Abus, IPPs and PPAs
The Philippine Star
May 13, 2002

Out with the Abu Sayyafs. Enough with the American military exercises.

With the Manila Electric Company (Meralco) billings taking the heat off issues like the Balikatan and the insurgency problem in Mindanao, Filipinos have found themselves a new kontrabida. These are the independent power producers (IPPs).

Only a few years ago, IPPs were the Filipinos' heroes with promises to save them from the inconveniences of 12-hour daily brownouts. They were the saviors of the times and the public just couldn't wait for these new power plants to bring light to dark homes and energy to run industries.

Least of the public's concern was how it was going to be done. Cost also mattered little. Just do it, the country implored.

IPPs were the product of the build-operate-transfer (BOT) law passed in 1987 by the Aquino government. The law encouraged the private sector to enter the power generation business and assist the government in funding the country's future power requirements. In effect, with the BOT law, Napocor's "generation monopoly" was dismantled.

In the early 90s, under President Fidel V. Ramos, the country dreamt of becoming the fastest growing economy in Asia. The government knew there was no way such a vision could be achieved without a stable supply of electricity.

During those times, the Philippines had not shed off the effect of military coups and the perception of a weak political leadership. Understandably, the country was seen as a high economic risk; investors could only be enticed if they were guaranteed back their capital at a faster than normal pace, plus plenty of perks on the side.

The scheme for seducing IPPs in the country, more so on a fast-track basis, was without doubt generous. Payback time was half shorter than those of comparable projects in other countries, and investments were insulated from many risks. The smart power plant investor naturally grabbed the offer.

Part of the IPP contract provisions is the now famous take-or-pay clause under a Power Purchase Agreement (PPA). When an IPP agrees to construct a power plant, it is premised on a projected demand, usually agreed with government. Demand for electricity is estimated based on calculations of how the economy would grow. This is usually based on conservative figures, and backfires are not often expected.

The IPP protects its investment by asking for a guaranteed sales volume premised to pay for its capital amortizations, operating costs and profit. Unfortunately, no one foresaw the Asian financial flu of 1997. As what happened, demand and consumption dropped, and the anticipated boom never came.

Now, the IPPs are no more the darlings they used to be, and they have morphed into vultures taking advantage of a nation in despair. Regarded as brilliant financial agreements in the early 90s, IPP contracts are now viewed as onerous.

If plans had not gone awry, all of Napocor's other power plants would have been privatized during the last decade; similarly, the transmission business would also have been sold. Tough luck that the Asian financial crisis happened. Overnight, Napocor found itself with the burden of PPAs in a magnitude it had never imagined.

Next question is: what should be done?

IPPs, I believe, are the future of the industry. The current take-or-pay clause of existing PPAs is definitely a heavy load on Napocor's viability and the public's sanity. But a solution, no matter how long it will take to be resolved, is taking shape. The government has the option of either selling off or buying these contracts. Or IPPs may be encouraged to aggressively seek other markets aside from that controlled by Napocor. This could mop up the unused capacity with the end-view of reducing the stranded cost resulting from under-utilized off-takes.

New IPPs may provide electricity to islands in a more cost-effective way. Napocor, at the moment, is a very costly operator because it is burdened by cross subsidies among island grids. Transmission operations should also be deregulated. Let the private sector build and operate transmission lines so that cross-subsidies, pilferages and transmission losses are better managed.

Given the brouhaha that IPPs are now experiencing, it may take awhile to bring in new investors in the power sector under less bighearted terms. New financial packages though are being developed in other countries, and these may be applicable to ours. Our technocrats should be able to rise to this challenge.

It is a perception that indigenous fuels used by geothermal and hydroelectric power plants are inexpensive. In truth, both are way over the cost of imported oil or even coal. Areas where geothermal and hydroelectric plants operate should be billed the real cost. Or perhaps, the government should consider mothballing them.

There are alternative fuels that offer attractive solutions for the country. Solar is now at a stage where it is economically competitive if used in areas that do not immediately have the potential of being connected to a major power plant or transmission grid. Solar is also commercially viable for street or security perimeter lighting.

Meanwhile, the witch-hunting is starting. A few weeks from now, the results of a Malacanang-led review on the IPPs would be completed. Expect a listing of IPPs that hurt our pockets most. I can almost hear public crying out for blood.

At this stage, existing IPPs would be naïve to think that they can hide behind the legal mumbo-jumbos that bind PPAs. It is best that they put on their thinking caps and find solutions to resolve this brewing crisis. Renegotiation of power contracts is something that has been successfully done in South Korea, and lately, in the United States. There's no reason why it couldn't be done here.

Some IPPs in the country have already recovered their investment and have earned more than enough. Some are looking at doing business in the country for many more years. Changing terms of doing business should not necessarily mean losing money. Businesses, especially those that look at the longer-term horizon, cannot ignore the environment where they operate. It is perhaps time to hear their customers' cries.

Before I end this column, Meralco customers may find it interesting to know that Napocor is not the only entity with IPP contracts. Other big distributors including Meralco can also get their power directly from IPPs.

From hearings at the Lower House, at least two-thirds of the P3.22-per-kwh purchase power adjustment charge in its recent monthly bill is directly from its own IPPs; the effect of Napocor's IPP contracts represent only a third.

For the sake of transparency, it is only fitting that each item in the billing statement be clearly described. The paying public deserves to know.

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