MERALCO:

CORPORATE STRATEGY ANALYSIS

Jesselyn Rochelle Rodriguez Malimata
European Joint Masters in Management and Engineering of Environment and Energy
Universidad Politécnica de Madrid

For the course:
Introduction to Organizations and Corporate Strategy
Under Prof. Carlos Rodriguez Monroy, Ph.D.
January 7, 2016

 TABLE OF CONTENTS

ABSTRACT .......................................................................................................................................... 4
I. INTRODUCTION .............................................................................................................................. 4
A. HISTORY .......................................................................................................................................... 4
B. VISION, MISSION, AND CORPORATE GOALS ....................................................................................... 6
C. SCOPE AND LIMITATION ........................................................................................................................ 7
III. ENVIRONMENTAL ANALYSIS ...................................................................................................... 8
A. GENERAL EVALUATION ..................................................................................................................... 8
B. DEGREE OF TURBULENCE .................................................................................................................. 8
C. PESTEL ANALYSIS ......................................................................................................................... 10
Demographics ................................................................................................................................. 10
Political and Sociological .............................................................................................................. 10
Economic .......................................................................................................................................... 11
Legal ................................................................................................................................................. 12
Technological .................................................................................................................................. 14
D. KEY FACTORS FOR SUCCESS ............................................................................................................ 14
Corporation: Infrastructure and Capital .................................................................................... 14
Competition: Size and Market Dominance .................................................................................. 15
Customers: Paying Capacity .......................................................................................................... 15
E. GROWTH AND LIFE CYCLE ANALYSIS ............................................................................................... 16
F. FIVE FORCES ANALYSIS ................................................................................................................... 17
Suppliers .......................................................................................................................................... 17
Customers ........................................................................................................................................ 17
New Entrants ................................................................................................................................... 18
Substitutes ....................................................................................................................................... 18
Existing Rivalry ............................................................................................................................... 18
G. FOUR LINKS ANALYSIS .................................................................................................................... 19
Informal Cooperative Links and Networks ................................................................................. 19
Formal Cooperative Links and Networks .................................................................................... 19
Complementors ............................................................................................................................... 19
Government Links and Networks ................................................................................................. 20
H. CUSTOMER ANALYSIS ...................................................................................................................... 20
V. CONCLUSIONS .............................................................................................................................. 21
VI. REFERENCES ............................................................................................................................... 21

TABLE OF FIGURES

Figure 1. Brief history of Meralco (Meralco, 2016) ........................................................................ 5
Figure 2. Meralco ownership (Meralco, 2016) ............................................................................... 5
Figure 3. Meralco subsidiaries (Meralco, 2016) ............................................................................. 6
Figure 4. 2015 Philippines' electricity market share by registered capacity (Philippine Electricity
Market Corporation, 2015) .................................................................................................... 7
Figure 5. [Left] Since the retail electricity sector started in 2013, the consumption of contestable
customers (orange) has been increasing, and [Right] Market share for the retail electricity
suppliers (Philippine Electricity Market Corporation, 2016) .................................................. 7
Figure 6. Meralco energy sales (in GWh) per sector (Metro Pacific Investments Corporation,
2015) ...................................................................................................................................... 8
Figure 7. Degree of turbulence of Meralco's environment (Lynch, 2015) ..................................... 9
Figure 8. Segregation of Filipino families by income class (Rappler, 2015) .................................. 10
Figure 9. [Left] The growing Philippine economy (Schnabel, 2016) accompanied by [Right]
growing electricity demand (Philippine Electricity Market Corporation, 2016) ................... 12
Figure 10. The electricity supply chain before and after EPIRA (Philippine Electricity Market
Corporation, 2016) ............................................................................................................... 13
Figure 11. Meralco's operational performance (Metro Pacific Investments Corporation, 2015) 14
Figure 12. 2015 Poverty incidence in the Philippines, showing Metro Manila with the least
incidence (Philippine Statistics Authority, 2015) .................................................................. 16
Figure 13. Life cycle analysis for Meralco’s distribution business ................................................ 16
Figure 14. Five Forces Analysis of Meralco ................................................................................... 17
Figure 15. Four links analysis of Meralco ..................................................................................... 19
Figure 16. The number of Meralco customers per sector (left) and energy consumption per
sector (right) in 2015 (Meralco, 2016) ................................................................................. 21


