Policy Lapses and Gaps on the Formulation of Energy Laws of the Philippines:The Case of Iligan Diesel Power Plants

POLICY LAPSES AND GAPS ON THE FORMULATION OF ENERGY LAWS OF THE

PHILIPPINES :THE CASE OF ILIGAN DIESEL POWER PLANTS

Ariel P. Anghay Title

In The early 1990’s, a severe lack of generating capacity resulted in power cuts of 10 hours a day. The government solution was to allow national power corporation (NAPOCOR) to enter into supply contracts with private energy/power generating companies. When the companies responded, there was an excess of capacity since it wasn’t clear how many suppliers would answer the needed power. The healthy economic growth sustained the operations of the suppliers (Mclean,2005).

Ariel P. Anghay

Introduction

CHAPTER ITHE PROBLEM AND ITS

BACKGROUND

With the decrease in economic growth triggered by the Asian financial crisis, NAPOCOR had to honor contracts with suppliers by buying power they supplied even if there was little or no demand for it. The losses translated to purchased power adjustment charge were paid by consumers. Hence, electricity prices in the country are among the highest in the world because the rates include the cost of power that NAPOCOR can’t sell. The contracts did not provide for adjustments of purchased power when demand decreased. Also, the suppliers had to be protected from reduced revenues due to lower demand. Hence, the policy protected the suppliers at the expense of the consumers and the government.

Ariel P. Anghay

Introduction

Among the key elements for attracting private finance for the energy sector, “rules of law and contract enforceability” protected the suppliers of electricity from reduced power purchase by NAPOCOR due to decrease in power demand. The government embarked on a program of privatization and liberalization of the power industry by allowing private sector participation in the generation of electricity and broadening applicability of BOT to all public infrastructure projects. These are bold measures that ushered a change in government from an authoritarian régime to a more open, transparent and democratic administration.

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Introduction

Executive order no. 215, promulgated in 1987, laid the basis for the entry of private sector into power generation, which had been a monopoly of the national power corporation (NPC), while republic act no. 6957 authorized the financing, construction, operation, and maintenance of infrastructure projects by the private sector. This means the independent power producer (IPP) participants were assured through a comfort letter that the government would ensure that the NPC would be able to comply with its commitments in implementing foreign exchange control to assure that earnings and capital could be remitted. Thus, by the end of 1994, a total of 1,481.3MW, representing 16.3 percent of total installed capacity of 9,067.9MW, were owned and/or operated by the private sector. In the Luzon grid, 20 percent of the total 6,558.1 MW generating capacity was in the private sector by end of 1994(Austria,2000).

Ariel P. Anghay

Introduction

To address the crisis of insufficient electrical generating capacity to avert the daily deficiency for 262 megawatts, President Marcos built a 620 MW nuclear power plant constructed by Westinghouse. The project was completed but the Aquino government decided not to use the facility because it was located on a seismic fault. Thus, the government embarked on solutions such as gas-turbine plants (500MW) and expansion of the rural electrification program (Dolan, 1991).

Ariel P. Anghay

Introduction

Mindanao is highly dependent on hydro plants for electricity, accounting for 55.22 percent electricity source in 2008; the department of energy power statistics in 2008 has shown. This hydro-driven generation capacity makes Mindanao vulnerable to a prolonged dry spell that lowers water inflow that powers the turbines of hydroelectric plants. With climate change triggering reduction of water during sunny days, the power industry is indeed vulnerable (Rosauro, 2010).

Ariel P. Anghay

Introduction

During the administration of former president fidel V. Ramos, the island of Mindanao also experienced the power crisis of the country because of the long drought caused by the El Niño phenomenon. To solve the problem, the Philippine Congress in April 1993 gave former President Ramos emergency powers that allowed him to negotiate independent power producer (IPP) contracts and bypass the usually long and tedious process required to bid out government projects. Pres. Ramos became known for the phrase “fast-track,” used to describe swift approval of contracts and projects.

Ariel P. Anghay

Introduction

In Mindanao, the first IPP (independent power producer) contracts were the two (2) ALSONS (Alcantara and sons)/ TOMEN (phil. /Japan) diesel power plants with a company’s name – Northern Mindanao power plant (NMPC) under a ten-year “build operate transfer” contract with an estimated cost of US $60 million with a contracted rated capacity of 113 MW and runs on a bunker C and / or diesel fuel types for its start-up and shut down operations. NMPC plant 1 became operational in 1993 while NMPC plant 2 was operational in 1996.

Ariel P. Anghay

Introduction

However, the energy generated by these plants did not solve the Mindanao problem because of its location, which is near the Agus hydro grid. The capacity of Agus hydro grid, situated along marawi city, Iligan city, and Lanao provinces, was ample enough to supply the whole Mindanao electricity needs at the time.

The BOT contract stipulated a capacity fee of around php60 M per month and a fixed operation and maintenance fee ofphp17 M per month with or without generation or a total fixed purchased power cost of not less than php900 M per year. With the ownership issue, however, NPC is shouldering payment of php53 M a year for the Iligan city’s real property tax assessment.

Ariel P. Anghay

Introduction

In the operation and maintenance of the power plants- IDPP 1 and IDPP 2, power sector assets and liabilities management (PSALM/ NPC) incurred financial losses at an annual average of about php405.53 M during the period of 2006-2009, resulting in a subsidy paid by the electricity consumers of about P17.35 KWH based on the average electricity production cost of IDPP 1 and IDPP 2 of Php 20.48 per KWH against the average selling rate in Mindanao of Php 3.13 per KWH for the same period. Despite these losses, IDPP 1 and IDPP 2 were operated to augment power requirements as a result of the power generation deficiency of the NPC’s hydroelectric power plants.

