DTI wants Meralco to lose P46-B

By J R Ruaya

The Department of Trade and Industry (DTI), most likely upon the prodding of the Palace, has just lodged a petition against Meralco before the Energy Regulatory Commission (ERC) seeking measures to lower power rates, the most striking of which is expanding special treatment to the marginalized.

DTI wants Meralco to extend preferential treatment to poor households and power intensive industries "without prejudice to other Meralco customers", which could only mean us, the average consumers who are diligently paying our power bills, and who are at present already subsidizing the "marginalized" and the power pilferers.

DTI wants Meralco to absorb all lifeline discounts and not pass on to "other customers" which means us, again.

DTI said that Meralco should refund the all the subsidies paid by the subsidizing customers in addition to expanding the coverage and increasing the discounts within its franchise area.

It even wants (not suggests) Meralco to buy more from the wholesale spot electricity market (WESM) at any given time. This suggestion is contrary to the spirit of the spot market, wherein the prices should be dictated by supply and demand.

How this could be done without impairing the viability of the distribution company, the DTI did not spell out. What is more frightening is the repercussions on the quality of service rendered as a result of these proposals.

What is clear though is that the distribution firm will likely post a loss of P46.124 billion once it implements government’s proposal to extend preferential treatment to poor families, according to a presentation of Meralco board member Christian Monsod.

Monsod said based on simulations made by Meralco, the P3.606 billion net income it posted last year would instead become a net loss of P46.124 billion after implementing the proposed measures.

Even if Meralco's projections are somewhat bloated, one cannot escape the fact that the utility firm would be severely affected financially. In the end all these costs would be shouldered by the paying customers.

But what is more fundamentally discomforting is the government's direction veering towards more subsidies, when most countries nowadays, including present and former communist countries like China, Cuba and Vietnam are weaning themselves from such policies.

Subsidies are a manifestation of what I termed "beggar economics"--looks palatable in the short term but devastating in the long term.

These also distort market prices, wherein the actual cost of an item or service is hidden, only to rear its ugly head at the most inopportune time--in a crisis.

Subsidies encourage inefficiency and discourage efficiency improvements.

Worse, the government wants to place the implementation of the subsidies on the hands of the private sector--a clear interference to private enterprises.

Investors have already pointed out that to lower power costs, there are other options which are within the orbit of government influence. The government may have to sacrifice short-term popularity in favor of long-lasting economic benefits.

Like for instance, it may have to lower taxes on indigenous resources like natural gas and geothermal. Swallow the bitter pill of less tax collection in favor of more benefits to the consumers.

It should not change the investment rules in midstream like amending the EPIRA without much analysis of the consequences

It can fast-track the privatization of government power generating assets so that there will be real competition in the power industry. In so doing, the prices at the spot market would reflect the actual supply and demand, and DTI would not have to order Meralco or any distributor to source its needs from the WESM, or peg the distribution charges.

It can hasten the interim open access regime in the industry.

All the government needs is stronger political will to effect the required reforms in the power industry, and not bend to populist whims.

Which is probably asking too much against the reality of depleted coffers, waning popularity, influence of vested interests and the upcoming 2010 elections.

Let us just pray.

Beggar economics

By J R Ruaya

A few days ago, my curiousity was piqued by a queue in a place when there should not have any. Each of those on the queue was carrying a sheet of paper.

No, it couldn't be for NFA rice as there was no outlet around. Neither was it for mega-lotto, for the outlet was two blocks away towards a separate direction.

I followed the snake trail which directly led to a Land Bank branch.

It was for the P500 lifeline subsidy for electricity consumers recently announced by the government. It is a one-time shot, according to government spokespersons, aimed to instantly lower the electricity bills of lifeline consumers, or those who use less than 100 kWh of electricity in a month.

All told, it would cost the government some P 2-billion -- for what? Earning a few pogi points amidst the deafening clamor for lower electricity prices?

You and I, who are paying religiously our electricity bills are shouldering the costs. It is in your bill, the lifeline subsidy which is twice over another subsidy called missionary electrification program. These are on top of another subsidy in a sense, the systems losses, because it also includes the cost of pilfered electricity which is not really insignificant.

When the EPIRA (electric power industry reform act) was passed, most of the cross subsidies have been eliminated, except for this so-called lifeline subsidy.

Mendicant economics

This policy is a blatant example of misplaced priorities practiced by our governments since time immemorial. If the masses are hungry, give them crumbs; they will temporarily quiet down.

This is mendicant economics.

It is no different than giving a few coins to beggars who knock at your car windows at a busy intersection. When it occurs to me, I always agonize whether to fork over some coins or not. The instant need is there; you can see it in their faces, in the young two- or three-year-old children these mothers are carrying as a prop to their trade.

But then, every time your heart melts, you are pushing them some more into the quagmire of poverty. You are encouraging them to risk their lives and limbs for crumbs. They will be back tomorrow, because you showed them that begging can be lucrative. It beats hands down than finding a legitimate job.

Why don't you just donate to your favorite charity or volunteer for work with the DSWD?

Giving the lifeline subsidy is just that.

If one is really serious in helping these lifeline consumers, might as well give them two pieces of 9-W compact fluorescent lamps (CFLs)* at only approximately half the cost to replace their 50 W incandescent lamps.