 ABSTRACT

Meralco is a Filipino electricity distribution utility (DU), operating mainly in Metro Manila. It was
founded 116 years ago by Americans, but was subsequently sold to the biggest Filipino conglomerates.
Its first entrant advantage made it the largest DU in the country, in the richest part of the Philippines.
Its size gives it strong bargaining power with its suppliers. Its ownership gives it working capital to
invest in and improve its infrastructure and services. Being the oldest and one of the most valuable
companies in the Philippines give Meralco implicit alliances across the industry. These factors allow
Meralco to thrive in the changing business environment. The power industry is being restructured by
the Electric Power Industry Reform Act (EPIRA), the Philippines’ economy is growing rapidly, and
distributed generation technologies are improving. From being just a DU, Meralco has vertically
integrated across the power sector and has diversified to complementary and even unrelated businesses.
The company dominates both the distribution and retail sectors, and is also entering the generation
sector with three coal power plants in the pipeline. It also uses its subsidiaries to address changing users’
needs and customize its services.

I. Introduction

A. History

In 1903, when the Philippines was a colony of the United States of America, Manila
Electric Railroad and Light company (Meralco) was established. It was a privately owned
American company, who built tramways, distributed electricity, and provided lighting across
Metro Manila. The railway system was heavily damaged in World War II, thus Meralco
concentrated on its electricity business. The company helped in the country’s rehabilitation
after gaining its independence from the United States in 1946. In 1961, Meralco became the
first American company to be “filipinized” when it was acquired by the Lopez family. The new
owners significantly improved the company’s infrastructure through investors and creditors
including the Bank of the United States, Bank of Japan, International Finance Corporation, and
various suppliers. In 1969, Meralco became the first billion-peso Filipino company without
government aid. In 1970, a new government policy required all major power generation
facilities to be turned over to the state-owned company, National Power Corporation. Meralco
was then left with electricity distribution as its core business. Following this, the company
expanded to provincial customers outside Metro Manila (Meralco, 2016).

 Brief
1970

1903
Generating
Facilities’
History
Manila Electric 1961 Turnover to
Railroad and Light Lopez National Power
Company Acquisition Corporation

1946 1969 2009

World First billion-peso Partnership with PLDT
War II company in the
and San Miguel Groups
Philippines

Figure 1. Brief history of Meralco (Meralco, 2016)

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
are: Beacon Electric Asset Holdings, JG Summit Holdings, Inc., Metro Pacific Investments, First
Philippines Holdings, and institutional investors and public shares (Meralco, 2016).

Figure 2. Meralco ownership (Meralco, 2016)

Metro Pacific Investments Corporation is a Philippine-based and publicly-listed company,

with other investments in water utilities, tollways hospitals, and railways in Metro Manila
(Metro Pacific Investments Corporation, 2015). Its parent company is the Hong-Kong based
First Pacific Company Limited. Beacon Electric Asset Holdings, Inc. is a joint venture between
Metro Pacific Investments Corporation and PLDT Communications and Energy Ventures, Inc.,
both owned by First Pacific Co. Ltd. It is a special-purpose vehicle, since foreign ownership in
utilities in the Philippines is limited to 40% by law (Bloomberg, 2017) (First Pacific, 2017)
(Dulay Pagunsan and Ty Law Offices, 2011). JG Summit Holdings is one of the largest Filipino
 conglomerates with major shares in real estate, food and beverage, banking, petrochemicals,
and air transportation (JG Summit Holdings, Inc., 2015). Finally, First Philippine Holdings
(FPH) is also a major conglomerate in the Philippines, with businesses in energy, real estate,
manufacturing, and construction (First Philippine Holdings, 2015).