The factor of the two power plants has been embroiled by the issue of ownership status. Alcantara and sons (ALSONS) continued to pay its real estate taxes on the lands, the cooling system, and the fuel holding tank in which the IDPP 1 and IDPP 2 are located, whereas, NPC did not pay the real estate taxes of the diesel units that accumulated Php 392, 527,159.46.

Ariel P. Anghay

Introduction

On April 25, 2007, the city government through the Sangguniang Panlungsod, after exhausting all legal remedies, sold the IDPP 1 and IDPP 2 (power plants) at a public auction but were subsequently sold to the city of Iligan pursuant to section 263 of the local government code due to the absence of bidders during the auction sale.

On November 10, 2008, Conal holdings corporation (Conrado Alcantara who happens to be the owner of the realty land where IDPP power plant 1 and IDPP power plant 2 are currently situated)offered P 275, 000, 000.00 (P275 M) to the Iligan city government as purchase price, but the resale of the LGU-confiscated / levied properties did not push through because of the lone bidder. The amount of the bid price was lower than the estimated power plant value of P 4.2 billion under the prevailing brand new cost of Warfzila diesel plant, which is one million ( US $1.00 million ) per one megawatt and IDPP 1 and IDPP 2 has a total capacity of 100 megawatt.

Ariel P. Anghay

Introduction

On September 4, 2010, the Sangguniang Panlungsod passed resolution no. 10-551 authorizing the City Mayor Lawrence Cruz to enter into a “compromise agreement” with Conal holdings corporation, which increased its offer from P 275 M to 300 M without prejudice to the conduct of a Swiss challenge (mode of bidding). The 14th city council in its July 4, 2011 regular session unanimously approved and adopted the terms of reference (TOR) for the SWISS CHALLENGE process for the sale of Iligan diesel power plants 1 and 2 facilities. The TOR sets the pre-bid conference relative to the disposal of IDPP’s 1 and 2 on August 15, 2011.

Ariel P. Anghay

Introduction

There are three (3) interested bidders, first is the Conal holdings corporation (CHC), the family-owned realty where IDPP power plant is located; second in the consortium of PGMC – platinum group metals corporation/ Atayde group/ one Subic of Mike Romero and Borja group; and third is the Energy Developer Co. Ltd./ Korea Midland Power Company Ltd (KOMIPO). Of these three groups interested to buy the IDPP’s 1 and 2, the Conal holdings of Alcantara had an upper hand since it owned the land where the power plants are currently situated. Under the terms of reference of the “Swiss challenge”, the bid proposal covers only the sale of the Iligan diesel power plants 1 and 2 facilities, excluding the land, the water supply piping for the cooling system, and other facilities which the Iligan city government does not own, on an “ as- is- where- is” basis.

Ariel P. Anghay

Introduction

The Iligan City government ownership of the IDPP 1 and 2 includes only the buildings and machineries being the only tax delinquent assets owned formerly by NPC/PSALM. Both two interested bidders- the Atayde/PGMC and KEPCO of South Korea-manifested their reservations since the power plants- IDPP 1 and 2-were acquired by the city due to the non-payment of taxes, which was the subject of the “Swiss challenge”, and yet the land/ realty where the plants are located is owned by the Alcantara group of companies, which is one of the interested bidders.

Ariel P. Anghay

Introduction

Under the TOR, the bid price will start at higher than the negotiated price of CHC of php300 M. Conal Holdings corporation, being the first to tender its offer in the November 2008 failed bidding, shall have the right to match the highest qualified and complying bid purchase price submitted.

Ariel P. Anghay

Introduction

One of the active non-government organizations in the city, the Lanao Power Consumer Federation (LAPOCOF), a consumer- protection advocate and strong lobbyist against the NPC Agus-Pulangi hydroelectric power plant privatization, wrote President Simeon Benigno Aquino and the Department of Energy Secretary Rene Amendras for a proposal that NPC/PSALM may enter into a MOA with the Iligan city government to rent or to share income of the proceeds of the operation of the IDPP through a joint ownership managed by the LGU and NPC/PSALM and/or form IDPP’s operation group through a cooperative management or contract out the management of the IDPP’s. These proposals offered by the LAPOCOF are now under review by the committee on power and energy in the city council.

Ariel P. Anghay

Introduction

The study explored the policy lapses and gaps in the energy laws of the Philippines as context of the IPP problems in Iligan City.Specifically, the study sought answers to the following questions:

1. What are the policy lapses and gaps in the following energy laws? 1.1 Republic Act No. 7648 Electric Power Crisis Act of 1993 1.2 Republic Act No. 9136 Electric Power Industry Reform Act of

20012. What are the manifestations of the policy lapses and gaps as observed in the IPP problems in Iligan City?3. What are policy recommendations that could be advanced to enhance the implementation of energy laws?

Ariel P. Anghay

Statement of the Problem

The study explored the policy lapses and gaps in the energy laws of the Philippines as context of the IPP problems in Iligan City.Specifically, the study sought answers to the following questions:

1. What are the policy lapses and gaps in the following energy laws? 1.1 Republic Act No. 7648 Electric Power Crisis Act of 1993 1.2 Republic Act No. 9136 Electric Power Industry Reform Act of

20012. What are the manifestations of the policy lapses and gaps as observed in the IPP problems in Iligan City?3. What are policy recommendations that could be advanced to enhance the implementation of energy laws?

Ariel P. Anghay

Statement of the Problem

The study was guided by the following objectives:

1. To analyze the policy lapses and gaps in Republic Act No. 7648 and 9136;

2. To describe the manifestations of the policy lapses and gaps in the IPP problems of Iligan City; and,

3. To recommend policy inputs for enhanced implementation.

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Objectives of the Study

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This qualitative study employed content analysis of existing documents, which served as basis for policy recommendations.