The savings in electricity bills would go a long way.
_____
* see post "Goodbye, Edison", June 16, 2008.

The Tiwi-Makban privatization target shifts again

By J R Ruaya

See, I told you? *

Like a moving target in a theater of war, the bidding date for the 289-MW Tiwi and the 458.53-MW Makban geothermal power has been pushed back to an unspecified date next month, according to the state-run Power Sector Assets and Liabilities Management Corp. (PSALM).

The original sale schedule was June 4, but was moved to June 27. The geothermal complex was first put up for sale in December 2005.

The extended bidding schedule should allow for more time to address several concerns raised by the prospective bidders, particularly on the geothermal resources supply contract (GRSC), according to PSALM vice president for asset management and electricity trading Froilan Tampinco said.

PSALM said it has already received letters of interest from nine prospective bidders for the geothermal complex.

PSALM seemed confident of making the bidding exercise a success after it allocated more than 400 MW of power supply contracts to the sale of the Tiwi-Makban power facilities which will provide the new owner a ready market for the electricity that the power complex will produce. 
However, the 400-MW power supply contract and the GRSC are two distinct items. The former is the electricity supply agreement between the power plant operator and the distributor, while the latter is the steam sales contract between the steam field management (in this case, Chevron's geothermal unit) and the power plant owner.

Following the pronouncement of PSALM, the power supply contract seemed to be now in order, and probably acceptable to the prospective investors, but contentious issues remain with the GRSC which may not be resolved with a few more weeks' extension of the bidding date.

The basic issues are:

* The GRSC is between PSALM and Chevron, but the most affected would be the successful buyer who has to abide by it despite not being a party to the crafting of the agreement.

* Certain provisions in the contract like the setting of the base price, pegging the steam price to coal prices and some penalty and bonus clauses may not work in favor of the investors.

* Rehabilitation of two of the generating units which is being passed on to the investors. This was supposed to have been done by then NPC (now PSALM) as part of the compromise agreement between it and Chevron.

Other issues unrelated to the GRSC and the power sales contract like the base price set by the government for the assets, land ownership, and even constitutional constraints to foreign entities like Chevron may derail the scheduled sale.

To make the sale successful, PSALM should step on the shoes on the potential investors.

Some moves it could consider include:

* The GRSC should be considered a transition contract in the absence of a negotiated contract between the winning bidder and the steam field manager and so as not to disrupt operations. The winning bidder should have the prerogative to enter into a new GRSC soon after it takes over the power plant operation while the steam field operator should concur in principle to it before the bidding.

* The issues raised by the potential bidders on the provisions should become the starting point in such negotiations.

* The winning investor should be at the very least partially compensated for the rehabilitation of two of the generating units. He should not be made to shoulder the original responsibility of PSALM.

* PSALM might consider, without violating any government auditing rules, lowering the base price of the assets or scrapping it altogether, letting the market decide the fair value of the assets.

As it is, the investors would have to grapple with basic business decisions like whether the enterprise is reasonable profitable to them given the constraints like the existing GRSC, power sales contract assignment, the wholesale electricity spot market, the unresolved interim open access, country risk, among others.

If we are interested for them to come, let us not erect unreasonable barriers towards fulfillment of the EPIRA mandate of privatization and the liberalization of the electricity market.

The issues surrounding the Tiwi-Makban sale will again surface during the forthcoming sale of other geothermal assets like Palinpinon, Tongonan I, and Bac-man. The Palinpinon sale was earlier waylaid by such issues.**

The sooner PSALM relents on these issues the better.

Otherwise, PSALM's target of selling 70% of the generating assets within the year is but a pipe dream.

_____

* See previous post "Tiwi-Makban sale also pushed back", on May 20, 2008.

** See previous post "Palinpinon power plant sale hangs", May 12, 2008.

E10, the latest blend:Let's drink to that!

By J R Ruaya

E10?

This is the newest entry into the dictionary of Filipino motorists who have been groaning under the onslaught of ever escalating prices of gasoline. It stands for the newly introduced vehicle fuel which is 10% ethanol and 90 % gasoline, which is cheaper by about P2 a liter. On top of that, it is supposed to be friendlier to the environment that the usual gasoline, and has been introduced by virtue of the the mandate under the Biofuels Act of 2006.

There are actually tow major types of ethanol-gasoline blends. One, the low-level blend which consist of 5 to 10 % ethanol by volume is designed for existing motor vehicles and it is not much different than the gasoline in terms of function. The other one, the high level blend has ethanol content of 60-85 % ethanol, also referred to as E85 (or E60, as the case may be) is used in special factory produced vehicles called flex-fuel vehicles (FFVs) which can use both the ethanol blend and conventional fuel. Intermediate blends with 20-40% ethanol are mulled, but are not designed for traditional four-wheeled road vehicles.

Why ethanol?

Ethanol, a common type of alcohol, is also the same chemical in alcoholic drinks. Its use as motor fuel was in fact considered during the early years of production of cars, but with the advent of cheaper gasoline from oil, its use was no longer found attractive.

