Asian Energy Advisors

I find that most people in the Philippines have a fairly myopic view of the potential for ECs. A view that’s not totally unjustified.

But Glenn English, the CEO of the National Rural Electric Cooperative Association (NRECA) in the U.S., made some very interesting revelations about ECs there recently.

First, in a press release, he reminds us (here in the Philippines) about one of the foundations of a healthy cooperative:

“Like other businesses – at least well-run businesses – an electric cooperative annually collects more money than it spends. Unlike other businesses, an electric cooperative annually ‘allocates’ its excess revenue, or its ‘margins,’ to its member-owners.”

And then goes on to say:

“as of December 31, 2006, electric distribution cooperatives had an average equity as a percent of assets equaling 40.6…. According to Fitch Ratings, … an electric distribution cooperative with reasonable quality and average credit features needs 30 to 50 percent equity for an investment grade rating.”

I don’t know what the average equity ratio is for ECs in the Philippines. I would guess it to be on the order of 1%-2% at best?

Changing gears a bit: don’t think that the issue of extravagant spending by management, as endorsed by the Board but not endorsed by the general membership, is a problem limited to the Philippine experience. (Or that bankruptcies don’t happen.) In a letter to Congressman Henry Waxman last week he re-stated the equity issues, but also addressed an issue in which the general membership is not happy at all with Board and management policies at two large ECs in the US.

These things happen. There needs to be mechanisms for handling them. These types of things happen with private corporations too. It doesn’t mean that the EC model is fundamentally flawed.

I hope that the ERC, in developing its new regulatory policy toward ECs, does not arbitrarily handcuff the Philippine EC business model with unnecessarily tight equity build-up and margin generation restrictions that would prevent the ECs from having the elbow-room necessary to be a successful business.