Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6999-PH

STAFF APPRAISAL REPORT

PHILIPPINES

BACON MANITO GEOTHERMAL POWER PROJECT

May 31, 1988

Industry and Energy Operations DivisionCountry Department IIAsia Regional Office

Thid doment has a re.dcled duu a mway be used by recI4ds only In te pedronmance oftheir offcial dudles Its contents may not owse be dscosed wihout Wodd Bak aodzallon

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CURRENCY EQUIVALENTS

Currency Unit - Philippine Pesos (I)US$1.00 # 20.51 1,000 - US$48.78P 1 - 100 Centavos (Ctvs.)

WEIGHTS AND MEASURES

MMTOE - Million tons oil equivalentMMBOE - Million barrels oil equivalentBOPD - Barrels of oil per dayHT - Million tonsMW - Megawatt (1,000 kilowatts)TWh a Terrawatt-hours (billion kilowatt-hours)kWh - Kilowatt-hours (1,000 watt-hours)kW - Kilowatt (1,000 watts)kV . Kilovolt (1,000 volts).m . meter (3.2808 foot)km - Kilometer (0.6214 mile)MWh - Megawatt hour (1,000 kilowatt-hours)MkWh - Million kilowatt-hours

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankBED - Bureau of Energy DevelopmentBEU - Bureau of Energy UtilizationCOA - Commission on AuditsDBP a Development Bank of the PhilippinesEdF - Electricitb de FranceEHV a Extra High VoltageERB - Energy Regulatory BoardGSIS a Government Services Insurance SystemsICB - International Competitive BiddingKfW 3 Kreditanstalt fur WiederaufrauKRTA - Kingston, Reynolds, Thom and AllardyceLCB - Local Competitive BiddingLIB m Limited International BiddingMERALCO - Manila Electric CompanyMIS Management Information SystemMOE - Ministry of EnergyNEA Natiohal Electrification AdministrationNEDA - National Economic Development AuthorityNPC - National Power CorporationNPCC - National Pollution Control CommissionNPV - Net Present ValueOKA Office of Energy AffairsPGI a Philippine Geothermal Inc.PLC a Power Line CarrierPNOC - Philippine National Oil CompanyPNOC-EDC a PNOC-Energy Development CorporationPNOC-EDI - PNOC-Energy Drilling Inc.

PNPP - Philiprine Nuclear Power PlantSCADA a Supervisory Control and Data AcquisitionSER a Sequence-of-Event RecordingSGS - Steam-Gathering SystemSOEs a Statements of Expenditures

FISCAL YEAR

January 1 to December 31

FOR OMCUIL USR ONLY

PHILIPPINES

BACON MANITO GEOTHERMAL POWER PROJECT

LOAN AND PROJEC SWMMARY

Borrowers: National Power Corporation (NPC)Philippine National Oil Company (PNOC)

Guarantors Republic of the Philippines

Beneficiar-y PNOC Energy Development Corporation (PNOC-EDC)

Amounts Two loans amounting to an aggregate of US$100 million,consisting of a loan to NPC of US$59 million and a loanto PNOC of US$41 million.

Lendinit Tomes Repayable over 20 years, including five years of grace,at the standard variable interest rate.

RelendinE Terms PMOC would relend the proceeds of its loan to PNOC-EDCunder the same terms and conditions as the Bank loan.

Pro4ect DescriptLons The project constitutes an integrated approach toresource development, power generation and transmLssion.the project's main objectives are to (a) develop anexisting geothermal steam field and a new 110 MM powerplant at Bacon Manitol (b) support the delineation andassessment of geothermal sites for use in Lu:.;(c) support measures for upgrading and expanding NPC'usystem facilities; and (d) support Institution-buildingand financLal recovery efforts at NPC. The projectprovides for ti) drilling of about 18 wells fordelineationlappraisal of geothermal sites, drilling ofadditlonal productian/injection wells at Bacon Manito Ifield, and construction of a steam-gathering system;(II) construction of 2 x 55 MV power plant Includingturbine generators, auxiliary equipment and 32 km of230 kV transmission line; (Iii) construction of 142 kmof 115 kV single and double circuit transmission lines,rehabilitation of substations and extension ofconmunlcatLon links; and (iv) consultancy servlces.

Rilskss The project entails no unusual twchnlcal rLsks.Extensive scLentLflc LnvestLgatLons and independentresource assessment have confirmed existence ofsufficient steam rese: ves. NPC and PNOC have staffexperlenced in supervLsLon and executlon of workssimilar to those required under this project. However,as a result of financLal weaknase, NPC could havedLfficalty realizing counterpart funds and keeping to

This document has a striced distbution and may be used by reipients only in the performanceof their official duties. its contents may not ohedwse be disclosed without Wodd Dank authodratin.

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the project implementation schedule. Measures tominimize these risks have been incorporated in theproject design.

Estimated Costss

Local Foreign Total--------US$ Million-------

PNOC-EDC

Development of Steam Field 4.9 19.3 24,2Delineation/Appraisal 30.1 17.2 47.3

Base Cost 35.0 36.5 71.5

NPC

Thermal Power Plant 12.6 46.6 59.2Transmission System 2.9 8.3 11.2Upgrading/ExpansioD 8.2 32.0 40.2Consultancy Services 0.8 3.0 3.8

Base Cost 24.5 89.9 114.4

Total Base Cost 59.5 126.4 185.9

Physical Contingencies 6.0 12.6 18.6Price Contingencies 3.3 8.5 11.8

Total Project Cost /a 68.8 147.5 216.3

Interest During Construction -- 10.7 10.7

Total Financing Requirements 68.8 158.2 227.0

Financing Plan:

Government of Italy 4.8 55.2 60.0IBRD 7.7 92.3 100.0PNOC-EDC 39.7 3.0 42.7NPC 16.6 7.7 24.3

Total 68.8 158.2 227.0

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Estimated Disbursementas

IBRD Fiscal Year 1989 1990 1991 1992 1993 1994-___________________ (US$ million) ------ ---- ^---

NPC 1.6 9.1 15.0 13.0 9.1 11.2PNOC 13.6 22.7 4.7Cumulative 15.2 47.0 66.7 79.7 88.8 100.0

Economic Rate of Returns About 19Z

/a This project is exempt from duties and taxes.

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PHILIPPINES

BACON MANITO GEOTHERMAL POWER PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. THE ENERG.7 SECTOR .............* . ... ... *. .. .... * *.............. 1

A. Overview ................ .. * ............... 1B. Domestic Energy Resources ..... * .. * . * .. * . * * . * * * * ... * .... . 1C. Energy Sector Institutinne ..... ................................ 2D- Energy Sector Objectives, Issues and Strategy ............. 2E. The Power Sector ....... ** .... ......** ................... .. * 3P. The Geothermal Sector ....... ....... 5G. Bank Lending for the Sector ..... * .... * .............................. , 7H. Sectoral issues ............... .... *.****...**.. ... 7I. Rationale for Bank Involvement ......... *................... 9

II. THE PROJECT .............. ........... 10

A. Background ......* ** ******. . ............ *.. ...... ...... 10B. Project Objectives ...........................*............ 10C. Project Description .........*.. .* ......................... 10D. Project Costs .............................................. 15E. Financing Plan ......... ................................... 17F. Project Implementation and Schedule ...... ................. 173. Procurement ...... ## ............................ 19H. Disbursements ............ *.*........*.. ... *... ... .. ... .. . 22I. Monitoring and Reporting ................................. . 22J. Environment .............*...*............ 23

III. THF BORROWERS AND THE BENEFICIARY ............................. 24

A. NPC .#.##....... *oo.... #o....... ............................ 24

Organization, Management and Staff ...................... 24Training .......................................................... 25Operations, Maintenance and Losses ...................... 25Accounting System .................... 000* ..... 25Financial Planning and Budgeting ........................ 25Commercial Systems ... ............... ......... ...... 25Audit ........ *.# ..... 26Taxes ............................. *..*... 26Insurance .................................... 26

This report is based on the findings of an appraisal mission to thePhilippines in August 1987. Mission members included Anil K. Malbotra(mission leader), Jamil Sopher, Darayes B. Mehta, Hossein Razavi (World Bank),and P.T. Venugopal (consultant).

Page No.

