In the usually placid boardroom of Manila Electric Co. (Meralco), the country’s biggest power distributor controlled by the Lopez family, the entry of brash and aggressive Winston Garcia, a new member of the board, was disconcerting.
 
Boardroom meetings were usually cordial and members were cozy with each other. Enter Garcia, whose skewering questions on corporate governance stretched an April meeting up to almost four hours. With his table banging and forceful voice, he stresses his points—and upsets others.

Garcia is the president and general manager of pension fund Government Service Insurance System (GSIS), a cash-rich government corporation, which increased its stake in Meralco early this year. The Lopez family is the legacy owner of Meralco. 
 
Personality differences between the two shareholders, each currently controlling about one-third of Meralco, have since sparked a public spat amid the declining price of Meralco’s listed shares because of worries on its political risks.

These public exchanges, moreover, have led to discussions on issues ranging from why electricity rates in the country are the second most expensive in the region, next to Japan, to the specter of a government takeover.

Unlike most boardroom dramas, Meralco’s is imbued with public interest. It has triggered a public discussion not only on Meralco’s corporate issues, but also on what else needs to be done in both policy and implementation of reforms in the energy sector.

As the drama unfolds, the question remains: will all this trigger reforms that will benefit consumers?  

Board changes

In interviews with abs-cbnnews.com/Newsbreak, Garcia said that by forcing Meralco management to be accountable for questionable transactions or improve company practices, which can be made more efficient, then Meralco’s earnings could increase and dividends paid out to shareholders more often.

But Garcia’s motives have been a puzzle. Meralco shareholders and supporters view Garcia’s high handedness as an effort by the government to harass the Lopez family who is into highly regulated industries such as power, telecommunications and, toll roads, since its media outlet, ABS-CBN, is perceived to be critical of the current administration. (Disclosure: This Web site, abs-cbnNEWS.com, is run by ABS-CBN Interactive, a company owned by the Lopezes.)

Some energy sector observers perceive Garcia as an “attack dog” unleashed by the current administration, but Garcia continues to hammer his message that he only wants value for the billions that GSIS has invested in Meralco.

He advocates transparency and good governance, which he said could be had through a change in management and not by controlling Meralco. At the same time, Garcia has been making moves to change some members in the Meralco board.

In the lead up to the annual stockholders meeting on May 27, which will elect its board, two independent directors have already quit. In early May, Garcia had separate dinners with Meralco independent directors Washington Sycip and Federico Puno, a former National Power Corporation head. Immediately after, both declined their nomination to the board.

Garcia declined to comment when asked what were discussed in these meetings that led to two directors, said to be sympathetic to the Lopezes, out of the board. Instead, he said he describes himself as an impatient man: ” I immediately go for the jugular.”

Garcia said he was informed that former Supreme Court Chief Justice Artemio Panganiban has been nominated to take over one of the vacated seats. “He (Panganiban) is a decent man,” Garcia said.

We asked Panganiban to comment and he confirmed the nomination. He said that part of his advocacy as a jurist is to represent the underserved and marginalized. Panganiban is also an independent director of First Philippine Holdings Co., the Lopez holding company and a Meralco shareholder.

Hugo Gutierrez?

Another casualty is the corporate secretary, Camilo Quiazon, former Supreme Court associate justice and lawyer of the Lopez family, who tendered his resignation. Those in the know said Quiazon couldn’t take the heat from Garcia anymore.

Besides the verbal bashing during board meetings, in March and April, Garcia sent at least 22 letters to Meralco—some directed to Quiazon—to demand documents and responses to his queries on Meralco’s various transactions. At least three of these letters were addressed to former director Sycip and the company he founded, SGV&Co, which also audits Meralco.

Last April 28, during a 3.5-hour board meeting, Garcia opposed the nomination of Monico Jacob to replace Quiazon as corporate secretary. Jacob was once chairman of energy-related companies, Philippine National Oil Company and Petron.