Meralco has also diversified from its core distribution business, to businesses across
the electricity supply chain (generation and retail supply) and other related (insurance,
construction, metering) and even unrelated (information technology, real estate) businesses
(Meralco, 2016).

Figure 3. Meralco subsidiaries (Meralco, 2016)

B. Vision, Mission, and Corporate Goals

Meralco’s vision is “to be a world-class company and the service provider of choice”,
while its mission is “to provide our customers the best value in energy, products and
services”. Its corporate objectives are to: (i) Strengthen core distribution business, (ii) build
the power generation portfolio, (iii) participate in the retail electricity supply, (iv) grow the
electric distribution service area, and (v) drive the expansion of subsidiaries (Meralco, 2015).

Currently, the company is in line with its goals. As a whole, Meralco is one of the
biggest companies in the Philippines. It is one of the companies determining the Philippine
Stock Exchange index, and is the #7 publicly-listed company as of 2015. It is also included in
the top 50 ASEAN publicly-listed companies that year. Meralco has a market capitalization of
US$ 7.7 billion, and has a Standard and Poor’s credit rating of BB++ (Meralco, 2016) (Rivera,
2016) (ASEAN Up, 2016).

Meralco is the largest and most “powerful” electric distribution company in the
Philippines covering 36 cities and 75 municipalities, including Metro Manila. Their franchise
area 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, has currently no installed capacity. However, three plants are in construction: 600-
MW RP Energy Coal, 460-MW San Buenaventura Coal, and 1,200-MW Atimonan Coal, totaling
to 2,260 MW of new capacity to go online by 2021 (MGen, 2017) (Department of Energy
(Philippines), 2016). The Philippines’ current registered capacity is around 15,662 MW, and
MGen is set to be the second largest power generation company in the Philippines upon the
completion of its generation projects. Currently, the power generation in the country is
dominated by major Philippine conglomerates (Philippine Electricity Market Corporation,
2016).

Figure 4. 2015 Philippines' electricity market share
by registered capacity (Philippine Electricity Market
Corporation, 2015)

Merlaco’s retail electricity supply business, MPower, is also leading with 50% of the
market as of March 2016, since the retail market started in 2013. This market is even
expected to grow further in the coming years (Philippine Electricity Market Corporation,
2016).

Figure 5. [Left] Since the retail electricity sector started in 2013, the consumption of contestable customers (orange)
has been increasing, and [Right] Market share for the retail electricity suppliers (Philippine Electricity Market
Corporation, 2016)

C. Scope and Limitation

 This paper analyzes how Meralco is able to attain its goals – through an analysis of
the environment it operates in. In the discussion, focus will be given on its core business –
electricity distribution. No competitor analysis is done because Meralco has a natural
monopoly over its market, as shown in the Five Forces Analysis (Section II.F).

II. Environmental Analysis

A. General Evaluation

Meralco’s core product is electricity distribution, delivering power from generators
to end-users, and getting its income from the distribution charge. Meralco has three major
customer segments, which will be discussed in detail later – (1) regular customers, (2)
businesses, and (3) corporations. For business and corporations, aside from just delivering
electricity, Meralco provides additional services through its many subsidiaries like
consultancy, energy-saving technologies, and most importantly, specialized rates
(MeralcoBiz Partners, 2017) (Meralco Corporate Partners, 2017). Meralco’s market size is
directly related to Metro Manila’s electricity demand, which is in turn proportional to the
country’s economy. In the PESTEL Analysis later (Section II.C), it will be shown that both the
country’s economy and energy demand is increasing. This presents an opportunity for
Meralco to strengthen its business, especially for commercial and industrial customers, who
makes up most of its energy sales (Metro Pacific Investments Corporation, 2015).

