PSALM’s ‘STRANDED COSTS” –The Just and Equitable Methodology to Spread the Burden and Time to Rethink the Strategic Use of Remaining NPC Assets

David Celestra Tan, MSK
29 July 2016

Electric consumers nationwide are being charged the so-called stranded costs of the privatization and deregulation of the power sector as provided for in the EPIRA Law of 2001. This item in your bill, Universal Charge – SCC is now P0.19 per kwh and will most likely increase as ERC allows PSALM to recover its accumulated losses. This could reach P0.30 to P0.50 depending on how many years they spread out the recovery period.

The way things are going all debts and losses of NPC that would not be covered by PSALM’s proceeds and collections for privatization would eventually be recovered from electricity consumers nationwide. The losses and deficits are combinations of so many factors, many not be the fault and to the benefit of the consumers. Hence it would be a grave injustice to our people to make them responsible for all the financial losses.

As of October 2015, PSALM is supposed to have sold NPC assets worth US$19.887B with $9.991B collected and $9.896B collectible. It is confusing how much of this money had been used to pay off NPC’s debts as PSALM is mandated by the EPIRA Law.
Legal Basis of the Stranded Cost Charge

There are two main parts to it. The Stranded Debts of NPC and the Stranded contract costs of NPC and the Epira Law defined them as:

“Stranded Debts of NPC” refer to any unpaid financial obligations of NPC which have not been liquidated by the proceeds from the sales and privatization of NPC assets;

“Stranded contract costs of NPC or distribution utility” refer to the excess of the contracted cost of electricity under eligible contracts over the actual selling price of the contracted energy output of such contracts in the market. Such contracts shall have been approved by the ERB as of December 31, 2000;

SEC. 33. Distribution Utilities Stranded Contract Costs Recovery. – Stranded contract costs of distribution utilities shall refer to the excess of the contracted cost of electricity under eligible contracts of such utilities over the actual selling price of such contracts in the market. Such contracts shall have been approved by the ERB as of December 31, 2000.

SEC. 34. Universal Charge. – Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC., shall be imposed on all electricity end-users for the following purposes:

(a) Payment for the stranded debts in excess of the amount assumed by the National Government and Payment for the stranded debts in excess of the amount assumed by the National Government and stranded contract costs of NPC and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry;

Where are the Proceeds Going?

To give you an idea on how things are going in paying off NPC debts from the proceeds of privatization, Energy writer Myrna Velasco of the Manila Bulletin reported on September 28, 2014:

“PSALM president Emmanuel R. Ledesma Jr. has disclosed to Congress last week that as of June 2014, the level of power sector debts and contingent liabilities still hover at P609 billion for the principal portion and P150 billion in interest charges.

He reckoned that prior to privatization of the power sector in year 2000, the liabilities had been at P863 billion, while admitting that it had not really gone down that much from then due to array of factors.

In 2000, debts had been at P863 billion… as of June 2014, principal debts had been at P609 billion and interest charges at P150 billion,” Ledesma has noted.

The PSALM chief executive has echoed previous justifications given by his predecessors on the very slow or non-phase out of power sector liabilities despite the flow of hefty proceeds from the divestments of majority of the National Power Corporation’s (NPC) assets.

Ledesma cited the delay in privatization, which he noted had compelled PSALM then to resort to more borrowings to plug its cash requirements to settle maturing debts as well as on alignment of operating expenses of un-privatized generating assets.

Industry watchers, however, have been disputing some of PSALM’s claims – noting that part of the failure on liability management had been the faulty privatization package set for some assets and the ‘fire sale’ undertaken for other facilities.”

An observation of the list of privatized assets in 2012 as reported by the DOE, showed that PSALM privatized 1,296.9mw of coal plants at a price of $996 per kw capacity. A Filipino company buyer paid $602.85 per kw but a foreign IPP paid $1,464.56 per kw after several Filipino conglomerates tried to lowball it at $551 per kw and later upped it to $1,152.75 per kw.

In hydro plants PSALM sold 865mw at an average price of $1,424.88 per kw capacity mainly because a foreign partner of a local conglomerate got involved. In geothermal plants, PSALM privatized 1,202.53mw at an average price of $578 per kw to Filipino IPP’s.

It is in the sale of bunker c power plants where PSALM did terribly as if the plants were scrap. 368.5mw of running diesel plants in Mindanao and Panay islands were sold only at an average of $97.31 per kw capacity, just a little higher than scrap steel. The IPP buyer turned around and signed a 4 year power supply contract with its own distribution utility that will enable it to recover its buying price from PSALM in two (2) years. That’s the power of Monopsony! Now the loss in value is going to be passed on to the national electric consumers as part of stranded contract costs of NPC. (in the “Is the glass half-empty or half full” category, 300mw of NPC diesel plants were just abandoned and government got zero!. I am not kidding pare. This happened in the Philippines and not even the press said a hoot!)

It seems PSALM only got decent prices for the NPC assets when foreign buyers are involved who are willing to pay the true market value of the assets.

