So Insensitive

So Insensitive

THEY come in the wee hours of the morning, without ample warning, as we’re in our homes fast asleep after a long week at work. We’re not talking about thieves in the night, but they might as well be, considering how much they take away from our hard-earned incomes.

Since the Downstream Oil Industry Deregulation Act took effect more than a decade ago—and especially lately with the record crude prices worldwide—retailers have been raising prices at the pump when we are at our most vulnerable.

Their announcements—if we could call them that—hardly reach the public to be of any practical use. If at all, they would be aired during the late night TV news or barely 30 minutes before midnight, by which time most of us are already in bed and too beat up from a week’s work and the Friday traffic to have the energy to get up and drive to the nearest station to gas up.

For all the discomfort they’re causing commuters during transport strikes, we must hand it to public utility vehicle operators and drivers because they have the decency to announce their plans way ahead of time. At least people could plan their lives accordingly.

We can say the same about labor unions, which are required by law to file the necessary papers with the government before they embark on work stoppages. Not that we’re great fans of these two groups, but the antiquated restraints imposed on these factor markets betray the free-market ideologists’ bias for the powerful when it comes to sectors such as the downstream oil industry.

The underhandedness exhibited by oil companies is so insensitive coming at this time when very expensive oil products are causing inflation to shoot up again, raising fears that incomes may be slow in catching up to the erosion in people’s purchasing power.

What difference would it make for companies if they announce their price increases early in the evening, giving motorists enough time to pass by a station along the way home to gas up? Apparently it means a whole lot for their margins, as they would rather surprise most of us the following morning.

What we find so intriguing is that whereas multinational oil refiners had reported record profits last year, their local units and affiliates said their earnings barely rose from the previous year. And we hear this at a time when oil products are at their most expensive in history—and still rising, judging from the unabated increases in the futures markets.

The sad part is that the downstream deregulation law took away whatever legal remedies past edicts provided consumers. The 1998 law even emasculated the government, which has been reduced to a bean counter, tallying price changes after the fact. The operative word, according to the law, is “price monitoring.”

True, the law banned a handful of anti-competitive offenses to prevent price collusion, but oil companies have found a way around these practices. The law also gave the Department of Energy certain powers it could exercise in such circumstances, but left it to the local courts to deliberate on the matter. As it is, the courts are already clogged up with other pressing cases, so ordinary consumers are left to their own devices. Once again, the free-market ideologists have betrayed the lot of their unsuspecting middle-class supporters.

Despite the limitations set by law, we’re still waiting for the incumbent energy secretary to make good on his bluster when he took office. Last year, he had warned oil companies to comply with a directive to inform the department of price adjustments. Moreover, he announced a government plan to audit oil companies, tapping the services of a third-party service provider.

We’re well into a new year, and we’ve yet to hear anything come out of those initiatives. So, Mr. Secretary, we’re still waiting.

The fastest and biggest deal

The fastest and biggest deal

ON Dec. 13, 2006, the state-owned PNOC Energy Development Corp. (PNOC EDC) sold its shares for the public for the first time. EDC is the world’s largest geothermal company. It generated P19.2 billion from the initial public offering (IPO) at P3.20 per share for 20 percent of the world’s leading geothermal producer.

The P3.20 share price was grossly underpriced. On the first trading day, investors easily earned 42 percent as the shares closed at P4.60 per share, thanks to CLSA Exchange Capital, the financial advisor and global coordinator hired by PNOC EDC President Paul Aquino.

In July 2007, PNOC EDC made a follow-on offering, for 20 percent of the company. It raised P17 billion and PNOC EDC was no longer a government firm. The IPO price was higher this time, P5.70 per share.

In November 2007, the remaining 60 percent was auctioned—40 percent in common shares and 20 percent in preferred shares.

EDC was acquired by the Lopez family’s Red Vulcan Holdings Corp. for a whopping P58.5 billion. EDC had become 100 percent private from 100 percent government three years ago.

Why would the Lopezes, the family that invented large-scale power ownership and management in the Philippines, value a company three times it was worth after 11 months and eight days?

The first answer is that the P3.20 per share IPO price was, it now turns out, really an anomaly. PNOC EDC was wrongly priced in December 2006.