B. PNOC and PNOC-EDC ................................ ......... 26

PNOC ............ *. ..... ............. 27

Organization and Management ...................... ....... 27Budgeting .................................. 27Accounting and Audit ................................................... 27Insurance ..*.*..........*................................. ............ 27

PNOC-EDC .... to.**.....*. *****. **. * . q..*... ...... 28

Organization, Management and Staff ...................... 28Training and Technical Assistance ....................... 28Collections ........................................................ 29Accounting and Audit ....... ........ ........ ............ . 29

IV* FINANCE ....... .......... ............................ 29

A. NPC .................... .................... ... *.......... 29

Past and Present Financial Performance .................. 29Foreign Exchange Exposure ............................... 31Valuation of Assets ..... ....... ............................. 31Tariff . .................................................... 32Financing Plan . ......................... ................ 32Future Financial Performance ............................ 33

B. PNOC and PNOC-EDC .. .. ................... .. ........... 35

PNOC ***.*... .. *...*........... . .. ***............... 35

Capital Structure ..................................... 35Financial Performance ................................. 36Asset Valuation ... ...................... .............. 37Tariffs .................. **........... ................. 37Future Financial Performance ... ,....................... 37

PNOC-EDC * *** ** *** *** **......... ..... ......... ... 38

Capital Structure ........... ...... ............... ..... 39Financial Performance . ...... ....... ... ...... 40Taxes ................ ,.#.....to.. 40Tariffs . ................... ........................... 40Future Financial Performance .............. ............ 41Financial Analysis of the Geothermal SteamComponent .............................................. 42

Sensitivity and Risk Analysis ......... ................ 43

V. PROJECT JUSTIFICATION AND RISKS ... ........................ 44

A. Justification ........................................................ 44B. Economic Rate of Return ....... *. **.*...................... 45C. Risks ..................................................... 46

VI. AGREEMENTS ......... . ***. *****************............. * 46

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ANNEXES

1.01 NPC's Gross Generation1.02 NPC's Installed Capacity by Grid and by Plant-Type (1981-86)1.03 Load Forecast for the Luzon Grid1.04 Load Forecast for the Mindanao Grid1.05 Load Forecast for the Visayas Grid2.01 Transmission Line and Substation Projects of NPC2.02 Detailed Project Cost - PNOC-EDC Component2.03 Detailed Project Cost - NPC Component2.04 Project Implementation Committee - Terms of Reference2.05 Organization Chart for PNOC-EDC2.06 Project Organization for PNOC-EDC2.07 Project Organization for NPC2.08 Implementation Schedule - Critical Activities2.09 Implementation Schedule for PNOC-EDC2.10 Implementation Schedule for NPC2.11 Major Project Procurement Contracts2.12 Disbursements Schedule of the Project2.13 Disbursement Schedule - PNOC-EDC2.14 Disbursement Schedule - NPC2.15 Consultancy Services for NPC3.01 Organization Chart for NPC3.02 NPC - Staffing Profile3.03 Organization Chart for PNOC3.04 PNOC.-EDC - Staffing Profile4.01 NPC's Annual Financial Statements (1984-95)4.02 KPC - Action Program to Reduce Accounts Receivable and Accounts Payable4.03 NPC's Tariff4.04 PNOC and Affiliatest Financial Highlights - 1987-19924.05 PNOC and Affiliates: Income Statements, Balance Sheets, and Internal

Cash Generation (1984-1992)4.06 PNOC-EDC: Income Statements, Balance Sheets, Cash Flows (1984-1995)4.07 PNOC and Affiliates and PNOC-EDC: Assumptions on Financial Projections4.08 PNOC-EDC: Financial Analysis of Investment in the Bacon Manito I

Geothermal Project5.01 Calculation of the Economic Rate of Return (Versus Coal Alternative)5.02 Calculation of the Economic Rate of Return5.03 Estimated Loss Reduction Benefits of the TransmissionlDistribution

Components5.04 List of Documents in Project File

MAPS

IBRD 20275 - Grid Map of National Power CorporationIBRD 20278 - Existing Geothermal Power Projects in Operation

I. THE ENERGY SECTOR

A. Overview

1.1 The energy sector acquired pre-eminence in the Philippine economy asa result of the oil crisis of the last decade. At the time of the first majoroil price increase in 1973, imported oil accounted for 952 of total energyconsumption. As a result of the Government's implementation of an energydiversification/management policy, the ratio of imported oil to total energyusage declined to 56X in 1986. Also, total consumption of energy, which hadgrown rapidly prior to 1973 (at 9.62 p.a. during 1965-73), increased at themodest level of 3.82 p.a. between 1973 to 1979. After the second oil shock,consumption actually declined continuously from the peak of 9.2 million tonsof oil equivalent (MfTOE) in 1979 to 8.5 MMTOE in 1983 and 7.1 MMTOE in 1985.Several factors contributed to this decline including the low GDP growth ofthe early 19808, the decrease in GDP of the 1984-85 period, and the increaseduse of non-conventional energy. Energy usage has started to increase with therecent economic recovery; total energy consumptior. reached 7.5 MMTOE in 1986and 9.6 MHTOE in 1987, representing growth rate of 62 and 282 for 1986 and1987, respectively.

1.2 The shares of energy consumption by sector have remained stable overthe years. The residential/commercial sector's accounts for about 142 ofusage, industrial consumption 51X, and transport 31?. The share of electri-city as a proportion of energy consumption has increased considerably; powergeneration accounted for about 47X of primary energy consumptica in 1986,compared to only 222 in 1973.

B. Domestic Energy Resources

1.3 Indigenous energy resources are relatively modest and proven reservesof petroleum, coal and of natutai gas are small. The proven reserves ofpetroleum are estimated at 4 million tons of oil equivalent (MMTOE) whilepotential reserves are projected at a possible 14 MKTOE. Domestic oil fieldsat Nido, Cadlao and Matinloc produced 14,000 barrels of oil per day (BOPD) andcontributed 7.42 of total prinary energy consumption when commercial produc-tion began in 1979; since then, production rates from these fields havedecreased so that, by 1987, domestic oil's share of total energy consumptionwas only 2.22. Natural gas deposits, found in Northern Luzon, are consideredto be sub-commercial; and probable uranium reserves are estimated at about 1.2MMTOE. Its total potential coal resource is estimated at about 1,500 millionstonnes but most of it is low grade and expensive to mine. The major coalfields at Semirara (152.1 million metric tons (MT)), Cagayan (65.8 millionMT), Surigao (36.8 million MT) and Zamboanga (18.6 million HT)--which accountfor an estimated 89.42 of total proven coal reserves--contributed only 4.32 uftotal energy consumption in 1987. Philippine hydropower resources are quitesubstantial, with a theoretical power potential in excess of 10,000 MW.However, development of hydro resources is relatively costly due to thedistance of the bettor sites from the main transmission grid. Hydropowercontributed 10.22 of total energy consumption in 1985. Geothermal reservesare not yet fully evaluated, but about 4.431 MW of probable reserves, 1640 MV

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of which have been tested, but only 894 MW of capacity has been installed. In1987, geothermal energy generated about 221 of the nation's electricitysupply. biomass resources abound in the Philippines, with an estimated annualpotential of 1.0 MMTOk from agricultural wastes. This source's share of totalprimary energy consumption was 16.8? in 1985.

C. Energa Sector Institutions

1.4 The basic organization of the energy sector was established by aPresidential Decree in 1977. That decree created the Ministry of Energy (MOE)as the central policy, planning and regulatory agency for energy; in turn, MOEoperated through two major bureaus, one for energy development (BED) and theother for energy utilizatlon (BEU). The responsibilities of the PhilippineNational Oil Company (PNOC), formed in 1973 to assure the adequacy of thecountry's oil supply, were extended in 1976 to include development ofindigenous energy resources; PNOC-Energy Development Corporation (PNOC-EDC)became responsible for geothermal exploration and development. The NationalPower Corporation (NPC) (responsible for power generation and transmission),and the National Elactrification Administration (NEA) (responsible for ruralelectrification), were also strengthened by that Decree. PNOC and NPC wereattached to MOE for program and policy coordination. A committee to coordi-nate their activities was established within the Ministry, and the Ministerheld the position of Chairman of the Board cf both PNOC and NPC. NEA, inturn, was attached to the Ministry of Human Settlements. Following the changeof Government in 1986, MOE was dissolved in June 1986, and all its units wereplaced temporarily under the Office of the President. In June 1987, ExecutiveOrder 193 formally placed the Office of Energy Affairs (OEA) under the Officeof the President and gave it primary responsibility for the formulation,planning, implementation and coordination of policies and programs in thefield of energy. NPC and PNOC were brought under the direct control of theOffice of the President. The National Coal Authority was abolished and itsregulatory functions transferred to the Energy Regulatory Board (ERB). A partof BEU was transferred to ERB which was given price-setting authority overprivate sector suppliers of petroleum and electricity. The organizationstructure of the energy sector is still somewhat fluid; working arrangementsunder this structure have not yet been established. Coordination of thesector's entities would still need to be strengthened and the Bank is expectedto assist this process through the Public Resource Management Loan, theproposed project and the ongoing energy sector study (para. 1.23).

D. Energy Sector Obiectives, Issues and Strategy

1.5 Prior to the first oil price hike of 1973, the Philippines did nothave a comprehensive formulation of energy sector programs and policies.Initial reactions to the 1973 oil crisis focused mostly on securing a stableand adequate supply of crude petroleum. To complement this, a longer termprogram of (a) indigenous energy resource development and (b) energy demandmanagement was implemented. The objective of indigenous energy resourcedevelopment was met through heavy Government participation in developing oiland non-oil resources. The search for domestic crude oil sources was pursuedunder an innovative production sharing scheme. The policy of diversifyingenergy sources focused on coal development as of 1976, geothermal explorationand development as of 1978, and construction of the 620 MW Philippine Nuclear

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Power Plant (PNPP) in 1979-85. Non-conventional energy development was leftprimarily to private enterprise, with the Government providing fiscal incen-tives for research, development and utilization of these resources.

1.6 Energy demand management was initially focused on direct Governmentiiterveation via fuel allocation and rationing schemes. In 1975, the EnergyConservat-on Program was enacted; however, the Government quickly recognizedthat pricing was more permanent and effective than legislation as a policytool. Thereafter, the Government pricing policy emphasized a rapid and fulladjustment of domestic petroleum product prices to uorld market levels.

1.7 Despite the notable past success in the energy diversification andmanagement policies, the sector is now facing a number of issues with regardto its long term development strategy. These issues are all the more argentbecause of the substantial capital needed for energy development at a timewhen the country is facing other urgent economic prioritiess

(a) Until 1986, the Government was planning to meet increases in demandfor electricity in Luzon with generation from PNPP. The Government'sdecision, made in the summer of 1986, to mothball PNPP along with thedowngrading of generating capacity in Tiwi geothermal power plant andthe relatively sharp increase in power demand in 1987, created asudden need to reexamine and optimize energy options for meetingexpected increases in demand for electricity;

(b) The recent collapse in the international energy prices has introducedconsiderable uncertainty regarding the economics of domestic energyresources. In particular, the development of domestic coal, geo-thermal steam and certain hydro resources may no longer be viablealternatives to energy imports;

(c) The Government's decision to abolish MOE has led to a lack of coordi-nation of energy sector activities and, in particular, a lack ofclear direction for energy resource development;

(d) Finally, the Government's energy pricing policy needs to be reexa-mined. In particular, further rationalization of power tariffs andpricing policies for geothermal steam and coal are needed in order toeltsure the economic efficiency of their development and use.