Energy Sales (in GWh)

15,000

14,000

13,000

12,000

11,000

10,000

9,000
2012 2013 2014 2015

Residential Commercial Industrial

Figure 6. Meralco energy sales (in GWh) per sector (Metro Pacific Investments Corporation, 2015)

B. Degree of Turbulence


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 generators
to substations, powerlines, and finally the end-users is done through mature technologies and
already established infrastructure. Although there are technological advances such as smart
grids and distributed generation (to be discussed in the PESTEL analysis in Section II.C), the
basic structure will not change. Despite this, the changeability of the Philippine power sector
is high. This is because of three major factors: (1) The Electric Power Industry Reform Act of
2001 (EPIRA) (See Section II.C), is still in the process of being fully implemented. This
established the spot and retail electricity markets. And since these markets are not yet fully
developed, the rules and regulations governing them are still changing. (2) The Philippines’
economy is growing fast, which affects the energy consumption, and the balance between
electricity supply and demand. (3) There is a greater push for renewable energy. Although
the country still relies mainly on coal to meet its increasing energy demand, policies such as
the Feed-in-Tariff have been put in place to support renewables. This directly affects
electricity prices in the Philippines (Philippine Electricity Market Corporation, 2016) (Lynch,
2015).

The predictability of changes in the industry is moderate to high. The provisions of
EPIRA are already determined. It is the execution schedule and market details that are
variable. And whenever revisions are made to market rules, they first go through public
consultation. The Philippines’ economy is forecasted by several agencies like the Bangko
Sentral 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 the
Philippines 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’s
corporate strategy is a mix of prescriptive and emergent. Prescriptive, because the core
business 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 the
changing policies, economy, and technology. Strategies must be put in place to make the most
out of the growing economy, while protecting the company’s dominance in the market.

C. PESTEL Analysis

Demographics

Meralco operates in the Philippines, a relatively small, densely-populated,
developing, archipelagic country in Southeast Asia. The country has a land area of 300,000
km2, but a population of 92 million people, and with a GDP (in current US$, as of 2014) of 285
billion, growing at 6.1%. Majority of Meralco’s customers are in Metro Manila, the country’s
capital. Although the National Capital Region only accounts for 0.2% of the country’s total
land mass, it houses 13% of the country’s population and contributes 36% of the country’s
GDP (2.1 percentage points out of its 6.1% GDP growth rate). Compared with distribution
utilities 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

$ 277

Figure 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 high
disparity between each social class. As of 2012, its GINI (a measure of inequality; the closer
to zero, the more economically equal the country is) is 43, the 14th highest in the world (World
Bank, 2016). Meanwhile, 21% of the country still has no access to electricity (International
Energy Agency, 2015) . Meralco is owned by the biggest conglomerates in the country, and
naturally, has the economic and political power. Its customers, however, are from the middle-
and lower-classes. Thus, its service must be made affordable for everyone. Otherwise, this
can 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 Investments
Corporation, 2015).

Economic

The Philippines defied global trends, with a Gross Domestic Product (GDP) growth of
5.8% in 2015, making it one of the fastest-growing developing countries in Asia together with
India, China, and Vietnam. Despite being lower than 2014’s 6.1% GDP growth and the target
growth of 7%-8%, this performance is decent, given the environment: a global economic
decline, aggravated by local concerns like El Niño. The country was able to overcome these
challenges 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 rating
ever 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 rating
Despite the decline in growth of remittances from Overseas Filipino Workers (OFWs), several
factors such as the continued growth of the Business Process Outsourcing (BPO) industry and
the 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 Asia
A growing economy results to growing electricity demand, thus signifying a larger growth
potential for Meralco (Meralco, 2016).


Figure 9. [Left] The growing Philippine economy (Schnabel, 2016) accompanied by [Right] growing electricity demand
(Philippine Electricity Market Corporation, 2016)

Legal

As with any public utility, the electricity sector is highly regulated by the government
through the Energy Regulatory Commission (ERC), an independent quasi-judicial regulatory
body. Its main responsibilities are to ensure consumer education and protection, and to
promote the competitive operations in the electricity market (Energy Regulatory
Commission, 2017). The commission approves prices of bilateral contracts between
electricity suppliers and retail customers, and also monitors the electricity bill charged to
end-users.

