Dangerously tweaking the EPIRA

The Senate might be treading on tenuous, dangerous grounds when it approved yesterday on third and final reading proposed revisions to Republic Act 9136 or the Electric Power Industry Reform Act (EPIRA).

On a vote of 16 to 3, the Senate passed Senate Bill 2121 which seeks to amend two important provisions of the EPIRA. These amendments are (1) scrapping the provisions that pass on to consumers stranded debts, or unpaid financial obligations; and so-called “stranded costs”; and (2) lowering the threshold percentage level of power assets privatization to 50% from the current 70%.

What are the possible ramifications of these amendments?

Stranded contract costs refer to the excess in contracted cost of electricity agreed on between an independent power producer and the National Power Corporation (NPC), the erstwhile operator of the transmission grid, over the actual selling price in the market of contracted energy. This can arise, for example, when NPC cannot sell the contracted amount of power due to some reasons such as low actual demand or prolonged breakdown in transmission facilities.

The stranded contract cost which applies to all distribution facilities was also scrapped “in order to reflect the true cost of power and avoid additional burden to consumers.”

In other words, according to Senate President Juan Ponce Enrile, if Napocor and the distribution utilities committed errors in contracting electricity costs, they will have to answer for their lapses in judgment. Let their economics be damned. Forget their target internal rate of return or cost of money.

If only the conditions were as simple as that.

Stranded costs are not the machinations of an evil mind. Big power projects have long gestation periods and entail huge capital outlay. For such a project to be viable, there has to be some guarantee that a portion of the output at least has an assured buyer even before the project proponents lays down the first cornerstone. The form could be either a “take-or-pay” provision or a guaranteed price and adjustments.

There are also technical limitations on the amount of power that can be generated. A 20-MW rated turbine running on geothermal steam could not be operated below a minimum output threshold. In a similar way, a high transmission line cannot carry a load below some limit.

During the previous opaque and monopolistic power regime of Napocor, such guarantees could be easily built in into the contract hammered under very amicable circumstances at the expense of the final consumers.

But even if there is no explicit passing on of the costs to the consumers, the generation costs would somehow appear as operating costs. Failure of the generating company to book such costs as expenses could spell the viability (or lack of it) of the project at the outset.

The amendment may dissuade would-be investors from putting up sorely needed additional capacity in the near future.

The other amendment—lowering the privatization threshold to 50%--could have far more dangerous implications. The rationale is that, with the lower threshold, the “open access regime” wherein big consumers can actually choose their source of power would immediately kick in. This is because the actual level of privatization has already been pegged at 57%.

The fatal downside is that Napocor will no longer have to sell its remaining power assets, and thus continue to exert dominance over electricity prices. This would also fell in the hands of the Napocor insiders who seem to be consciously delaying the privatization process for reasons we can only speculate. With this scenario, the open access would ring hollow.

For the investors who have already put up money on the basis of the original EPIRA provisions, they would have to adopt with increased difficulty should the bill be passed into law. Those who are waiting in the wings would have to go back to the drawing board and their financial spreadsheets and assess the changed circumstances. They might back out altogether.

Changing rules in midstream have been the bane of investors. This is why the various foreign chambers of commerce, which represent foreign investors, have been adamant about changing the rules of engagement in the din of battle.

The world economic order is already is disarray and highly uncertain. Investors would like to see some of the uncertainly addressed to by not changing the rules of the game.

Tweaking the EPIRA this time may not deliver the benefits the law is supposed to give. On the contrary, the results could be devastating to the industry and the country.

We just hope that our esteemed senators are actually concerned at the hapless consumers and not looking misty-eyed at the forthcoming 2010 elections.

Career executive now at Napocor’s helm

Froilan A. Tampinco, vice-president of Power Sector Assets and Liabilities Management Corp. (PSALM) which is tasked to privatize the government’s power assets has been named the new president of the National Power Corporation(Napocor or NPC), it was announced Monday by Malacanang.