With the Bank's assistance, the Government is planning to: (a) reexamine theeconomics of various sources of energy; (b) prepare a consolidated plan fordevelopment and utilization of indigenous energy; and (c) strengthen a coordi-nating body so that it can resume many of MOE's former responsibilities.

E. The Power Sector

1.8 Overview. The electric power industry in the Philippines is dividedinto two segments: (a) generation and transmission; and (b) distribution.The industry has a number of participating organizations, some of which arepublicly, and others privately, owned. By far, the largest organization isNPC, which is responsible for the generation of bulk power and its transmi;-sion through a number of grids that serve virtually the entire country except

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for remote rural areas and smuJl outlying islands. Power is distributed tomajor urban areas by a number of investor-owned utilities. Of these, thelargest is the Manila Electric Company (MERALCO), which serves Metro Manilaand accounts for about 70X of NPC's sales in Luzon. The rural areas areserved by over 100 cooperatives, a few of which are either wholly or partlyauto-generating. NEa was established to service the cooperatives by mobiliz-ing funds, providing tichnical assistance, and arranging procurement of commonmaterials.

1.9 At the end of 1986, the total installed capacity of the Philippinepower subsector was about 6,600 MW, of which 5,788 MW (88?) belonged to NPC(Annexes 1.01 and 1.02). The major part (41Z) of NPC's capacity is oil-fired,while geothermal (152), hydro (372), and coal-fired (7?) plants comprise therest. Currently, NPC operates 19 oil-fired, 17 hydro, 4 geothermal and 1coal-fired power plants. Total genexation from NPC facilities was 19.2 kWh in1986, accounting for about 902 of the Philippines' total generation. Theresidential sector accounted for 23X of electricity sales; the commercialsector, 22?; industry sector, 502; and the Government, street lighting andwater supply, 5Z. Losses exceeded 20? of gross generation.

1.10 Currently, NPC's facilities are organized into separate systems forLuzon, the Visayas and Mindanao. Among them, Luzon is the largest. Totalenergy sales in 1986 were 17.6 billion kWh from which the Luzon grid accountedfor 76?; Mindanao, 17?; and the Visayas, 7?. The growth of electricityconsumption was well above 15? p.a. in the 1960s and the early 19709.Following the steep rise in oil prices in 1973, the corresponding increases inpower tariffs reduced the growth rate to 122 p.a. for 1973-79. The slow-downin the economy further reduced the growth rate to 4.9? p.a. for 1980-86.Electricity sales in Luzon, which grew during 1980-83 at 4.6?, declined by4.8? in 1984 and by 0.8? in 1985. A modest rebound of 2.5? and a sharpincrease of 10.5? were experienced in 1985 and 1986 respectively. Growthrates of 6? and 55? are projected for 1988-90 and 1990-95, respectively.

1.11 Power Sector Investment Program. The existing generating capacityin Luzon is 4,100 MW, consisting of 1,925 MW of oil-fired, 1,226 MW of hydro-power, 660 MW of geothermal, and 300 MW of coal-fired plants. The oil-basedpower plants have not been maintained adequately in the past and have deterio-rated to conditions of poor reliability and low thermal efficiency. However,the Malaya power plant units No. 1 and 2 (300 MW and 350 MW respectively) arebeing rehabilitated and are scheduled to be recommissioned in 1988. Sucatunits No. 1 and 4 (150 MW and 300 MW respectively) are scheduled for rehabili-tation in 1988-89. Rehabilitation of other units at these plants, however,must be delayed until some new generating capacity is added so that the systemwill have sufficient capacity while the units to be rehabilitated are takenoff line. Thus, the actual capability of the oil-fired power plants is, andwill be, substantially lese than their rated capacity, at least until early1990s. In addition, from the 660 MW of geothermal power, 220 MW of Tiwi plantwill be retired during 1989-90 due to technical problems related to the steamsupply. Therefore, the total available capacity, after rehabilitation of oil-fired plants, will be about 3,000 MW. In contrast to installed capacity, theLuzon grid's current peak demand of 2,500 MW is projected to reach 3,200 MW by1992. No new generating plant is under contruction despite the (a) projectedincrease in load, (b) decrease in installed capacity due to the unexpected

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retirement of the geothermal units at Tiwi, and (c) mothballing of the nuclearplant. As a result, system reliability is expected to fall very sharply; theloss of load probability (LOLP) is expected to increase from its present levelof 2 days/year to 7 days/year in 1989 and more than 30 days/year in 1991.

1.12 Rectification of this deteriorating situation will require some heavyinvestment, precisely at a time when both NPC and the Government are facingresource mobilization constraints. Short term relief can only be providedthrough projects involving low lead time for which substantial financing canbe obtained on attractive terms. Longer term investment decisions need to beoptimized in order that finite available resources can be stretched as far aspossible. In this regard, NPC currently plans to: (a) address peakingrequirements in 1989 and 1990 by installing two gas turbines (150 MW and200 MW); (b) address base load requirements for 1991 and beyond byconstructing the Bacon Manito geothermai power plant; and (c) address longerterm requirements by optimizing the economic and technical aspects of othercandidate plants and use sound financial practices to develop the optimalcandidates. Although the relative economic merits of geothermal versusimported coal are not clearly established, the Bacon Manito geothermal plantis clearly the least-cost option to supply the next increment of base loadgenerating capacity because of the investment which has already been incurredin developing the steam production wells; from the total capital cost ofUS$73.3 million for geothermal development, more than 702 has already beenexpended. The economic viability of other geothermal candidate plants will,however, need to be investigated in a least-cost framework. In conjunctionwith the ongoing Energy Sector Study, the Bank and NPC are conducting a jointreview of NPC's investment program through the year 2000. At negotiations,NPC agreed that it would review its investment program annually with the Bank.In conjunction with the Energy Sector Study, the Bank ascertained that NPC wasdeveloping methodologies for investment program formulation that weresatisfactory; therefore, the annual reviews of NPC's investment program couldfocus as mtuch on the methods used for investment optimization as on theconstituents of the program.

F. The Geothermal Sector

1.13 The share of geothermal in total energy use has been steadilyincreasing during the last five years. In 1979, consultants visited 25 of themajor geothermal manifestations in the Philippines and identified 11 aspriority areas for further investigation. In addition to these 11, explora-tory drilling is planned or already under way in a number of additional areas;also, where ongoing geoscientific work is likely to lead to drilling prospectsin still additional areas. Based on exploration to date, the total geothermalresources of the Philippines are estimated at 8,000 MW. Four fields, Tiwi andMakiling-Banahaw (MakBan) on Luzon and Tongonan and Palinpinon in the Visayas,are currently operating and drive a combined generating capacity of 894 MW,thus ma'ing the Philippines the world's second largest producer of geothermalenergy (after the USA). As of the end of 1986, more than 320 geothermal wellshad been drilled in the Philippines, principally in the four fields underdevelopment; in turn, geological, geophysical and geochemical analyses havebeen completed at a number of other sites. But during the period 1984-86,geothermal exploration and development activity slowed considerably; PNOC-EDC's drilling activity dropped from 26 wells in 1983 to six in 1984, four in

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1985 and one in 1986. Attempts are now being made to accelerate theexploration and development program and PNOC has proposed a program to drill171 wells providing an additional 1,290 MW geothermal steam capacity for theperiod 1987-1994.

1.14 The first 2.5 kW geothermal power plant on Luzon was put into opera-tion at Tiwi in 1969 and the first commercial geothermal power station inLeyte, supplying 3 MW of electricity to Ormoc City, was put into operation in1977 at Tongonan. Large-scale geothermal power production began in 1979 inboth the Tiwi and MakBan areas, when a 110 MW power station was commissionedin each area. Currently, Tiwi and MakBan both have 330 MW installed capacity;both fields are operated by Philippine Geothermal Inc. (PGI) under a servicecontract with NPC. PNOC-EDC operates two geothermal fields, both supplyirg112.5 MW plants, at Tongonan on Leyte and at Palinpinon on Southern Negros.

1.15 Geothermal Exploration and Development. Geothermal exploration anddevelopment is govez-nsd by Presidential Decree No. 1442 (The GeothermalExploration and Development Act, 1978). The terms apply equally to foreignand local contractors and joint ventures. Contracts were administered earlierby the Ministry of Energ, through its BED. With %'he recent constitution,BED's functions have been transferred to the Office for Energy Operationswithin OEA.

1.16 From a resource development perspective, geothermal steam has manyparallels with oil and gas; in the Philippines, they are administered compar-ably. The basic features of the service contracts previously entered into byBED for geothermal exploration, drilling and production paralleled those ofpetroleum production-sha,.ing segments. Although details may be negotiated andvariations may occur, the contractor must in all cases take all explorationand development risks, meeting all costs as incurred and recovering thosecosts from a share of future production (the contractor's take is a maximum of401 of net income). The Government's intention was for NPC to purchase thesteam at the "power plant fence" on a cost-related approach, with a firmcontract price based on estimated costs plus a target rate of return. Theservice contract is supplemented by two prior contracts for geoscientificstudiess a geophysical survey contract, providing an exclusive right to acontract area; and a geophysical permit, providing a non-exclusive right to anarea. Foreign companies considering operating in the Philippines generallyregard the contractual arrangements as satisfactory and their relations withthe Government, OEA and PNOC to be good. But world-wide, few companies parti-cipate in geothermal development and even fewer (less than 10) operate inter-nationally.