The second answer is that PNOC EDC is a good company. It is literally steaming with potential. The largest geothermal energy producer in the world, it supplies steam to 12 operating power plants with total generating capacity of 1,199 megawatts (MW). Future projects will add 300 MW more in capacity.

EDC has hot geothermal properties. It has good management, especially the engineering team (including 750 geothermalists with combined 11,000 man years of experience). An archipelago of volcanoes, the Philippines is the world’s second largest geothermal producer, with 1,978 MW of installed capacity. The US is first, with 2,544 MW.

The company’s worth has been highlighted with oil soaring past $111 per barrel and by the global focus on green fuel like geothermal.

Finally, the team that auctioned the controlling 60 percent of PNOC EDC last November did a really good job, packaging the equity, drawing up the ground rules, adopting complete transparency, and thus triggering unprecedented investor interest.

That team was composed of PNOC President Antonio Cailao, president and CEO of PNOC, PNOC EDC’s mother company; veteran treasury expert Reynaldo G. David, president and CEO of the state-owned Development Bank of the Philippines; Manuel Salak III, managing director of ING, and topnotch lawyer Perry Pe, a partner in the Romulo Law Offices.

David’s DBP committed to provide what he calls “staple financing” or half of the financing needed by the winning bidder. “Where can you find a bidding where the bidders are given the financial wherewithal, the financial lubrication, the ammo for their bids,” gushed PNOC CEO Cailao.

The staple financing, David explained, “is that it would come in just in case the foreign partners of the winning bidder opted out.”

Rey also secured, quickly, the required approvals from government to sweeten the offer. This included continuance of government guarantees on PNOC EDC’s sovereign loans, the Monetary Board exemption from the single borrower’s limit on loans extended by the financiers, and the Department of Justice and the Securities and Exchange Commission opinions that a 60 percent Filipino consortium could be considered 100 percent Filipino as far as the bidding was concerned.

At the time of the bidding, Pe noted, EDC was already about 30 percent foreign, leaving just 10 percent remaining to be owned by foreigners since utilities like energy must be at least 60 percent Filipino.

Salak packaged the deal to interested bidders. His ING has an enviable track record, having handled or played the leading role in the $98 million IPO of Meralco in 1992, the $400 million IPO of Petron in 1994, the sale of government’s 32.5 percent equity in PNB for $145 million in 2005, and the $336 million EDC IPO in 2006. It counts Aboitiz,Marubenim,Banpu of China, Siemens, and Mirant among its energy clients.

Lawyer Pe made sure that “the rules crafted were all transparent and of international standard.”

With the terms made appealing, the bidding naturally attracted what Cailao calls “the crème de la crème” of the energy business, 15 groups, later reduced to five, then four final bidders. The interested parties were amazed at the groundwork done by the privatization team. Two of them, Reykjavik Energy and Geysir, told the group: “You think like Bobby Fisher, 30 steps ahead.” Which means the team was a genius in their work.

Rey David’s heart sank when the first bid was opened, P33.2 billion by AP Renewables of the Aboitiz Group. PANASIA Energy of San Miguel quoted P39 billion. Then Andrew Gotianun submitted P48.5 billion. The privatization team’s hopes were buoyed. Then Red Vulcan’s bid was opened—P8.5 billion!

Another look at nuclear power

Another look at nuclear power

Nuclear power, if properly harnessed, can meet the rising energy demands of developing countries such as the Philippines, cutting power costs for both household and industrial users. The idea of drastically bringing down air-conditioning bills and manufacturing costs can be irresistible to many quarters.

But before the government expends a lot of time, effort and taxpayers’ money on studies to harness nuclear power for peaceful uses, there are several things to consider. One is that while nuclear power can cut electricity bills and is cleaner than energy derived from fossil fuels, nuclear waste is toxic, volatile garbage that cannot be recycled and is non-biodegradable. The world’s best minds have not yet found a way to dispose of nuclear waste without posing a threat to the environment.

Another factor that must be considered is the site for a nuclear plant. The $2.3-billion Bataan Nuclear Power Plant was mothballed partly because it was built near an earthquake fault. The Philippines lies along the so-called Ring of Fire – a section of the planet that is littered with active volcanoes and earthquake faults. One nuclear accident can be catastrophic for the country.