Again, Garcia cited an administrative lapse of management: “They (management) did not even furnish the (board) members a copy of his (Jacob) resume. They (management) are so used to having their way and the board just allows it. I will not tolerate that.”

A special board meeting is set for May 15 to elect a new corporate secretary. Garcia said he is batting for former Supreme Court justice Hugo Gutierrez.

In the book, “Getting A Dial Tone: Telecommunications Liberalization in Malaysia and the Philippines,” Gutierrez’s 1992 resignation from the high court was described as the “first concrete evidence of corruption in the judiciary.” Gutierrez wrote a decision favoring giant Philippine Long Distance Telephone (PLDT) over competitor Eastern Telecom. A professor and language expert from Columbia University testified that the decision penned by Gutierrez was actually drafted by PLDT’s lawyer.

Garcia, however, described Gutierrez as a “legal luminary” and “very professional.”

How it began
What started the rift between Garcia and the Meralco’s other shareholders and current management was actually a simple issue: Garcia wanted to receive an advance copy of the audited financial statements of Meralco days before the board was to convene on Mach 17 to approve them. Several phone calls and letters between Garcia and Meralco management yielded nothing.

Garcia said he sits on the board of other companies where he receives a formal copy of the agenda and documents, such as financial statements, a week or two before the meetings, so he could study them. But in the case of Meralco, he said he received the documents on the day of the meeting itself. “How can I study the financial statements properly if I receive it just minutes before we approve it?” he told abs-cbnnews.com/Newsbreak.

Getting documents from Meralco on time became a recurring irritation to Garcia. For example, Meralco board meetings fall on Mondays, and since the meetings’ agenda were usually handed out the Saturday before, Garcia said he has no time to study the issues since he goes home to Cebu on weekends. “They (Meralco management) say it’s been their practice. But that is not acceptable,” he said.

Those intimately familiar with the board goings on say the friction between the two all boils down to style—well, Garcia’s brash style, that is. Garcia is perceived as “arrogant,” “brat-like,” “unprofessional,” and “seeking importance.” All of these are new to the Meralco old-timers with established work pace and practices already.

Dinners and letters

Nonetheless, there have been efforts by third parties to patch the rift between the Lopez family and Garcia. But two dinners between Meralco chairman, Manolo Lopez, and Garcia didn’t work either. They didn’t warm up to each other, and in fact, exacerbated the already brewing tension.

Garcia said that he reiterated to Manolo Lopez that his letters to management to get copies of Meralco transactions remained unheeded. A few days after one of the meetings with the Lopez family member, Garcia said Meralco management imposed conditions, like asking GSIS’s five lawyers who went to Meralco office, to sign confidentiality letters before they could pore over the supply contracts between Meralco and the generating plants of Lopez holding company and Meralco shareholder First Philippine Holdings Corp. (FPHC).

In the letters of Meralco management to Garcia dated March 25 and 27, 2008, Garcia was told that he could be given a personal briefing about the details of supply contracts, but could not bring home copies of the documents. However, the GSIS lawyers, since “they are strangers to the transaction,” need to sign a confidentiality agreement first, management wrote. This was because of “confidentiality and security reasons… especially now that the [energy sector] is undergoing deregulation.”

In a radio interview, Christian Monsod, a Meralco board member, explained that while these contracts are open for all their 80,000 shareholders to scrutinize, Meralco needs to follow certain procedures to ensure order.

This peeved Garcia. “I am a major shareholder of this company (Meralco), but why am I not given the courtesy due to the institution I am representing?”

On its own, GSIS has a 22 percent stake in Meralco, but the government has an aggregate of about 35 percent stake to include the shares of Landbank, Philhealth and Pag-Ibig Fund. The Lopez’s FPHC has 33.4 percent.

“I have to remind them (Lopez) that this is not their company. This is our company,” Garcia said.