 He will replace Cyril C. del Callar who has tendered his resignation this month for health reasons, according to the announcement

Tampinco is regarded as a career executive and a technocrat unlike many other appointees in sensitive government positions who have been chosen on the basis of political considerations.

 Tampinco is a licenced chemical engineer and holds a postgraduate degree in chemistry from the Catholic University of Leuven in Belgium in 1975. He also obtained a master’s degree in management from the Asian Institute of Management.

 Prior to his position at PSALM, he has bee Napocor’s vice-president for sales and services from February 2003 to February 2004. As head of NPC’s Genco 2 group from November 2001 to January 2004, he oversaw the operations of a number of generating assets under the group. 

Industry players generally welcomed the news.

 The president of Philippine Electricity Market Corp. which operates the wholesale electricity spot market (WESM) , Lasse A. Holopainen, in a text message, said "he should do really well" considering his record

 National Transmission Corp. President Arthur N. Aguilar promised full cooperation and support, while Manila Electric Co. president Jesus P. Francisco regards the new NPC head as “very much qualified."

 Mr. Tampinco, in a text message, simply said the new job was both a "challenge and a privilege."

 Appointment of a career official at NPC should bode well for the industry. Initially, he already has his hands full in resuscitating the financial health of the power firm which has been in the red for most of its existence.

 He has also to show that he can lick the perceived shenanigans within the organizations.

 Coming from PSALM, he should be able to give the privatization process the much-needed push towards successful completion.

 He seems to have the necessary credentials. Let us just hope that he has the will to resist political pressures from above and the resolve to clean Napocor’s Augean stables even if he has to sweep to the dustbins former colleagues involved in running down the power company.

 Let us silence our artillery and declare a unilateral truce against NPC to pave the way for the new chieftain to stamp his mark.

 But the people will likely not hesitate to resume their missile barrage against it once the new head cannot show proof that he can be a cut above the heads of his predecessors.

Sick Napocor takes in a patient

The sick trying to cure another sick.

This is probably the apt description when a management team from the state-owned National Power Corp. (Napocor) is poised to take over the operations of Albay Electric Cooperative (Aleco) as stipulated in the operations and management (O & M) contract agreed and signed by both Napocor and Aleco last July 17.

In addition to overseeing Aleco's administration, finance, management and support services, Napocor will also suspend the interest and penalty charges on Aleco's unpaid billings for the former for the duration of the one-year contract. This can however be extended by mutual agreement.

For its part, Aleco shall avail of National Power’s financial and technical expertise to achieve efficient, reliable and profitable management of its electrical distribution system for a service fee of two percent of the power purchased from the power generator during the contract period.

We have recently alluded to this dire situation of this cooperative when we referred to a sick power distributor in the Bicol area.

But can Napocor, by itself facing financial difficulties and is only kept alive by intravenous injection by the government, able to sustain Aleco?

The multilateral lender Asian Development Bank (ADB) recently suggested that the sale of Napocor itself is one of the best ways this government can improve the electricity prices of this country.

At the moment, Napocor's business is generation and transmission, but little of retail distribution, so it is doubtful whether it can stage a turnaround. Sure, the problems of Aleco is miniscule relative to Napocor's difficulty itself, but are quite different.

Aleco's problems are management-related, or the absence of it. Aleco probably exemplifies what an electricity distributor should not be.

For this type of service business, the management team should have a technical grasp of the requirements needed. It should not be beholden to the local political warlords. It should have strict internal controls on money and personnel matters.

It should have a professional management team.

We have been advocating all along to sell off these electric cooperatives, which are a relic of the bygone era of state monopoly, to entities such as experienced distribution companies. One could start with the cooperatives serving a large number of the populace. This has been successfully done in recent years as in the case of the San Fernando, Pampanga electric cooperative which has been sold to a private interest.

Napocor's takeover is not the best solution; it should only be temporary.

The consumers should have no fear of a private takeover, only relief. As it is, the electricity distribution industry is highly regulated and consumer protection is in place throughout the service chain from generation to transmission and distribution.

They could only gain freedom from incompetent administrators of many of these cooperatives.