Its present "rediscovery" was prompted largely by demands for a replacement of the "anti-knock" additive methyl t-butyl ether (MTBE) which had been discovered to cause contamination of ground water. MTBE, in turn was introduced to replace the heavy metal lead, the original anti-knock component in gasoline.

Economic issues

Aside from technical issues, social and political issues have arisen with increased ethanol production. Critics point out that production of ethanol, which uses mainly organic waste (e.g., bagasse) and food crops like corn, may sacrifice food production. No less than UN experts on food production have pointed out such very real possibility.

This has become an issue in the United States where corn farms have been converted to ethanol production. In Brazil, the leading ethanol user in its vehicles, ethanol production has been linked to exploitation of farm workers and the degradation of lush tropical forests in the Amazon basin.

Here in the Philippines, there have been accusations that some prominent land owners are trying to circumvent the agrarian reform law by converting their farms to ethanol production.

Another very important economic issue raised is whether its production would in fact generate more energy than the required input. Depending on which side of the fence you are in, the assumptions used and personal bias, the answer to the previous query is either yes or no.

Cal Hodge, an energy consultant based in Houston, Texas (the oil center of the U. S.) in an article published in the prestigious Oil and Gas Journal in September 2002, collated the available studies at that time and found out that range of results varies from a net loss of up to 20 % and net gain of up to 40 %. In order to make any sense to these studies, Hodge averaged their results assuming that the authors have done their best efforts in coming up with their conclusions and came up with with the value that only 92% of the energy expended in ethanol production is recovered. Meaning, it is likely that one in fact loses-- not gains--energy in producing ethanol.

These issues are valid and should be addressed by our lawmakers, policy makers and by any concerned citizen.

Environmental issues

Proponents of ethanol as fuel wax eloquent on purported environmental benefits of ethanol blends, but these benefits are probably overstated.

Because ethanol contains oxygen, it can be regarded as a partially oxidized hydrocarbon. On a per weight basis and using the same engine, an ethanol blend produces less carbon monoxide (CO), a deadly chemical poison found in vehicle exhausts. But at the same time, because of more efficient fuel burning, the same engine actually produces more carbon dioxide (CO₂), the same gas that you exhale and also the same greenhouse gas (GHG) accused of primarily abetting man-made global warming, than pure gasoline.

In the local context though, CO production is more of a function of the state of the car system than on the fuel. Unmaintained engines (e.g., improperly tuned-up) usually generate more CO owing to incomplete fuel combustion, for example.

Ethanol burning has more nitrogen oxides (NO_x), also a major environmental concern, than does MTBE, the compound displaced by ethanol. For E10, the increase in NO_x was found to be statistically significant at 5 % more.

In advanced countries, ethanol blends pass ambient environmental standards not because of ethanol per se, but because of the catalytic converters in exhaust systems which render the nitrogen oxides innocuous. Here, it is doubtful if motorists pay much attention to the state of their catalytic converters, if their cars have them in the first place. Do public utility vehicles like jeepneys , FX and taxis which normally use the "dirtier" diesel have them?

Ethanol is completely miscible with water but not so with hydrocarbons, the main component of gasoline. So ethanol blenders will have to sacrifice easily burned low molecular weight components such as pentanes in favor of higher molecular components (e.g. benzenes). Unfortunately, the latter component releases more of the so-called volatile organic compounds (VOCs) which many of these (e.g., aromatics like benzenes) are considered carcinogens (cancer-causing).

Production of VOCs is far worse in ethanol plants.

Needless to say, this would also increase NOx emission which negates the decrease in CO production.

Safe to use in your car?

Car manufacturers and proponents assure us that E10 blend is safe to use even without extensive modification of your car. It is claimed that the only cars not suitable for properly-blended ethanol gasoline mixtures are those cars manufactured earlier than 1970, and there are not many of those around.

There were many issues involved during the earlier introduction of ethanol blends, but these have been apparently resolved. For example, ethanol reacts with rubber, and can create jams in the fuel pipe. The rubber components in fuel pipes have been replaced by more expensive, but more ethanol resistant fluorocarbon rubber. However, most of the cars in our streets have been manufactured prior to the idea of using ethanol blends and it is likely that the use of fluorocarbon-based rubber is not as extensive as one might think.

As mentioned earlier, ethanol is completely miscible with water, so if even traces of water are introduced into the blend during the manufacture of ethanol, during blending, or even during transport, could cause corrosion in your engine or other car parts. Absolute, or water-free, ethanol is used in blended fuels, but one cannot be sure if the blenders of ethanol producers are zealously meticulous in their processes.

To use or not to use

The P2 discount per liter over the regular unleaded gasoline should be enough incentive to shift to E10. Using it for the sake of the environment is more like a leap of faith than a conclusion based on hard scientific data.

Let us not be intoxicated by overly eager pronouncement of the proponents of the blended fuel regarding saving the environment or saving dollars by avoiding crude oil imports. Due to scarcity of local ethanol, Petron is in fact importing ethanol from Brazil for the roll out of it blended fuel.

What is required is a continuing sober assessment of the issues involved, many of which have not been mentioned in this note.

About the only certainty in shifting to E10 is at least some of the alcohol is going into the tank, and not to the motorists' heads.

Let's drink to that!