Methodology of the Study

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Scope and Limitation

The study delved on the policy lapses and gaps in the energy laws of the Philippines as context of the IPP problems in Iligan City. It was limited to the content analysis of Republic Acts 7648 and 9136 in relation to the disposition of IPP’s assets acquired by the local government of Iligan City.

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Significance of the Study

1. Congress of the Philippines. The study provides the lawmakers of the House of Congress with inputs on the lapses and gaps of RA Nos. 7648 and 9136 for legislative review. 2. Local Government Units. The study provides the LGU executives and legislators with information regarding the consequences of the take-over of large assets particularly in the various forms of encumbrances on the sale of assets.

Ariel P. Anghay


3. Power Sector Assets and Liabilities Management Corporation (PSALM Corp.). The study provides insights into the actual problems encountered in the disposition of real estate assets acquired from NPC. 4. Sangguniang Panlungsod of Iligan City. The study provides some explanations for the lapses and gaps in the policy on Build-Operation-Transfer and how such lapses and gaps impact the acquisition of real estate assets by the LGU.

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5. University of Makati (CGPP). The study serves as reference material for students and faculty of the graduate studies on the impact of policy lapses and gaps on the disposition and acquisition of real estate assets. 6. Development management and governance as a field of study. The study is useful in development management and governance as this provides an actual case of theories and concepts for effective and transparent public governance.

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THEORETICAL PARADIGMS AND RELEVANT LAWS

Globalization and the rapid development of information and communication technology have resulted in the interdependence of depressed economies around the world. Markets are opened allowing producers to penetrate more markets and consumers to have greater choices. The new competitive setting requires greater competitiveness so that each nation can participate in and benefit from globalization (Austria, 2010).

CHAPTER 2

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Theoretical Paradigms and Relevant Laws

The development experience during the past two decades has shown that the necessary step to enable a country to face globalization and participate in economic integration is by having domestic industries that are efficient and competitive. Economic integration presupposes that participating economies have already attained a high level of competitiveness and maturity of their production structures to be able to face regional and global competition.

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Every deregulation started in the hydrocarbon sector with the dismantling of government monopolies. This was in response to the 1970’s oil price shock that made government support monopolies with subsidies and ignore their unsustainable financial performance. Energy deregulation is oriented towards increasing competition in different parts of the supply chain and choice in energy demand. The electricity sector leads in this direction. Energy deregulation has implications on the economic, societal, and environmental fronts – the three dimensions of sustainable development (Lefevre and Todoc, 2001).

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Energy deregulation is defined in broad terms and encompasses privatization, the sale or transfer of government assets to the private sector, and restructuring, the move towards more competitive markets. Energy deregulation also implies transition from regulated or controlled to market-based energy prices. Asia covers selected countries in East Asia and the Pacific (Southeast and Northeast Asia) and South Asia and these sub regions taken together.

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In the power industry, the opening up to private and foreign direct investments led to the mushrooming of independent power projects in the region in response to the strong growth in electricity demand and the inability of these economies to finance the needed capital investments. IPP’s have been successful in meeting the expected growth in demand, but the financial crisis in 1997-1998 has expressed flaws in this kind of arrangement, which is typical of a single buyer model and called for more competitive arrangements or ultimately consumer choice. The financial crisis has renewed the thrust towards privatization, which is viewed as the long-term solution to structural weaknesses not only in the energy industries but also in the economics as a whole.

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Independent Power ProducersThe entry of Independent Power Producers (IPP) has

created a paradox. While there was increasing supply of power generated by the state-owned National Power Corporation (NAPOCOR), there was a higher electricity rate for consumers, largely because of ill-advised contracts it drew with the numerous IPPs. NAPOCOR has entered into 48 IPP contracts since 1991, when there was crippling power shortages with more than half of these contracts made during Ramos’ Presidency.

The Philippine Center for Investigative Journalism study revealed that Ramos personally pushed for the fast approval of some of the most expensive power deals despite warnings from within the government and the World Bank that an impending oversupply for electricity could push prices.

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NAPOCOR paid a variety of fees, often in excess of what it should be paying the IPPs. These payments came in the form of fixed operating and maintenance cost for power plants that were hardly running. NAPOCOR was paying much more than it should for the electricity generated by the IPPs that were overcharging capacity fees, or the amount the IPPs collected to recover their investment.

IPP operations cost the government $14 billion excluding the fuel that NAPOCOR pays for and supplies to the power plants, and which cost it Php. 35 billion. NAPOCOR pays IPPs and Php 4 billion every month for the fixed cost of energy whether or not the plants actually generated or supplied the electricity. To recover the expenses in dealing with the IPPs, NAPOCOR passes on the burden to consumers in the form of a Purchased Power Adjustment (PPA) rate. So, the consumers pay both the power consumed and the PPA – a 30-to-50 percent addition to the average bill.

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The Philippines has the second highest electricity rate in Asia after Japan. This prompted Senator Sergio Osmeña III to state in his speech in 1995: “The kindest thing I can say is that this is gross mismanagement. They over-contracted overpriced power plants. The IPPs probably provided the government with executive incentives to allow such onerous contracts. This is tantamount to graft and corruption because under the law, anyone who enters into a contract that is disadvantageous to the government should be held liable.”

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Relevant Laws1. Republic Act No. 8525 – An Act prescribing urgent related

measures necessary and proper to effectively address electric power crisis and for other purposes. This Act is otherwise known as the Electric Power Crisis Act of 1993.

This Act discusses negotiated contracts in which the President, acting in the public interest and whenever advantageous to the government, may enter into negotiated contracts for construction, regain, rehabilitation, improvement, or maintenance of power plants, projects and facilities. Such contracts must meet three criteria, to wit: (1) proven competence and experience in similar projects, (2) competent key personnel and sufficient and reliable equipment, and (5) sound financial capacity.

