PSE Circular for Brokers No. 155-98

February 18, 1998 PSE CIRCULAR FOR BROKERS NO. 155-98 February 17, 1998 Philippine Stock Exchange Date Exchange Road, Ortigas Center Pasig City Attention : ( Illegible portion in PSE file ) Gentlemen : This is in response to your request for us to verify the accuracy of the newspaper article in the Manila Times dated February 23, 1998. We deny the allegation of COA that Meralco "overlooked certain rules regarding the estimation of the return on rate base." Our position with respect to this allegation is contained in the attached copy of an advertisement which we caused to be published in newspapers of general circulation on February 16, 1998. We are also furnishing you a copy of the materials given out during a press conference held at 2:30 p.m. on the same date. Despite continued pronouncements in the press by various entities, Meralco has not officially received the written Order of the Energy Regulator Board (ERB). Very truly yours, (SGD.) CAMILO D. QUIASON Corporate Secretary SO THE PUBLIC MAY KNOW The Manila Electric Company ( MERALCO ) has been the subject of a barrage of accusations in the media, from "overcharging its customers" to "bloating its assets and expenses." These accusations, hurled by parties with vested interests or various agenda, were meant to undermine the painstaking efforts of the Company to provide reliable and efficient electric service at reasonable cost to the customers it has been serving for more than nine decades. Here are the facts that speak for themselves. Fact 1 : Meralco is not overcharging its customers . Being a regulated utility, Meralco bills its 3.1 million customers according to rate schedules approved by the Energy Regulatory Board (ERB) . Even the formulas for its automatic adjustment clauses, the Purchased Power Adjustment (PPA) and the Currency Exchange Rate Adjustment (CERA) have also been approved by ERB which also reviews the monthly computations of these adjustments. Fact 2 : Treatment of income tax as operating expense is consistent with previous COA and ERB decisions for all private utilities and is a universally accepted practice . Executive Order 72 signed by President Corazon C . Aquino in 1987 levied a 35% income tax on private utilities in addition to franchise taxes on gross revenues . Since then, ERB's decisions for all rate filings of private utilities allowed the inclusion of income tax as part of operating expense, including Meralco's 1990 rate application which was made final in 1994. Considering the broad implications of any ERB decision on the matter, the Philippine Electric Plant Owners Association (PEPOA) filed last Thursday, February 12 a Motion for Leave to Intervene in Meralco's pending rate application. Electric utility regulation, particularly in the US has allowed this practice for already six decades . Fact 3 : Meralco's rate filing in 1993 was in accordance with procedures that have been duly accepted in previous cases by both the COA and the ERB . There has been no attempt whatsoever on Meralco's part to bloat its assets or its operating expenses so as to disadvantage its consumers through higher rates. Meralco's medical and recreational facilities contribute to the welfare of its employees and to their efficiency as well. Outside parties, including affiliates, are correspondingly charged when they use these facilities. Fact 4 : Meralco's core business is distribution . Meralco has no intention of building its own generating capacities. Last year, it purchased 96% of the power it distributes from NPC and 4% from independent power producers or IPPs. Meralco entered into contracts with IPPs after NPC failed to supply the country with enough generating capacities in 1992 and 1993 resulting in 8 to 10 hour brownouts daily, in addition to the fact that NPC's wholesale rate to Meralco continues to be among the highest in Asia. These contracts were in accordance with the government initiative contained in EO 215 enabling the private sector to enter generation and, thus, dismantling NPC's monopoly. All of Meralco's IPP contracts are duly scrutinized by ERB to prevent any collusion and to provide quality power at least cost to the customers. First Gas Power Corp. is only one among Meralco's six suppliers, including NPC, and will at most provide only 25% of Meralco's load starting 2002. Fact 5 : Meralco is a publicly held company with around 90,000 stockholders which include 8,500 employees and retirees . Attributing its control or ownership to one family is not fair, nor factual . In fact, government-held shares account for 30% of the total stockholder base, thus, enabling government representatives to nominate 4 seats in the Company's 11-man board. First Philippine Holdings, also a publicly-traded company, accounts for 16.5% of Meralco's outstanding stock. 95 YEARS OF MERALCO SERVICE The negative publicity Meralco has been experiencing in the past weeks as result of irresponsible statements issued to the media has tried to erode customer confidence in the utility that has been serving the nation since 1903, only five years after the declaration of Philippine independence. The facts above indicate that inspite of all the nasty accusations, Meralco has not reneged on its commitments and continues to be committed in providing adequate and reliable electric service to its customers at reasonable cost powering industries in Metro Manila and the fast-growing Calabarzon area, providing electricity to schools, hospitals, and other commercial establishments, lighting our homes so that we and our families may enjoy the comforts that modern technology brings. Such commitment transcends political and economic boundaries for where in the Philippines can poor households pay merely P125 for 50 kwhs of power? While Meralco's detractors have been vocal about Meralco's profits, Meralco's record of energizing 400,000 beneficiaries in seven years through its Depressed and Rural Areas Electrification programs speaks for itself. It is true Meralco has its constraints. It has limited options electric rates are concerned being still mainly dependent on NPC for its supply. Figures show that for every peso Meralco customers pay, only 12 centavos go to Meralco for operating and maintaining its distribution system, meter reading, billing and collection while providing a fair level of return to meet the requirement of our creditors and stockholders. The nation's economic progress as reflected in the massive infrastructure development in Meralco's