Proponents of nuclear power argue that, except for the Chernobyl accident in the former Soviet Union, there has been no major nuclear disaster in the other countries that harness nuclear power for peaceful purposes. But here lies another factor that must be considered: if corruption and sloppy work have given us roads that disintegrate in a downpour and bridges that collapse from the weight of regular vehicular traffic, we are likely to end up with an unsafe nuclear plant like the one in Chernobyl rather than those in Japan or South Korea.

Corruption must also be a serious consideration, given the country’s experience with fat commissions in the construction of the Bataan nuclear plant. The late dictator Ferdinand Marcos was never made to answer for the $80-million commission he reportedly received from power plant builder Westinghouse. If building personal fortunes is the overriding consideration in the latest efforts to harness nuclear power, the idea must be abandoned immediately.

This won’t be a big loss to the Department of Energy. It can always focus on expanding the country’s use of alternative forms of energy, including wind, natural gas and geothermal power. These energy sources produce clean fuel without safety risks.

Miriam’s counsel

Miriam’s counsel

Observers are hoping that Angelo Reyes and Miriam D. Santiago would patch up whatever differences they may have. The newly named energy chief can benefit from the wisdom of the veteran senator—and their collaboration can help solve much of the woes besetting the energy sector.

Unbeknown perhaps to many, Santiago was instrumental in the relatively successful stints of Reyes’s predecessors. For one, former energy secretary Vincent Perez derived immeasurable benefit from the counsel of Santiago—who chairs the Senate energy committee and is part of the Joint Congressional Power Commission.

She may not have the extensive technical know-how that would have given her the credentials of, say, Francisco Viray. However, Santiago is known to seriously study any subject matter that is of personal or professional interest to her. No doubt, she does her homework when it comes to her responsibilities as energy committee chair.

Sen. Miguel Zubiri took much of the credit for the Bio-fuels Act of 2006, but the former Bukidnon congressman must share the tribute with Santiago. After all, it was her guiding presence in the bicameral conference committee that did much to reconcile the Senate and House versions of the landmark legislation. It spoke well of the perfect combination of Santiago’s technical grasp and legislative prowess.

There are two major issues that the Department of Energy will have to deal with—if not now, then certainly in the very near future. On both issues the DOE will need a lot of Santiago’s support and counsel.

First is the Electric Power Industry Reform Act (Epira). It appears the energy sector is uncertain about what to do with it—whether to amend it or let it stay the way it is. What makes a resolution of this issue urgent is the clamor for lower power rates. One side of the debate believes that Epira is responsible for the high cost of electricity in the country.

You can expect many politicians to jump into the fray and—in true populist fashion—champion cutting power costs willy-nilly but Santiago will likely take a more prudent tack. After all, she is a maverick and has no qualms about taking the unpopular side if she believes it to be the right choice.

Santiago could provide the voice of sobriety in this debate. Observers hope that Reyes, as the new DOE chief, would find it in the best interest of the energy sector to tap the senator’s help in dealing with this issue.

Then there is the matter of energy sufficiency. This issue was buried in the brouhaha over power rates, but the reality is that the energy sector has not fully addressed the problem. A power shortage still looms. The two islands that face the worst impact of this shortage are Cebu and Panay.

Who could be a better authority on power issues, especially those that affect her native island of Panay, than the Ilongga senator herself?

A disastrous power shortage could have hit Panay as early as three years ago. The island was short by 200 megawatts, but then-energy secretary Perez opted to work closely with two lawmakers from Iloilo, then-Senate President Franklin Drilon and Santiago.

Perez got the political support for the interim power supply solutions he needed. In the process, however, he was publicly scolded by Drilon. Perez opted to exercise humility and avoided a head-on clash with the then-Senate chief. Result: the quick resolution of the Panay power supply problem.

The problem is, there have been no additional capacities for Cebu and Panay since Perez, Santiago and Drilon collaborated on an interim solution. As the new DOE chief, Perez will have to find a more permanent solution to the shortage—not just in Panay but the rest of the country, too.

