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MERALCO:CORPORATESTRATEGYANALYSIS
JesselynRochelleRodriguezMalimataEuropeanJointMastersinManagementandEngineeringofEnvironmentandEnergy
UniversidadPolitécnicadeMadrid
Forthecourse:IntroductiontoOrganizationsandCorporateStrategy
UnderProf.CarlosRodriguezMonroy,Ph.D.January7,2016
TABLEOFCONTENTS
ABSTRACT..........................................................................................................................................4
I.INTRODUCTION..............................................................................................................................4A. HISTORY..........................................................................................................................................4B. VISION,MISSION,ANDCORPORATEGOALS.......................................................................................6C.SCOPEANDLIMITATION........................................................................................................................7
III.ENVIRONMENTALANALYSIS......................................................................................................8A. GENERALEVALUATION.....................................................................................................................8B. DEGREEOFTURBULENCE..................................................................................................................8C. PESTELANALYSIS.........................................................................................................................10Demographics.................................................................................................................................10PoliticalandSociological..............................................................................................................10Economic..........................................................................................................................................11Legal.................................................................................................................................................12Technological..................................................................................................................................14
D. KEYFACTORSFORSUCCESS............................................................................................................14Corporation:InfrastructureandCapital....................................................................................14Competition:SizeandMarketDominance..................................................................................15Customers:PayingCapacity..........................................................................................................15
E. GROWTHANDLIFECYCLEANALYSIS...............................................................................................16F. FIVEFORCESANALYSIS...................................................................................................................17Suppliers..........................................................................................................................................17Customers........................................................................................................................................17NewEntrants...................................................................................................................................18Substitutes.......................................................................................................................................18ExistingRivalry...............................................................................................................................18
G. FOURLINKSANALYSIS....................................................................................................................19InformalCooperativeLinksandNetworks.................................................................................19FormalCooperativeLinksandNetworks....................................................................................19Complementors...............................................................................................................................19GovernmentLinksandNetworks.................................................................................................20
H. CUSTOMERANALYSIS......................................................................................................................20
V.CONCLUSIONS..............................................................................................................................21
VI.REFERENCES...............................................................................................................................21
TABLEOFFIGURES
Figure1.BriefhistoryofMeralco(Meralco,2016)........................................................................5Figure2.Meralcoownership(Meralco,2016)...............................................................................5Figure3.Meralcosubsidiaries(Meralco,2016).............................................................................6Figure4.2015Philippines'electricitymarketsharebyregisteredcapacity(PhilippineElectricity
MarketCorporation,2015)....................................................................................................7
Figure5.[Left]Sincetheretailelectricitysectorstartedin2013,theconsumptionofcontestablecustomers(orange)hasbeenincreasing,and[Right]Marketsharefortheretailelectricitysuppliers(PhilippineElectricityMarketCorporation,2016)..................................................7
Figure6.Meralcoenergysales(inGWh)persector(MetroPacificInvestmentsCorporation,2015)......................................................................................................................................8
Figure7.DegreeofturbulenceofMeralco'senvironment(Lynch,2015).....................................9Figure8.SegregationofFilipinofamiliesbyincomeclass(Rappler,2015)..................................10Figure9.[Left]ThegrowingPhilippineeconomy(Schnabel,2016)accompaniedby[Right]
growingelectricitydemand(PhilippineElectricityMarketCorporation,2016)...................12Figure10.TheelectricitysupplychainbeforeandafterEPIRA(PhilippineElectricityMarket
Corporation,2016)...............................................................................................................13Figure11.Meralco'soperationalperformance(MetroPacificInvestmentsCorporation,2015)14Figure12.2015PovertyincidenceinthePhilippines,showingMetroManilawiththeleast
incidence(PhilippineStatisticsAuthority,2015)..................................................................16Figure13.LifecycleanalysisforMeralco’sdistributionbusiness................................................16Figure14.FiveForcesAnalysisofMeralco...................................................................................17Figure15.FourlinksanalysisofMeralco.....................................................................................19Figure16.ThenumberofMeralcocustomerspersector(left)andenergyconsumptionper
sector(right)in2015(Meralco,2016).................................................................................21
ABSTRACT
Meralco is a Filipino electricity distribution utility (DU), operatingmainly in MetroManila. It wasfounded116yearsagobyAmericans,butwassubsequentlysoldtothebiggestFilipinoconglomerates.ItsfirstentrantadvantagemadeitthelargestDUinthecountry,intherichestpartofthePhilippines.Its sizegives it strongbargainingpowerwith its suppliers. Itsownershipgives itworkingcapital toinvest inand improve its infrastructureand services.Being theoldestandoneof themost valuablecompanies in thePhilippinesgiveMeralco implicitalliancesacross the industry.These factorsallowMeralcotothriveinthechangingbusinessenvironment.Thepowerindustryisbeingrestructuredbythe Electric Power Industry Reform Act (EPIRA), the Philippines’ economy is growing rapidly, anddistributed generation technologies are improving. From being just a DU, Meralco has verticallyintegratedacrossthepowersectorandhasdiversifiedtocomplementaryandevenunrelatedbusinesses.Thecompanydominatesboththedistributionandretail sectors,and isalsoenteringthegenerationsectorwiththreecoalpowerplantsinthepipeline.Italsousesitssubsidiariestoaddresschangingusers’needsandcustomizeitsservices.
