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Cablegate: Electric Power Struggle or Family Fued?

VZCZCXRO3318
OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHML #1855/01 2180711
ZNR UUUUU ZZH
O 050711Z AUG 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1493
INFO RHEBAAA/USDOE WASHDC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNASE/ASEAN MEMBER COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 MANILA 001855

SENSITIVE

SIPDIS

STATE FOR EB/IFD/OIA, EB/ESC AND EAP/PMBS
STATE PASS USAID FOR AA/ANE, AA/G
STATE PASS EXIM, OPIC AND USTR
USAID FOR AA/ANE AND AA/EGAT
DOE FOR TOM CUTLER
TREASURY FOR LMOGHTADER
TREASURY ALSO FOR OASIA
USDOC FOR 4430 ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN

E.O. 12958: N/A
TAGS: ENRG EFIN EXIM RP
SUBJECT: ELECTRIC POWER STRUGGLE OR FAMILY FUED?

SENSITIVE BUT UNCLASSIFIED

1. (SBU) Summary: Philippine analysts predict a protracted struggle
between the Lopez family and the Government Service Insurance System
(GSIS, the government employees' pension fund) for control of the
Manila Electric Company (MERALCO). This conflict, which some
analysts see as a feud between the Arroyo and Lopez families, has
eroded the appearance of stability that Philippine economic managers
want to project, and may give foreign investors qualms about the
Philippine power sector. End summary.

Corporate Railroading: From Boardroom to Courtroom
--------------------------------------------- ------

2. (U) The Government Service Insurance System (GSIS)
government-employee pension fund now holds 22% of stocks in the
Manila Electric Company (MERALCO). MERALCO is the largest
electricity distributor in the Philippines. GSIS CEO Winston Garcia
tried to seize control of the company during a May 27 Board meeting
which was set to affirm Lopez family control. Garcia obtained a
cease and desist order from the Philippine Security and Exchange
Commission (SEC) to stop the Board meeting. Despite the SEC order,
Lopez supporters held the meeting and voted enough proxy ballots to
win five board seats to GSIS' four.

3. (U) The Lopez-led group challenged the SEC cease and desist
order. Lopez supporters sought an injunction from the Court of
Appeals (CA) against the order, arguing that SEC does not have
jurisdiction over an intra-company dispute. The Court granted a
60-day restraining order on May 30, suspending the cease and desist
order for further study. On July 24, the 8th Division of the CA
voided the SEC order amid internal protests from the Special 9th
Division that initially heard and claim jurisdiction on the case. A
CA justice also alleged that he was offered millions in bribe by an
alleged businessman-friend of Manolo Lopez, current chair and CEO of
MERALCO. In a rare appearance, Mr. Lopez vehemently denied any
involvement in the allegation of bribery. The Philippine Supreme
Court formed a three-man panel of ex-justices to investigate
allegations of impropriety in handling of this case in the CA. The
investigation panel will submit its findings by August 21.

Political Vendetta: Lopez vs. Arroyo?
-------------------------------------

4. (SBU) The Lopez family (here referring to a clan of nearly 100
kin with shares in Benpres Holdings Corporation, the flagship
holding firm of the Lopez group of companies) currently controls
MERALCO, while Arroyo ally Winston Garcia is President and CEO of
GSIS. Mixing business and politics is a common practice in
Philippine society. The heads of leading companies in the energy
sector hail from elite families who use the sector as a stage to
enhance their dynastic clout. Many analysts see the battle for
control of MERALCO as a manifestation of a power struggle between
feuding families.

5. (SBU) The hostile history between the Lopez and Arroyo clans has
surfaced anew in the MERALCO Boardroom fight (para 10 gives a link
to details of this hostile history). Some Philippine analysts
speculate that Winston Garcia poses as the people's champion to
lower electricity rates, but is actually out to break up MERALCO to
weaken the Lopez family on the Arroyos' behalf. The Arroyos have
accused the Lopez-owned domestic ABS-CBN news station and
international outlet, The Filipino Channel, of causing embarrassment
to President Arroyo and her husband by reporting on corruption
allegations.

6. (SBU) The Lopez family has controlled MERALCO since the late
Eugenio Lopez Sr. acquired it in 1962. President Diosdado
Macapagal, President Arroyo's father, failed in a populist campaign
against the Lopezes to dismantle their control of the energy giant.
President Ferdinand Marcos eventually seized MERALCO in 1972 during
the martial law period. Lopez family friend, President Corazon
Aquino, took office after the ouster of Marcos in 1986 and returned
MERALCO to the Lopezes. Aquino thereby secured the Lopez's
unwavering support throughout her presidency.

Clan Alliances
--------------


MANILA 00001855 002 OF 002


7. (SBU) Removing MERALCO from Lopez control would also benefit the
Aboitiz clan, another prominent Cebu-based family with close
relations to the Arroyos. The Aboitizes have vast business
interests, especially in the power sector. They own the Visayan
Electric Company (VECO) and Davao Light, among the more prominent
and fast growing electrical distribution companies for the Visayas
and Mindanao, respectively.

8. (SBU) The Arroyo administration appears intent on blaming
MERALCO leadership for high electricity costs while seeking other
ways to ease escalating prices. The Philippine government has
initiated several measures to bring down power rates including: a
one-time $45 million electricity subsidy to 4 million
low-consumption users; a flat rate for electricity purchases by
MERALCO from state-owned power producer National Power Corporation;
a reduction in the cap on system loss recoverable from consumers;
and other renegotiations, inducements and subsidies.

Comments
--------

9. (SBU) The struggle for control of MERALCO highlights the role of
prominent families in business and government and creates
uncertainty that could damage efforts to attract investors. Lack of
additional investment into the power sector will almost certainly
leave Filipino consumers more vulnerable to power disruptions.

10. (U) Details of the feud surrounding the Arroyo, Lopez, Aboitiz,
and Garcia families are found on Intellipedia at Intelink.gov, Wiki
pages, under the title, Dynastic Families in the Philippine
Electricity Market.


Kenney

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