1.17 Difficulties inhibiting further geothermal development have alsoarisen because of the need to agree with NPC to a steam price in advance ofcommencing exploration, a need arising from both lack of major alternativeuses for steam in most locations and the relatively low initial risk offailing to find a commercial resource. Almost no international precedentsexist for steam pricing! and further study and contract initiative are neededto ease and accelerate the contractual process, and to provide for uncertain-ties which may arise during geothermal field production. In the past, Caltexand Total had proceeded with basic geothetmal exploration in advance of asteam contract, and Union Oil has continued on the basis set out in its

existing geothermal license (1970) (Union Oil's license for geothermaldevelopment is different from current practice; it was issued prior to thePresidential Decree and provides for development to be on a cost-reimbursablebasis to be met from future earnings, but without formal limitations on thecontractor's take); but other interested companies have been extremelycautious and have not been prepared to undertake even basic exploration inadvance of reaching an agreed steam selling price. PNOC-EDC, as a subsidiaryof a state company, has undertaken exploration in advance of any steamcontract in the interests of national energy development objectives. A numberof highly promising areas, not being explored by PNOC-EDC, are still availableto the private sector; in any case, PNOC-EDC is willing to consider seriouslysuitable joint venture proposals. The Government has established within OEA aspecial inter-Governmental committee charged with the responsibility toresolve the steam pricing issue on the basis of the recommendations of arecent Steam Pricing Study fostered by an existing Bank geothermal project.

G. Bank Lending for the Sector

1.18 Since 1957, the Bank has made nine lending operations (eight loansand one credit) to the power sector, amounting to US$290.2 million equivalent,and one for geothermal exploration amounting to US$36 million equivalent.These lending operations include sever to NPC, for a total amount of US$218.2million to finance three hyd opower projects, two thermal power plants, andone transmission project. Apart from considerable slippage in the projectconstruction schedules and a consequential cost overrun on the fifth and sixthprojects, all projects were completed without major problems and the resultantfacilities are operating satisfactorily. The seventh loan, which was theBank's last operation with NPC (1460-PH, US$58 million, 1977) and whichfivanced the expansion of the transmission system in Luzon and construction ofa load dispatching center, was closed in 1985. Bank group lending to thePhilippine power sector has also includeds (a) a loan to NEA for US$60million in 1978, to help finance the 1979/80 portion of the rural electrifica-tion program; and (b) a commitment by the International Finance Corporation(IFC) of US$12 million equi. lent to MERALCO in 1967. The role of geothermalenergy was considered in some detail in the energy assessment undertaken by ajoint World Bank/Asian Development Bank (ADB) mission in 1980 and a project(Loan 2203-PH, US$36 million, 1982) comprising a 25-well exploration programat the Bacon Manito and Palinpinon fields, is scheduled for completion in end-1988. Two of the aforementioned projects have been audited: the Fourth PowerProject (PPAR No. P-0980, January 1976)--a thermal plant at Bataan; and theRural Electrification Project (PPAR No. P-5372, June 1985). Both auditreports identified major problems, such as implementation delays and costoverruns, and their causes, such as project design changes, cumbersomecontract award procedures and weak project management.

H. Sectoral Issues

1.19 Because solutions to the power sector's problems are so capitalintensive, the prevailing uncertainties in energy sector development andcoordination can have a substantial cost to the economy. The power sector isnow facing a number of issues in the areas of resource allocation and utili-zation. In the area of resource allocation, the sector needs to optimizeinvestment, but currently lacks a clear direction regarding the economic

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advantages of various sources of supply. This problem became particularlyurgent after the decision to mothball the nuclear plant, which had beenplanned to meet all increments of electricity demand in the Luzon grid through1994/95. Thus, the plant's capacity of 620 MW needs to be replaced with moreconventional power generation. New plants powered by domestic or importedcoal, geothermal steam or hydro resources, as well as rehabilitated existingoil-fired plants are all feasible fuel alternatives for meetirg future growthin demand. However, except for the proposed geothermal plant, which is econo-mically justified based on its incremental cost., the other candidates cannotbe optimized because a reliable basis for cost comparison is lacking. Toresolve this issue, a thorough examination of the development cost of coal,geothermal and hydro resources, together with a comprehensive analysis oftheir economic positions within a consolidated investment program, is needed.In addition, the option of rehabilitating several existing oil-fired generat-ing facilities should be weighed against each of the other alternative sourcesof capacity expansion.

1.20 Pricina. Adjacent to the above issue are problems related to steamand coal pricing. In brief, these resources need to be priced in a way thatreflectt their relative economic merits. Currently, pricing of both resourcesis being disputed by concerned entities and has created a bottleneck in NPC'splanning for new, and operation of existing, coal-fired and geothermal powerplants. For NPC and PN0C, the price of geothermal steam must fall between thecost of production and the 'avoided cost' of using alternative fuels; however,the specific parameters to be used in the computation of cost of productionand 'avoided cost' must still be developed and agreed between the two partiesbefore a specific pricing structure can be fixed. An ADB-financed study hasprovided an important tool for resolving the issue. It includes a model forgeotherna) steam pricing. The Government has appointed an inter-Governmentalcommittee to establish a price to cover the steam needed to power the proposedBacon Manito project, and to develop a long term steam pricing policy based onthe study. The Bank is expected to assist in (a) providing information on themost important input into the model, namely the least-cost power developmentprogram, and (b) addressing the financial and fiscal implications of variouspricing policies.

1.21 In addition to optimizing investment programs, NPC and the otherpower sector participants need to ensure that they are as efficient aspossible at managing their businesses and producing revenues. In particular,transmission losses need to be kept at existing levels, distribution lossesneed to be reduced, tariff structures need rationalization and the financialperformance of NPC, MERALCO and NEA need substantial improvement.

1.22 Losses. System losses within Luzon have increased from 142 in 1978to 242 in 1986. NPC appears to have been effective at controlling transmis-sion losses; however, distribution losses are excessive and need to bereduced. MERALCO, which supplies 752 of the total electricity used in Luzon,by itself recorded losses In excess of 202 in 1986.

1.23 Tariffs. Rationalization of power tariffs has alreauy receivedconsiderable attention. A tariff study was completed recently; it concludedthat, although average revenue realizable from aggregate electricity sales isconsistent with the average aggregate production and delivery costs, the

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structure of the tariff, as well as the allocation of rates between demand andenergy charges, needs to be altered substantially in order for rates toreflect efficiently the cost of providing service to each consumer. TheGovernment has adopted a policy of revising present tariffs to reflect themarginal cost of power supply and is currently developing guidelines forchanges to both bulk rates and retail tariffs.

1.24 Financial Restructuring. A number of factors have had a negativeimpact on the financial performance of NPC, MERALCO and NEA. These organiza-tions all have had serious accounts receivable problems; as a result, to meetsome of their working capital requirements, all three have stretched theiraccounts payable beyond reasonable limits. All are undercapitalized, with NPCnot being able to raise peso denominated long term loans bearing appropriatematurities and MERALCO having insufficient paid-in equity capital. Thisproblem has constrained NPC's cash flows and has affected some of MERALCO'sinvestment and resource maintenance decisions. NPC, with Government support,has already implemented measures which would relieve its cash constraints, atleast for the next year or two. MERALCO's problems can only be resolvedthrough an action program to attract fresh equity capital that will need someyears to implement.

1.25 In discussions regarding the proposed project with the NationalEconomic Development Authority (NEDA), NPC, PNOC, MERALCO and OEA, all partiesnoted that the aforementioned issues needed to be addre3sed within a compre-hensive and consolidated framework. Accordingly, these organizationsindicated their interest that the Banks (a) provide assistance through theproposed project to (i; reduce distribution losses, (ii) facilitate the coor-dination among the concerned entities, especially with regard to geothermaldevelopment and steam pricing, (iii) relieve NPC's cash constraints, and(iv) rationalize MERALCO's financial structure; and (b) conduct a sector studyaimed at developing an action plan to resolve medium and long term energyissues. The sector study, initiated in early 1988, would: (a) assess thegeothermal reserves and review the cost estimates of future exploration anddevelopment activities; (b) carry out a technical and economic analysis ofvarious coal de;elopment schemes; (c) develop a concensus regarding NPC'sleast-cost investment program for the period through 2000; (d) proposeguidelines for the pricing of geothermal steam, coal and petroleum products;(e) review the technical and economic aspects of plant rehabilitation and lossreduction; and (f) analyze the various instruments available for enhancing thecapitalization of power sector organizations.

I. Rationale for Bank Involvement

1.26 The efficient development of the Philippine power sector requiresclose cooperation and coordination among the principal parties--NPC as thegenerator and wholesaler of power, PNOC as the primary supplier of fuels toNPC, and the major private and public distribution franchisees. Through itspast operational involvement, the Bank has developed constructive relation-ships that enable it to facilitate important interactions between NPC, PNOCand PNOC-EDC. The Bank can play a significant role in resolution of issuessuch as coal and steam pricing, and on the consequent analysis of investmentstrategies. The sector's institutions all have considerable scope forimprovement of operational performance, financial stability and investment

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planning. The project would afford the Bank an opportunity to assist NPC andMERALCO in implementing financial recovery measures. Finally, by using Bankprocedures for procurement, the real cost of investment in the project can beoptimized. The Government is keenly interested in the Bank's continuedinvolvement in a sector which is critical for the country's industrialization.

