Oro Chamber: Oct 11, 2010

By: Ryan D. Rosauro

Inquirer Mindanao

OZAMIS CITY-Power rates in Mindanao were expected to sharply go down following the order of the Energy Regulatory Commission (ERC) to the Aboitiz-owned Therma Marine, Inc. (TMI) to refund consumers for over-recovery in capital cost.

TMI's capital cost recovery charges were being collected since MArch by the National Grid Corp. of the Philippines (NGCP) as ancillary charge in the electric bill of Mindanao power consumers.

In a decision dated Oct. 4, which the Inquirer obtained on Friday, the ERC adjusted the rate of ancillary services charged by TMI to electricity consumers, taking into account a radically lower figure for capital recovery compared to that proposed by the company.

The ERC said TMI's proposed capital cost of P2.04 billion for each power barge was too much.

The ERC noted that TMI acquired M1 (formerly Power Barge 118) in Maco, Compostela Valley; and M2 (Power Barge 117), located in Nasipit, Agusan del Norte; from the National Power Corp. (Napocor) at only P651.2 million and P739.5 million respectively.

The ERC said "there was no sufficient justification" to use the company's appraised value in computing capital cost.

TMI said it would contest the order.

In adjusting the charges, the ERC computed the total rate base by adding the acquisition cost of the power barges with "the cost of procurement of the excluded equipment and replenishment of spare parts..."

With this, the ERC said the total rate base for M1 should only be P870.0 million while M2 should be P962.6 million.

The regulatory body also lowered the weighted average cost of capital (WACC) from 18 percent to only 15 percent.

TMI said under the ERC computation "the reductions are in the order of P0.5218 per kilowatt-hour for M1, and P0.49085 per kilowatt-hour for M2."

TMI acquired Power Barge 118 on Feb. 5 and Power Barge 117 on MArch 1 from Napocor.

As part of the decision, the ERC directed the NGCP "to recalculate... the (ancillary service) rates from its effectivity" and submit to it a refund scheme within 15 days.

Ancillary services generally consist of reserve capacity "essential to maintaining the power quality, reliability and security of the national grid."

As grid operator, the NGCP will collect charges for use of ancillary services even if actual power was not delivered to the Mindanao grid.

At present, the NGCP has two one-year Ancillary Services Procurement Agreements (ASPA) with TMI, which was inked on Feb. 1 covering the two barges.

Each barge has a power generating capacity of 100 megawatts, consisting of two 50-megawatt engines. The ASPAs bind 50 MW of each barge for ancillary services to NGCP.

As a fee levied on power consumers, ancillary services fees also consist of charges for capital recovery, also referred to as capacity fee; fixed operation and maintenance expenditures; and energy costs.

When Napocor still operated the power barges, the ancillary service fee in Mindanao was only at P0.1830 per kWh.

But under TMI's ASPA, the ancillary service billing for M1 is at P1.40154 per kWh comprising of capacity fee of P0.92290, fixed operation and maintenance fee of P0.32973, and energy fee of P0.14891.

But the ERC said the reasonable rate is only P0.87636 per kWh comprising of capacity fee of P0.39962, fixed operation and maintenance fee of P0.32783 and energy fee of P0.14891.

The difference between the ASPA rate and the ERC's computation is P0.52518 per kWh. largely from reduction of the capital recovery fee.

The ASPA for M2 ancillary service was pegged at P1.39692 per kWh comprising of capacity fee of P0.92277, fixed operation and maintenance fee of P0.32524, and energy fee of P0.14891.

But the ERC found that a reasonable rate is at P0.90607 per kWh comprising of P0.43192, fixed operation and maintenance fee of P0.32524, and energy fee of P0.14891.

2010 budget gap seen staying below ceiling

The Department of Finance said the budget deficit for the year might be lower than the official ceiling of P325 billion, citing the rationalization of expenditures being implemented by budget authorities.

Finance Undersecretary Gil Beltran said that although tax collectors deemed the revenue target of the government for 2010 “very tough,” the move of the Department of Budget and Management to eliminate some unnecessary expenses might make it possible for the actual deficit for the year to be lower than P325 billion.

Unnecessary expenses

“It is possible for the deficit to be lower than P325 billion because they (budget officials) saw that some expenses (incurred by the previous administration) were not too important,” Beltran said Friday.

Earlier, Budget Secretary Florencio Abad said the DBM had implemented several expenditure reforms.