Goodbye, Edison

By J R Ruaya

During the Independence Day celebrations in Bacolod City last week, the Department of Energy launched its "Palit-ilaw" (light shift) program aimed at promoting energy efficiency lighting by a ceremonial switching which replaces 200 incandescent bulbs with compact fluorescent lamps (CFLs) at the fish section of the Burgos public market.

Rodolfo Manga, energy inspector of the Philippine Efficient Lighting Market Transformation Project, claims that the move will allow the city to save almost P400,000 per year in electricity bills, and up to P1.1 million if all the 500 incandescent lamps in the market are replaced.

This innocous piece of news might not jostle past the big-time news such as the GSIS-Meralco tangle, the P500 electricity subsidy or the price of oil, but it is part of the world-wide paradigm shift towards more efficient lighting and energy efficiency movement.

The truth is, many countries have already started to phase out the incandescent lamp as we know it. In December last year, U.S. President George W. Bush signed a comprehensive energy bill which contains among other things a provision to phase out the incandescent lamps starting 2012 until 2014 when a complete phase-out shall be completed.

The Australian government aims to accomplish the same by recently passing a law fully enforcing a new lighting standards by 2009 or 2010. The incandescent bulb would simply fall by the wayside.

Other countries that have plans to phase out the venerable Edison invention include South Africa, China, some countries of the European Union--and the Philippines. During the Energy Summit last February, President Gloria Macapagal-Arroyo mentioned a phase-out plan by 2010, and a bill is actually filed in Congress to implement such plan.

Enter the compact fluorescent lamps (CFLs)

Expected to replace the incandescent bulbs are the compact fluorescent lamps (CFLs) which use around 20 per cent of the energy to produce the same amount of light than the former. About 90% of the energy emitted by the incandescent lamp ends up wasted as heat.

CFLs can also last between four and 10 times longer than the former.

CFLs employ the same technology as the familiar linear fluorescent lamps, but are shaped to replace incandescent lamps in most applications. The reason why CFLs have not been introduced earlier is because the technology to "bend" the fluorescent lamp took some time to develop.

CFLs cost about 5 to 6 times as the incandescent lamp but the electricity bills savings throughout the life of the former easily offsets the initial high cost. Also, with the entry of low cost producers in Asia (e.g., China and Taiwan) CFL costs are going down rapidly.

Another energy efficient technology that may replace the incandescent bulb is the light-emitting diodes (LEDs) but the costs of producing them are still prohibitive. The intensity of light emitted from these LEDs are still not comparable to standard lamps.

CFL hazards

About the only environmental hazard that the CFL poses is the presence of mercury, one of the most toxic substances known, inside the bulb (which is also present inside the conventional fluorescent lamp). Mercury is necessary for production, but the amount of mercury is only 1% of that inside a standard mercury-in-glass thermometers found in many homes and in school laboratories.

If one were to follow strictly correct disposal procedures (e.g., do not break used lamps!) the hazard is virtually eliminated. Both the Australian and U.S. governments include programs to educate the citizenry on the potential hazards of the CFLs in their respective campaigns.

In an indirect way, the incandescent lamp also contribute to greenhouse gases emission by its voracious consumption of electricity which is mostly coming from fuel-fired (e.g. coal) plants.

Even without legislation, the incandescent lamp may finally disappear due to obsolescence and to the increasing awareness of the populace to an energy-efficient living. But a formal legislation could make more people aware of the benefits of a phase-out, and hasten the disappearance altogether of the incandescent bulb.

If we were to legislate the incandescent bulb to oblivion, it should be within the framework of a comprehensive energy efficiency bill, much like Australia's wherein, an energy efficiency standard is spelled out not only for home or office lighting, but also for home appliances like refrigerators, electric fans, air conditioners and washing machines, cars and building design, among others.

The venerable incandescent bulb will soon be joining the graveyard of obsolete and inefficient technologies like the typewriter, floppy disk, VHS, vinyl record--and even, maybe, the silver-based camera film.

We should shed no tear for it.

Clean coal?

By J R Ruaya

Last weekend in Iloilo City, Energy Secretary Angelo Reyes declared that he is in favor of building new coal-fired power plants in the Visayas as long as they use the so-called “clean coal technology”. He made his position on the issue amid his advocacy in the promotion of renewable energy sources.

It was a brave pronouncement, a calculated one, amidst active protests against coal in particular and environmental degradation in general. At the same he was making the statement a group of environmentalists have scaled nearby Mt. Kanlaon to protest the granting of permit to geothermal developer PNOC-EDC to enter Mt. Kanlaon National Park. A few days earlier, Greenpeace environmental activists vandalized a ship loading coal to Pagbilao power plant in Luzon.

For sure he will get rotten tomatoes plastered on his face, but at least Reyes is showing pragmatism in the face of mounting power crisis especially in the Visayas on one hand, and a noisy environmental movement on the other.

According to Reyes, the country could veer away from coal power plants, but not now.

“We still have coal-fired power plants firing up Luzon grid,” Reyes said. Coal accounts for 30 and 25 percent of Luzon and the Philippine generation mix, respectively.

He said the government has to balance the need of the country in terms of power.

“Coal will continue to be the bridge fuel,” he said.

Clean coal?