I.Introduction
A. History
In1903,whenthePhilippineswasacolonyoftheUnitedStatesofAmerica,ManilaElectricRailroad andLight company (Meralco)was established. Itwas aprivately ownedAmericancompany,whobuilttramways,distributedelectricity,andprovidedlightingacrossMetro Manila. The railway system was heavily damaged in World War II, thus Meralcoconcentratedonitselectricitybusiness.Thecompanyhelpedinthecountry’srehabilitationaftergainingitsindependencefromtheUnitedStatesin1946.In1961,MeralcobecamethefirstAmericancompanytobe“filipinized”whenitwasacquiredbytheLopezfamily.Thenewownerssignificantlyimprovedthecompany’sinfrastructurethroughinvestorsandcreditorsincludingtheBankoftheUnitedStates,BankofJapan,InternationalFinanceCorporation,andvarioussuppliers.In1969,Meralcobecamethefirstbillion-pesoFilipinocompanywithoutgovernment aid. In 1970, a new government policy required allmajor power generationfacilitiestobeturnedovertothestate-ownedcompany,NationalPowerCorporation.Meralcowasthenleftwithelectricitydistributionasitscorebusiness.Followingthis,thecompanyexpandedtoprovincialcustomersoutsideMetroManila(Meralco,2016).
Figure1.BriefhistoryofMeralco(Meralco,2016)
In 2009, two other major conglomerates – PLDT Corporation and San MiguelCorporation,boughtmajoritystocksfromtheLopezfamily.Sincethen,theownershipofthecompanyhasevolved(Meralco,2016).Asof2015,themajorshareholdersofthecompanyare:BeaconElectricAssetHoldings,JGSummitHoldings,Inc.,MetroPacificInvestments,FirstPhilippinesHoldings,andinstitutionalinvestorsandpublicshares(Meralco,2016).
Figure2.Meralcoownership(Meralco,2016)
Metro Pacific Investments Corporation is a Philippine-based and publicly-listed company,withother investments inwaterutilities, tollwayshospitals,andrailways inMetroManila(MetroPacificInvestmentsCorporation,2015).ItsparentcompanyistheHong-KongbasedFirstPacificCompanyLimited.BeaconElectricAssetHoldings,Inc.isajointventurebetweenMetroPacificInvestmentsCorporationandPLDTCommunicationsandEnergyVentures,Inc.,bothownedbyFirstPacificCo.Ltd.Itisaspecial-purposevehicle,sinceforeignownershipinutilitiesinthePhilippinesislimitedto40%bylaw(Bloomberg,2017)(FirstPacific,2017)(DulayPagunsanandTyLawOffices,2011).JGSummitHoldingsisoneofthelargestFilipino
1903Manila Electric
Railroad and Light Company
1946World War II
1961Lopez
Acquisition
1969First billion-peso company in the
Philippines
1970Generating Facilities’
Turnover to National Power
Corporation
2009Partnership with PLDT and San Miguel Groups
BriefHistory
conglomerateswithmajorsharesinrealestate,foodandbeverage,banking,petrochemicals,and air transportation (JG SummitHoldings, Inc., 2015). Finally, First PhilippineHoldings(FPH)isalsoamajorconglomerateinthePhilippines,withbusinessesinenergy,realestate,manufacturing,andconstruction(FirstPhilippineHoldings,2015).
Meralcohasalsodiversifiedfromitscoredistributionbusiness,tobusinessesacrossthe electricity supply chain (generation and retail supply) and other related (insurance,construction,metering)andevenunrelated(informationtechnology,realestate)businesses(Meralco,2016).
Figure3.Meralcosubsidiaries(Meralco,2016)
B. Vision,Mission,andCorporateGoals
Meralco’svisionis“tobeaworld-classcompanyandtheserviceproviderofchoice”,while its mission is “to provide our customers the best value in energy, products andservices”.Itscorporateobjectivesareto:(i)Strengthencoredistributionbusiness,(ii)buildthepowergenerationportfolio,(iii)participateintheretailelectricitysupply,(iv)growtheelectricdistributionservicearea,and(v)drivetheexpansionofsubsidiaries(Meralco,2015).
Currently, the company is in linewith its goals. As awhole,Meralco is one of thebiggestcompaniesinthePhilippines.ItisoneofthecompaniesdeterminingthePhilippineStockExchangeindex,andisthe#7publicly-listedcompanyasof2015.Itisalsoincludedinthetop50ASEANpublicly-listedcompaniesthatyear.MeralcohasamarketcapitalizationofUS$7.7billion,andhasaStandardandPoor’screditratingofBB++(Meralco,2016)(Rivera,2016)(ASEANUp,2016).