Industry insiders are hoping Santiago continues to work actively on the legislative requirements of the power sector. While constitutional law is her forte, she has nonetheless done much for energy legislation.

Impossible demands

Impossible demands

We will let on government planners on a private sector secret which actually has long been known to practically all corporate planners. For almost 20 years now, many companies routinely input the high likelihood of a drought every five years and adjusted their corporate plans accordingly.

This nugget of defensive strategy we learned from the corporate planner of one of the biggest conglomerates in its time, which was severely weakened by the money market collapse in 1980-1981 and finally buried when its principal flew the coop after the ouster of Ferdinand Marcos. The planner learned to take the vagaries of the weather seriously when he started as an analyst of the US agriculture department, working out from a desk at the US Embassy. For all we know, he is still using the same, if improved, forecasting model at a commercial bank where he is now serving as executive vice president.

His point was that invoking force majeure was rather silly because information about the cyclical El Niño phenomenon was readily available (global warming was not yet a familiar term in those days). And invoking force majeure won’t cut ice with the board of directors which he was reporting to. So his group’s investment, trading and lending programs were designed to minimize exposure on industries dependent on good weather, meaning, principally agricultural-related companies, whenever he saw signs of a coming dry spell.

How good is the planner? Well, let’s just say he is treated as a star every time the Philippine Economic Society holds its annual meeting.

So why doesn’t the government do the same, pro-actively addressing the threat of a long dry spell like what the country is experiencing now?

Wrong question. Most agencies, especially government-owned corporations and financial institutions, do plan ahead. It’s just that politicians tapped to head the corporations and to sit on the boards have priorities set by their masters.

Let’s take the National Power Corp., the current whipping boy for the rising power rates due to a) idled hydroelectric plants and b) more expensive fuel. It is not publicly known that Napocor is a subscriber to a very expensive weather forecasting service that is acknowledged as being better than the official weather bureau. The Napocor should have known the hydros were about to run out of water. It should have been prepared to harness its other plants, mostly thermal.

The reality is that the Napocor has not stocked up on coal, for example, in anticipation of greater reliance on thermal plants. The reason is simple. The pressure is on Napocor to raise its profits while ensuring stable rates. Remember the to-do about the alleged price-fixing in the wholesale market? The Napocor told the trading groups at the wholesale market that they should not sell output at giveaway rates. For its trouble, Napocor was cited by the Energy Regulatory Commission for price-fixing.

This week, wholesale spot prices peaked at over P52 per kilowatt-hour, more than 10 times the recent average. We expect to see stepped up calls for heads to roll at the Napocor. As if cutting off heads will lead to an additional megawatt of power to the grid.

And so the finger-pointing goes on, with every expendable executive adjudged guilty to absolve the pols who demand adequate power supply at a cheap price on rising production cost.

They might as well demand the squaring of the circle. But that’s politicians for you.

Go ahead, Chief Justice Puno

Go ahead, Chief Justice Puno

"The people should support the decision by the Supreme Court, headed by Chief Justice Reynato Puno, to investigate corrupt men in the judiciary. Hoodlums in robes—these are the men who sell their power to the highest bidder. They should be unmasked.

Many Filipinos know there is corruption in the judiciary. But they are difficult to ferret out because corrupt judges deal only with their close friends in the profession—law school classmates—or relatives. If there are a few judges (or fiscals) caught receiving money in exchange for a favorable decision on a case, it is only because of indiscretion.

We look forward to the investigation of the 12 members of the Court of Appeals based in Cebu—the so-called Dirty Dozen—who have been suspected of selling temporary restraining orders (TROs). By the way, TROs have a price because it provides relief to a client—he or she can buy time enough to fix a case.

With the Supreme Court at the head of the investigation body, we should not expect a whitewash on the case. No less than the Chief Justice has showed interest in the problem of the Dirty Dozen.

The Court’s decision to press the investigation is supported by leaders of Cebu, including Rep. Antonio Cuenco. He said: “For all we know, the alleged sale of TROs by 12 CA justices dubbed the Dirty Dozen may just be the tip of the iceberg. This cleansing process is long overdue. Let the ax fall on the hoodlums in robes.”