Clean coal will continue to be an oxymoron for many years to come. What is touted as clean coal technology is broadly understood to be any technology that has the capability to substantially reduce the "dirty" side associated with coal burning; noxious sulfur and nitrogen oxides, carbon dioxide which is accused to be the main culprit of man-made global warming, lead, mercury, arsenic and other poisonous heavy metals, fly-ash or particulates and residues consisting of inorganic materials. Also to be included is the attendant environmental degradation during coal mining.

The term's origin could be traced back to the U.S Department of Energy's Clean Coal Technology Program which was launched in 1986 and continued for more than twenty years with not much to show off. Recently, this has been replaced with the FutureGen project which is an ambitious undertaking to finally make coal "squeaky clean" to the satisfaction of environmental standards, and also to appease the green activists.

That the U.S. leads in research and development to make coal palatable is hardly surprising. Despite being a first world country with high standard of environmental protection, 52 % of its electricity needs comes from burning coal. The percentage is not expected to come down even 20 or 30 years from now. Coal is still cheap compared to alternatives, and the U.S. has plenty of it, producing about 27% of the world output yearly.

A significant improvement to the conventional pulverized coal burning is the use of fluidized bed technology wherein coal powder is suspended in fluid form while burning. This significantly brings down airborne particulates but not carbon dioxide and the noxious oxides. One still has residue to dispose of.

Of the 31 or so projects funded by US DOE at a cost of some $2.75-B, perhaps the project that came close to "clean coal technology" is the integrated cycle coal gasification (ICCG) plant wherein coal is turned to gas before being burned to generate electricity. So far, no significant commercial taker has come forward.

A demonstration ICCG plant has been recently built at a cost of $600-M with some $140-M grant coming from the DOE, by Tampa Electric Co., in Polk, Florida which is 10% more efficient than most coal-fired plants. But still, it is far from clean. While the plant captures all of its fly ash, removes 98% of sulfur and nearly all of its nitrogen oxides, the operator admits that it is not designed to remove mercury, one of the most toxic substances known to man, or carbon dioxide.

A more ambitious undertaking is a small project at the Los Alamos Research Laboratory which is dubbed "zero emission coal alliance" (ZECA) which aims to trap all pollutants. The ZECA plant combines coal gasification with a process that absorbs coal in magnesium silicates, which is quite common and inexpensive. The rock dust with CO₂ will then be buried underground. A researcher involved in the project thinks that it could take 20 years for the project to completion and could double the price of electricity compared to a conventional coal-fired plant.

Carbon dioxide sequestration, as the technology is also known for, if successful, is a geological and technological marvel, simply because of its scope. It is estimated that 2.5 billion tons of CO₂ is emitted by U.S. coal plants yearly; at least 1/3 of that should be removed for the technology to have an impact on CO₂ reduction efforts.

Another innovative idea is the use of algae for carbon capture using a process that has been with us for millions of years:photosynthesis. Algae, in batch reactors, capture the CO₂ emission of a coal plant, while the grown algae themselves, once dewatered, may be converted into vehicle-quality biofuel. NRG Energy is pilot testing the process in one of its plants at Loiusiana, while another outfit, Sapphire Energy, believes the idea is feasible and is putting some efforts to realize it.

Other ideas being tried out include conversion of coal to fuel gas or liquid, which is then burned to produce electricity or used in vehicles. This and other propositions require that oil prices remain high to become viable. There are also technical hurdles to overcome in the laboratory and demonstration trials.

Much of these efforts has been stymied by high costs and the advent of cleaner and cheaper natural gas plants in the 80s and 90s. However, with oil prices breaching $130 to a barrel, "clean coal technology" is getting a second look.

Pragmatism required

To immediately address the looming power crisis in the Visayas, pragmatism should prevail over wishful thinking by considering any proposed coal plant on a case to case basis while "clean coal technology" is still a mirage on the horizon. The alternative is a debilitating power crisis that is to occur sooner than later.

So, Secretary Reyes is unlikely to have his wish granted. The best he could get is an improved coal plant over the existing ones.

But it would be far from clean.

Taking out the "take-or-pay" provision

By J R Ruaya

In the heated exchange of charges and counter charges on who is to blame for the country's high electricity costs, the "take-or-pay" provisions in the power purchase agreements (PPA) contracted by the government and the independent power producers (IPP) have been singled out as a major culprit by consumer advocates, left-leaning or populist legislators, media, and virtually by everybody, including the balut vendor.

Listen to some of the recent exchange of barbs:

At the House energy committee hearing, representative Teddy Casiño of Bayan Muna grilled Meralco and the ERC on the take-or-pay provisions in energy supply contracts, citing the case of First Gas, to which Meralco paid the amount equivalent to 1,000 MW of electricity even if it generated only a total of 300 MW from December 2000 to November 2001. This translates to payment of P12.99 billion for this "undelivered power", according to Representative Luis Villafuerte in a privileged speech weeks ago. Meralco, in turn, passed on the additional cost to its consumers.

“What is the basis for the take-or-pay provisions in the IPP supply contracts? This provision in the IPP supply contracts makes their businesses virtually risk-free,” Casiño fumed.