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Relevant Laws1.Republic Act No. 8525

Furthermore, the Act provides for each House of Congress oversight committees composed of five (5) members each to over see the implementation of this Act and to submit periodic reports, evaluations and recommendation to the Senate and the House of Representatives.

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2. Republic Act No. 9136 An Act ordaining reforms in the electric power industry,

amending for the purpose certain laws, and for other purposes. The Act is known as the “Electric Power Industry Reform Act of 2001, the EPIRA Law.

The Act delves on the organization and operation of the National Transmission Company (TRANSCO). It also covers wholesale electricity spot market, retail competition and opens access, NPC stranded debt and contract cost recovery, universal charge, regulations, returns and tax rates for indigenous energy resources, unbundling of rates, and functions.

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The Act defines the role of the Department of Energy, regulation of the electric power industry, compensation and other emoluments for ERC personnel cross ownership, market power abuse, and competitive behavior. Moreover, it deals on the privatization of these assets of the National Power Corporation and the creation of the Power Section Assets and Liabilities Management Corporation (PSALM Corp.).

Moreover, the Act also discusses the promotion of rural electrification particularly conversion of electric cooperatives and additional mandate of the National Electrification Administration (NEA).

2. Republic Act No. 9136

CHAPTER 3UNIT ANALYSIS

Geographical Location and

Socio-economic Profile

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Iligan City is situated in Northern Mindanao, Region 10, approximately 800 kilometers southeast of Manila. It was created as a city on June 16, 1950, through Republic Act 525. The land sprawls across 81, 337 hectares (813.37 sq. km.). The climate is a pronounced dry spell for one to three months with rainfall evenly distributed throughout the year. The population of Iligan City is 308, 046 as of August 2007 National Statistics Office Census.

There are 44 barangays in Iligan City. The religion is predominantly Roman Catholic. The main dialect is Cebuano. The city’s classification is highly urbanized. There are 11 major industries, 24 banks (14 public; 20 private), 23 waterfalls, 8 springs, and 15 caves.

Geographical Location and Socio-economic Profile

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The city has 181 schools (106 public; 75 private; 17 madrasah) including vocational and technical schools. The literacy rate is 94.71 percent. There are 5 hospitals (4 private; 1 public), 49 barangay Health Centers, and one Main Health Center. The city has one public seaport-9 private and 2 fishing ports.

Churning for industrialization are three hydro-electric power plants. The communication infrastructure includes 4 digital telephone systems, 2 wireless telephone systems (Smart Comm. Inc. and Globe), 2 cable stations, 1 TV station, 8 radio stations, managerial agencies and cargo forwarders, 1 post office, 4 newspaper publications, 4 Internet service companies (Iligan Global Across Network, MARANET, Weblink, Philweb) and other private Internet cafes located within the city.


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As to the transport system, the city has two bus companies and four shipping lines.

Iligan City is multicultural with a mix of Christians, Muslims, and other ethnic tribes. Although peace and order has been occasionally marred by bomb explosions and national calamities, the city has remained resilient and is able to sustain the socio-economic needs of the residents.

CHAPTER 4POLICY ANALYSIS

AND CRITICAL DISCUSSION

POLICY ANALYSIS AND CRITICAL DISCUSSION

A. STAKEHOLDER ANALYSISBrief History of Energy Regulation

The regulation of public services started way back in 1902 with the enactment of Act No. 520 that created the Coastwise Rate Commission. In 1906, Act No. 1507 was passed creating the Supervising Railway Expert. The following year, Act No. 1779 was enacted creating the Board of Rate Regulation. Then, Act No. 2307, which was patterned after the Public Service Law of the State of New Jersey, was approved by the Philippine Commission in 1914, creating the Board of Public Utility Commissioners, composed of three members which absorbed all the functions of the Coastwise Rate Commission, the Supervising Railway Expert, and the Board of Rate Regulation (www.doe.gov.ph, downloaded June 19, 2012).

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http://www.doe.gov.ph/


Thereafter, several laws were enacted on public utility regulation. On November 7, 1936, Commonwealth Act No. 146, otherwise known as the Public Service Law, was enacted by the National Assembly. The Public Service Commission (PSC) had jurisdiction, supervision, and control over all public services, including the electric power service.


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Ariel P. Anghay

On September 24, 1972, then President Ferdinand E. Marcos issued Presidential Decree No. 1, which ordered the preparation of the Integrated Reorganization Plan by the Commission on Reorganization. The plan abolished the PSC and transferred the regulatory and adjudicatory functions pertaining to the electricity industry and water resources to then Board of Power and Waterworks (BOPW).

On October 6, 1977, the government created the Department of Energy (DOE) and consequently abolished the OIC, which was replaced by the creation of the Board of Energy (BOE) through Presidential Decree No. 1206. The BOE, in addition, assumed the powers and functions of the BOPW over the electric power industry.



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On May 8, 1987, the BOE was reconstituted into the Energy Regulatory Board (ERB), pursuant to Executive Order No. 172 issued by then President Corazon C. Aquino as part of her government’s reorganization program. The rationale was to consolidate and entrust into a single body all the regulatory and adjudicatory functions pertaining to the energy sector. Thus, the power to regulate the power rates and services of private electric facilities was transferred to the ERB.

On December 28, 1992, Republic Act No. 7638 was signed into law, where the power to fix the rates of the National Power Corporation (NPC) and the Rural Electric Cooperatives (RECs) was passed on to the ERB. Non-pricing functions of the ERB with respect to the petroleum industry were transferred to the DOE, i.e., regulating the capacities of new refineries.