franchise area has put tremendous pressure on Meralco to continuously expand and upgrade its facilities. Last year, Meralco poured in P10 billion to upgrade its electric system. It is also in the process of modernizing its information systems, from as far south as Lucena to the northern fringes of its franchise. As we celebrate the centennial of the Philippines independence, we are proud to be Meralco, the Company that has lighted the nation's capital through the different periods of its history, the Company that has propelled the country's development towards industrialization. We continue our commitment . The Manila Electric Company said yesterday that it will file with the Court of Appeals a petition for review of the Energy Regulatory Board ruling with a prayer for the issuance of a temporary restraining order. The ERB has ordered the Manila Electric Company to reduce its rates by 16.7 centavos and refund to its customers the excess billing it had collected from them since February, 1994. The ERB said the refundable amount shall be charged to the customers' future billing. Being a regulated utility, Meralco bills its 3.1 million customers according to rate schedules approved by the Energy Regulatory Board (ERB) . The current rate schedules applicable to Meralco customers were approved by the Board in two cases: ERB Case 385 which effected the revenue-neutral restructuring m Meralco rates and the ERB Case 97-18 which implemented the reduction rates to industries and very large customers. Both these rate filings were made based on the 1994 ERB provisional approval of Meralco's 1993 rate increase application. Executive Order 72 signed by President Corazon C. Aquino in 1987 levied a 35% income tax on private utilities in addition to franchise taxes on gross revenues. Since then, ERB's decisions for all rate filings of private utilities allowed the inclusion of income tax as part of operating expenses , including that for Meralco's 1990 rate application which was made final in 1994. The recently released ERB order contradicts all its previous decisions on the matter . As the ERB decision affects not only Meralco but all other private electric utilities, the Philippine Electric Plant Owners Association (PEPOA) filed last Thursday, February 12, a Motion for Leave to Intervene in Meralco's rate application. Despite having received a copy of the Motion, the Board did not provide PEPOA the opportunity to be heard via hearing, but proceeded in rendering a decision. It should be emphasized that electric utility regulation, particularly in the US, has allowed this practice for already six decades. There was no attempt whatsoever on Meralco's part to bloat its assets or its operating expenses to disadvantage its consumers through higher rates. Meralco's medical and recreational facilities contribute to the welfare of its employees and to their efficiency as well. Outside parties, including affiliates, are correspondingly charged when they use these facilities. Meralco has no intention of building its own generating capacities. Last year, it purchased 96% of the power it distributes from NPC and 4% from independent power producers or IPPs. Meralco entered into contracts with IPPs after NPC failed to supply the country with enough generating capacities in 1992 and 1993 resulting in 8 to 10 hour brownouts daily, in addition to the fact that NPC's wholesale rate to Meralco continues to be among the highest in Asia. These contracts were in accordance with the government initiative contained in EO 215 enabling the private sector to enter generation and thus, dismantling NPC's monopoly. All of Meralco's IPP contracts are duly scrutinized by ERB to prevent any collusion and to provide quality power at least cost to the customers. First Gas Power Corp. is only one among Meralco's six suppliers, including NPC, and will at most provide only 25% of Meralco's load starting 2002. Attributing its control or ownership to one family is not fair, nor factual . In fact, government-held shares account for 30% of the total stockholder base, thus, enabling government representatives to nominate 4 seats in the Company's 11-man board. First Philippine Holdings, also a publicly-traded company, accounts for 16.5% of Meralco's outstanding stock. The negative publicity Meralco has been experiencing in the past weeks as a result of irresponsible statements issued to the media has tried to erode customer confidence in the utility that has been serving the nation since 1903, only five years after the declaration of Philippine independence. The facts above indicate that in spite of all the nasty accusations, Meralco has not reneged on its commitments and continues to be committed in providing adequate and reliable electric service to its customers at reasonable cost powering industries in Metro Manila and the fast-growing Calabarzon area, providing electricity to schools, hospitals and other commercial establishments, lighting our homes so that we and our families may enjoy the comforts that modern technology brings. Such commitment transcends political and economic boundaries for where in the Philippines can poor households pay merely P125 for 50 kwhs of power? While Meralco's detractors have been vocal about Meralco's profits, Meralco's record of energizing 400,000 beneficiaries in seven years through its Depressed and Rural Areas Electrification programs speaks for itself. It is true Meralco has its constraints. It has limited options where electric rates are concerned being still mainly dependent on NPC for its supply. Figures show that for every peso, Meralco customers pay, only 12 centavos go to Meralco for operating and maintaining its distribution system, meter reading, billing and collection while providing a fair level of return to meet the requirement of our creditors and stockholders. The nation's economic progress as reflected in the massive infrastructure development in Meralco's franchise area has put tremendous pressure on Meralco to continuously expand and upgrade its facilities. Last year, Meralco poured in P10 billion to upgrade its electric system. It is also in the process of modernizing its information system, from as far south as Lucena to the northern fringes of its franchise. As we celebrate the centennial of the Philippines independence , we are proud to be Meralco, the Company that has lighted the nation's capital through the different periods of its history, the Company that has propelled the country's development towards industrialization.