Feed-in-Tariff (FIT)

Pursuant to the Renewable Energy Act of 2008 (Republic Act No. 9513), The ERC
issued a resolution adopting FIT rules in 2010. The FIT system is a policy guaranteeing a fixed
payment per kilowatt-hour for wind, solar, ocean, run-of-river, and biomass generators. To
support this program, ERC approved the collection of a FIT-Allowance (FIT-All) charge of
PhP0.0406 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 the
Renewable Energy producers (Meralco, 2016).

Electric Power Industry Reform Act (EPIRA)

The most important legislation, however, that restructured the electricity sector was
the 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 encouraging
private investment in the industry
• To ensure affordability of electricity, by encouraging free and fair competition
through the establishment of the wholesale and retail electricity markets and the
Energy Regulatory Commission (Senate and House of Representatives of the
Philippines, 2001)

Philippine Electricity Supply Chain

Before EPIRA, all power generation and transmission facilities were owned by the
state-owned National Power Corporation (NPC). Meralco, a distribution utility, thus only
sourced its electricity from the government. All end-users (residential homes and industrial
facilities alike) sourced their power from their local electric cooperatives and distribution
utilities. 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 highest
bidders; (ii) the company’s power transmission network was franchised to the National Grid
Corporation of the Philippines (NGCP) – a consortium comprised of Monte Oro Grid
Resources Corporation (owned by a Filipino conglomerate) and the State Grid Corporation of
China (National Grid Corporation of the Philippines, 2016); (iii) the Philippine Electricity
Market Corporation, a company supervised by the country’s Energy Secretary, was
established in 2006 to (iv) operate the Wholesale Electricity Spot Market, which started in
2010 and (v) the Retail Competition and Open Access (RCOA) in 2013 – through which
consumers with an average load of 1 MW of greater are free to purchase electricity from
electricity suppliers aside from their local providers (Philippine Electricity Market
Corporation, 2016).

For Meralco, this opened the opportunity to vertically integrate with other parts of
the supply chain. As stated earlier, its power generation arm, MGen, is currently constructing
three generation facilities. Its retail arm, MPower, has half the market share. EPIRA also gave
Meralco the liberty to source its power from a variety of private generators, and even from
the market – whatever suits its strategy. The establishment of RCOA expanded Meralco’s
customer reach as it can now provide power to contestable customers (mostly industrial
facilities which use more than 1 MW of electricity) outside Metro Manila.

Venture in power
generation

Single supplier Many suppliers

Monopoly in Venture in retail

distribution electricity supply

Captive customers
Captive customers
Contestable
customers

Figure 10. The electricity supply chain before and after EPIRA (Philippine Electricity Market
Corporation, 2016)
 Technological

In 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 with
distributed generation. Distributed generation refers to small generation entities who can
supply directly to the grid with a maximum capacity of 100 kW. Net-metering means that
consumers who have installed capacities (e.g. solar panels) and generate more electricity
than they consume can sell this extra power to the grid. The Renewable Energy Act of 2008
pioneered this net-metering concept, with the goal of encouraging end-users to participate in
renewable energy generation (Department of Energy (Philippines), 2008).

Since the technology for solar photovoltaics is quite mature, solar providers have
been offering the supply and installation of rooftop solar panels for as low as US$3,800 (Solar
Philippines, 2017). Meralco mitigates this risk by investing heavily in infrastructure to
improve efficiencies to the point of making self-generation uneconomical. In 2015, Meralco’s
capital expenditure amounted to around US$228 million, most of which was dedicated to
electric capital projects like substations and transmission lines. As a result, the company’s
system 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 Success

Three major factors are identified to thrive as an electricity distributor –
infrastructure, size, and customers.

Corporation: Infrastructure and Capital

Distribution lines are infrastructure that are impractical to build in parallel – because
they are costly and logistically difficult to manage. Setting up the power lines first in any
region 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 capture
all electricity consumers in Metro Manila for over 100 years. Connected to this is the capital
to 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 the
country, also has this advantage.