Meralco is the largest and most “powerful” electric distribution company in thePhilippinescovering36citiesand75municipalities,includingMetroManila.Theirfranchisearea covers 9,337 km2, serving 5.8 million customers – including the most important
industrial, commercial, and political centers (Meralco, 2016). Its power generation arm,MGen,hascurrentlyno installedcapacity.However, threeplantsare inconstruction:600-MWRPEnergyCoal,460-MWSanBuenaventuraCoal,and1,200-MWAtimonanCoal,totalingto2,260MWofnew capacity to goonlineby2021 (MGen, 2017) (Department ofEnergy(Philippines),2016).ThePhilippines’currentregisteredcapacityisaround15,662MW,andMGenissettobethesecondlargestpowergenerationcompanyinthePhilippinesuponthecompletion of its generation projects. Currently, the power generation in the country isdominatedbymajorPhilippine conglomerates (PhilippineElectricityMarket Corporation,2016).
Figure4.2015Philippines'electricitymarketsharebyregisteredcapacity(PhilippineElectricityMarket
Corporation,2015)
Merlaco’sretailelectricitysupplybusiness,MPower,isalsoleadingwith50%ofthemarket as of March 2016, since the retail market started in 2013. This market is evenexpected to grow further in the coming years (Philippine ElectricityMarket Corporation,2016).
Figure5.[Left]Sincetheretailelectricitysectorstartedin2013,theconsumptionofcontestablecustomers(orange)
hasbeenincreasing,and[Right]Marketsharefortheretailelectricitysuppliers(PhilippineElectricityMarketCorporation,2016)
C.ScopeandLimitation
ThispaperanalyzeshowMeralcoisabletoattainitsgoals–throughananalysisoftheenvironmentitoperatesin.Inthediscussion,focuswillbegivenonitscorebusiness–electricity distribution. No competitor analysis is done because Meralco has a naturalmonopolyoveritsmarket,asshownintheFiveForcesAnalysis(SectionII.F).
II.EnvironmentalAnalysis
A. GeneralEvaluation
Meralco’scoreproductiselectricitydistribution,deliveringpowerfromgeneratorstoend-users,andgettingitsincomefromthedistributioncharge.Meralcohasthreemajorcustomer segments, which will be discussed in detail later – (1) regular customers, (2)businesses,and(3)corporations.Forbusinessandcorporations,asidefromjustdeliveringelectricity, Meralco provides additional services through its many subsidiaries likeconsultancy, energy-saving technologies, and most importantly, specialized rates(MeralcoBizPartners,2017)(MeralcoCorporatePartners,2017).Meralco’smarketsize isdirectly related toMetroManila’selectricitydemand,which is in turnproportional to thecountry’seconomy.InthePESTELAnalysislater(SectionII.C),itwillbeshownthatboththecountry’s economy and energy demand is increasing. This presents an opportunity forMeralcotostrengthenitsbusiness,especiallyforcommercialandindustrialcustomers,whomakesupmostofitsenergysales(MetroPacificInvestmentsCorporation,2015).
Figure6.Meralcoenergysales(inGWh)persector(MetroPacificInvestmentsCorporation,2015)
B. DegreeofTurbulence
9,000
10,000
11,000
12,000
13,000
14,000
15,000
2012 2013 2014 2015
EnergySales(inGWh)
Residential Commercial Industrial
Figure7.DegreeofturbulenceofMeralco'senvironment(Lynch,2015)
Theelectricitysupplychainisstatic,inasensethattheflowofpowerfromgenerators
tosubstations,powerlines,andfinallytheend-usersisdonethroughmaturetechnologiesandalreadyestablishedinfrastructure.Althoughtherearetechnologicaladvancessuchassmartgridsanddistributedgeneration(tobediscussedinthePESTELanalysisinSectionII.C),thebasicstructurewillnotchange.Despitethis,thechangeabilityofthePhilippinepowersectorishigh.Thisisbecauseofthreemajorfactors:(1)TheElectricPowerIndustryReformActof2001 (EPIRA) (See Section II.C), is still in the process of being fully implemented. Thisestablishedthespotandretailelectricitymarkets.Andsincethesemarketsarenotyetfullydeveloped,therulesandregulationsgoverningthemarestillchanging.(2)ThePhilippines’economy isgrowing fast,whichaffects theenergyconsumption,and thebalancebetweenelectricitysupplyanddemand.(3)Thereisagreaterpushforrenewableenergy.Althoughthecountrystillreliesmainlyoncoaltomeetitsincreasingenergydemand,policiessuchasthe Feed-in-Tariff have been put in place to support renewables. This directly affectselectricitypricesinthePhilippines(PhilippineElectricityMarketCorporation,2016)(Lynch,2015).
