Contracts with power producers: The cause of high electricity cost
05/15/2008 | 10:35 PM
MANILA, Philippines - Reducing electricity costs in the Philippines is a simple matter. That is, if you ask presidential economic adviser Joey Salceda.
According to Salceda, who is also governor of Albay, the government should review contracts between the state-led National Power Corp. (Napocor) and power plants, also known as independent power producers (IPPs).
“This is the heart and soul of the problem," Salceda told GMANews.TV in a phone interview, referring to the contracts.
Also known as power purchase agreements (PPAs), these contracts, which are effective for a period of ten to 25 years, have been approved in the early nineties when a power crisis caused debilitating brownouts across the country.
Famous for their “take or pay" provisions, these contracts enable power plants to charge consumers for electricity that is neither used nor generated.
Moreover, if electricity is actually produced and/or dispatched, these contracts allow IPPs to charge twice the regular costs for producing electricity, according to Maitet Diokno-Pascual, who used to head the Citizens’ IPP Review Commission.
Pascual told GMANews.TV that some contracts even feature a fuel cover.
Besides requiring Napocor to provide power plants with fuel, the provision allows IPPs to shield themselves from additional costs arising from the increase in the prices of energy, whether coal or bunker.
Similarly, a few agreements also include a foreign exchange cover, protecting power plant operators from currency volatility between the Philippine peso and the US dollar.
Every time the peso falls and/or the greenback appreciates, prices of fuel automatically cost more in pesos because they are pegged in dollars. As a result, fuel users—such as power plants—pay more pesos for the same amount of energy they consume. However, additional fuel costs are borne by consumers, not power plants.
All these charges are shouldered by Napocor which, in turn, pass them onto consumers through what used to be called the power purchase agreement (PPA). The PPA mechanism is added on top of the regular fees for consumers’ electricity consumption.
Previously identified in electric bills, the PPA has been replaced by the generation rate adjustment mechanism (GRAM) and the the incremental currency exchange rate adjustment (ICERA), two new financial mechanisms introduced with the passage of the Electric Power Industry Reform Act (EPIRA) in 2001.
While GRAM allows power plants to collect additional fees from consumers whenever fuel prices rise, ICERA also adds to power costs whenever the peso goes down. Although these additional charges may go up or down, both rates are reviewed and changed—depending on world fuel prices and currency exchange rates—every three months.
Some agreements are so disadvantageous to government and consumers that “a corporation can theoretically hold a power purchase contract and still be paid for it even if it doesn’t own nor operate a power plant," according to Atty. Ibarra M. Gutierrez III, who also participated in the citizens’ IPP review group.
In late 2001, pressure from consumers—including the Citizens’ IPP Review Commission—forced the newly-installed Arroyo administration to create an IPP Review Committee.
In various reports, the interagency body—composed of the Departments of Finance, Justice, and the National Economic and Development Authority (NEDA)—said that of the 49 power purchase agreements, 37 underwent review.
Of 37 contracts which were re-examined, five were found to have legal, operational, and financial “infirmities." Besides legal questions, these findings indicate that the financial mechanisms and formulas used by these five power plants were irregular. The IPPs’ abilities to fulfill their end of the contract—which is to produce and dispatch electricity previously agreed upon—was also disputed.
Meanwhile, all the other contracts had questions surrounding either legal, operational, and financial aspects.
Despite these findings, no case has been filed against any power plant operator. Even though some have been renegotiated, these agreements remain disadvantageous to electricity consumers, Pascual explained.
This explains why Pascual, like Gutierrez, support Salceda’s call for a review of the IPP contracts, even for the second time. EmPower Consumers, a newly-formed advocacy group, also expressed the same sentiments.
But Dean de la Paz, a consultant to the Joint Congressional Power Commission, is not warm to the idea.
“The government already conducted a thorough and incisive contract review following the passage of EPIRA," de la Paz told GMANews.TV in a text message. “To repeat would infringe on the sanctity of contracts. If it found onerous provisions before, then it should have prosecuted at that time. To do so now would be an injustice to all."
De la Paz, who used to work for an IPP, also said that the various “take or pay" provisions in the power contracts were approved to entice foreign investors to invest in the industry.
According to De la Paz, the “premium" was needed for foreign direct investments—such as power plants, which unlike stocks and treasury bills are easily convertible to cash—because the Philippines, during the late eighties to the early nineties, was “politically-risky."
But then again, De la Paz may have his way. At least for now.
After all, Malacañang may not be interested in undertaking another IPP review soon.
