Sparks in the dimming power sector
The Philippine Star
09/19/2003

In a previous column (Lights Out for the Power Industry, Philippine STAR, Sept. 15, 2003), a rather dim picture of the current over-all situation of the power industry emerged.

There are the impending brownouts in Panay next year that is definitely an unwanted feature of Tourism Secretary Richard Gordon’s "Wow! Philippines" promo campaign.

The massive debt problems of the National Power Corp. (Napocor) remain unresolved. And potential investors are generally wary with the perception that the current government is "trigger-happy" about reneging on contracts previously signed and sealed.

With our lawmakers pre-occupied in unzipping the tight-lipped Jose Pidal, the Senate inquiry into alleged "onerous" provisions in the contracts with independent power producers (IPPs) is in suspended animation. The threat of politicians engaging again in IPP-bashing, however, remains as election time approaches. And it does not augur well for the search for new investments in the power sector.

The outlook does look dim but apparently there is some flicker of light in some corners of the vast and complex structure called government. Some government officials not yet affected by the political virus and continue to work quietly and silently to stop the hemorrhaging of this critical sector.

After Political Fanfare, A Prudent Pragmatic Approach

Political points were earned when the Arroyo administration announced the review of 35 contracts between independent power producers (IPPs) and National Power Corp. (Napocor) worth an aggregate value of about $10 billion.

Temptation was there to fight it out with the IPPs in court. However, as political emotions ebbed, prudence prevailed and government adopted the one-on-one – often closed-door – approach to convince parties concerned to sit down and discuss possibilities in amending the contracts.

One year after the committee completed its review and final report, 18 contracts were successfully modified by appropriate government agencies.

Exactly how the contentious legal and financial issues were resolved is not freely discussed in public. The more important point is that the sanctity of the contracts was preserved and at the same time the renegotiations generated a total estimated savings of $850 million over the life of the modified IPP contracts. The savings, according to the energy department, will in effect lower the universal charges of electricity to consumers.

Focusing On Take-Or-Pay Provisions

Most of these IPP contracts signed during the Ramos administration need to be viewed in the context of the early 90s‚ gripping eight-hour rotating brownouts in Metro Manila, as well as the varying risk perceptions in the country then.

The contracts contained take-or-pay guarantees in the power purchase agreements (PPA) between Napocor and IPPs. Such guarantees stipulated that Napocor had to pay for the contracted electricity volumes whether or not this was consumed or sold.

The cost of such guarantees was passed on by Napocor to electricity distributors like Meralco, which subsequently billed this to its customers. This accounted for exorbitant power rate increases particularly in Luzon. The cost of guarantees not passed to distributors and consumers became stranded costs that the government (or we taxpayers) eventually subsidized.

Case-To-Case Negotiations

In the renegotiation of questioned IPP contracts, the government panel considered the unique individual structure of each agreement and initiated discussions according to the limitations or flexibilities of the financial and shareholder agreements.

The review and renegotiation team composed of the departments of energy, justice and finance and a bevy of government lawyers and financial consultants also focused on the financial implications of the Napocor commitments.

For example, in the CBK Power contract involving the rehabilitation, maintenance and operation of the Caliraya-Botocan-Kalayaan hydroelectric and peaking plants in Laguna, the government panel was able to negotiate for CBK to waive its right to collect its last four installments worth $26 million on a $70-million security deposit. Effectively, the $70-million security deposit became an interest-free loan extended by CBK to Napocor.

CBK Power also agreed to waive until December 2003 part of its claims for capital recovery fees, as well as operation and maintenance fees on Kalayaan 2. On top of this, the power firm also agreed to provide Napocor with electricity produced above the minimum guaranteed level free of charge for 18 months.

In most cases, IPPs agreed to renegotiations with the end view of clinching new projects in future. The Philippines, after all, will require an additional 5,000 megawatts of generating capacity within the decade.

Politicians Stay Out

The renegotiations are turning out well for the government. While the bulk of the savings will not be realized until a few years from today, there are already slight indications of actual benefits. For one, electricity rates in the country have in present net values gone down.

Although the Philippines has dropped a notch lower from sixth to seventh place in the hierarchy of countries with expensive electricity, Vietnam, China, Thailand and Indonesia are still better than us.

There are 10 more contracts being renegotiated. Taking stock of what has so far been accomplished, though, government negotiators are happy with their scorecard. The team is also optimistic that the remaining IPP contracts will be resolved in the interest of the consuming public.

These sparks of achievements should eventually add a new glow of hope in the power sector. Unless, of course, politicians backpedal into the picture again.

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