Thepredictabilityofchangesintheindustryismoderatetohigh.TheprovisionsofEPIRA are already determined. It is the execution schedule and market details that arevariable. Andwhenever revisions aremade tomarket rules, they first go through publicconsultation. The Philippines’ economy is forecasted by several agencies like theBangkoSentralngPilipinas(CentralBankofthePhilippines),WorldBank,AsianDevelopmentBank,etc.Finally,anydevelopment intechnologyiscloselymonitoredbycompaniesbothinthePhilippinesandabroad.Ofcourse,allofthesearesubjecttothecountry’spoliticalstability,whichisalsoratedbyagenciessuchasTheEconomistIntelligenceUnit.
Giventhese,thedegreeofturbulenceoftheenvironmentisconcludedtobemoderate.
There is high changeability, but this is accompanied by high predictability. Meralco’scorporate strategy is a mix of prescriptive and emergent. Prescriptive, because the corebusinessisessentiallythesameasitwas100yearsago.Thus,itcontinuesusingthe“formula”
thathasbeenworking for it.At thesame time, thecompanymustbeable toadapt to thechangingpolicies,economy,andtechnology.Strategiesmustbeputinplacetomakethemostoutofthegrowingeconomy,whileprotectingthecompany’sdominanceinthemarket.
C. PESTELAnalysis
Demographics
Meralco operates in the Philippines, a relatively small, densely-populated,developing,archipelagiccountryinSoutheastAsia.Thecountryhasalandareaof300,000km2,butapopulationof92millionpeople,andwithaGDP(incurrentUS$,asof2014)of285billion,growingat6.1%.MajorityofMeralco’scustomersareinMetroManila,thecountry’scapital.AlthoughtheNationalCapitalRegiononlyaccounts for0.2%of thecountry’s totallandmass,ithouses13%ofthecountry’spopulationandcontributes36%ofthecountry’sGDP(2.1percentagepointsoutof its6.1%GDPgrowthrate).Comparedwithdistributionutilities in other parts of the country, Meralco’s clientele have more purchasing power(PhilippinesStatisticsAuthority,2016).
PoliticalandSociological
Figure8.SegregationofFilipinofamiliesbyincomeclass(Rappler,2015)
$ 16,697
$ 1,352
$ 397
$ 277
Thefigureaboveshowsthecountry’ssocio-economicstructureasof2015(Albert,Gaspar, & Raymundo, 2015). The Philippines is low- and middle-class heavy, with highdisparitybetweeneachsocialclass.Asof2012,itsGINI(ameasureofinequality;theclosertozero,themoreeconomicallyequalthecountryis)is43,the14thhighestintheworld(WorldBank,2016).Meanwhile,21%ofthecountrystillhasnoaccesstoelectricity(InternationalEnergyAgency,2015).Meralcoisownedbythebiggestconglomeratesinthecountry,andnaturally,hastheeconomicandpoliticalpower.Itscustomers,however,arefromthemiddle-andlower-classes.Thus, itsservicemustbemadeaffordableforeveryone.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).
Economic
ThePhilippinesdefiedglobaltrends,withaGrossDomesticProduct(GDP)growthof5.8%in2015,makingitoneofthefastest-growingdevelopingcountriesinAsiatogetherwithIndia,China,andVietnam.Despitebeinglowerthan2014’s6.1%GDPgrowthandthetargetgrowth of 7%-8%, this performance is decent, given the environment: a global economicdecline,aggravatedbylocalconcernslikeElNiño.Thecountrywasabletoovercomethesechallenges through high government spending aided by robust private investments,encouragingfavorableratingsfromtopcreditratingagencies:
• Standard&Poor’sreaffirmedthePhilippines’BBBStablerating, thehighestratingeverrecordedinthecountry’shistory
• FitchRatingsratedthePhilippinesaBBB-PositiveInvestmentGraderating• Moody’sratedthePhilippineswithaBAA2StableInvestmentGraderating
DespitethedeclineingrowthofremittancesfromOverseasFilipinoWorkers(OFWs),severalfactorssuchasthecontinuedgrowthoftheBusinessProcessOutsourcing(BPO)industryandtheServicessectorledtomorepositiveresults:
• Record-lowunemploymentrateat5.6%• Record-lowinflationrateat1.4%• 6.2%growthinhouseholdconsumption• HighestConsumerConfidenceIndexinSoutheastAsia
Agrowingeconomyresultstogrowingelectricitydemand, thussignifyinga largergrowthpotentialforMeralco(Meralco,2016).
Figure9.[Left]ThegrowingPhilippineeconomy(Schnabel,2016)accompaniedby[Right]growingelectricitydemand
(PhilippineElectricityMarketCorporation,2016)
Legal
Aswithanypublicutility,theelectricitysectorishighlyregulatedbythegovernmentthroughtheEnergyRegulatoryCommission(ERC),anindependentquasi-judicialregulatorybody. 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 suppliersandretail customers,andalsomonitors theelectricitybill charged toend-users.
