On Agus-Pulangui Privatization and possible alternatives:

Prepared by Maris dela Cruz, EmPOWER Consumers Coalition10 September 2009

AGUS-PULANGUI HYDRO COMPLEXES IN MINDANAO CANNOT BE PRIVATIZED EARLIER THAN 10 YEARS AFTER THE EFFECTIVITY OF RA9136.

EPIRA or RA 9136 is very clear on this. SECTION 47 of EPIRA and RULE 23, SEC.4 (F), RA 9136 IRR provide for the temporary exemption of Agus-Pulangui from being privatized.

 Sec.4 (f) of RA 9136 IRR. "The Agus and the Pulangui complexes in Mindanao shall be excluded from among the Generation Companies that will be initially privatized. Their ownership shall be transferred to the PSALM and both shall continue to be operated by the NPC. Said complexes may be privatized not earlier than ten (10) years from the effectivity of the Act, and, except for Agus III, shall not be subject to BOT, Build-Rehabilitate-Operate-Transfer (BROT) and other variations thereof pursuant to Republic Act. No. 6957 (BOT Law), as amended by Republic Act No. 7718. The Privatization of Agus and Pulangui complexes shall be left to the discretion of PSALM in consultation with Congress. PSALM, out of the earnings in the operation of Agus and Pulangui complexes, shall ensure the availability of adequate funds intended for the upkeep of facilities to include funds for repairs, maintenance and expansion of existing facilities;"

Aside from conflict with RA 9136, there is also a problem with the issue of WATER RIGHT. If Agus-Pulangui would be privatized, the water right will be given to the owner of the hydro complexes. This will affect the access/use of communities and other people who depend on Agus-Pulangi water for their living, drinking, and sanitation, etc. The case of Casecnan Hydropower plant is a good example of how communities in the area were deprived of their means of livelihood when the contractor of Casecnan Hydropower Plant diverted the water from another river towards the turbines to generate power.

EVEN AFTER 2011 (TEN YEARS AFTER THE EFFECTIVITY OF EPIRA) IT WOULD BE BEST TO RETAIN PUBLIC OWNERSHIP AND CONTROL OF HYDROPOWER PLANTS:

a) THE PEOPLE (CONSUMERS/RESIDENTS IN THE COMMUNITY AND WORKERS IN THE PLANT) CAN OWN THE HYDROPOWER PLANT. Agus-Pulange can be publicly-owned -- by the workers and consumers and probably the local government too. The current workers can operate it. What they may need is additional financing. The local government may provide or facilitate government guarantee to some financial instruments. The government provides guarantees to loans by private companies owned by few individuals, why can’t it guarantee as well financial instruments by people/public-owned corporations.

There are some cases worth looking into and maybe emulating too. The American Public Power Association (APPA) is one case. Public power utilities under APPA are governed by their consumer-owners through locally elected or appointed officials. In a few states, public

power systems are regulated by state utility commissions. Some public power communities vest authority in their local city governing body – such as a city council – to guide the util-

ity. Others have independent elected or appointed utility boards. In any case, they are account-able to the citizens they serve. (www.appanet.org)

b) HYDROPOWER PLANTS HAVE CHEAPER GENERATION RATE, LOWER OPERATION COST, HIGHER RETURN TO THE OWNER. Though hydropower plants may have higher capacity fees or construction/building costs, but in the long run they are more efficient -- cheaper generation rate and longer life of plants. (sorry, I can’t find the comparative table of generation cost per type of plant that we got from Engr. Del Mundo, but NPC engineers and financial people can attest to this).

c) SELLING ALL NPC GENERATION PLANTS HAS LESSER IMPACT THAN RENEGOTIATING AND RESCINDING IPP CONTRACTS; ADDRESSING SERIOUSLY THE IPP CONTRACTS WILL RESULT IN LOWER UNIVERSAL CHARGE.