Competition: Size and Market Dominance

The bigger the franchise area, the bigger the bargaining power of a distribution utility
is. This is the reason why smaller electric cooperatives in the rural parts of the Philippines
are aggregating when securing power supply agreements. They are able to buy power from
generators at lower prices or at more flexible terms, compared to when they negotiate
individually. On the other hand, generators are competing to obtain power supply
agreements with Meralco, because of its huge demand. In 2015, Meralco’s peak demand
reached 6,298 MW (60% of the whole country’s peak demand for the same year). Securing a
contract 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 have
greater political power in these organizations, can ensure that the organizations’ positions
are in their best interest.

Size also pertains to the position occupied in the value chain (vertical integration).
Owning a bigger part of the chain means greater control of the prices and income of the
company, as in the case for Meralco.

Customers: Paying Capacity

Customers of distribution utilities are captive – meaning they have no choice but to
source their power from the power lines already existing in their area. Although the quality
and reliability of electricity is important for economic growth and everyday living, end-users
have little control over this. Consumer groups may lobby for more stable or sustainable
power, but in the end, national policies and economic growth will dictate this.

However, what is very important for customers is the price of electricity. As
mentioned earlier, the Philippines is middle- and lower-class heavy, and power must be made
affordable for them. Illegal connections are very rampant. There are even electric
cooperatives that run out of business simply because their customers won’t pay. Compared
to the rest of the country though, the National Capital Region, where Meralco operates, has
the lowest poverty incidence among families at 2.7%, while Philippines is at 16.5% in 2015
(Philippine Statistics Authority, 2015). Meralco still employs measures though, to make its
service affordable for all customers (ex. prepaid electricity, consumption calculator, etc.).
Additionally, since electricity is a utility, consumer groups such as the National Association of
Electricity Consumers (Nasecore) closely monitor Meralco. This is why Meralco is as
 transparent as possible with regards to its electricity charges. Monthly television and radio
advisories are released and the breakdown of electric bills are available to the public via the
company website (Meralco, 2016).

Figure 12. 2015 Poverty incidence in the Philippines, showing Metro Manila with the least incidence (Philippine Statistics
Authority, 2015)

E. Growth and Life Cycle Analysis

SALES

Figure 13. Life cycle analysis for Meralco’s distribution business

Initially, Meralco and the electric power industry have been in maturity. Although
demand was increasing, the services used to deliver power have been stagnant. But, given the
rapidly environment (EPIRA, RCOA, FIT-All, distributed generation, and the increasing
commercial and industrial needs of the country) – and add to this the increasing resources at
Meralco’s disposal (its subsidiaries in generation, retail market, engineering and
construction, insurance, payment centers, etc.) – it can be said that Meralco is in a new growth
 phase. This is evident in its increasing sales as shown in Figure 6. Meralco energy sales (in
GWh) per sector (Metro Pacific Investments Corporation, 2015). New products and services
(other than just power distribution) are being offered my Meralco, to suit the changing needs
of its customers. Section II.H shows a more detailed customer analysis, and an overview of
the new products Meralco offers.

It should also be noted that Meralco was the first entrant to the distribution business,
which is also the main reason why it was able to maintain its growth/maturity phase for a
very long time. This will be discussed further in the next section on the Five Forces Analysis.

F. Five Forces Analysis

New
Entrants High barrier to
entry

Suppliers
Existing Customers
Rivalry

Monopolistic
Low bargaining Public interest –
power Highly-regulated

Self-
Substitutes
consumption

Figure 14. Five Forces Analysis of Meralco

Suppliers

The suppliers of Meralco are the power generation companies. They have low
bargaining power because there are many of them, and the product they offer, electricity, is
non-differentiable. Also, although generation costs comprise a large part of Meralco’s over-
all costs, these are simply passed through to the end-users. Meralco has the biggest load, and
generators compete to have Meralco as their customer by arranging payment and supply
terms according to Meralco’s wants. On the other hand, a long-term power supply contract
with Meralco eliminates major risks in the power producer’s business. Finally, with the
completion of MGen’s three new power plants by 2021, Meralco’s suppliers will have an even
weaker bargaining power since Meralco can source most of its demand from its subsidiary.

