IFC asked to study DOE circular on supply deals

by Lenie Lectura, 12 July 2015
from BusinessMirror

THE Department of Energy (DOE) has asked the International Finance Corp. (IFC), a member of the World Bank Group, to conduct a study on the agency’s latest circular that mandates all distribution utilities (DUs) and electric cooperatives (ECs)  to undertake competitive selection process (CSP) in securing their power-supply agreements (PSAs).

Resigned Energy Secretary Carlos Jericho L. Petilla said shortly after he stepped down that the study would focus on “the rule drafting for CSP.” Petilla signed DOE Circular 2015-06-0008, which was released on June 30.

“I also asked the IFC to look into CSP’s  effect in the WESM [Wholesale Electricity Spot Market], specifically how it will encourage merchant and peaking plants. The study will also look into this, not just on  how the guidelines should be carried out,” explained Petilla, when sought for comment.

The CSP circular basically requires all DUs and ECs to bid out their power requirements—instead of entering into negotiate contracts with power producers—which, Petilla said, is a more transparent way to do it, because it involves pass-through cost, meaning consumers are paying for it.

“I remember IFC saying that this is a bold move to the point that Washington is interested, because this will be the first time that a market-driven industry will bid out its procurement. Other countries will watch out how this will be implemented,” Petilla said.

Petilla expects industry stakeholders to oppose this all the way to the courts. Still, he challenged them to do so. “For me, this is just common sense. Why is it good, and why is it not good? I am quite sure that the DOE will take into consideration any opposition they have, but the main reason we will have on CSP is transparency.”

“Why I am interested? To make sure that, as I leave the DOE, I did everything for the good  of the consumers; and transparency is one of them. Now, if the DUs and ECs will raise other justifications, then I am quite sure the DOE will listen to them. Why object if you have
nothing to hide?” he commented.

Under the CSP circular, the bidding will be conducted by a third party duly recognized by the DOE and the Energey Regulatory Commission.

It is the ERC that will release the guidelines and procedures within 120 days from effectivity of the circular. “The IFC  study will also be submitted to the ERC. The IFC does not want to be political, saying that it’s not their job to sell the CSP. Some people say that this plan to implement the CSP will fizzle out  because it needs a strong political will; but I don’t think so, especially when the only objective here is transparency,” Petilla added.

The Manila Electric Co. (Meralco), the country’s largest DU, sources part of its power requirements via negotiated PSAs. The company has yet to comment on this.

AboitizPower, which also sources most of its power requirements via negotiated contracts, likewise, deferred comments, as it has yet to study the circular.

The Philippine Independent Power Producers Association Inc., meanwhile, is expected to issue a position paper on this.

Industry sources said the CSP is also meant “to eliminate self-dealing activities in cases when the DU has an affiliate or sister firms engaged in power generation.”

In the power industry, it is a known fact that Meralco has a power arm engaged in the generation business, while AboitizPower is also involved in the distribution business via Visayan Electric Co., Subic Enerzone Lima Enerzone, and Davao Light.

Petilla said the DUs should not worry about the possible financial implications of the CSP when it is implemented. “It will not affect the financials of DUs and ECs, because on their books generation is a pass-through cost.” Aside from transparency, Petilla earlier said it is also worthy to note that this policy will encourage investments in the power sector because it will not be monopolized by any of the big firms.

The circular states that “the DOE recognizes the adoption of competitive selection as a policy that will encourage investments in the power-generation business, thereby ensuring electric power- supply availability in a regime of transparent process in securing PSAs, which is an integral part of the power-sector reform agenda.”

Petilla said foreign firms with existing investments in the country’s power sector, say, AES Corp. and GN Power, will be inspired to do more
business in the country.  This also goes to other foreign investors that may want to enter in the power business.

“They don’t have strong connections with anybody, so it will be a level playing field because there are rules to follow,” he said.


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