Solving water and energy problems

We always love to scare ourselves. The latest evidence of this is the headlines about the potential crisis in the supply of water and energy. The best way to solve these problems is to call for a meeting of LEDAC which coordinates the work of the Palace and the legislators.

Sen. Chiz Escudero has an input on what he calls the looming energy crisis. He said that this problem needs to be addressed immediately to “abate falling into the pitfalls of the same problem in the early 90s where the country resorted to the so-called power purchase adjustment [PPA].”

“PPAs proved to be grossly disadvantageous to the people and the government. The price is always more than what is right and is needed, and up until now we are still paying for it. If we do not heed to the urgency of this matter, we might be falling into the same trap again.”

Escudero wants Senate to immediately constitute the Committee on Energy amid the alleged imminent power crisis. “We are not here to implicate anyone but if someone out there is responsible for this trouble, we will not hesitate to run after their heads.” By the way, negotiations are still ongoing on who will head the several committees in the Senate.

The senator said the Committee on Energy needs to get down to work to look closely into the root cause of this problem and immediately identify stopgap measures. “We would like to know what went wrong. Was it something that could have been avoided? Was it artificially created?”

Artificially created? Coming from a senator, that should be intriguing. We should go to the bottom of this—whether there are interests involved in this looming shortage. Baka may kumikita na diyan?

Call for water conservation

Call for water conservation

DESPITE an earlier declaration of the start of the rainy season, the government sees the need for the public to engage in water conservation. There is an unexplained dry spell that has hit Metro Manila and nearby provinces and a water shortage and lower agricultural production loom if the drought-like condition continues in the coming weeks.

As reported by the Philippine Atmospheric, Geophysical, and Astronomical Services Administration (PAGASA), the country is expected to have below normal rainfall this August, particularly in most parts of Luzon, some parts of the Visayas, as well as central and eastern Mindanao. If this forecast comes true, Regions I (Ilocos) to V (Bicol region), especially some areas in Region III (Central Luzon), will be in danger of a water crisis. The same condition is forecast for Region VI (Western Visayas) and the Autonomous Region in Muslim Mindanao.

PAGASA sees lower water levels in the major dams servicing these areas – Angat Dam, Magat Dam, and Pantabangan Dam. This month of July, below-normal rainfall was registered in Abra, Benguet, Ifugao, Kalinga, Apayao, Mountain Province, Ilocos provinces. La Union, Nueva Vizcaya, Metro Manila, Cavite, and Agusan del Norte. Last June, below-normal rainfall was noted in Bataan, Pampanga, Zambales and Metro Manila.

President Gloria Macapagal Arroyo has mobilized various government agencies to prepare for a possible drought in Luzon. She directed the National Disaster Coordinating Council to launch an information campaign to raise public awareness about water conservation. She directed the Department of Agriculture to plant "drought-resistant" crops that do not require much water to grow.

The current situation indicates how much of a precious resource water is. Let us all do our share in preventing a worsening of the condition – CONSERVE WATER!

This trick of naming roads, etc., after VIPs

This trick of naming roads, etc., after VIPs

NAMING GAME: They say that one way of ensuring government support for a project, especially big ticket infrastructure, is to name it after somebody dear to the President. I don’t know if the trick works, but I won’t be surprised if it does.

In my province, for instance, local politicians pulled a scoop when they named Clark Field, the former home base of the US 13th Air Force, the Diosdado Macapagal International Airport.

If you were President Gloria Macapagal Arroyo, would you allow a major airport named after your dear father go the way of ordinary weather-beaten infrastructure standing as monuments to government neglect?

But what rules are there, if any, governing the naming of public structures after notable persons, dead or alive?

* * *

DIVISIVE: Reader Jorge B. Navarra, a Butuanon, has written the National Historical Institute to ask if the renaming of the “2nd Magsaysay Bridge” in their city as “Diosdado Macapagal Bridge” complied with NHI requirements as prescribed by law.

Navarra reported: “This multibillion-peso bridge project spans the Agusan river about three kilometers upriver from the old Magsaysay Bridge in downtown Butuan. It was temporarily called 2nd Magsaysay Bridge.

