Statement of Vice President for Asset Management and Electricity Trading Froilan A. Tampinco in response to issues raised by columnist Federico Pascual, Jr. of the Philippine Star (published February 16, 2006)

17 Feb 2006

For the past 70 years, the power plants and transmission lines that were put up to power the country's development were financed through borrowings. This is clearly reflected in the 2004 audited financial statements of the National Power Corp. whose total capital infused by the government, including contributions from the Philippine Games and Amusement Corp. is merely P31 billion, or 2.9% of its total asset base amounting to P1,055 billion.

For decades, power rates had been highly regulated and had been kept at levels that were barely able to cover the total cost of generating electricity. As a result, whatever meager earnings realized by National Power barely covered its maturing debts, forcing it to borrow again to pay old debts, put up new facilities, and maintain the existing plants.

The EPIRA was envisioned to stop this vicious cycle. The law precisely mandated the privatization of the assets of National Power primarily because government, given its fiscal position, is not in a position to continue financing the country's growing power requirements.

With the passage of EPIRA, the national government absorbed P200 billion of National Power's debts to lighten the company's financial burden and ease the pressure to further increase power rates. As reflected in National Power's audited financial statements, the long-term and current portion of its debts was P483.4 billion as of end-2003 and P368.6 billion as of end-2004 after the mandated debt absorption. By the end of 2005, National Power's outstanding debt, inclusive of the current portion, is $7.0 billion, or P372 billion, at the prevailing foreign exchange rate of P53.1:$1 when these were booked.

Aside from simply privatizing the assets of National Power, the government envisioned to carry out an industry restructuring program that would redefine the relationships among various industry players and ensure that the interest of the Filipino consumer, who at present is not in a position to choose his electricity provider, is well protected.

Thus, aside from mandating the privatization of the assets of National Power, the EPIRA called for the implementation of open access which would allow any power generator to transmit electricity to any consumer using the transmission and distribution lines of the National Transmission Corp. and the distribution utilities franchised to operate in the country. The best analogy would be the case of the North and South Expressway in Luzon where any vehicle could pass for as long as motorists pay the toll and follow the traffic rules.

Aware that the power plants would have different levels of competitiveness and to prevent drastic price fluctuations during the early years of a deregulated electricity industry, our lawmakers who drafted the EPIRA also mandated that the distribution utilities and National Power enter into transition supply contracts (TSCs). These TSCs would also assure investors in these power plants that they would have a ready market for the electricity that they would be producing, particularly during the first few years of operations in a deregulated environment.

So far, 118 have signed bilateral supply contracts with National Power. These contracts will have to be approved by the Energy Regulatory Commission. Only seven distributors have yet to conclude their TSCs with National Power.

One peculiar feature of the Philippine electricity industry is that while many are engaged in distributing power, one entity, the Manila Electric Company, controls a sizeable chunk of the market - 70% of the entire Luzon grid and about 60% of the entire country.

Unfortunately, National Power and Meralco, which are entangled in a complex web of issues, have not been able to agree on a TSC.

This is precisely one of the main difficulties that the government is facing as far as the privatization of assets of National Power is concerned.

The EPIRA provides that for open access and retail competition to set in, which will supposedly widen the competition base among distributors, at least 70% of the total capacity of generating assets of National Power in Luzon and Visayas should have been privatized.

The successful bidding of six power plants, which include the 600-megawatt Masinloc coal-fired power plant, accounts for the 603.40 megawatts, or 11% of the total 5,664.70 megawatts in installed capacity. This includes decommissioned plants with a total capacity of 1,329 megawatts. While the decommissioned plants are no longer operating and have no contribution to the grids' electricity supply, we are mandated under the EPIRA to sell them. Thus, a different marketing strategy is being adopted for these plants.

The confusion arising from these numbers apparently stems from the fact that the 70% requirement for open access covers the Luzon and Visayas grids. Thus, the reference to the 14% privatization performance actually pertains to the plants in Luzon and Visayas that have successfully been auctioned in relation to the 4,335.70 megawatts of generating capacity, that is excluding the decommissioned plants, in these two grids.

Taking into account Sen. Joker Arroyo's argument, our privatization performance would indeed be less than 1% if we must exclude the 600-megawatt Masinloc, which was successfully bid out with the winning bidder, YNN Consortium, offering $561.74 million for the coal-fired facility. We have delivered all the commitments required from the Philippine government and are now awaiting YNN to deliver the $222-million down payment. They have until March 31 to deliver the money, otherwise their $11 million irrevocable letter of credit will be forfeited.

It is just a matter of time and the Philippine government can eventually collect from YNN. We have adopted the necessary measures to protect the interests of the Philippine government.

Strategic Communications and Partnership Division
Tel. No. (632) 9029067