Feed-in-Tariff(FIT)
Pursuant to theRenewableEnergyActof2008 (RepublicActNo.9513),TheERCissuedaresolutionadoptingFITrulesin2010.TheFITsystemisapolicyguaranteeingafixedpaymentperkilowatt-hourforwind,solar,ocean,run-of-river,andbiomassgenerators.Tosupport thisprogram,ERCapproved the collectionofaFIT-Allowance (FIT-All) chargeofPhP0.0406perkWhfromallconsumersnationwide,inadditiontotheregularelectricitybills.This fee is collected through distribution utilities like Meralco, and is passed on to theRenewableEnergyproducers(Meralco,2016).
ElectricPowerIndustryReformAct(EPIRA)
Themostimportantlegislation,however,thatrestructuredtheelectricitysectorwastheElectricPowerIndustryReformActof2001(RepublicActNo.9136).Itsmaingoalswere:
• To ensure and accelerate the total electrification of the country, by encouragingprivateinvestmentintheindustry
• To ensure affordability of electricity, by encouraging free and fair competitionthrough the establishment of thewholesale and retail electricitymarkets and theEnergy Regulatory Commission (Senate and House of Representatives of thePhilippines,2001)
PhilippineElectricitySupplyChain
BeforeEPIRA,allpowergenerationand transmission facilitieswereownedby the
state-owned National Power Corporation (NPC). Meralco, a distribution utility, thus onlysourceditselectricityfromthegovernment.Allend-users(residentialhomesandindustrialfacilitiesalike)sourcedtheirpower fromtheir localelectriccooperativesanddistributionutilities.Inthiscase,allelectricityconsumersinsideMeralco’sfranchisearea(MetroManila)gottheirpowerfromMeralco.
ThroughEPIRA,(i)powerplantswereprivatizedbyauctioningthemtothehighestbidders;(ii)thecompany’spowertransmissionnetworkwasfranchisedtotheNationalGridCorporation of the Philippines (NGCP) – a consortium comprised of Monte Oro GridResourcesCorporation(ownedbyaFilipinoconglomerate)andtheStateGridCorporationofChina (National Grid Corporation of the Philippines, 2016); (iii) the Philippine ElectricityMarket Corporation, a company supervised by the country’s Energy Secretary, wasestablishedin2006to(iv)operatetheWholesaleElectricitySpotMarket,whichstartedin2010 and (v) the Retail Competition and Open Access (RCOA) in 2013 – through whichconsumerswith anaverage loadof1MWof greater are free topurchase electricity fromelectricity suppliers aside from their local providers (Philippine Electricity MarketCorporation,2016).
ForMeralco,thisopenedtheopportunitytoverticallyintegratewithotherpartsofthesupplychain.Asstatedearlier,itspowergenerationarm,MGen,iscurrentlyconstructingthreegenerationfacilities.Itsretailarm,MPower,hashalfthemarketshare.EPIRAalsogaveMeralcothelibertytosourceitspowerfromavarietyofprivategenerators,andevenfromthemarket –whatever suits its strategy. The establishment of RCOA expandedMeralco’scustomer reach as it cannowprovide power to contestable customers (mostly industrialfacilitieswhichusemorethan1MWofelectricity)outsideMetroManila.
Figure10.TheelectricitysupplychainbeforeandafterEPIRA(PhilippineElectricityMarket
Corporation,2016)
�Monopoly in distribution
� Single supplier
� Captive customers
�Many suppliers
� Venture in power generation
� Venture in retail electricity supply
� Captive customers
� Contestable customers
Technological
In2013,theERC,themaingovernmentbodyinchargeofregulatingtheelectricgrid,approved the standards enabling net-metering of renewable energy for customers withdistributedgeneration.Distributedgenerationrefers to smallgenerationentitieswhocansupplydirectly to thegridwithamaximumcapacityof100kW.Net-meteringmeans thatconsumerswhohave installed capacities (e.g. solar panels) and generatemore electricitythantheyconsumecansellthisextrapowertothegrid.TheRenewableEnergyActof2008pioneeredthisnet-meteringconcept,withthegoalofencouragingend-userstoparticipateinrenewableenergygeneration(DepartmentofEnergy(Philippines),2008).
Since the technology for solar photovoltaics is quitemature, solar providers have
beenofferingthesupplyandinstallationofrooftopsolarpanelsforaslowasUS$3,800(SolarPhilippines, 2017). Meralco mitigates this risk by investing heavily in infrastructure toimproveefficienciestothepointofmakingself-generationuneconomical.In2015,Meralco’scapital expenditure amounted to aroundUS$228million,mostofwhichwasdedicated toelectriccapitalprojects likesubstationsandtransmission lines.Asaresult, thecompany’ssystemlossandinterruptionindexeshaveconsistentlybeendecreasinginthepastfiveyears(Meralco,2016).