II. THE PROJECT

A. Background

2.1 Several Bank missions during 1984-86 reviewed with NPC, PNOC andPNOC-EDC the development of the power and geothermal sectors in Philippines.An examination of NPC's least cost power development program indicates thatdevelopment of a 110 MW power plant at Bacon Manito in southern Luzon shouldbe NPC's next development priority. PNOC has already invested US$51.5 millionin developing the Bacon Manito geothermal steam field to sustain a productionlevel of 70 MW and needs an incremental investment of about US$24 million toupgrade the field to 110 MW. To optimize the efficiency of investments ingeneration, there is a need to upgrade and expand the facilities of NPC'ssystem.

B. Proiect Objectives

2.2 The main objectives of the project are to:

(a) support the delineation and assessment of geothermal resources foruse in Luzon, and thereby reduce the need to rely on imported fuelfor power generation;

(b) develop an existing geothermal steam field at Bacon Manito I and anassociated 110 MW base load power plant that would provide a newsource to meet demand growth in the Luzon grid;

(c) support measures for upgrading and expanding NPC's system facilities;and

(d) support institution-building and financial recovery efforts at NPCduring this critical stage of the economic recovery period.

C. Proiect Description

2.3 The project includes the following components:

(a) Geothermal Steam Exploitation and Distribution

(i) development of the Bacon Manito I geothermal field includingdrilling of additional production and injection wells, andengineering, procurement, installation and commissioning of thesteam-gathering system;

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(ii) delineation/appraisal of geothermal sites for power supply tothe Luzon grid. This includes drilling of about 18 wells to anaverage depth of 2,800 meters, and studies for assessing theextent of geothermal resources and the feasibility of theirdevelopment.

(b) Power Plant and Associated Transmission System

(i) construction of the 2 x 55 MW Bacon Manito geothermal powerplant including turbine generators, auxiliary equipment, steamcondensing and gas extraction systems, cooling towers and the230 kV switching system;

(ii) construction of about 32 km of double circuit 230 kV transmis-sion line for evacuating power from the generating station.

(c) Upgrading and Expansion of NPC's System Facilities

(i) expansions of Bantay, Balintawak, San Jose, San Esteban, Laoag,Olongapo, Dasmarinas and Binan substations, construction of21 km of 230 kV double circuit Balintawak-San Jose and 121 km of115 kV single circuit San Esteban-Laoag transmission lines andrehabilitation of substation transformers and switchgear in theLuzon grid; expansions at Lugait, General Santos and Davaosubstations in the Mindanao grid; and expansions at Tunga, SantaBarbara, Panitan, Medelin and Bacolod substations in the Visayasgrid (Annex 2.01);

(ii) extension of the communication link to Mindanao and Visayas andexpanding telecommunication facilities of the Luzon grid loaddispatch system; installation of computer hardware and softwarefor enhancing NPC's Management Information System (MIS); andprocurement of mobile environmental monitoring units for NPC'senvironmental division; and

(iii) rehabilitation of instrumentation and controls for the 50 MWcoal/oil-fired unit at the Naga thermal power station.

(d) Consultancy Studies for

(a) establishing the feasibility of transmitting power from Leyte toLuzon;

(b) Tongonan Geothermal Power Plant Siting and Development;

(c) establishing the feasibility of transmission interconnections tothe islands of Masbate, Mindoro, Marinduque, Romblon,Batanduanes and Basilan;

(d) developing cost estimating techniques for power systemcomponents, and a computerized data base;

(e) developing norms for cost of power supply outages; and

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(f) establishing feasibility of the latest techniques in theconstruction of hydro-electric dams.

2.4 Development of Bacon Manito Geothermal Field. The first reconnais-sance survey of the Bacon Manito geothermal field, located about 600 km southof Manila in southern Luzon, was started in May 1977 by PNOC and GeothermalEnergy of New Zealand, Ltd. During 1977-85, PNOC carried out detailedgeophysical, geological and geochemical studies and delineated a geothermalfield, about 10 sq. km. In Bacon Manito, a total of 24 wells have alreadybeen drilled and only three additional wells are needed to complete theproduction and reinjection requirements of the 110 MW plant. Of the totalwells drilled, only 16 are presently hookable to the steam-gathering system,while four wells could be used in the future for power on a modular concept.The current production capacity is 102.5 MW, and the additional wells willenable attainment of the plant rated capacity of 110 MW, plus an additional 10MW reserve capacity. An independent resource assessment completed in 1985concluded that the site has reserves sufficient to supply a 110 MW power plantfor 25 years. This conclusion has been confirmed by an independent expert,who assisted the Bank in 1987. The project component includes the drilling ofadditional three wells so as to develop the first section of the Bacon Manitogeothermal field, and construction of the required steam-gathering system.The steam-gathering system (SGS) is comprised of a piping network, threeseparator stations, cross-country steamlines and reinjection lines. The SGS,designed to drive as a base load station, although provisions for load peakingwill be included, will have a fully automatic control system with a secondaryprovision for full blow-off capacity to take care of major plant operatingupsets.

2.5 Delineation and Appraisal of Geothermal Sites for the Supply of Powerto the Luzon Grid. Geoscientific studies, including geological, geophysicaland geochemical studies, will be conducted to identify appropriate locationsand targets for drilling operations. The project includes the drilling of 19confirmatory wells on the basis of the above geoscientific studies and/orbased on results of drilling already undertaken earlier. Three wells will bedrilled to an average depth of 2,800 - 3,000 meters to complete the eightwells that are necessary to define an area for a 110 MW development at BaconManito II, including both the production and reinjection wells; five wellswith an average depth of 2,800 - 3,000 meters which will be drilled inPinatubo are necessary to complete the ten wells required to delineate aresource area capable of sustaining a 110 MW development; and approximatelyten wells will be drilled to an average depth of 2,800 - 3,000 meters in oneor more of the following areass Del Gallego, Mariveles Natib, and GreaterLeyte area to confirm the resource potential of the chosen area. Oncompletion of geoscientific surveys and drilling, studies of geothermalresource and feasibility of development will be carried out. An independentresource assessment and feasibility study by an internationally reputedorganization will confirm and establishs (a) the existence of an exploitablegeothermal resource sufficient to support a first stage development of up to110 MW on two sites; and (b) the future drilling and development plans.

2.6 Bacon Manito Geothermal Power Plant. A feasibility report detailingthe parameters of the Bacon Manito geothermal power plant has been prepared by

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NPC, and a site for the power plant has already been selected. The projectconstruction includes a power house installed with two 55 MW generating units,auxiliary equipment and controls, steam condensing and gas extraction systemsand the cooling water system including cooling towers. Power from the genera-tors would be sterped up to 230 kV by transformers leading to an adjacent gasinsulated metalclad 230 kV switching station. A 10 km long 230 kV doublecircuit transmission line will convey power to the nearest 230 kV switchingstation at Daraga and thence to Manila by the 500 kV EHV system currentlyunder construction. The project would provide the Luzon grid with a source ofadditional firm energy of about 800 GWh annually from 1991/92.

2.7 Upgrading and Expansion of NPC's System Facilities. To meet theprojected increases in power demands in its Luzon, Mindanao and Visayas grids,NPC has formulated a sizeable investment program (US$6,337 million equivalentover the period 1989-1995) to strengthen its system facilities. This programenvisages construction of new transmission lines and substations, augmentationof transforming and reactive control capacity at existing substations andrehabilitation of transmission lines and substation equipment. For moreefficient system operation, NPC plans to extend its communication facilitiesand enhance its management information system. A portion of NPC's investmentprogram for the 1989-91 period is expected to be financed by an ADB's powersector loan currently under appraisal. The proposed project includes compo-nents (para. 2.4(c)) which would complement the ADB project.

2.8 Extension of NPC's Communication System. The Luzon-Visayas-Mindanaomicrowave link, which will establish an integrated communication network forNPC, will provide communication channels needed among the NPC offices inLuzon, the Visayas, and Mindanao. The channels will be used to transmit data(computer, telex, facsimile) and voice information between the regionaloffices and the head office. This will also allow communication between thedifferent plants, substations and offices of NPC and will contribute to anefficient and effective operation and management of the corporation. Theexisting microwave system will be extended to the south from Kalayaan to Tiwiand to the north from La Trinidad to San Esteban. Power Line Carrier (PLC)equipment will be used to replace equipment which was installed and commis-sioned a decade ago and provide for expansion of PLC channels to plants/sub-stations that cannot be reached via microwave. The upgrading of the microwavesystem in Luzon will provide the communication channels needed for improvedhigh voltage transmission line protection, supervisory control and data acqui-sition (SCADA) computer terminals of plants/substations, centralized sequence-of-event recording (SER), telephone, telex, facsimile and other communicationfacilities required in plants, substations and offices. Microwave and PLCequipment will be used to establish a communication network among the islandsof Visayas. The communication channels will be used for telephone, telex andfacsimile, transmission line protections, SCADA, centralized SER and computerterminals.

2.9 Enhancement of NPC's MIS. With the rapid power expansion program ofthe 70s, information systems did not evolve to match NPC's growth. In 1982,NPC engaged Computer Information Systems (a subsidiary of MERALCO) to formu-late its MIS plan. This plan envisaged development of 43 MIS software modulesand installation of a total of 27 computers for major offices and plants.Currently, NPC has three Burroughs mainframes for commercial work and a VAX

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computer for engineering applications. While NPC has made substantialprogress in the implementation of the Materials Management and ProjectManagement Information systems, considerable work still needs to be done forthe Financial Management, Maintenance Management and AdministrativeInformation Systems. In order to complete the MIS System Plan, NPC needs topurch4se additional hardware and software including four mainframe computersand eight minicomputers, software, and consulting assistance for theMaintenance Management and Project Management systems. The four mainframeswill serve as regional computers whereas the eight minicomputers will handleMaintenance and Materials Management systems at eight major power plants.