POLICY ANALYSIS AND CRITICAL DISCUSSIONA. STAKEHOLDER ANALYSISBrief History of Energy Regulation

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1993 Power Crisis- The Birth of R.A. 7648RA 7648 Electric Power Crisis Act of 1993 was approved by the Senate and House of Representatives of the Philippines that gave the President of the Philippines, Fidel V. Ramos, and the power to implement any measures to address the pending power crisis. The Act declares the policy of the state to adopt adequate and effective measures to address the electric power crisis that disrupted the country’s economic and social life and assumed the nature and magnitude of a public calamity. It gave the current president a power to enter into negotiated contracts for the construction, repair, rehabilitation, improvement or maintenance of power plants, projects and facilities to effect immediate solution to the power crisis that hampered the growth of the nation economically and socially. In addition, the return on rate base was established ensuring the rate of return of investments.


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1993 Power Crisis- The Birth of R.A. 7648 Rate of return is the assurance given by the government to the private investors in the power industry to recover its investment with a fair return through establishment of a minimum fixed rate of return. Reorganization of the National Power Corporation, a government-owned and controlled corporation that monopolizes the operation and maintenance of power generation and distribution has been included to make it more effective, innovative and responsive to the power crisis. The authority granted to the president under this act was one (1) year.The President had signed over 40 independent power producers’ (IPP) contracts including the Iligan diesel power plants 1 and 2 that resulted in an oversupply of power plants that, to this day, power consumers have to pay for owing to the take-and-pay provision in the contracts that were all given sovereign guarantees by the state.


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Iligan Diesel Power PlantsIligan Diesel Power Plants (IDPP) 1 & 2 were the first,

majority Filipino-owned Build to Operate Transfer (BOT) fast-track power project located in Mapalad, IliganCity. These plants were aimed at augmenting supply of power in the Mindanao region, which was experiencing shortage of power because of the long drought caused by El Niño phenomenon that lowered the output of the hydro power plants of National Power Corporation. The go signal to fast track the establishment of IPP contacts and bypass the usually long and tedious process for government projects was given by the President; hence, IDPP came into existence.


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Iligan Diesel Power PlantsIDPP was under the joint undertaking of Northern

Mindanao Power Corporation (NMPC) of the Alcantara Group and Tomen Corporation of Japan. The Alcantara group is a diversified Filipino-owned conglomerate based in Mindanao. A leading manufacturer of plywood and cement, the Alcantara group is also extensively involved in agri-business, real estate development, transportation, and marketing. Tomen Corporation is one of the largest Japanese trading companies.


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Iligan Diesel Power PlantsUnder the BOT scheme, NMPC operates the 58mw power

plant and the 40mw power plant for ten and twelve years, respectively. After these periods, the ownership of the two plants would be transferred to the National Power Corporation at no cost and consequently to the local government of IliganCity.

The plant sprawls over 7.9 hectares of private land immediately bounded by Mapalad community at the south and Alsons cement quarry site at the north. There are 8 major infrastructures, namely substations, power plant no.1, power plant no. 2, heavy oil tank farm, production office, water reservoir, multi-purpose court and site office.


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Iligan Diesel Power Plants On June 8, 2001, Republic Act No. 9136, otherwise

known as the Electric Power Industry Reform Act (EPIRA) of 2001 was enacted. The Act abolished the ERB and created in its place the Energy Regulatory Commission (ERC), which is a purely independent regulatory body performing the combined quasi- judicial, quasi-legislative, and administrative functions in the electric industry.


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The privatization of the NPC assets intends to achieve the following objectives (IRR of EPIRA):

To ensure and accelerate the total electrification of the country;To ensure the quality, reliability, security and affordability of the

supply of electric power;To ensure transparent and reasonable prices of electricity in a

regime of free and fair competition and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products in the global market;

To enhance the inflow of private capital and broaden the ownership base of the power generation, transmission and distribution sectors;


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The privatization of the NPC assets intends to achieve the following objectives (IRR of EPIRA):

To ensure fair and non-discriminatory treatment of public and private sector entities in the process of restructuring the electric power industry;

To protect the public interest as it is affected by the rates and services of electric utilities and other providers of electric power;

To assure socially and environmentally compatible energy sources and infrastructure;

To promote the utilization of indigenous and new and Renewable Energy Resources in power generation in order to reduce dependence on imported energy; and

To ensure consumer protection and enhance the competitive operation of the electricity market.


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The Local Government of Iligan CityIligan City benefited from the establishment of the

Iligan diesel power plants through tax collection for it also collected real estate taxes for the diesel units. Unfortunately, when the diesel plants were turned over to the National Power Corporation on CY 2003 and CY 2006 after ten years of operation from the IPPS, NPC was unable to pay its real estate taxes amounting to (Php 392, 527, 159.46). Hence, Iligan City filed a resolution to take control of the power plants through legal means. Eventually, Iligan City took the ownership of the plants.

POLICY ANALYSIS AND CRITICAL DISCUSSIONB. SWOT ANALYSIS

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-Strengths Immediately addresses the power crisis Higher confidence of investors Investment protection Short-term solution Stable supply Infusion of more fresh funds -Weaknesses Power rate instability Consumer disadvantaged Low government control Low participation of local investors due to higher

competition with foreign investors Onerous contract in favor of the investors Non-concrete solutions to the recurring problem

POLICY ANALYSIS AND CRITICAL DISCUSSIONB. SWOT ANALYSIS

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-Opportunities Consider previous experience to improve the policyImplement other solutions to the recurring problemConsider other stakeholders’ opinion in addressing the recurring

problemEnhance the advocacies of the government about the policyFocus on the root cause of the recurring problems-Threats Difficulty to infuse new funds from the governmentMarket instabilityHigher cost of power generationEnvironmental concerns/ problem

POLICY ANALYSIS AND CRITICAL DISCUSSIONCRITICAL DISCUSSION

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Policy Lapses and Gaps in RA No. 7648Republic Act No. 7648 is an Act

prescribing urgent related measures to effectively address the Electric Power Crisis and for other purposes. This Act is known as the Electric Power Crisis Act of 1993.