“When it was inaugurated before the May 14 elections, its name was 2nd Magsaysay Bridge. The people of Butuan knew that a permanent name would be given in due time.

“Not a few Butuanons wanted ‘Butuan Bridge’ to identify this landmark with Butuan and inculcate pride of place among its citizens. This was a monumental project for Butuanons and naming it Butuan Bridge will inspire unity. This name will avoid the divisiveness caused by naming public structures after politicians, their relatives and their benefactors.”

* * *

RECOMMENDATORY: Navarra recalled that during the Butuan visit of President Arroyo last July 10, the bridge suddenly sprouted signs identifying it as “President Diosdado Macapagal Bridge.”

Then the President was reported on TV, radio and the newspapers to have accepted the resolution of the Butuan City Sangguniang Panglungsod giving the Macapagal name to it.

Did the Butuan City Sangguniang Panglungsod officially confer this name to the bridge? “If it did,” Navarra said, “was this not done in violation of the Local Government Code?”

He noted that Section 13 provides that local governments can exercise authority only over structures owned by them. It so happened that the Butuan bridge is funded by a national government loan from Japan’s ODA-granting agency.

If the Butuan Sanggunian passed a resolution endorsing to the President or to Congress the naming of the new bridge, Navarra said, this resolution is merely recommendatory.

* * *

CONSULTATION: The Macapagal name cannot as yet be adopted, he added, yet it has been placed on signs at the structure, carried in media and used by bureaucrats in referring to it.

Until a presidential proclamation is issued or a law is enacted naming the bridge, its project name “2nd Magsaysay Bridge” remains. The preparing of the proclamation or passing of a law must involve public consultations, Navarra said.

“We have no issue with the credentials of the persons being honored by naming public structures after them,” he said. “We are questioning the practice of naming highways, bridges, buildings, airports, etc., after persons using procedures that do not conform to the law.”

* * *

WHERE’S MONEY?: Sen. Mar Roxas is pressing Malacañang to tell the people where it would get the billions needed to fund the ambitious infrastructure program that President Arroyo outlined in her last State of the Nation Address.

This makes sense, because it is easy to draw up a wish list of supposed projects and wave it before an expectant population — and another thing to produced the money to make the wish come true.

Roxas said the President mentioned only these fund sources: P1 trillion from state revenues, with tax reforms, and orders to the BIR and Customs to meet their collection targets, P300 billion from government corporations, and more billions from state financial institutions, private sector investments, local government equity, and foreign loans and grants.

But after you add up the money, he said, there is still a big deficiency.

* * *

MASINLOC SOLD: The government announced the sale, finally, of the 600-megawatt Masinloc coal-fired power plant in Zambales.

This is significant because Masinloc is the most valuable among the power-generating plants of the National Power Corp. and has been the subject of questioned attempts to sell it to favored bidders.

The Singaporean-led consortium Masinloc Power Partners Co. Ltd. won the auction after submitting a $930-million bid. It will be asked to pay 20 percent of that price up front after the official transfer of the plant.

The MPPC is affiliated with Singapore’s AES Transpower Pte. Ltd., an investment holding and service company for entities involved in generating, accumulating and trading electricity.

Losing bidders included big names: Masinloc Consolidated Power Inc. (which bid $588 million), Masinloc Holdco Inc. ($606 million), Anglo Cayman Energy Development Co. Ltd. ($650 million); First Gen Luzon Power Corp. ($710 million).

* * *

BID CANCELLED: The first round of Masinloc bidding in 2004 failed because the only buyer, the supposed winner, would not pay the required deposit until it is assured of signing a firm supply contract with a generator or distributor.

In that bidding in 2004, YNN Pacific Consortium offered $560 million. But it failed to deliver the 40-percent up-front payment of $270 million.

The Power Sector Assets and Liabilities Management which oversaw the bidding forfeited YNN’s performance bond of $14 million in July 2006.

Another major transfer of power assets months ago was of Mirant — the biggest independent power producer — selling its assets in the country to a consortium of Tokyo Electric Power and Marubeni Corp.

Where the money is

Where the money is

SAN Miguel Corp. paid Goldman Sachs millions to identify growth opportunities, initially on power.