2.10 Consultancy Studies. Draft terms of reference for all the studies,including cost estimates, are presented in Annex 2.15. These drafts werediscussed and confirmed at negotiations.

(a) Establishing the feasibility of transmitting power from Leyte toLuzon. This study will determine the feasibility of transmittinelarge blocks of power (500-1200 MW) from the Tongonan GeothermalProject in Leyte to the Luzon grid over a distance of 460 km (23 kmsubmarine). The study will consider a.c. versus d.c. transmissionand establish the least cost technically feasible transmissionoption. The feasibility study carried out in Phase 1 will befollowed by engineering studies and preparation of procurementdocuments in Phase 2. This study is estimated to require 70 man-months of consultancy services.

(b) Tongonan Geothermal Power Plant Siting and Development. This studywill determine the least cost technically feasible alternative forsiting, sizing and interconnection of power plants in the vastgeothermal steam complex at Tongonan. This study is estimated torequire 30 man-months of consultancy services.

(c) Establishing the feasibility of transmission interconnections to theIslands of Masbate, Mindoro, Marinduquie, Romblon, Catanduanes andBasilan. This study will determine the feasibility of transmittingelectricity from the mainland grids to the nearby islands mentionedabove, thus mitigating the need for expensive local diesel powergeneration on the islands. The feasibility study carried out underPhase 1 will be followed by engineering studies and preparation ofprocurement documents under Phase 2. This study is expected torequire 70 man-months of consultancy services.

(d) Developing cost estimating techniques for power system components anda computerized data base. This study will establish techniques forestimating the cost of major power system components such as thermalpower plants, hydroelectric power plants, transmission lines,substations and civil works. The study which will be followed bypreparation of a computerized data base and a cost estimated manualwill assist NPC in major planning exercises for power systemdevelopment. This study is expected to require 25 man-months ofconsultancy services.

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(e) Developing norms for the cost of power supply outages. This studywill establish norms for the determination of cost of power supplyoutages in the various grids of PNC, which would assist NPC indeveloping its future generation expansion plans. This study isexpected to require 25 man-months of consultancy services.

(f) Establishing feasibility of the latest techniques in the constructionof hydroelectric dams. This study will determine the applicabilityof latest techniques in dam construction in the Philippines withparticular reference to the application of Roller Compacted Concrete.The study will review in detail the design of seven prospectivehydroelectric dams and recommend the most cost-effective constructiontechniques. This study is expected to require 25 man-months ofconsultancy services.

D. Project Costs

2.11 The total project cost is estimated at US$216.3 million excludinginterest during construction, of which about US$147.5 million is expected tobe in foreign exchange. A summary of project cost is shown below in Table 2.1for the two agencies executing the project.

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Table 2.1s PROJECT COST ESTIMATE

Foreign CostPescs Miltlon US$UMillton as X of

Local Foreign Total Local Foreign Total Total

PNOC-EDCDevelopment of Bacon Manito I Steam Field 100 898 496 4.9 19.8 24.2 79.8Delneaotlon-Cum-Appraseal 617 a85 970 B0.1 17.2 47.2 36.6

Total Boso CoOt 717 749 1.466 36.0 86.6 71.6 F1.O

Physteal Contingoncy 72 75 147 3.5 8.7 7.2 51.4Price Contingoney 180 64 220 1.2 0.8 2.1 40.0

Total Prolect Cost (PNOC-EOC) 925 908 8a3 89.7 41.0 80.7 60.8

NECBacon Manito Thermal Power Plant 258 955 1,213 12.6 46.6 59.2 78.7Transmission System for Bacon Manito s0 170 230 2.9 8.8 11.2 74.1Upgrading and Expansion of NPC'o System

Facilities 168 656 824 8.2 82.0 40.2 79.8Consultancy Services 18 82 78 0.8 8.0 8.8 78.9

Total Base Cost $02 1.843 2.845 24.5 09.9 114.4 78.9

Physical Contingencets (lOx) s0 184 284 2.6 6.9 11.4 78.6Prie¢ Contingencles 157 586 723 2.1 7.7 9.0 78.6

Total Prolect Cost (NPC) 709 2.89B 8.802 29.1 108.5 165.6 78.6

TOTAL PROJECT COST /p 548 8,601 5,186 68.8 147.5 218.3 88.2INTEREST DURINO CONSTRUCTION - 219 219 - 10.7 10.7

TOTAL FINANCING REIJIRED 1.684 8.720 5.B54 80.8 158.2 227.0

/n This project Is exempt from duties and taxes.

NOTES: (1) December 1967 price levels.(2) Exchange Rates US$1 u P 20.6.

2.12 Annexes 2.02 and 2.03 give detailed cost estimates for the projectcomponents for PNOC-EDC and NPC, respectively. All costs are based onDecember 1987 prices; physical contingencies are at 10X. Cost estimates forthe Bacon Manito geothermal power plant are estimated based on budgetaryestimates obtained by NPC in mid-1987. Price escalation for costs expressedin terms of foreign exchange (US dollars) is calculated according toanticipated international price movements of 1.0Z for 1988-90, and 3.5? for1991 and thereafter. Price escalation for costs expressed in local currency

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is calcul..ted according to projected local inflation :at.es of 6.5Z for 1988-90and 8.02 for 1991 and thereafter. The cost estimates assume that exchangerate adjustments would, on average, maintain "purchasing power parity' duringthe project implementation period.

E. Financina Plan

2.13 The financing plan for the project is presented in Table 2.2 below:

Table 2.2s FINANCING PLAN FOR THE PROJECT

Local Foreign Total Percent

Govt. of Italy 4.8 55.2 60.0 26IBRD 7.7 92.3 100.0 44PNOC-EDC 39.7 3.0 42.7 19NPC 16.6 7.7 24.3 11

Total 68.8 158.2 227.0 100

A protocol soft loan being offered by the Government of Italy will finance theforeign cost and a portion of local cost for the Bacon Manito power station.At negotiations the Government of Italy indicated the expectation that thisprotocol loan would become effective not later than December 31, 1988. TwoBank loans will cover the proposed project's remaining foreign exchangerequirements, including interest during construction. The remaining expendi-tures will be financed by PNOC-EDC and NPC using internal cash generation.US$41 million would be lent to PNOC (PNOC Loan) for 20 years, including fiveyears of grace on repayment of principal, at the standard variable interestrate. PNOC would relend the proceeds of that loan to PNOC-EDC on the sameterms and conditions as the PNOC Loan, and PNOC-EDC would bear the foreignexchange risk. Execution of a Subsidiary Loan Agreement, satisfactory to theBank, between PNOC and PNOC-EDC would be a condition of loan effectiveness.US$59 million would be lent to NPC (NPC Loan) at the standard variableinterest rate for 20 years, including five years of grace on repayment ofprincipal.

2.14 The aggregate amount of the proposed Bank loans is US$100 millionequivalent. The Republic of the Philippines will guarantee the two Bankloans.

F. Proiect Imnlementation and Schedule

2.15 In order that the two separate organizations involved in projectimplementation coordinate their activities in the most effective manner, NPCand PNOC-EDC have formed a Project Implementation Committee, consisting of therelevant managers of each of the two implementing organizations. Thiscommittee has functions and powers agreed by all parties; a draft of thoseterms of refereace is given in Annex 2.04. At negotiations, NPC and PNOC-EDC

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indicated that each will comply with such functions and powers for the ProjectImplementation Committee as are satisfactory to these two organizations and tothe Bank.

2.16 DNOC-EDC will have overall responsibility for implementing the geo-thermal component of the project. It is organized in four technical operaLinggroups (Annex 2.05) composed of highly capable technical and professionalstaff whio have gained extensive experience in geothermal technology from thePhilippines experience, as well as training extended through various bilateralagreements with New Zealand, Iceland, Italy, Japan and USA. PNOC-EDC willcontinue to retain Kingston, Reynolds, Thom and Allardyce (KRTA), New Zealand,to provide experienced staff to assist them in the specialized areas of geo-sciences, drilling, production and system engineering through the projectduration for an estimated 28 man-months. For the development of the BaconManito I steam-gathering system, PNOC-EDC agreed at negotiations to appoint aconsultant to provide support for project execution services. In addition,PNOC-EDC agreed that, after completion of appraisal ard delineation drillingat prospective geothermal sites, it will retain an independent consultant forstudy of resource assessment and techno-economics of field development. Theterms of reference for these studies shall be drawn up in consultation withthe Bank on completion of the drilling program at each site. The project isbased on a detailed feasibility study prepared by PNOC-EDC, in consultationwith KRTA, and verified independently by NPC. The overall engineering designhas been developed by PNOC-EDC after optimization studies have been carriedout in consultation with NPC. The detailed engineering will also be revie-qedby KRTA before the end of 1987. The corporate structure for undertakirgdrilling, as well as development activities, already exists with PNOC-EDC, whohave carried out similar works successfully in the past at Palinpinon andTongonan. The project will be executed through a project team constituted forthis purpose (Annex 2.06). The 21 wells under the proposed project would bedrilled by PNOC-EDC. PNOC Energy Drilling Inc. (PNOC-EDI), the drillingsubsidiary of PNOC, which has drilled over 100 geothermal wells and 10 oil andgas wells in a technically efficient and cost effective manner, has recentlybeen made a part of PNOC-EDC. The PNOC-EDC drilling crews will use their ownrigs and staff, while all other drilling equipment, materials and serviceswill be obtained from the international market as needed. Implementation ofthe steam-gathering system will be procured through seven contracts for thepurchase of materials and services and a single installation-cum-erectioncontract.