DOE figures show that PSALM already collected $9.991 billion but the NPC debts only came down P104 billion or $2.3 billion. Where did the $7.691 billion go? Those funds were specifically provided by law for payment of NPC debts. Isn’t there a law against misappropriating funds?

We believe it is not fair to consumers to make them pay for all the residual debts of NPC not covered by the proceeds of privatization of its assets. There are equitable ways that the debts should be taken cared of.

1. Only Stranded debts that are properly chargeable to consumers

NPC contracts and debts that became stranded because of the need to dismantle its monopoly and privatize its generating assets to create a competitive power generation sector.

2. Stranded contracts and debts resulting from failed government policy.

It would not be fair to dump these on the electric consumers. These include the cost of solving the power crisis of the 1990’s. The 700mw geothermal plant in Leyte was used only 50% in its first 10 years. The balance paid and guaranteed by the national government. The total 200mw of diesel plants in Mindanao that were hardly used. Losses from political projects in large hydro and minimum off take agreements. We must eliminate the higher cost of “fast tracking” the power projects from the consumers share.

3. Stranded debts resulting from neglect of government to protect NPC generating assets. Reduction of asset sales proceeds that patently were at “fire-sale” prices like many small hydro projects and power barges. One thing sad about many of the BOT projects was that at the time of the “T”, transfer of ownership to the government and after the government and the taxpayers have paid for it, PSALM negotiated the sale to the operators like the Navotas power complex from Hopewell, the Mirant assets in Pagbilao and Sual. Many diesel plants were just outright neglected as if they were unwanted assets of no value. People observed that the valuations were non transparent. The 100mw diesel plant in Iligan and the 200mw diesel plant in Bauang Ilocos Norte were allowed to be auctioned off by the local government for “non payment” of local taxes. P5 Billion in value lost. No one raised a hoot.

Another 100mw diesel plant in Panay island was built for P1.20 billion using equipment transferred from Batangas. Less than 2 years later NPC sold it to a well connected operator for P250 million with the diesel plants of Bohol thrown in for free. Then NPC gave the buyer a guaranteed revenue worth P300 million! Why do we do these things?

We forgot that consumers, both as electricity users and taxpayers, already painfully paid for those assets through their guaranteed take-or-pay provisions and when it was time to own them, we gave the assets away. Now the consequent leftover debts will again be charged to the consumers. When would we start showing mercy on the consumers?

It would be wonderful if a Presidential audit of these accounts is done to see how the proceeds of the privatization were used and why little seems to have been applied to reducing the debts as specifically mandated by the Epira Law. Why not hire an independent foreign auditor to sort all these out? (most local auditing firms are conflicted with big local power industry players).

4. Recurring losses and debts of NPC and PSALM The Stranded contracts and debts and losses were supposed to be during the implementation of restructuring of the power sector. It has been 15 years since the EPIRA Law was passed in June 2001. It is about time that there is a cutoff period and start treating NPC remaining assets as recurring.

Why should consumers continue paying for operating expenses and debts not paid because the proceeds were used somewhere else? 5. Time to rethink the smart use of NPC remaining assets

In late 2013 the power plants of the private generators started mysteriously conking out because of “boiler leaks”at about the same time, creating power shortages and sending the WESM spot markets skyhigh to P62 per kwh. The following summer the DOE raised the alarm bells on potential power shortage of 1000mw. The government came face to face with the reality that it had limited options to come to the rescue of the Filipino people. EPIRA barred the government from owning any power generating plant save for the off-grid areas. Section 71 opened the window for governments involvement in power generation in case of emergencies but required a tedious process, starting with a Presidential declaration of emergency and congressional approval, that will take too long to be useful to address power shortages in time.

Privatization or not it is clear that the people expect the government to solve power problems of supply and least cost rates. The government needs ready capability to maintain strategic power generating capacity and reserves. And the best place to start are those remaining power plants that can be used strategically to protect the public instead of giving them away at fire-sale prices to the well- connected who had been drooling over the Agus hydro complex and the CBK pump hydro complex. Selling Agus will turn it into an ancillary services plant and deny Mindanaons with low cost power. Expect an increase of at least P1 per kwh. The 600mw Malaya fossil fuel could be a strategic government asset. How about the Sucat power complex?

Who will buy them anyway at a fair price with Meralco’s power supply for the next 25 years are already locked up in their 4000mw of negotiated sweetheart deals with sister company generators?

Let us rethink about security of supply and the strategic use of NPC’s remaining assets. NPC still has many very qualified people who can run these plants. Especially since the sale of more than 4000mw of NPC plants had not made much of a dent in paying off the NPC debts. It would end up being charged again to the consumers through the ballooning UC-SCC charge.

When would we start having mercy on the electric consumers?

Matuwid na Singil sa Kuryente Consumer Alliance Inc

David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Was active in the finalization of the Epira Law and served as volunteer technical adviser to key Senatorial, Congressional, and Energy officials. Through his blog in retirement he seeks to share his expertise in power policy and strategy towards reducing the power cost in the country and eliminate abuses and monopolization.