No takeover

In another dinner meeting with a Lopez family member, this time with Federico Lopez, son of family leader and FPHC chairman, Oscar Lopez, the brother of Meralco’s Manolo Lopez, the mood turned better.

Federico told abs-cbnnews.com/Newsbreak that he listened to the concerns of Garcia and immediately sent copies of the supply contracts to Garcia afterwards.

Garcia described Federico as “level-headed.” Thus, when Oscar Lopez told reporters on the sideline of a business chambers meeting last May 8 that the Lopez family is willing to sell its stake in Meralco, Garcia said he sent word to Oscar Lopez that “he is willing to talk.”

He stressed however, that he has no intention to buy Lopez’s stake and eventually control Meralco.

He hints that he prefers dealing with this branch of the family. He said he is more open to discussions with Oscar and Federico. “I find them more down-to-earth to talk to,” he said to abs-cbnnews.com/Newsbreak an hour after Oscar made the announcement about selling their shares in Meralco.

Supply contracts

He puts the blame on management for stonewalling him when he tried to access documents regarding a long list of Meralco transactions, including those with other Lopez companies

He claims that these transactions, some of which may be “self-dealing,” cost Meralco some P55 billion a year so he wants to scrutinize them. Among the transactions that he has been asking Meralco management for more documents and information on is Republic Surety Insurance Company, which takes care of the insurance needs of Meralco.

“This is a Bahamas-based insurance company. My friends in the insurance business told me that this company is charging a lot. Meralco management does not want to give me documents about this company because they say I’m also in the insurance business. But if we can source insurance cheaper that way, what’s wrong with it?”

Sources from Meralco, however, said that whatever explanation they give to Garcia fell on deaf ears since they think Garcia is out to “witch hunt.”

The focus of Garcia’s scrutiny, however, has been on the supply contracts between Meralco and FPHC subsidiary, First Generation’s two power plants in Batangas, which process natural gas sourced from the Malampaya offshore gas platform, into electricity. The supply contracts cover a commercial agreement where the electricity from the Batangas plants are sold directly to Meralco.

Garcia explained that one of the reasons why the supply of electricity to Meralco is more expensive than those sourced by its counterparts outside Luzon, such as Visayan Electric Company and Davao Light & Power Company, is because of these supply contracts between Meralco and the First Generation power plants.

Federico Lopez, president of FPHC, however, explained the electricity supplied by their Batangas power plants is actually cheaper than those from other sources, such as those from government-owned power plants.

But the story doesn’t end here. Other factors come into play.

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PART 2: Why power rates in the Philippines are high

How does one solve a problem like high electricity prices? The simple answer would be
to introduce free market conditions in all the electricity sector’s different components.
Theory says efficiency and transparency in the different aspects of the sector would push
prices down, in effect trickling down to electricity bills that don’t drive away job-
producing industries and account for a bigger share in monthly household expenditures.
But, as the seven-year old Electric Power Industry Reform Act (EPIRA) showed, theory
is neater than reality. For one, there are economic and political interests that come into
play. For another, it takes time for all the players and stakeholders to absorb the impact of
the changes.

After privatizing, deregulating and restructuring the generation and transmission
components of the sector, the EPIRA’s end goal is to have a “retail open access,” which
is supposed to provide the end-users of electricity the freedom to decide which among the
generating plants they would like to directly source from. Currently, the distribution
company that holds a franchise in a specific area exercises that choice.

And there lies the current value of Meralco. It is currently a “gatekeeper” between a
captured market that accounts for 70 percent of total demand in Luzon, and the power
plants that churn out the electricity.

When the EPIRA takes full effect and retail open access is in place, Meralco stands to
lose its gatekeeper role. Instead of being the gatekeeper, it could well just be a toll road
operator that charges consumers for the use of the road—in this case, the use of the wires
that delivers the electricity straight to the consumer.