Customers

The end-users of Meralco’s products are the Filipino people. Meralco’s business is of
public interest, which is why it is highly regulated. The Energy Regulatory Commission has to
 approve all power supply agreements with generators. Furthermore, Meralco is required to
release a breakdown of its charges every month. Several consumer groups monitor these
electricity prices. In extreme cases when prices are deemed to be unfair, Meralco can be
demanded to give refunds to its customers. This happened in November and December 2013
when electricity prices in the spot market spiked due to the simultaneous outage of several
power plants. Since Meralco sourced around 8.6% of its power from the spot market, the
electric bill of end-users also jumped (Meralco, 2013). The power plants on outage were
accused of collusion by consumer groups. Eventually, ERC imposed a standard by which
market prices will be recalculated for those two months, and the excess of which was
returned to the consumers (Salaverria, Olchondra, & Burgonio, 2014).

New Entrants

As stated earlier, power distribution is capital-intensive (both in terms of industries
of scale and technical and market expertise) because it requires specialized and logistically
non-duplicable infrastructure. In addition to that, the switching costs for customers may be
very high (as this will involve electrical re-wiring, etc.). Thus, the barrier to entry is very high.
In fact, in the last 6 years, only 6 new distribution utilities entered the market (Philippine
Electricity Market Corporation, 2011) (Philippine Electricity Market Corporation, 2016).

Substitutes

The main substitute for Meralco is backward integration or self-consumption, in the
form of distributed generation and alternative energy sources. Distributed generation mainly
refers to the rise in solar photovoltaic installations in the country. As part of its risk-
management strategy, Meralco is improving efficiencies such that self-generation becomes
uneconomical (Meralco, 2016). Alternative energy sources include the use of natural gas, or
primary fossil fuels like wood or coal, instead of electricity for cooking. The use of solar
heating for bathing water is also increasing. However, self-consumption is not expected to
disrupt Meralco’s business in the short-term. The increase in energy demand in the country
is fast, and the fastest and cheapest technology to address this is still coal. As of November
2016, 59% (9,890 MW) of the indicative and committed private-sector initiated power
projects are fueled by coal (Department of Energy (Philippines), 2016).

Existing Rivalry

Given the industry and environment Meralco operates in, it can be said that the
company has a natural monopoly in electricity distribution in Metro Manila. It is also the most
powerful distribution utility in the country. It has been serving the capital for over 100 years,
and any new entrant can only truly compete with Meralco in case of a severe disruption in
technology or an extreme natural calamity – which is highly unlikely. For example, if an
earthquake or flood wipes out the power system of the country and everything has to be
restarted. Regulations such as the opening of Retail Competition and Open Access, however,
 can change customers from captive to contestable; and in the retail electricity business,
Meralco (through MPower) can face competition in the future.

G. Four Links Analysis

Long relationship Sister companies
but changing Informal
& Business
policies Cooperative associations
Links and
Networks

Formal
Comple- Cooperative
mentors Links and
Networks
Meralco Long-standing
subsidiaries contracts

Figure 15. Four links analysis of Meralco

Informal Cooperative Links and Networks

Given that Meralco is owned by the biggest conglomerates in the country, it has strong
informal cooperative links both inside and outside the power industry, through its sister
companies. This is particularly useful for securing customers. For example, chemical plants
owned by JG Summit Holdings will most probably get electricity from MPower. Almost any
customer that Meralco wants to tap, it already has its foot in the door. Compare this with
foreign-owned generators, whose sole business is producing electricity. They will have no
previous connections with potential customers, and almost all marketing efforts will have to
be done from scratch. The sheer age of Meralco also gives it an advantage. It has been a part
of several business associations for a long time, and the network resulting from these is
enormous.