Figure11.Meralco'soperationalperformance(MetroPacificInvestmentsCorporation,2015)
D. KeyFactorsforSuccess
Three major factors are identified to thrive as an electricity distributor –
infrastructure,size,andcustomers.Corporation:InfrastructureandCapital
Distributionlinesareinfrastructurethatareimpracticaltobuildinparallel–becausethey are costly and logisticallydifficult tomanage. Settingup thepower lines first in anyregiongivesthecompanyanobviouscompetitiveadvantage.ThiswasthecaseforMeralco.ItwasthefirstcompanytoelectrifyMetroManila,andsothecompanywasabletocaptureallelectricityconsumersinMetroManilaforover100years.Connectedtothisisthecapitaltodevelopinfrastructure.Thefranchiseareacannotbeexpandedwithoutthemoneytobuild
andmaintain the power lines.Meralco, being ownedby the biggest conglomerates in thecountry,alsohasthisadvantage.Competition:SizeandMarketDominance
Thebiggerthefranchisearea,thebiggerthebargainingpowerofadistributionutilityis.ThisisthereasonwhysmallerelectriccooperativesintheruralpartsofthePhilippinesareaggregatingwhensecuringpowersupplyagreements.Theyareabletobuypowerfromgenerators 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 demandreached6,298MW(60%ofthewholecountry’speakdemandforthesameyear).Securingacontract with Meralco meant securing the company’s income for a long period of time(Meralco,2016)(PhilippineElectricityMarketCorporation,2016).
Size also increases the lobbying power of a company. Various organizations(Independent PowerProducers’ Association, Retail Electricity Suppliers’ Association, etc.)protect the interestofdifferentplayers in thepower sector. Larger companies,whohavegreaterpoliticalpowerintheseorganizations,canensurethattheorganizations’positionsareintheirbestinterest.
Sizealsopertainstothepositionoccupiedinthevaluechain(vertical integration).Owning a bigger part of the chainmeans greater control of the prices and income of thecompany,asinthecaseforMeralco.Customers:PayingCapacity
Customersofdistributionutilitiesarecaptive–meaningtheyhavenochoicebutto
sourcetheirpowerfromthepowerlinesalreadyexistingintheirarea.Althoughthequalityandreliabilityofelectricityisimportantforeconomicgrowthandeverydayliving,end-usershave little control over this. Consumer groupsmay lobby formore stable or sustainablepower,butintheend,nationalpoliciesandeconomicgrowthwilldictatethis.
However, what is very important for customers is the price of electricity. As
mentionedearlier,thePhilippinesismiddle-andlower-classheavy,andpowermustbemadeaffordable for them. Illegal connections are very rampant. There are even electriccooperativesthatrunoutofbusinesssimplybecausetheircustomerswon’tpay.Comparedtotherestofthecountrythough,theNationalCapitalRegion,whereMeralcooperates,hasthelowestpovertyincidenceamongfamiliesat2.7%,whilePhilippinesisat16.5%in2015(PhilippineStatisticsAuthority,2015).Meralcostillemploysmeasuresthough,tomakeitsservice affordable for all customers (ex. prepaid electricity, consumption calculator, etc.).Additionally,sinceelectricityisautility,consumergroupssuchastheNationalAssociationofElectricity Consumers (Nasecore) closely monitor Meralco. This is why Meralco is as
transparentaspossiblewithregardstoitselectricitycharges.Monthlytelevisionandradioadvisoriesarereleasedandthebreakdownofelectricbillsareavailabletothepublicviathecompanywebsite(Meralco,2016).
Figure12.2015PovertyincidenceinthePhilippines,showingMetroManilawiththeleastincidence(PhilippineStatistics
Authority,2015)
E. GrowthandLifeCycleAnalysis
Figure13.LifecycleanalysisforMeralco’sdistributionbusiness
Initially,Meralcoand theelectricpower industryhavebeen inmaturity.Althoughdemandwasincreasing,theservicesusedtodeliverpowerhavebeenstagnant.But,giventherapidly environment (EPIRA, RCOA, FIT-All, distributed generation, and the increasingcommercialandindustrialneedsofthecountry)–andaddtothistheincreasingresourcesatMeralco’s disposal (its subsidiaries in generation, retail market, engineering andconstruction,insurance,paymentcenters,etc.)–itcanbesaidthatMeralcoisinanewgrowth
SALES
phase.ThisisevidentinitsincreasingsalesasshowninFigure6.Meralcoenergysales(inGWh)persector(MetroPacificInvestmentsCorporation,2015).Newproductsandservices(otherthanjustpowerdistribution)arebeingofferedmyMeralco,tosuitthechangingneedsofitscustomers.SectionII.Hshowsamoredetailedcustomeranalysis,andanoverviewofthenewproductsMeralcooffers. ItshouldalsobenotedthatMeralcowasthefirstentranttothedistributionbusiness,whichisalsothemainreasonwhyitwasabletomaintainitsgrowth/maturityphaseforaverylongtime.ThiswillbediscussedfurtherinthenextsectionontheFiveForcesAnalysis.