He said priority projects and programs were given higher budget allocations, and that “unnecessary expenses” were being eliminated.

Abad also claims that the DBM is improving on transparency and accountability in government expenditures. Some special purpose funds are being dissolved, Abad said, while others were being integrated into the budget of government agencies that are supposed to be accountable for these funds.

Special purpose funds are not part of the general funds of the government, and are instead meant for certain projects or programs. A special purpose fund, therefore, is not part of the budget of a specific government agency, but may be dispensed through a directive from the President.

Special purpose funds
Abad said integrating special purpose funds to the budgets of concerned government agencies would improve accountability in expenditures.

In August, the government posted a budget surplus of P1.3 billion. This was brought about by a revenue collection of P107.8 billion for the month, the bulk of which was tax revenue, and the P106.5 billion in expenditure.

For the eight-month period up to August, the government posted a budget deficit of P228.1 billion. The revenue collection of P802.8 billion fell short of the P1.03 trillion in expenditures.

Beltran said the deficit for the first eight months had so far allowed the government to stay well within the deficit ceiling of P325 billion for the year.

The deficit limit set for 2010 is higher than the P299 billion recorded last year.

Higher infra spending

Officials claimed that the higher deficit ceiling set for this year was meant to allow for higher spending on infrastructure and social services, which they said were needed for the economy to grow at a much faster rate over the medium term compared with its growth rate over the past decade.

The government economic team said it was aiming for a yearly economic growth rate of at least 7 percent during the Aquino administration’s term in office. The target growth rate is faster than the 4.9 percent average annual growth recorded by the economy over the past decade.

Can the Dow blow past 11,000 in the earnings week ahead?

Stocks have climbed five out of the last six weeks, and that momentum is likely to continue as investors digest the first big batch of third-quarter financial results this week.

Earnings season started off with a bang late last week as Dow component Alcoa (AA, Fortune 500) posted profits and sales that topped Wall Street estimates and raised its outlook for the year.

This week three other Dow names report: Intel (INTC, Fortune 500) on Tuesday, JP Morgan Chase (JPM, Fortune 500) on Wednesday, and General Electric (GE, Fortune 500) on Friday. Other major players on tap: Google (GOOG, Fortune 500) on Thursday and Mattel (MAT, Fortune 500) on Friday.

A total of 15 S&P 500 companies will open up their books this week, with most of the rest spread out over the next few weeks.

According to Thomson Reuters, third-quarter results are expected to be up almost 24% from the same period a year ago, when corporate profits dipped 14.7%. That was the last of nine consecutive quarters of negative financial reports.

Revenues are expected to gain 7%, after sinking more than 10% a year ago.

"Earnings season kicks into full gear, and we're expecting generally good numbers as the trend has been all year, which will drive the market higher," said Peter Tuz, president at Chase Investment Counsel. He noted that Alcoa's stock surged almost 6% Friday as investors cheered the aluminum maker's performance and full-year guidance.

Tuz added that traders will keep a close eye on JP Morgan Chase, as it will be the first banking giant to deliver results.

Economic news is fairly light at the start of the week but starts flooding in on Thursday. Investors are likely to focus on Friday's retail sales figures as they try to gauge the health of the consumer.

"August retail sales were decent because of back-to-school season," said Phil Orlando, chief equity market strategist at Federated Investors. "If September sales also come in strong, it's a good sign that we'll see a healthy level of spending during the holiday season."

Since consumer spending accounts for 70% of economic activity, Orlando said indications that Americans are opening up their wallets will likely drive markets higher.

"It would just be another dagger in the heart of all the double-dippers who thought the world was on the edge of Armageddon," he said.

But even if economic news is downbeat, Chase Investment Counsel's Tuz said markets will continue to push higher.

"Ultimately, markets need an improving economy to move higher," Tuz said. "But we're in an interesting situation because weak economic news increases the odds of another round of stimulus from the Federal Reserve, which is positive for markets at least in the short term."

In fact, the stocks rallied to five-month highs on Friday after a sharp drop in the overall jobs figures in September boosted the chances of the Fed stepping in to stimulate the economy.

"I wouldn't call it a rousing win-win situation, but there are positive points to each side of the coin," Tuz said.

On the docket

Monday: There are no market-moving economic or corporate events expected on Monday. The bond market is closed for the Columbus Day holiday, but other financial markets remain open.