2.17 NPC will have overall responsibility for implementing the powergeneration and transmission lines component of the project. NPC has carriedout an indepth feasibility study of the Bacon Manito geothermal power plant,and has prepared the specifications, drawings and bid documents for procuringthe entire power plant including civil works on a single responsibility basis.NPC has also prepared the bid documents for the transmission lines and substa-tions. Having been associated with the design, construction and operation ofthe Tiwi and MakBan geothermal plants, which have six 110 MW units, the staffof NPC has the experience and capability to undertake the pToposed projectwithout outside assistance. Detailed designs and drawings for the power plantwhich will be produced by the contractor, will be reviewed by NPC's engineersto ensure compliance with the specifications. NPC's field staff will providenecessary supervision and exercise quality control over the contractor's

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activities during construction, testing and commissioning. The proposed NPC'sorganization which will function exclusively for implementation of the BaconManito geothermal plant is shown in Annex 2.07 and is considered to beadequate. The project manager and other key staff have already beenappointed. NPC also has in-house capability for designing, engineering andimplementing the other project components including the transmission lines andsubstations, communication, instrumentation ar4 control systems, with engage-ment of local civil works and erection contractors as necessary to supplementNPC's own forces. Limited consultancy assistance will be needed for themaintenance management system of the MIS; the overall design of the latter hasalready been formulated.

2.18 Implementation Schedule. Annex 2.08 gives the critical activities inthe implementation schedule of the Bacon Manito geothermal power plant.Annex 2.09 gives the implementation schedule for installation and erection ofthe steam-gathering system for Bacon Manito I, and for the drilling programfor the delineation-cum-appraisal component of the project. The commissioningof the steam-gathering system is scheduled to be completed by the middle of1991. The 21 wells to be drilled under the project are scheduled to becompleted by the first quarter of 1990. Annex 2.10 gives the implementationschedule for the NPC component of the project. The first 55 MW unit isscheduled to be commissioned by April 1991 and the second unit by July 1991.The associated transmission system will be available on time for evacuation ofpower from the first unit. The system upgrading and expansion components areprojected to be completed by 1991. The entire project is scheduled forcompletion by end 1991.

G. Procurement

2.19 The procurement arrangements fcr the project are summarized inTable 2.3 below.

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Table 2.3s SUMMARY OF PROCUREMENT ARRANGEMENTS(US$ million)

Procurement MethodProject Component ICB LCB Other/a N/A/b Total Cost

PNOC-EDCSGS Installation/Erection 8.6 0.3 0.0 0.0 8.9

(8.6) (O.0) (0.0) (0.0) (8.6)Mechanical Equips. & Materials for SGS 8.9 0.0 0.0 0.0 8.9

(8.9) (0.0) (0.0) (0.0) (8.9)Non-Destructive Testing Services 0.2 0.0 0.0 0.0 0.2

(0.2) (0.0) (0.0) (0.0) (0.2)Consultancy Services & Studies 0.0 0.0 2.7 0.0 2.7

(0.0) (0.0) (2.3) (0.0) (2.3)Drilling Consumables 17.9 0.0 0.0 0.0 17.9

(17.9) (0.0) (0.0) (0.0) (17.9)Drilling Services 0.0 00: 2.80c 0.0 2.0

(O.0) (0.0) (2.0)- (O.0) (2.0)Rig Charges 0.0 0.0 16.0/d 0.0 16.0

(0.0) (0.0) (0.0)- (0.0) (0.0)Training 0.0 0.0 0.3 0.0 0.3

(0.0) (0.0) (0.2) (0.0) (0.2)Fuel 0.0 1.8 0.0 0.0 1.8

(0.0) (0.9) (0.0) (0.0) (0.9)Engineering & Administrative Overheads 0.0 0.0 0.0 22.0 22.0

(0.0) (0.0) (0.0) (0.0) (0.0)

Total PNOC-EDC 35.6 2.1 21.0 22.0 80.7(337) (UT) T47) TOT) (7iT7)

NPCZacon Manito Thermal Power Plant - 3.5 65.2/e 1.5 70.2

(0.0) (3.5) (0.0)_ (0.0) (3.5)Transmission System for Bacon Manito 9.8 3.2 0.0 0.3 3.3

Uprading & Exansion of NPC's (9.8) (1.6) (0.0) (0.0) (11.4)yetem FacilitiesTransmission System 20.0 6.3 0.0 0.5 26.8

(20.0) (3.2) (0.0) (0.0) (23.2)Communication System 10.7 1.9 0.0 0.1 12.7

(10. 7) ( 0) (0 0) (0.0) (10 7)MIS 5.7 0.4 0.0 0.1 6.2

(5.7) (0.0) (0.0) (0.0) (5.7)Instrumentation & Controls 1.1 0.3 0.0 0.1 1.5

(1.1) (0.0) (0.0) (0.0) (1.1)Environmental Monitoring Equip. 0.4 0.0 0.0 0.1 0.5

(0.4) (0.0) (0.0) (0.0) (0.4)Consultancy Services - - 4.5 - 4.5

- - (3.0) - (3.0)

Total NPC 47.7 15.6 69.7 2.7 135.7(r "7) T"7 ) TYTM) (". ) (59.0

NOTEs Figures in parentheses indicate financing from the two Bank loans.

/a Includes limited international bidding, direct contracting, force accountand bilateral funding.

/b Refers to expenditures on engineering and administrative overheadsIc Technical assistance from XRTA on contract exiansion./d Rigs are owned by PNOC-EDC./e Financed by the Government of Italy to the extent of US$60 million.

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2.20 Equipment and services financed under the proposed Bank loans wouldbe procured by International Competitive Bidding (ICB) in accordance with theBank's Procurement Guidelines except as noted in paras. 2.21, 2.22 and 2.23below. The power plant will be procured on a single responsibility turnkeybasis from an Italian firm. For all ICB procurement, local manufacturers willbe permitted to participate where appropriate and, at PNOC-EDC's and NPC'soption, will be eligible for a preference of 15Z of the CIP cost of theimported goods or the prevailing customs duties and other import taxes,whichever is lower, in the evaluation of bids. All essential procurementdocumentation for goods and services financed by the Bank and estimated tocost over US$1 million equivalent will be subject to the Bank's prior review.Procurement packages valued at approximately 80Z of the loan amount are likelyto be reviewed.

2.21 All major packages of materials, equipment and services for PNOC-EDCshall be procured via ICB, except for the followings

(a) Contracts for services and equipment needed for well-related opera-tions, e.g., cementing, directional drilling, pipe inspection andother highly specialized operations available only from a limitednumber of suppliers which do not exceed in the aggregate the equi-valent of US$4,000,000, may be awarded in accordance with LimitedInternational Biddings (LIB) procedures. All qualified bidders willbe invited to bid on these packages.

(b) Contracts for equipment and materials that are proprietary or toensure standardization and compatibility with existing equipment andfacilities which do not exceo.d, in the aggregate, the equivalent ofUS$1,000,000 may be procured by direct contracting under terms andconditions acceptable to the Bank.

(c) Approximately US$16.8 million for drilling of wells on force accountbasis using PNOC-EDC's own drilling rigs and crews; these items willnot be financed by the Bank loan.

2.22 Minor packages for equipment, spare parts, materials, consumables andservices (not exceeding US$200,000 per contract up to an aggregate amount ofUS$3 million for NPC and US$2 million for PNOC), may be procured in accordancewith local competitive bidding procedures which have been reviewed by theBank, and are considered acceptable to the Bank, or international shoppingprocedures based on comparing price quotations from at least three qualifiedsuppliers.

2.23 Conductors for NPC's transmission lines will be fabricated locallyfollowing LCB procedures from ingots procured through ICB. The local condu%.-tor manufacturing industry is efficient and this mode of procurement is notexpected to affect satisfactory implementation of the project in terms ofcost, efficiency and completion time. Local fabrication of conductors willnot be financed from the Bank loan. Poles for transmission lines and civilworks for substations and transmission lines will be procured locally throughLCB procedures. These procedures are acceptable to the Bank.

2.24 The major packages for procurement on the project are shown inAnnex 2.11.

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2.25 Consulting services financed under the Bank loan would be engaged inaccordance with the Bank Guidelines for the use of consultants.

2.26 Retroactive financing would be permitted to the extent of US$2 mil-lion equivalent for payments made after March 31, 1988 by NPC, and US$1million for payments made after March 31, 1988 by PNOC-EDC to cover advancedcontracting for materials and services.

H. Disbursements

2.27 The Bank loan would be disbursed against (a) 1002 of the foreignexpenditures of directly imported equipment and materials; (b) 100? of localexpenditures ex-factory of locally manufactured items procured through ICB;(c) 502 of local expenditure for materials and works procured locally;(d) 100? of total expenditures for consulting services; and (e) for fuel,disbursement would be made against 502 of cost (the estimated foreign exchangecomponent) and, for imported goods procured locally (e.g., chemicals), 80? ofthe cost.

2.28 Reimbursements of expenditures relating to contracts valued at lessthan US$200,000 equivalent would be made on the basis of statements of expen-ditures (SOEs). Documentation supporting the SOEs need not be submitted tothe Bank but should be retained by PNOC-EDC and NPC and made available forreview by the Bank supervision missions. To facilitate project disbursements,a Special Account in a fully convertible currency will be established in abank on terms and conditions satisfactory to the Bank for each agency. Theauthorized allocation to the Special Account will be US$4 million for NPC andUS$2 million for PNOC-EDC, representing four months, average projectexpenditure. Replenishments to the Special Account would be made quarterly orwhenever the account is drawn down by about 50? of the initial deposit. Thestandard procedure for auditing SOEs will apply.