But Meralco president Jesus Francisco said the provision was introduced in the IPP supply contracts during the time of former President Fidel Ramos at a time when the country was experiencing a crisis in power to encourage investors to put up power plants.

The take-or-pay provision however, according to Francisco, would not have posed a problem if the government made an accurate projection of the country’s power requirement." An overly rosy growth forecast by NEDA coupled with the debilitating financial crisis in 1997 resulted in an oversupply of electricity which "we, in accordance with the provisions of the supply contracts, have to pay whether there is actual consumption or not, " said Francisco.

In a statement, First Gas executive vice president Richard B. Tantoco refuted Villafuerte's claim that the company did not deliver to Meralco for 12 months.

"[S]tate-owned Napocor has not kept its part of the bargain on the availability of the transmission lines needed to transport power from the First Gas plant," he said. Back then, the National Transmission Corp. which owns and runs the power grid infrastructure, was still a part of Napocor.

Tantoco was referring to the Sucat-Araneta line and Dasmariñas line, which are part of the government's power development program and the $4.5-billion Malampaya deep water gas-to-power project.

"As records would show, the completion (of these lines, along with the) Zapote substation were delayed by over five years," Tantoco said. "A generating plant without a transmission line to transport power will definitely be stranded."

He said the result of the transmission bottleneck was that First Gas' Sta. Rita 1,000-MW plant and Napocor's 600-MW Calaca coal plant were limited to a total combined dispatch of only 600 to 700 MWs.

The late party-list congressman Crispin Beltran even refused to pay the PPA portion of his electric bill in 2001 as a protest.

At the Senate, the legislators are jostling each other to be the first in line to be a hero to the masses by trying to take out the "take-or-pay" with a sniper fire from the EPIRA.

What is "take-or-pay"?

The "take-or-pay" is a provision within the sales agreement between a buyer and a seller that obligates the buyer to pay a minimum amount of money for a product or a service, even if the product or service is not delivered. These contracts are most often used in the utility industry to back a financing scheme (e.g., bonds) in constructing new power plants. On the finance side, it is a sort of a comfort (collateral) for the lender that the project would have a steady stream of revenues to pay for the principal and interest. The supplier would also have confidence that a continuous extraction of his resource, for example geothermal steam or natural gas, would be viable. The buyer-- for example, the owner of a power plant--would also be assured of fuel to run his generators.

Under the right or normal circumstances, a "take-or-pay" contract should make all the stakeholders concerned happy, or least give some comfort. But the devil advocate here is the term "right" or "normal". Typically, a "take-or-pay" duration spans 15 to 20, or more years. This is to give a semblance of stability and predictability of the contract.

However, given the dynamics of the industry, what is right or normal at the time of the agreement could become rapidly abnormal in a few years--the demand projection could be widely off, a competitive fuel price shoots up through the roof, a financial crisis sets in which causes interest rates to gyrate wildly or currency exchange rates to fluctuate unpredictably, political upheaval which causes drastic changes in policy--and the "take-or-pay" could either be a bonanza or a financial guillotine for any of the parties involved, including the consumers.

Objections to "take-or-pay"

The advent of new technology and liberalization of markets usually make the take or pay provision onerous to the buyer. Newer facilities may produce the same commodity traded at at much lower cost, but the buyer under a take-or-pay provision cannot take advantage of the fall in prices as he is bound by the contract.

Because of the inherent inflexibility of the take or pay contract, buyers cannot adopt rapidly to changing markets, inevitably leading to financial losses. For example, when there was a glut in electricity, NPC could not switch suppliers from the IPPs due to its contractual obligations.

Take or pay contracts is also a negation to the principles of competition which is inherent in a liberalized market. A major aim of competition is to get the best price for the consumers. Buyers under take or pay provisions may no longer be able to pass on their costs to the consumers. In a monopolistic electricity market which we still have, these costs are passed onto us in the form of high electricity prices.

Whenever disputes arise, take or pay litigation can take time and become costly for all the stakeholders. They interrupt the contract and smear the business relationship between the seller and the buyer. Even in the United States, there have been attempts by buyers to get out of onerous contracts through litigation, but in most cases, the sanctity of the contract is held up by the courts of law despite how uneconomic the contract could be.

Take-or-pay provisions promote inefficiency and waste. This is because whether the efforts put into production is minimal or optimum, the revenue stream for the seller is assured.

Possible improvements

Long term contracts with take-or-pay provisions should have a renegotiation clause. The triggering device could be a major shift in the market (whether caused by a disruptive technology or a shift in government policy) wherein the original basis for the contract no longer applies to the prevailing market.

Price adjustment clauses could also render a long term contract adaptable to changes in the market. For example, if say steam price from a geothermal resource is indexed to some energy commodity like coal, a price adjustment can be capped to a level less than the actual price of coal if coal prices suddenly shoots up way beyond projections.

A shorter take or pay duration with a review clause could also benefit the buyer.

Or there could be found an alternative to take or pay altogether.