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Policy Lapses and Gaps No. 1Sec. 3. Negotiated Contracts. The law provides that the

President may enter into negotiated contracts for the construction, repair, rehabilitation, improvement or maintenance of power plants, projects, and facilities.

The policy lapse in negotiated contracts is the granting of sole authority to the President, opening the vulnerability to award the contracts to the Presidents’ favored few. The requirements are not stringent. What are required of the contractors are (1) proven competence and experience in similar projects, (2) competent key personnel and sufficient and reliable equipment, and (3) sound financial capacity.


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Policy Lapses and Gaps No. 1 The requirements are perceptual. How does one measure competence and experience? The requirement should have been a clearance of the Commission on Audit that proves the track record of contractors in entering into contracts. A delinquent contractor who does not have a pending case in court can get the negotiated contracts as long as he is in good graces with the President. COA clearance should be made a requirement to show that projects entered into are delivered on time at the agreed cost.


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Policy Lapses and Gaps No. 1The second requirement, competent key personnel and

sufficient and reliable equipment, is also perceptual. What are the objective bases for such criterion? The policy is silent on independent appraisers, local or foreign, that can render impartial judgment on the competence of personnel and the reliability of the equipment of contractors. Having independent appraiser’s guarantees that only those who are fit can take part in negotiated contracts.


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Policy Lapses and Gaps No. 1 The third requirement is sound financial capacity. The policy is silent on the participation of financial analysts, local or foreign, to render judgment on sound financial capacity. Clearance of the BIR Commissioner can be a good mechanism in promoting responsible business practices among the contractors.RA 7698 is designed to fast track energy projects by effectively paralyzing the government check-and-balance mechanism by centralizing all powers to the President.


Ariel P. Anghay

Policy Lapse No. 2. Return on Rate BaseThe policy provides cushion for poor households to absorb the impact of power hikes through provision of non-increase in power bills to households with power consumption less than 100 kilowatt hours per month. This means that the urban and rural poor households are protected from power rate increases. The difference is that the standard power rates will be absorbed by the bigger households and businesses, which will also bear the brunt of power rate increase. Hence, the business sector will pass on the burden of the power hikes to the consumers through price increase in their products or services.


Ariel P. Anghay

Policy Lapse No. 2. Return on Rate BaseThe electricity generated by NAPOCOR is sold in bulk to the electric cooperatives that are mandated to affect the socialized power rates to the consumers. Thus, the electric cooperatives would bear the burden of having to pass on to the business consumers and the bigger households the higher power rates.In effect, the state uses the private sector to subsidize power rates through the policy, worsening the economic crisis due to the energy crisis.


Ariel P. Anghay

Policy Lapse No. 2. Return on Rate Base

The passage of emergency powers given to the President to take control of the power situation is a solution that brings advantages and disadvantages to all stakeholders. Considering the power crisis in the 1990’s and the current power crisis, the existing policies should be modified so as to create a win-win situation and to bring concrete and lasting solution to the problem.The experience of Iligan City with the Iligan Diesel Power Plant should be considered in formulating policies with regard to Build-Operate-Transfer Scheme.


Ariel P. Anghay

Lapses and Gaps of the RA No. 9136 EPIRA LAW1. Power Sector Assets, and Liabilities Management

The transfer of assets, liabilities, IPP contracts, real estate, and all other disposable assets is wholesale. There is no clear provision for the evaluation of accountability of those involved in the IPP contracts and real estate for possible abuse of executive authority. Thus, it was easy for the PSALM to sweep under the rug its culpabilities for the consequential effects of its decisions. Right from its creation, PSALM has been saddled with liabilities and difficulty in disposing of less performing assets.


Ariel P. Anghay


The stranded debts and contract cost of the NPC are passed on to the consumers through the ERC-mandated universal charge. Thus, the public is paying for the irresponsible, if there is any, management decisions of NPC.


Ariel P. Anghay


The stranded debts and contract cost of the NPC are passed on to the consumers through the ERC-mandated universal charge. Thus, the public is paying for the irresponsible, if there is any, management decisions of NPC.


Ariel P. Anghay

Lapses and Gaps of the RA No. 9136 EPIRA LAW Political Economy of IPPs

In 1990, the Philippine government passed the Republic Act 6957, which provided the legal framework for the private sector participation in infrastructure development, and promulgated the Energy Crisis Act (Republic Act No. 7648) to empower the executive branch to fast track the IPP projects in 1991 when the power crisis became full blown (Wu and Sulistiyano, 2010). The prominence of IPP is a result of convergence of interest among private investors, development agencies, and politicians. Private investors from US and Europe were looking for investments due to excess supply in the industrial world. Development agencies considered IPP as a move towards liberalization and privatization of the power sector. The politicians found IPP model appealing due to seemingly low political risks. Due to the power crisis, the tracking of the IPP proposal was legitimized while the private sector was backed up with financial resources and the development agencies were supplied with intellectual capital.


Ariel P. Anghay

Lapses and Gaps of the RA No. 9136 EPIRA LAW

Lapses of the IPP1. Competitive Body that could have reduced PPA prices by 25% did not happen because exclusive bilateral negotiations took place.2. Many IPP deals were initiated from unsolicited bid that might not reflect the needs and preference of the planning agencies for the power sector.3. The outcomes of the negotiations of PPAs were not made available to the public, effectively shielding them from the public scrutiny. Many IPPs were developed through cronyism.4. The political patronage and cronyism do not only explain why the IPPs were overly expensive but also why the expansion was excessive.