That is how serious SMC is in its diversification effort. The money paid Goldman is well spent. The investment bank is probably the world’s best strategic planner today.

A consortium led by tycoons Ramon S. Ang, Henry Sy Jr. of SM and Joselito “Butch” Campos of Del Mon­te gained the upper hand in the auction of the state power transmission TransCo. following the failure of bidding in four tries.

In the last attempt, only three bidders were left for the right to operate TransCo for 25 years—Ramon Ang’s San Miguel group with Tenaga, operator of Malaysia’s National Grid, as its technical partner; the group of Enrique Razon of International Container Terminal Services, Inc. (ICTSI) with the Satte Grid Corp. of China as technical partner, and the group of Ricky Delgado who has an Italian partner.

TransCo could cost from $2.6 billion to $4.5 billion but the cash required of the winning bidder could be just 10 percent of that.

TransCo is a hugely profitable enterprise, being a monopoly.

In 2006 it had an operating income of P16.2 billion ($345 million), a return on gross utility revenue of P24.29 billion. In 2004 its return on sales was also a hefty 62.2 percent.

Properly managed, Trans­Co could yield its operator between $500 million and $800 million in annual free cash or EBITDA.

Not everybody with mo­ney can buy TransCo. A bidder must be 60 percent Filipino. It must have $300 million of net worth. It must have a foreign technical partner whose transmission experience includes 50,000 miles of power lines.

There are three major reasons why San Miguel is keen to diversify: one, thinning margins on beer; two, shrinking beer demand; and three, the market shift to brandy, as Filipino taste moved upscale.

Thus, SMC will go into power, mining, infrastructure, utilities, and property development. These businesses are extremely more profitable than brewing and selling beer.

In 2006, SMC posted return on sales of four percent—P10.17 billion net income on record revenues of P249.65 billion. The P249 billion made San Miguel the country’s largest company in sales but the P10.17 billion made it one of the well, modestly profitable. So it is not a question of just generating revenues. It is more a game of generating profits.

Based on average equity of P145 billion, SMC’s P10.17 billion represents a return on equity of seven percent—below the bank-lending rate of about 10 percent.

TransCo claims a return on equity of 10.89 percent in 2005 and 12.42 in 2004 but analysts believe ROE could be as high as 20 percent, given the right focus and the right management.

Luzon’s biggest power producer, Mirant, makes easily P10 billion from its two power plants, Sual and Pagbilao. Those plants were bought this year by Tokyo Electric and Marubeni. Their Team Energy paid $4 billion for the plants and will spend another $350 million to expand capacity. It takes three years to put a power plant on stream.

In her SONA July 23, President Arroyo admitted to a power shortage in Luzon and Mindanao over the next two years, by 150 megawatts and 210 megawatts, respectively. Visayas is even now suffering from occasional brownouts. Overall, the country needs probably as much as 3,400 megawatts of additional power capacity. It costs $1 million to install a megawatt.

In 2006 the Lopezes’ First Gen Corp. made 14 percent return on sales from power generation; their Meralco electricity retailer made 6.58 percent but its profits are understated. Meralco’s share price rose seven-fold in the last year, to P116 a share, reflecting higher demand for power and electricity shortages, with the booming economy. Meralco buys electricity from another Lopez company, First Gen, at a price twice that it pays Napocor.

The power business is extremely good. The economy has been growing by about five percent in the last six years releasing pent-up demand for energy that present supply cannot meet.

In water, the value of the Ayala family’s investment in Manila Water rose from P2 billion in 2001 to P22 billion in 2006, ten times in just five years. It’s not brilliance but high pricing. Manila Water got a 50 percent rate hike per year for five years. Any business that gets a 50 percent yearly price increase cannot lose money.

Property is another mega­bucks producer. In 2006 Henry Sy’s SM Development Corp. generated a whopping 69 percent return on sales—P984-billion profits out of revenues of P1.43 billion.

In mining in 2006, Philex Mining chalked up a 30.6 percent return on sales. Coal producer Semirara Mining reported 12.1 percent. There is a worldwide shortage of minerals and China, the world’s fastest-growing economy, wants to buy everything it can lay its hands on.