F. FiveForcesAnalysis
Figure14.FiveForcesAnalysisofMeralco
Suppliers
The suppliers of Meralco are the power generation companies. They have lowbargainingpowerbecausetherearemanyofthem,andtheproducttheyoffer,electricity,isnon-differentiable.Also,althoughgenerationcostscomprisealargepartofMeralco’sover-allcosts,thesearesimplypassedthroughtotheend-users.Meralcohasthebiggestload,andgenerators compete tohaveMeralco as their customerby arrangingpayment and supplytermsaccordingtoMeralco’swants.Ontheotherhand,along-termpowersupplycontractwith Meralco eliminates major risks in the power producer’s business. Finally, with thecompletionofMGen’sthreenewpowerplantsby2021,Meralco’ssupplierswillhaveanevenweakerbargainingpowersinceMeralcocansourcemostofitsdemandfromitssubsidiary.
Customers
Theend-usersofMeralco’sproductsaretheFilipinopeople.Meralco’sbusinessisofpublicinterest,whichiswhyitishighlyregulated.TheEnergyRegulatoryCommissionhasto
New Entrants
Substitutes
CustomersExisting Rivalry
Suppliers
Low bargaining power
Public interest –Highly-regulated
Self-consumption
High barrier to entry
Monopolistic
approveallpowersupplyagreementswithgenerators.Furthermore,Meralcoisrequiredtorelease abreakdownof its charges everymonth. Several consumergroupsmonitor theseelectricity prices. In extreme caseswhen prices are deemed to be unfair,Meralco can bedemandedtogiverefundstoitscustomers.ThishappenedinNovemberandDecember2013whenelectricitypricesinthespotmarketspikedduetothesimultaneousoutageofseveralpowerplants. SinceMeralco sourcedaround8.6%of itspower from thespotmarket, theelectric bill of end-users also jumped (Meralco, 2013). The power plants on outagewereaccused of collusion by consumer groups. Eventually, ERC imposed a standard bywhichmarket prices will be recalculated for those two months, and the excess of which wasreturnedtotheconsumers(Salaverria,Olchondra,&Burgonio,2014).
NewEntrants
Asstatedearlier,powerdistributioniscapital-intensive(bothintermsofindustriesofscaleandtechnicalandmarketexpertise)becauseitrequiresspecializedandlogisticallynon-duplicableinfrastructure.Inadditiontothat,theswitchingcostsforcustomersmaybeveryhigh(asthiswillinvolveelectricalre-wiring,etc.).Thus,thebarriertoentryisveryhigh.In fact, in the last6years,only6newdistributionutilitiesenteredthemarket(PhilippineElectricityMarketCorporation,2011)(PhilippineElectricityMarketCorporation,2016).
Substitutes
ThemainsubstituteforMeralcoisbackwardintegrationorself-consumption,intheformofdistributedgenerationandalternativeenergysources.Distributedgenerationmainlyrefers to the rise in solar photovoltaic installations in the country. As part of its risk-managementstrategy,Meralcois improvingefficienciessuchthatself-generationbecomesuneconomical(Meralco,2016).Alternativeenergysourcesincludetheuseofnaturalgas,orprimary fossil fuels likewood or coal, instead of electricity for cooking. The use of solarheatingforbathingwaterisalsoincreasing.However,self-consumptionisnotexpectedtodisruptMeralco’sbusinessintheshort-term.Theincreaseinenergydemandinthecountryisfast,andthefastestandcheapesttechnologytoaddressthisisstillcoal.AsofNovember2016, 59% (9,890 MW) of the indicative and committed private-sector initiated powerprojectsarefueledbycoal(DepartmentofEnergy(Philippines),2016).
ExistingRivalry
Given the industry and environment Meralco operates in, it can be said that thecompanyhasanaturalmonopolyinelectricitydistributioninMetroManila.Itisalsothemostpowerfuldistributionutilityinthecountry.Ithasbeenservingthecapitalforover100years,andanynewentrantcanonlytrulycompetewithMeralcoincaseofaseveredisruptionintechnology or an extreme natural calamity –which is highly unlikely. For example, if anearthquakeor floodwipesout thepower systemof the countryandeverythinghas toberestarted.RegulationssuchastheopeningofRetailCompetitionandOpenAccess,however,
can change customers from captive to contestable; and in the retail electricity business,Meralco(throughMPower)canfacecompetitioninthefuture.
G. FourLinksAnalysis
Figure15.FourlinksanalysisofMeralco
InformalCooperativeLinksandNetworks
GiventhatMeralcoisownedbythebiggestconglomeratesinthecountry,ithasstronginformal cooperative links both inside and outside the power industry, through its sistercompanies.Thisisparticularlyusefulforsecuringcustomers.Forexample,chemicalplantsownedbyJGSummitHoldingswillmostprobablygetelectricityfromMPower.Almostanycustomer thatMeralcowants to tap, italreadyhas its foot in thedoor.Compare thiswithforeign-ownedgenerators,whosesolebusiness isproducingelectricity.Theywillhavenopreviousconnectionswithpotentialcustomers,andalmostallmarketingeffortswillhavetobedonefromscratch.ThesheerageofMeralcoalsogivesitanadvantage.Ithasbeenapartof several business associations for a long time, and the network resulting from these isenormous.