That will drastically change the dynamics and the business model of Meralco. A source
familiar with the industry said that as the one that holds the key to the most profitable
distribution franchise in the country, Meralco is a sought-after partner by those who snap
up the generation assets of Napocor up for privatization. “If you get into the generation
business, you would like to be assured that you have a ready buyer for your product.
Meralco is your best bet,” the source said.

Other business activities, such as insurance for and management of the assets of the
utility company, equity investments and related financing activities, numerous
construction and labor supply activities are largely hinged on Meralco’s gatekeeper
power.

No wonder that these were the focus of major shareholder representative Winston Garcia
who invokes transparency and good governance when Meralco management gave him a
difficult time as he tried to get documents on these company transactions. Garcia, the
swashbuckling president and general manager of Government Service and Insurance
System (GSIS), which together with other government entities, collectively owns about
35 percent of Meralco already.

But it was actually the direct transactions between Meralco and its sister companies in the
electricity generating business that Garcia focused on in his recent tirades.

Garcia called these “self-dealing” transactions, implying that the Lopezes, who, through
FPHC, own 33.4 percent of Meralco, have been using their control of the company to
benefit another business, never mind if, as Garcia claimed, it resulted in higher cost to the
consuming public.

But the Lopezes flatly deny Garcia’s rants. Federico Lopez, the president of FPHC that
own two Batangas-based natural gas power plants explained in a briefing that the power
that Meralco sources from its sister companies are less expensive than those sourced
elsewhere.

In his presentation, he said power sourced from sister companies under First Gas
Corporation, an FPHC subsidiary, costs only P3.91 per kilowatt hour, compared to the
P5.67-worth sourced from government-owned plants of the National Power Corporation
(Napocor), the P7.85 average worth of those from the spot market, and the P3.56 from
Quezon Power Phils Ltd (QPPL), another private company that Meralco has a supply
contract with.

Electricity sourced from First Gas accounts for about 39 percent of Meralco’s total
supply, while Napocor, those bought from the spot market, and QPPL each have a share
of 30, 19, and 12 percent, respectively.

A source also familiar with the industry said that while it the generation assets of the
Lopezes continue to have cross ownership with its distribution company, the conflicting
interests would always be raised, whether by stockholders like GSIS’s Garcia or someone
else.

This was highlighted in the P15 billion 10-year supply contract between Napocor and
Meralco starting 1994. When the 1997 financial crisis hit and electricity demand dipped,
the Lopezes decided to reneg on the bilateral supply contract with Napocor that specified
a specific minimum electricity sale from Napocor to Meralco. Instead, the Lopezes
pursued their existing bilateral supply contract with their natural gas power plants in
Batangas.

In 2004, there was a settlement agreement between Napocor and Meralco but is yet to be
implemented. Meralco was seeking permission to charge it to their consumers.

Industry observers say that the boardroom conflict now in Meralco is a good time to
attract public attention to the need to further implement the remaining aspects of EPIRA,
such as the privatization of more generation assets of Napocor.

However, the danger of the controversy is that the players may go overboard and send the
wrong signals especially to private investors who might get the idea that they may not be
allowed to recover fair returns on their investments.

In the recent statement of Oscar Lopez, chairman of FPHC, he said he is “sick and tired”
of Meralco being blamed for the high cost of electricity prices, and is ready to sell but not
willing to sit down with Garcia.

While Garcia has been known to have earned big for GSIS’s investments from other
companies, like Equitable PCI Bank and San Miguel Corporation, he claims he has no
intention of buying out the Lopezes in Meralco. And that he just wants fair return for
GSIS’s stake. Garcia does not deny however that if the price is right, he can also opt to
sell GSIS’s stake in Meralco.

One industry analyst said that with a looming stalemate, the other option is for both
government and the Lopezes to both exit from Meralco, get a premium for their
combined 68 percent stake, and allow a less conflicted group to run the country’s biggest
electricity retailer.