May 01, 2014

Court clears MER-Napacor settlement deal

The Court of Appeals has ruled that a decade-old multi-billion settlement agreement between the Manila Electric Co (MER, Buy) and the National Power Corp (NPC) is valid and binding. Under the deal, MER will pay NPC about P14.32b instead the latter’s claim of P27b which represents unsettled collections under a 10-year power supply contract that ended in December 2004.

Implementation of the deal was put on hold when the Office of the Solicitor General questioned it before the court and asserted that the deal is supposed to be reviewed and approved by various government bodies, including the Office of the President, Commission on Audit and Congress.

Our take: Assuming that the OSG will not file any motion for reconsideration, the court decision will pave the way for the two parties to implement the deal subject to public hearings and approval by the Energy Regulatory Commission. The court decision will be positive for Meralco as it can now pass on the NPC claims to its customers. Initial company estimates put the potential power rate hike at P0.12/kwh over five to six years to recover the liability.

However, this was based on the average annual energy volumes prevailing during the time that the deal was crafted. Given a much larger volume sales base, the rate may be reduced to minimize the impact to customers. At any rate, there could be a potential write back by MER given that it has already provided for at least half of the settlement amount. – WealthSec