Ariel P. Anghay

Lapses and Gaps of the RA No. 9136 EPIRA LAW

Deed of Conditional Sale between Iligan and Conal Holdings Corporation for the Iligan Diesel Power Plant

A compromise agreement between the local government of Iligan City and PSALM/NPC on the Iligan Diesel Power Plant was intended to end the litigations and to settle the ownership of these plants.


Ariel P. Anghay

Lapses and Gaps of the RA No. 9136 EPIRA LAWDeed of Conditional Sale between Iligan and Conal Holdings

Corporation for the Iligan Diesel Power PlantThe Iligan Power Plant was acquired by the City of Iligan

through auction on April 25, 2007, after the National Power Corporation (NPC) failed to pay the assessed taxes even while the CBAA case filed by NPC was still pending before the Regional Trial Court, Branch 3, Iligan City. Since then, the assessment and the auction sale cases have been pending before the Central Board Assessment Appeals and the Regional Trial Court of Iligan City. Thus, the City Mayor, Hon. Lawrence Ll. Cruz, duly authorized by the Sanggunian under Resolution No. 10-358, entered into the compromise agreement with PSALM/NPC (Ranulo D. Ceras, Chief of Staff, communication to Mayor Cruz August 7, 2010).


Ariel P. Anghay


Corporation for the Iligan Diesel Power Plant

Through the efforts of the City Mayor upon the authority given by the Sangguniang Panlungsod under Resolution No. 10-323, independent appraisals were done to assess the value of the plant. It was discovered that even if the City would have absolute ownership of the plants, the City cannot run and maintain the plants due to lack of technical capability. The logical option was to sell the plants to the players in the power industry to recover the money to replace deprived income from failure to pay taxes on real property.


Ariel P. Anghay


Corporation for the Iligan Diesel Power PlantThe City decided to resell the property in a second auction on

October 10, 2008, as per Ordinance No. 08-5367 as embodied in Resolution No. 08-611. The auction was published in the Mindanao Gold Star Daily. However, there was no bidder during the auction. It turned out that any buyer would have to face the problem of land acquisition from the Alcantaras. While NPC failed to settle the tax dues on its power plants, the Alcantaras paid taxes on their land property upon which the power plants were established. Hence, the local government of Iligan City could only acquire the power plant and resell it but not the lands. The land issue could not be resolved by the local government since it could not acquire it. The most logical buyer of the power plant would be the Alcantaras because they own the land as well.


Ariel P. Anghay


Corporation for the Iligan Diesel Power PlantThe Alcantara group through Conal Holdings Corporation

offered to pay Php 275 million on November 10, 2008, for the IDPP with conditions such as a waiver of NPC over the properties since NPC questioned in court the sale of the property by the local government. NPC also submitted an offer of Php 90 M, a price deemed very low for the local government to agree to the sale.

In Resolution No. 09-96, the Sanggunian requested the City Mayor to step up the resale of the IDPP and prompted him to negotiate with the PSALM/NPC for its unconditional recognition of the City’s ownership over the IDPP. Hence, PSALM/NPC cleared the way for the local government to sell the property.


Ariel P. Anghay


Corporation for the Iligan Diesel Power PlantFrom an initial bid of Php 275 million, the Conal Holdings

Corporation upped the offer to Php 300 million to finally seal the deal. Moreover, Conal offered the local government its services to man the plants after the turning over of the facilities to the city by the PSALM/NPC.

Thus, the Compromise Agreement dated June 29, 2010, was signed. NPC agreed to turn over the plant to the City of Iligan. The case NPC filed at the CBAA and RTC was dismissed pursuant to the joint motion filed by both NPC and the city of Iligan. Conal Holdings price deal was Php 300 M.


Ariel P. Anghay


Corporation for the Iligan Diesel Power PlantThere was an obstacle to the peaceful sale due

to the offer made by the Atayde Group, PGMC, and the Borja Group connected with the Iligan Light. The offer was Php 500 M as contained in a letter dated December 16, 2010. On December 16, 2010, the City Mayor wrote back Mr. Atayde, declining the offer since the sale of the plants has already been made with Conal Holdings Corporation (CHC) as approved by the Sangguniang Panlungsod.


Ariel P. Anghay


Corporation for the Iligan Diesel Power PlantThe offer led to a frenzy of debates and exchanges

of ideas, justifications and position papers. On March 7, 2011, the Sangguniang Panlungsod passed Resolution No. 11-189 creating a task force to resolve by negotiation the sale of the power plants (IDPP and IDPP2). The task force was headed by Councilor Moises G. Dalisay Jr.

On May 9, 2011, the Ad Hoc Committee introduced points of reference for the sale to resolve the land issue, giving the owner of the land a bidding advantage. One point of reference was the awarding of the plants to Conal Holdings Corporation. The Borja group that offered Php 500 million asserted that it won the bidding because its offer was higher than the Php 300 M offer of Conal Holdings Corporation.


Ariel P. Anghay

Lapses and Gaps of the RA No. 9136 EPIRA LAWDeed of Conditional Sale between Iligan and Conal

Holdings Corporation for the Iligan Diesel Power PlantThe sale of the plant to Conal Holdings is under review by

an appropriate government agency, the Commission on Audit, to determine if the appropriate procedure was observed.

To date, the ownership of the plants has not been transferred yet to Conal Holdings.

POLICY ANALYSIS AND CRITICAL DISCUSSIONINTEGRATION OF ANALYSIS

Ariel P. Anghay

The Build-Operate-Transfer (BOT)Law or Republic Act 7718 allows the private sector to construct big government projects. The BOT scheme offers incentives or “sweeteners” to the government such as tax holdings, profit repatriation, and duty and contractors’ tax exemptions. Thus, all IPP contracts have attractive guarantees and incentives to provide comfort in financing ventures that entail high capital and risks. The lapse is that IPPs are funded by foreign loans secured with a form of sovereign guarantee on performance undertaking (PU). If the IPPs are defaulted, the government pays. The PUs carry the full backing of the government and are treated as quasi-sovereign debt enabling the power companies to raise funds abroad rather than use their own money. While the Ramos’ administration declared IPP contracts as investments, they are in fact the country’s future debts.