Indeed, the value of NPC assets is lesser than the amount of its total liabilities and credits. Since 1998, the total amount of NPC lease obligations to IPPs has always been higher than the total amount of long-term debts of NPC. The huge IPP obligations have actually been the cause of NPC’s financial collapse. Since 2001, there had been several cases of onerous IPP contracts exposed and investigated by the Senate. In fact, five of them were admitted by the government, through the InterAgency IPP Review Committee, that they were onerous – having serious financial and legal problems. Only 6 IPP contracts turned out to be free from legal and financial infirmity. It must be noted however, that to this date, there has been no technical review conducted yet on the IPPs. The Inter-Agency IPP Review Committee was supposed to conduct not only financial and legal review, but technical review of the IPPs as well.

Actions to IPP contracts should range from renegotiation to rescission. But the government lacks political will to do this, and it would rather pass the burden to all consumers than negotiate or compel the IPPs to reduce their costs, amend, or cancel those onerous IPP contracts.

Below is the financial condition of NPC (generation and transmission assets), now held by PSALM, from 1998-2005. This was from the ADB Power Sector Development Program Loan Document in 2005.

 

PSALM’s (NPC and TRANSCO’s) Financial Performance, 1998-2005

Financial Condition (In billion pesos)

Item 1998 1999 2000 2001 2002 2003 2004 2005Utility Plants 297.1 277.6 273.5 270.1 268.9 268.2 262.8 309.5Plants Under Capi-tal Lease 166.3 350.9 360 367.2 454.7 552.5 528.3 503.5Other Assets 192.7 233.9 355.5 368.7 429.4 169.3 264.9 266

Total Assets646.

1862.

4989.

8 1006 1153 990 1056 1079Long Term Debt 214 238.8 292 290.1 376.3 481.1 348.6 346IPP Lease Obliga-tions 230.5 406.2 485.8 505 595.2 716 680.7 596.1Other Liabilities and Credits 72.5 92 100.9 117.4 120.8 140.1 164 158.3

Total Liabilities 517 737 878. 912. 1092.2 1317.2 1193 1100.4

and Deferred Credits 7 5

Net Assets129.

1125.

4111.

1 93.5 60.8 (327.20) (137.30)(21.40

)

Further, IPP contracts can also be rescinded on the legal basis of contract breaches. It had been found that most IPPs were not able to deliver power according to their contractual obligations. In 1998, 26 IPPs have fell short from their contractual obligation for guaranteed power availability. Contract breaches among the 21 IPPs resulted in an average actual availability of 37%, way below the average guaranteed availability of 82% set by the IPP contracts. The significant discrepancies between guaranteed and actual plant availability constitute major contract breaches. These contract breaches could be grounds for rescinding or renegotiating the contracts with the IPPs.

In 2001, FDC study of IPP contracts showed that if the government rescinded IPP contracts that have been breached, the savings would be US$ 1.22 billion per year. Meanwhile, if the government renegotiated the IPP contracts down to what is deliverable, the savings would reach approximately US$ 571 million annually1. The US$ 1,036 million expected savings from 2004 IPP renegotiation is a modest achievement when compared to the financial gains from contract cancellation and true renegotiation; the US$ 1,220 billion annual savings from contract cancellation already surpasses the US$ 1,036 million expected savings from the recent savings for the first year while US$ 571 million savings from contract renegotiation can surpass it in just two years.

Given the anomalous and onerous origins of some debts and liabilities of the power sector, the right policy action before the collection of the universal charge are:

1) active renegotiation and/or and even cancellation of unfair IPP contracts

2) comprehensive audit of NPC/power sector debts3) cancelation of illegitimate power sector debts4) restructuring of other debts (those proven legitimate, not onerous)

------References:ADB. Proposed Program Cluster and Program Loan Republic of the Philippines: Power Sector

1 PSALM Solution: Cure or Palliative?.Freedom from Debt Coalition.May 2002.Powerpoint Presentation.

Development Program. Nov. 2006ADB. Power Sector Development Program Loan. December 2006.Association of Public Power Association. http://www.appanet.org/utility/FDC. PSALM Solution: Cure or Palliative? May 2002.Powerpoint Presentation at the Lower House Committee on Energy Hearing.Ocampo, Jamir. “Heading towards the Debt Iceberg with Blind Faith: The Case of ADB’s US$450 million PSDP loan,” FDC. Unpublished paper. 2007.RA 9136RA 9136 Implementing Rules and Regulations