2.29 Annexes 2.12, 2.13 and 2.14 give the disbursement schedules for theproposed Bank loan for the project, PNOC-EDC and NPC, respectively. There isno information available on typical disbursement profiles for similar powerprojects in Philippines, no meaningful comparison can be made in that respect.However, the disbursement schedules up to the year 1993 for the NPC componentsare in line with the Bank's profile of disbursements for power projects in theEast Asian region and the PNOC-EDC component is expected to be fully disbursedby 1991. The closing date would be Deoember 31, 1993.

I. Monitoring and Reporting

2.30 Satisfactory procedures for monitoring the progress of the project interms of physical execution and financial reports have been agreed. PNOC-EDCand NPC will furnish quarterly progress reports. At negotiations, PNOC-EDCagreed to furnish annually to the Bank its exploration program for the nextyear for areas covered by the project.

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J. Environment

2.31 The potential environmental problems of steam field development andoperation are taken very seriously by PNOC and NPC, who wish to avoid environ-mental damage. At Bacon Manito and other sites, maximum use would be made ofdirectional drilling, which would minimize the amount of land to be levelled.Flow testing operations are planned so as to restrict the temporary dischargeof geothermal fluid to the amount capable of being carried by local streamswithout permanent harm, and testing would be deferred rather than permittingfluid to exceed that level. Operational effluent would be reinjected. Safetyprocedures have been designed for each well, and appropriate industrypractices are followed regarding disposal of fluids recovered in tests,borehole cuttings, and other waste materials normal to drilling operations.

2.32 There are very few inhabitants in the immediate area of the proposedpower plant, the vegetation is sparse and there is little wildlife. Specialattention has been given to the problem of hydrogen sulphide in the design ofthe system so as to eliminate unventilated areas, and deep pits or trencheswhere the gas may accumulate. Disposal of gases would normally be through a24 m high stack which has been designed to provide adequate dispersion anddilution so as to conform with recommended allowable ground level concentra-tion. The ground level concentration of H2S will be kept below 20 parts perbillion (Philippine National Standard) in the plant areas. Further, a sensi-tive HBS monitoring system will be installed to give alarm and shut down theplant in the event H2S concentrations exceed specified levels. Periodically,it would be necessary to blow off steam for pressure stabilization and wellmaintenance, but with suitable protection the noise would be within acceptablelimits for the operators, who would normally be stationed in an air-conditioned control room. Housing of the operating staff would be locatedsome distance away so that objectionable gases would be diffused and seldomreach the area, and the noise level much reduced. Waste water containinglarge quantities of salts would be reinjected to the reinjection wells wherethe water would seep deep into the ground.

2.33 Transmission lines will be designed to international practices andwill have no adverse impact on the environment. Within the urban areas, highvoltage lines will be run on poles meeting necessary safety codes. Substa-tions in built-up areas will be indoors depending on availability of space.

2.34 The Environmental Management Bureau has granted an EnvironmentalCompliance Certificate for the proposed Bacon Manito Geothermal Power Projectbased on compliance with the Environmental Impact Assessment. The Certificateis issued subject to the project authorities ensuring (a) that Boron andArsenic discharge do not exceed the levels set by the National PollutionControl Commission (NPCC), and that this is adequately monitored; (b) H2Semissions are kept within acceptable limits and H2S control facilities areinstalled according to the specifications set forth in the EnvironmentalImpact Statement, and that continuous monitoring of H2S is effected; (c) noiselevels are kept within NPCC set levels and (d) monitoring of water quality inaffected river systems is institutionalized. NPC and PNOC-EDC have furnishedto the Bank updated environmental reports showing that they have incorporatedthe design parameters needed to enable compliance with the regulations of theEnvironmental Management Board and with environmental standards satisfactoryto the Bank.

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III. THE BORROWERS AND THE BENEFICIARY

3.1 The Borrowers of the two separate Bank loans will be the NationalPower Corporation (NPC) and the Philippine National Oil Company (PNOC). Inturn, PNOC's subsidiary, the Energy Development Corporation (PNOC-EDCI will bethe Beneficiary of the loan to PNOC. These entities are large corporationswith occasionally contiguous, though dissimilar operations. This chapter willpresent separate institutional analyses for each of the two Borrowers and theBeneficiary.

A. NPC

3.2 NPC was established in 1936 as a non-stock public corporation with amandate to develop hydroelectric power generating facilities. In 1960, NPCwas converted into a stock corporation with all shares subscrlbed by theGovernment. NPC's charter, which was issued in 1971 and was amended there-after by several Presidential Decrees, expanded its mandate into the develop-ment, construction and operation of all electric power generation and trans-mission facilities throughout the country. Since 1979, the NationalElectrification Administration (NEA) is empowered to authorize electric powercooperatives to construct and operate generating plants of less than 5 MW. InJuly 1987, the Government issued an amendment to Presidential Decree No. 40,allowing the private sector to construct and operate electric generatingplants and sell their production to grids where they exist and to end userswhere grids do not exist.

3.3 Organization, Management and Staff. NPC's corporate powers areexercised by its seven-member Board of Directors. The present NPC Board,which consists mostly of businessmen, was appointed by the Presidelit of theRepublic in July 1986. Appointments are normally for five years, and containthe possibility of reappointment. NPC's management is vested in its Presidentwho is Chief Executive of the Corporation; the incumbent is normally appointedby the President of the Republic.

3.4 NPC's organization chart is presented in Annex 3.01. In 1985, theCorporation underwent a major reorganization that had the objectives of (a)consolidating operations and construction, (b) decentralizing those functions,and (c) placing responsibility for them in the regional centers under thesupervision of regional Vice Presidents. In view of the large and geographi-cally fragmented nature of NPC's system and the often difficult communicationsbetween headquarters and the field, NPC operates as three separate businesses;therefore, the decentralized structure is appropriate for NPC.

3.5 A profile of NPC's staff, allocated according to function is presen-ted in Annex 3.02. In conjunction with its reorganization, after redeployingpersonnel with fungible skills from units that were streamlined, NPC reducedits staff from about 11,500 to about 10,600 in early-1986. Most of the cut-backs were effected in the construction department, which was reduced by about652 because of a retrenchment in the scope of NPC's in-house constructionactivities. As of mid-1987, NPC had 11,300 approved positions, of which about10,200 were filled by permanent staff and the remainder with temporaries.

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3.6 Training. NPC has an ample in-house training program. In the past,this program has focused on orientation for new employees and skills develop-ment for technicians, equipment operators, and other specialized workers. Inrelation to the reorganization, NPC promoted to newly created management posi-tions many employees lacking previous managerial experience; to developquickly the effectiveness of these new managers, NPC devised a separate in-house training curriculum emphasizing basic managerial techniques, systems andprocedures. NPC also arranges with other centers in the Philippines fordeserving staff to acquire training in relevant topics not covered in its in-house program. These training arrangements are appropriate.

3.7 Operations. Maintenance and Losses. Although NPC appears to havelarge capacity margins, especially in Luzon, much of its aging plant andequipment cannot be operated at rated capacity. NPC has operated andmaintained its assets satisfactorily, especially in view of the age and mix ofits plant, the geographic dispersion of its systems, and the resourceconstraints of recent years. Many of the NPC system improvement measuresincluded in the proposed project are expected to enable better fut're stan-dards of operation and maintenance. In recent years, NPC's combined linelosses and station use have averaged between 7-8X of energy sold, a levelappropriate to NPC's current circumstances.

3.8 Accounting System. NPC's accouating system is based on acceptedpower utility principles and procedures. It was modeled after the UniformSystem of Accounts prescribed for public utilities by the Federal EnergyRegulatory Commission of the United States of America, and adapted to suitlocal conditions and requirements.

3.9 Financial Planning and Budgeting. NPC has well staffed units forfinancial planning and budgeting. The financial planning unit has developedseveral computerized financial models, which are used primarily for reportingto the Government. These financial plans are also used for evaluating invest-ment alternatives and providing necessary information to financiers. NPCprepares budgets annually according to Government practice. The budget isrevised periodically during the year and comparisons of actual performanceagainst budget is a regular managerial exercise.

3.10 Commercial Systems. As of July 31, 1987, NPC had 245 powercustomers. MERALCO, which accounts for more than 502 of both sales andconsumption, is by far the largest. Other customers include a handful ofsmall investor-owned utilities, about 115 electrical cooperatives, a fewpublic sector consumers (armed forces installations and municipal utilities),and industrial operations with loads greater than 69 kV. None among theseother customers predominates the rest.

3.11 In the past, NPC has had severe problems collecting from MERALCO, thecooperatives, and Government sector consumers (para. 4.6). Many of thesecustomers were experiencing difficulty in realizing collections from their ownGovernment sector customers and were stretching their payables to theirlargest Government sector creditors. To assist NPC inter alia, the Governmentdecided to use a clearing-house approach for settling some transactionsbetween public sector organizations. This enabled power retailers to turn

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verifiable receivables from national Government consume s over to NPC; inturn, NPC could collect the amounts due directly from the Treasury. In addi-tion, the Government has authorized NPC to toughen its disconnection of coope-ratives. NPC has recently disconnected several cooperatives; as a result,many cooperatives have sought to reschedule their arrears while paying theircurrent obligations on time (or making strictly enforced prior arrangementsfor late payments). As of post-appraisal, NPC had concluded negotiations withMERALCO for a rescheduling of arrears; this agreement includes severe penal-ties for late payment of current bills as well as amortization of