Ariel P. Anghay

Another lapse in policy is the provision in the contracts that guarantee 15 to 25 years of IPP’s profitability whether or not the plant operates.1. Take or Pay. NAPOCOR is obliged to pay for most of the power produced by the IPP whether or not NAPOCOR actually needs it.2. Force Majeure Provisions that force the government to pay the IPPs even during fortuitous events like labor strikes, insurrection, war, calamities and natural disasters.3. Contracts are quoted in US dollars so that all exchange –rate fluctuations are borne by the government.4. The government could take over certain responsibilities of the IPP during project implementation such as plant site, right of way, transmission lines, refund of tax payments, fuel cost guarantee that requires NAPOCOR to supply and pay for fund used to run the plants.


Ariel P. Anghay

The Build-Operate-Transfer scheme lacks clear provision for ownership transfer. There should be a clear stipulation ensuring no encumbrance as to the disposal of the BOT project controlled by the local government due to land property. As experienced, the local government had difficulty disposing of the BOT project due to land property issue, that is, the BOT project was sold apart from its land property.


Ariel P. Anghay

The sale of property such as IPP shall be done in open bidding or Swiss challenge. In case only one bidder comes forward, there is a declaration of no successful bidding. In cases where the holder of the IPP happens to be the LGU, there are no expressed provisions on the conditions by which the IPP could be sold. Hence, the IPP can be sold at a price too low than its assessed market value by independent appraisers- a situation that is inimical to the interest of the government.An LGU that lacks the logistical and manpower supply to maintain a confiscated property may incur heavy losses. To avert any losses, the LGU may resort to selling the IPP property at a much lower price.

In view of the findings of the study, the following policy options are recommended:1. Amendments to R.A. NO. 7648 and R.A. NO.9136 1.1. Limit the authority of the President in entering into negotiated contracts. Effective controls should be put in place to insure that the terms of the contracts are disclosed to the public and that the basis for selection of contractors be subject to review and verification by international appraisers only to prevent bribery to secure contracts. Immediate family members of the President and his wife should be banned from participating in the negotiated contracts to prevent nepotism.

In view of the findings of the study, the following policy options are recommended:1. Amendments to R.A. NO. 7648 and R.A. NO.9136 1.2 Guidelines on Conditions of Turnover for expiring IPP contracts be promulgated to include the manner of disposition of assets in case of confiscation due to non-payment of taxes. Moreover, the BIR should impose stricter monitoring of and harsher punishment against IPP’s that failed to pay yearly taxes on plants and equipment particularly on the last 5 years prior to expiry of contract. It is clear that the NPC purposely defaulted on taxes because it planned to redeem at a much lower price the confiscated property of the Iligan IPP’s.

In view of the findings of the study, the following policy options are recommended:1. Amendments to R.A. NO. 7648 and R.A. NO.9136 1.3 Condition on the grant of IPP contract must specify that the ownership of the plants and equipment and the land upon which those are established should be one person or judicial entity only. This is to ensure that in the event of expiry of contract, the disposition of the assets will not be hampered by separate ownership of land and plants.

In view of the findings of the study, the following policy options are recommended:

2. Review the culpabilities of decision makers involved in awarding the contracts and set up an independent IPP Commission to implement the findings of the review panel created for such purpose and mete due punishment: erring officials should be listed and barred from engaging in government service.


3. Judicial review by the Supreme Court on the constitutionality of the incentives and sweeteners offered by the Philippine government as stipulated in the Build-Operate-Transfer law. The results of the judicial review will finally determine the need to repeal the law and/or amend specific provisions that are onerous and inimical to the interest of the nation.


4. Prosecute Former President Fidel V. Ramos since all research leads to his gross mismanagement of the power industry that compromised the government into honoring contracts of IPP until 2028. Ramos deserves to answer for his culpabilities.

The policy paper has led to the following conclusions:1. The granting by Congress to President Fidel V. Ramos emergency powers to deal on the electric power crisis created heavy problems and serious economic consequential effects far beyond the term of President Ramos’ office way down to 2028 when the last IPP contract shall expire. What were touted as IPP investments become long-term debts of the country. IPP spawned more problems than solution to the power sector crisis.

The policy paper has led to the following conclusions:2. The terms to motivate energy power industry players to join Build-Operate-Transfer scheme were onerous and grossly disadvantageous to the political economy of the country. That the indebtedness of the government due to the exorbitant fees it paid to IPP’s whether they supply power or not undermines correct and judicious intentions and prudent management of the energy sector by government leaders.

The policy paper has led to the following conclusions:3. That the erring officials remain unpunished and some are even back to government service smack accountability and good public governance. The nation cannot begin the healing and recovery process unless the perpetrators are brought to justice and made to account for their sins against the Filipino people.

The policy paper has led to the following conclusions:4. The gross negligence of President Fidel V. Ramos and his minions to the stark warnings of the World Bank and the government agencies on the perils of the decisions made to accommodate more negotiated contracts that generate electricity more than what was needed was evident in the transactions. This clearly shows that BOT enriched those who were close to the President at the expense of the country’s welfare.

The policy paper has led to the following conclusions:5. The lapses and gaps in the laws on the electric power energy created snowballing problems until 2028 that, when not addressed, will create a permanent scar in the country’s political economy.

Government & Nonprofit

Policy Lapses and Gaps on the Formulation of Energy Laws of the Philippines:The Case of Iligan Diesel Power Plants