“The President is still studying the matter," Salceda said. “When things subside, these serious issues should be discussed." - Robert JA Basilio, Jr GMANews.TV
According to Salceda, who is also governor of Albay, the government should review contracts between the state-led National Power Corp. (Napocor) and power plants, also known as independent power producers (IPPs).
“This is the heart and soul of the problem," Salceda told GMANews.TV in a phone interview, referring to the contracts.
Also known as power purchase agreements (PPAs), these contracts, which are effective for a period of ten to 25 years, have been approved in the early nineties when a power crisis caused debilitating brownouts across the country.
Famous for their “take or pay" provisions, these contracts enable power plants to charge consumers for electricity that is neither used nor generated.
Moreover, if electricity is actually produced and/or dispatched, these contracts allow IPPs to charge twice the regular costs for producing electricity, according to Maitet Diokno-Pascual, who used to head the Citizens’ IPP Review Commission.
Pascual told GMANews.TV that some contracts even feature a fuel cover.
Besides requiring Napocor to provide power plants with fuel, the provision allows IPPs to shield themselves from additional costs arising from the increase in the prices of energy, whether coal or bunker.
Similarly, a few agreements also include a foreign exchange cover, protecting power plant operators from currency volatility between the Philippine peso and the US dollar.
Every time the peso falls and/or the greenback appreciates, prices of fuel automatically cost more in pesos because they are pegged in dollars. As a result, fuel users—such as power plants—pay more pesos for the same amount of energy they consume. However, additional fuel costs are borne by consumers, not power plants.
All these charges are shouldered by Napocor which, in turn, pass them onto consumers through what used to be called the power purchase agreement (PPA). The PPA mechanism is added on top of the regular fees for consumers’ electricity consumption.
Previously identified in electric bills, the PPA has been replaced by the generation rate adjustment mechanism (GRAM) and the the incremental currency exchange rate adjustment (ICERA), two new financial mechanisms introduced with the passage of the Electric Power Industry Reform Act (EPIRA) in 2001.
While GRAM allows power plants to collect additional fees from consumers whenever fuel prices rise, ICERA also adds to power costs whenever the peso goes down. Although these additional charges may go up or down, both rates are reviewed and changed—depending on world fuel prices and currency exchange rates—every three months.
Some agreements are so disadvantageous to government and consumers that “a corporation can theoretically hold a power purchase contract and still be paid for it even if it doesn’t own nor operate a power plant," according to Atty. Ibarra M. Gutierrez III, who also participated in the citizens’ IPP review group.
In late 2001, pressure from consumers—including the Citizens’ IPP Review Commission—forced the newly-installed Arroyo administration to create an IPP Review Committee.
In various reports, the interagency body—composed of the Departments of Finance, Justice, and the National Economic and Development Authority (NEDA)—said that of the 49 power purchase agreements, 37 underwent review.
Of 37 contracts which were re-examined, five were found to have legal, operational, and financial “infirmities." Besides legal questions, these findings indicate that the financial mechanisms and formulas used by these five power plants were irregular. The IPPs’ abilities to fulfill their end of the contract—which is to produce and dispatch electricity previously agreed upon—was also disputed.
Meanwhile, all the other contracts had questions surrounding either legal, operational, and financial aspects.
Despite these findings, no case has been filed against any power plant operator. Even though some have been renegotiated, these agreements remain disadvantageous to electricity consumers, Pascual explained.
This explains why Pascual, like Gutierrez, support Salceda’s call for a review of the IPP contracts, even for the second time. EmPower Consumers, a newly-formed advocacy group, also expressed the same sentiments.
But Dean de la Paz, a consultant to the Joint Congressional Power Commission, is not warm to the idea.
“The government already conducted a thorough and incisive contract review following the passage of EPIRA," de la Paz told GMANews.TV in a text message. “To repeat would infringe on the sanctity of contracts. If it found onerous provisions before, then it should have prosecuted at that time. To do so now would be an injustice to all."
De la Paz, who used to work for an IPP, also said that the various “take or pay" provisions in the power contracts were approved to entice foreign investors to invest in the industry.
According to De la Paz, the “premium" was needed for foreign direct investments—such as power plants, which unlike stocks and treasury bills are easily convertible to cash—because the Philippines, during the late eighties to the early nineties, was “politically-risky."
But then again, De la Paz may have his way. At least for now.
After all, Malacañang may not be interested in undertaking another IPP review soon.
“The President is still studying the matter," Salceda said. “When things subside, these serious issues should be discussed." - Robert JA Basilio, Jr GMANews.TV