Enter the IPPs

The term entered into the lexicon of our consumers through the independent power producers (IPPs) in the form of the build-operate (BOT) scheme and its variants, which came in in the early 1990s to help ease the debilitating power shortage experienced by the country. Back then, the situation was hardly normal:the 12-hour rotating brownouts were crippling the industries and citizens were at their boiling points. The country was still feeling the aftershocks of the military adventurism in late 1989 led by then Colonel Gringo Honasan, who went on to be rewarded with a position in the Senate. The new presidency of Fidel Ramos, which came in with less than a clear-cut mandate from the electorate, took over from a wobbly Corazon Aquino regime with hardly any finances to start with.

The IPP is not a cheap power option. The actual price (which is usually much more than the initial cost) we have to pay would be spread out in the years to come. If not for the gracious incentives offered--tax breaks, power purchase agreement including a "take-or-pay" provision--only the bravest or the foolhardy investors would take the government's bait then. In a very uncertain environment, an investor would demand a higher compensation for the risk he is taking. Take it or leave it.

For the financier of these capital-intensive projects, the key principle of financial cost recovery in the power sector is that revenues from electricity sales should fully recover operational expenses and depreciation, and generate a reasonable return on the capital invested. The return specified is based on the weighted average cost of capital, consisting of long-term debt and equity. The take or pay provisions help realize these targets.

The cost of power from the IPPs is necessarily higher than the average generating cost of the existing utilities because of their need to use commercially priced debt with maturities shorter than the useful life of the underlying generation assets, and high returns on equity based on the perceived country risk. To further mitigate the assumed risk, prices were asked to be denominated in U.S. dollars, not in local currency as a shield against currency exchange rate downside.

In addition, the lender requires government guarantee such that a government keen to keep its credit standing would have no choice but to service its debts ahead of social services.

Furthermore, the selected IPPs and concluded power purchase agreements were made on the basis of direct negotiations rather than following transparent international competitive bidding procedures. Such selection and contracting processes also contributed significantly to the high prices received. The agreed prices, with take-or-pay provisions, were expressed in convertible currencies or were fully indexed to exchange rate variations.

Excessive capacities were also contracted on the basis of highly optimistic load forecasts. When, in the later part of the 1990s,

economic growth and electricity demand slowed down, and local currencies depreciated substantially as a result of the Asian financial crisis, the cost of power purchased from IPPs rose substantially in local currency terms. Because of the take-or-pay provisions, utilities frequently had to reduce their own generation and absorb the higher priced output from the IPPs. This seriously eroded the financial viability of utilities; in our case the national Power Corporation (NPC)

Renegotiating the IPP contracts

Theoretically, any contract, including the IPP contracts, is negotiable. Especially if your costly assets are under the threat of forcibly taken away, an option would be negotiation even if reluctantly. The NPC has taken pride in "successfully" re-negotiating some of these contracts, but what would be the effect on the present and future investors?

For one, the country would be perceived as a high risk, with no regard for the sanctity of contracts. Those still looking in would need to do more homework.

How would you feel when the basis of all your financial projections is suddenly shattered by a forcible scrapping of contract provisions. One may have only bear and grin it, if it is still tolerable. But a cat who has sat on a hot stove wouldn't ever sit again even on a cold stove.

But if the demands are excessive--that's another story. When at the height of the financial crisis in late 1990s the Indonesian government demanded that the foreign power producers be paid in the sinking rupiah, many just packed up and went away. Some elevated their cases to international courts of arbitration--and won, but they still have to collect what is due to them.

So, how would you eliminate the hated take-or-pay? By improving the general climate of investment so that the take-or-pay or its variants would be redundant. By eliminating red tape and corruption that have added to the cost of doing business. By stabilizing the political situation so that the financial risk premium would be lowered.

By not excessively taxing the power producers or strangling them with unreasonable environmental demands.

By making the EPIRA work such as accelerating the privatization of generating assets so that a truly, open and competitive power industry be established and equitably assigning the IPP administrators soon.

To bring down the power costs --which is what this is all about--everybody must work hard methodologically, painstakingly and with determination. It takes time and there are no shortcuts.

Let us respect the sanctity of the law like in commercial contracts. Modern commerce is based on mutual respect backed up by law.

Take out the "take-or-pay" forcibly and immediately? The bullet you use in taking out "take-or-pay" might ricochet and maim, if not kill, you instead.

Flogging the country

By J R Ruaya

It can't be!

The almost surreal scene could have come straight from a scary movie wherein our supposedly esteemed senators took turns in exorcising the foreign demons during a hearing on the supposed intervention of the Joint Foreign Chambers (JFC) on the legislative processes of the country. The JFC had been invited appear before the Senate after it has written to president Gloria Macapagal-Arroyo regarding its concerns on the moves of the legislative chamber to amend the EPIRA, the electric power reform act.

Led by veteran legislator Juan Ponce-Enrile, the senators take turns at lashing out at Hubert D'Aboville, president of the European Chamber of Commerce of the Philippines, who appeared as the spokesman of the JFC, for "intrusion into the domain of policy" of the Philippines.

Every time, D'Aboville tried to read the statement of the JFC, Enrile cut him off, insisting that he name the “legislators” the foreign business group, in their letter to Arroyo, said had made “unwarranted accusations against bedrock principles accepted in progressive countries around the world.”