FormalCooperativeLinksandNetworks
Meralcohassecuredlong-termcontractswithitsgenerators.Asexplainedpreviously,Meralco’ssizegivesitstrongbargainingpowersuchthatitssuppliersusuallygiveMeralcothelowestprices,andaccordingtoMeralco’sterms.
Complementors
Formal Cooperative
Links and Networks
Informal Cooperative
Links and Networks
Comple-mentors
Meralcosubsidiaries
Long relationship but changing
policies
Long-standing contracts
Sister companies & Business associations
Meralcoisverticallyintegratedintheelectricitysupplychain.Italsohassubsidiariesinrelatedbusinesseslikeengineering,metering,insurance,informationtechnology,andevenfinancing.Meralcovirtuallyownsallcomplementorstoitscoredistributionbusiness.
GovernmentLinksandNetworks
Meralcoisolderthananyothercompanyorentityinthepowerindustry.Itpredatesthe electricity market, the Energy Regulatory Commission, and even the Department ofEnergy.Becauseofitsageandmarketdominance,itimplicitlyyieldsgreatinfluencetopolicy-making.On theotherhand, alsobecauseof its size, anyenergy-relatedpolicy isbound toaffectthecompanyonewayoranother.Andagain,thepowerindustryiscurrentlystillinthephaseofreformation,coupledwitheconomicandtechnologicaldevelopment–willyieldtocorrespondingchangesinenergypolicies.
H. CustomerAnalysis
Meralco,asadistributioncompany,hascaptivecustomers.Theseareend-userswho
simply get their power from Meralco (and from whichever power plant Meralco hascontractedwith).AsmentionedintheGeneralEvaluation(SectionII.A),thesecustomersaresegmented into regular customers, businesses, and corporations. (1) Regular customersinclude residential, commercial, and industrial consumers who only avail of powerdistributionservicesfromMeralco.Distributionchargesdifferdependingonthelocationofthe customers. Commercial areas have a generally higher rate than residential areas. (2)Businesscustomers,dubbedas“MeralcoBizpartners”,aregivendifferentgenerationchargesfor peak and off-peak hours, so that they can get up to 37% savings if they shift theiroperationstothecheaperoff-peakhours.Prepaidelectricityoptionsandelectricity-savingconsultancyservicesarealsooffered.Thesecustomersincludesmallandmediumenterprisessuchasrestaurantsandstart-ups.Itispositionedto“helpFilipinosexpandtheirbusinessforthefutureoftheirfamilies”(MeralcoBizPartners,2017)(3)“MeralcoCorporatePartners”,ontheotherhand,targetspublicandprivatecustomerswithacapacityofatleast500kW.Theseconsumersrepresentthetop10,000Philippinecorporationsandconglomerates.Thisbusiness isdone throughRelationshipManagers (RMs),whoare technical and regulatoryexpertscomingfromdifferentindustries.Theyactasenergyconsultantswhohelpfromtheinitial planning stages, the service application process, until the actual connection to thepower grid, and power quality and energy efficiency management. (Meralco CorporatePartners, 2017). As observed, Meralco offers additional customized services for biggercustomers who have special needs. This is a part of Meralco’s strategy to becomemorecustomer-focusedbyleveragingonitsvarioussubsidiaries(Meralco,2016).
Figure16.ThenumberofMeralcocustomerspersector(left)andenergyconsumptionpersector(right)in2015
(Meralco,2016)
Almostall (92%)ofMeralco’scustomersare fromtheresidential sector,however70%ofenergyconsumptioncomesfromthecommercialandindustrialcustomers.It isthusmorestrategicforMeralcotoconcentrateitseffortsonthis8%(Meralco,2016).
Meanwhile, Meralco as a retail electricity supplier, MPower, has contestable
customers. These are facilities which have a consumption of 1MW or higher. These aremostly industrial plants, or establishments with high aggregated demand such as bigshoppingmallsorhospitals.TheysourcetheirelectricityfromretailelectricitysupplierssuchasMPower,whointurngettheelectricityfromthegenerators.
V.Conclusions Meralcoisavertically-integratedpowercompanyinthePhilippines,whosecorebusinessisdistributingelectricityinMetroManila.Itdominatesinthedistributionandretailsupplysectors,andsooninthegeneratingsectoraswell.Itisabletodosobecauseoftherightmixofitsenvironmentandresources.Meralcohasthefirstentryadvantage,givingitmonopolyinMetroManila,therichestregion in the country. Add to this the growing Philippine economy,which givesMeralco greateropportunities.Ontheresourcesside,Meralcohasgreateconomicandpoliticalmusclebyvirtueofitsownership.Beingownedby thebiggest conglomerates in thePhilippines, ithas implicit alliancesacross different industries. Because of its size, it has strong bargaining power to get favorablecontractsfromitssuppliers. However, thepower industry is changing–due to the implementationofEPIRA, growingeconomy,anddevelopingtechnologies.Meralco’sstrategyisthusamixofprescriptiveandemergent.Itcontinuesitsprovenstrategiesofimprovingefficiencyandbeingcustomer-focused,whileseizingthenewopportunitiesthroughverticalintegrationanddiversification.
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