Formal Cooperative Links and Networks

Meralco has secured long-term contracts with its generators. As explained previously,
Meralco’s size gives it strong bargaining power such that its suppliers usually give Meralco
the lowest prices, and according to Meralco’s terms.

Complementors

 Meralco is vertically integrated in the electricity supply chain. It also has subsidiaries
in related businesses like engineering, metering, insurance, information technology, and even
financing. Meralco virtually owns all complementors to its core distribution business.

Government Links and Networks

Meralco is older than any other company or entity in the power industry. It predates
the electricity market, the Energy Regulatory Commission, and even the Department of
Energy. Because of its age and market dominance, it implicitly yields great influence to policy-
making. On the other hand, also because of its size, any energy-related policy is bound to
affect the company one way or another. And again, the power industry is currently still in the
phase of reformation, coupled with economic and technological development – will yield to
corresponding changes in energy policies.

H. Customer Analysis

Meralco, as a distribution company, has captive customers. These are end-users who
simply get their power from Meralco (and from whichever power plant Meralco has
contracted with). As mentioned in the General Evaluation (Section II.A), these customers are
segmented into regular customers, businesses, and corporations. (1) Regular customers
include residential, commercial, and industrial consumers who only avail of power
distribution services from Meralco. Distribution charges differ depending on the location of
the customers. Commercial areas have a generally higher rate than residential areas. (2)
Business customers, dubbed as “MeralcoBiz partners”, are given different generation charges
for peak and off-peak hours, so that they can get up to 37% savings if they shift their
operations to the cheaper off-peak hours. Prepaid electricity options and electricity-saving
consultancy services are also offered. These customers include small and medium enterprises
such as restaurants and start-ups. It is positioned to “help Filipinos expand their business for
the future of their families” (MeralcoBiz Partners, 2017) (3) “Meralco Corporate Partners”,
on the other hand, targets public and private customers with a capacity of at least 500 kW.
These consumers represent the top 10,000 Philippine corporations and conglomerates. This
business is done through Relationship Managers (RMs), who are technical and regulatory
experts coming from different industries. They act as energy consultants who help from the
initial planning stages, the service application process, until the actual connection to the
power grid, and power quality and energy efficiency management. (Meralco Corporate
Partners, 2017). As observed, Meralco offers additional customized services for bigger
customers who have special needs. This is a part of Meralco’s strategy to become more
customer-focused by leveraging on its various subsidiaries (Meralco, 2016).


Figure 16. The number of Meralco customers per sector (left) and energy consumption per sector (right) in 2015
(Meralco, 2016)

Almost all (92%) of Meralco’s customers are from the residential sector, however 70% of
energy consumption comes from the commercial and industrial customers. It is thus more
strategic for Meralco to concentrate its efforts on this 8% (Meralco, 2016).

Meanwhile, Meralco as a retail electricity supplier, MPower, has contestable
customers. These are facilities which have a consumption of 1 MW or higher. These are
mostly industrial plants, or establishments with high aggregated demand such as big
shopping malls or hospitals. They source their electricity from retail electricity suppliers such
as MPower, who in turn get the electricity from the generators.

V. Conclusions

Meralco is a vertically-integrated power company in the Philippines, whose core business is
distributing electricity in Metro Manila. It dominates in the distribution and retail supply sectors, and
soon in the generating sector as well. It is able to do so because of the right mix of its environment
and resources. Meralco has the first entry advantage, giving it monopoly in Metro Manila, the richest
region in the country. Add to this the growing Philippine economy, which gives Meralco greater
opportunities. On the resources side, Meralco has great economic and political muscle by virtue of its
ownership. Being owned by the biggest conglomerates in the Philippines, it has implicit alliances
across different industries. Because of its size, it has strong bargaining power to get favorable
contracts from its suppliers.

However, the power industry is changing – due to the implementation of EPIRA, growing
economy, and developing technologies. Meralco’s strategy is thus a mix of prescriptive and emergent.
It continues its proven strategies of improving efficiency and being customer-focused, while seizing
the new opportunities through vertical integration and diversification.

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