This time, Enrile may have outdone Miriam Defensor-Santiago, chair of the senate energy committee, in spewing out tetrodoxin to perceived trespassers into their domain. She merely lectured the Frenchman on legislative processes and pointblankly told him when to and not to speak. She said later that the hearing injected a "sense of modesty" among the JFC members.

Enrile even dared foreign investors to leave the country if they do not respect its institutions.

“You may be a Frenchman, but you cannot outthink a Filipino,” the angry senator told D'Aboville.

To which D'Aboville replied: “I know sir. My wife is a Filipina. I live it on a daily basis.”

Pity the poor Frenchman. His wife would have made profuse apologies in behalf of her elected legislators. I myself, would like to hide under the mattress due to shame for what the senators did and said to the JFC members.

The crucifixion of the Frenchman is indicative of how we treat our guest-investors in this country. Those that are here are thinking of relocating to more pleasant environments, and those that are still looking in are having second thoughts. Those who have already left may have sighed a relief.

The list of those who have left for various reasons including our inhospitable environment is too long, and is growing longer by day. In the energy sector, the latest to bail out was Saudi Aramco. Prior to that, there was Union Fenosa, CalEnergy, Mirant, Reykjavik Energy Invest. Parcel delivery giants UPS and FedEx are moving out or drastically scaling down their operations. The less unlucky like Hanjin, ZTE, IMPSA, Fraport, etc. have already been condemned to hell.

After the bruising hearing, D'Aboville, ever the courteous Frenchman-guest, put up a brave face, even telling reporters that, as far as he is concerned, what he went through wouldn't affect foreign investments in the country. He did point out that Vietnam received $15-billion foreign investments compared to the Philippines' paltry $2.5 billion last year.

Those foreign investors that didn't speak merely voted with their feet.

All this time we proclaim we need them.

Oh, my, these senators are continually flogging this country.

Tweak the EPIRA? Let it work first!

By J R Ruaya

The normally staid and sober Senator Juan Ponce-Enrile went berserk in his latest privileged speech who lambasted foreign investors whom he called "catpetbaggers, predators, and buccaneers" saying they have no right to intervene in the country's political process.

He was specifically peeved at the recent letter of the influential Joint Chambers of Commerce in the Philippines to President Gloria Macapagal-Arroyo urging her (and Congress) not to amend Republic Act 9136 or the Electric Power Industry Reform Act (EPIRA) which forms the basis of the ongoing restructuring of the power industry. Enrile is spearheading the moves at Congress to amend the EPIRA.

"Who are these people coming here to say, 'you do this, you do that'? To them, I say, the hell with you, get out of this country,” Enrile said. “If you want to do business under the system with us, to those who are lecturing to us, enough is enough. It is not right for foreigners to be meddling in our affairs, meddling in the workings of government, meddling in our political life, duties of duly elected representatives of the people."

No, Mr. Senator, they are not meddling. They are just concerned. Besides, their nationals-investors-the very entities the EPIRA is enticing to come in to make the spirit of the law successful, are the ones affected. Listen to them first.

"We would like to reiterate our long-standing position not to amend RA 9136, the EPIRA which mandates the privatization of the Philippines’ energy sector. Amending EPIRA will have negative consequences that will not only dampen the confidence of both foreign and local investors but could even drive them away at a time when shortages in power supply already plague the Visayas and are expected in Luzon in the next several years. Amending EPIRA will result in a highly unstable legal framework for the industry and investors,” it said.

Besides, the initially slow pace of National Power Corporation's privatization of power assets is picking up, as three of the five conditions required to begin retail competition and open access, have already been met, it pointed out. The two other unmet conditions are the privatization of at least 70 % of Napocor assets and of Napocor-IPP contracts.

It cautioned that such action would derail the ongoing power reforms, a polite way of saying not to change the rules of engagement in the middle of the war for reforms.

Investors just want a stable and predictable regime of policies to operate. Is this asking too much?

International Finance Corporation (IFC)-Philippines Resident Representative Jesse O. Ang opined that it would be better for the government to allow seamless implementation of the EPIRA as has already been started, instead of endlessly attempting to amend some of its provisions.

Even PSALM head Jose Ibazeta says amending the EPIRA to bring down this threshold to 50 % is unnecessasry, since he is confident of meeting the original target before the end of the year.

Multilateral lender the Asian Development Bank (ADB) which is active in the power sector financing, chimed in, saying the government should commit to let the EPIRA work first so that investors would settle to a more stable and comfortable environment first.

Einar Stenstadvold of Norway, Executive Vice President of Asia of SN Power which has a joint venture with the Aboitiz group in hydro, emphasized that the robust framework of EPIRA was the reason for them to come to invest in the Philippines.

I hope the senator is listening to them.

If the issue is lowering the electricity rates, there are other ways of doing it even without touching EPIRA.

The Philippine Chamber of Commerce of Industries (PCCI) has identified many ways including:

- Efficient power source mixture of geothermal, hydro, natural gas, coal, bunker fuel and diesel to reduce use of imported fossil fuel.

- Maintain the heat rate of power plants for more efficient fuel burning

- Reexamine the distribution and transmission charges by reviewing the supply and metering system and the committed service component

- Suspend the 12 percent value added tax on power and oil for six months, including the royalty tax on natural gas.

Tweak the EPIRA at this time? Let it work first.