Tuesday: The Federal Reserve will release the minutes from its most recent policy-setting meeting.

After the closing bell, chipmaker Intel will report its third-quarter results. The Dow component is expected to have earned 50 cents per share, up from 33 cents a year ago, on revenue of $11 billion, according to analysts polled by Thomson Reuters.

Wednesday: JP Morgan Chase, another Dow component, announces quarterly results before the market opens. Analysts expect the bank booked 88 cents per share during the third quarter, up from 82 cents a year earlier, on revenue of $25.5 billion.

Reports on import and export prices, and weekly crude oil inventories are also due in the morning; the September Treasury budget is on tap for the afternoon. Neither of those are typically not market movers.

Thursday: The Department of Labor releases the weekly jobless claims report in the morning. The number of Americans filing new claims for unemployment last week is forecast to inch higher to 449,000 from 445,000 in the previous week, according to a consensus of economists surveyed by Briefing.com.

Continuing claims -- a measure of Americans who have been receiving benefits for a week or more -- is expected to have fallen to 4.45 million from 4.46 million in the previous week.

The Producer Price Index, a measure of wholesale inflation, is due out from the Commerce Department at the same time. The index is expected to have edged up 0.2% in September after rising 0.4% in August. The so-called core PPI, which strips out volatile food and energy prices, is expected to have risen 0.1% after increasing by the same amount in the previous month.

The trade balance, also due in the morning from the Commerce Department, is expected to have widened to $44.5 billion in August from $42.8 billion in July.

After the close, analysts are looking for Google to post earnings per share of $6.67, up from $5.89 a year ago, on revenue of $5.3 billion.

Friday: The Commerce Department releases the Consumer Price Index, a measure of consumer inflation, in the morning. CPI is expected to have increased 0.2% in September after climbing 0.3% the previous month. Core CPI is expected to have inched up 0.1%, after rising the same amount in August.

The Commerce Department also reports on retail sales before trading starts. Sales are expected to have gained 0.4% in September after having increased the same amount in August. Sales excluding volatile autos are expected to have ticked up 0.4% after a 0.6% rise the previous month.

The Empire Manufacturing survey is due before the start of trading. The regional reading on manufacturing is forecast to have jumped to 6.00 in October from 4.1 in September.

Dow component GE reports quarterly results before the bell. Analysts expect the company to have earned 27 cents per share, up from 22 cents a year ago, on flat revenue of $37.7 billion.

Toymaker Mattel also announces third-quarter earnings.

Due after the start of trading, the University of Michigan's consumer sentiment index, is expected to have increased to 68.6 in September from 68.2 in September.

The August reading on business inventories, due from the government later in the morning, is likely to show an increase of 0.5% after rising 1% in July.

Oil Rises a Second Day Amid Speculation Fed May Buy Debt to Boost Economy

Oil advanced for a second day in New York after the dollar fell against the euro as bigger-than- expected U.S. job losses spurred speculation that the Federal Reserve will buy more debt to boost the economy.

Futures rose 1.2 percent on Oct. 8 after the Labor Department said that employers cut 95,000 workers after a revised 57,000 decrease in August. The median estimate of economists surveyed by Bloomberg News was a drop of 5,000. A weaker U.S. currency increases the appeal of commodities as an alternative investment.

Crude for November delivery gained as much as 76 cents, or 0.9 percent, to $83.42 a barrel in electronic trading on the New York Mercantile Exchange, and was at $83.08 at 9:20 a.m. Sydney time. Futures climbed 99 cents to $82.66 on Oct 8. Prices are up 4.8 percent this year.

The dollar lost 0.3 percent to $1.3986 per euro, after closing at $1.3939 on Oct. 8. The Fed may purchase bonds in a strategy known as quantitative easing, weakening the U.S. currency and boosting dollar-denominated commodities.

Deutsche Bank AG raised its fourth-quarter 2010 and first- quarter 2011 forecasts for both Nymex and Brent oil to $80 a barrel, a level compatible with equity and currency levels, according to an Oct. 8 report by Adam Sieminski, chief energy economist. The bank’s previous forecasts, in mid-September, were $70 for the fourth quarter and $75 for the first.

Brent crude for November settlement surged as much as 53 cents, or 0.6 percent, to $84.56 a barrel on the ICE Futures Europe exchange in London. It jumped 60 cents, or 0.7 percent, to $84.03 on Oct. 8.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Monday, October 11, 2010

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