Posted by: empowerconsumers | September 14, 2009

WHY LAPOCOF IS OPPOSED TO THE SALE OF THE AGUS AND PULANGUI HYDROPOWER COMPLEXES

LANAO POWER CONSUMERS FEDERATION (LAPOCOF) POSITION VS. THE PRIVATIZATION OF AGUS-PULANGUI HYDROPOWER COMPLEXES

I. IT WILL DEFINITELY INCREASE OUR ALREADY HIGH ELECTRICITY RATES

a) To Attract Buyers.  In preparation for privatization, generation rates are gradually increased so that it will be attractive to buyers.

b) For Competitive Pricing. When retail competition starts, the other producers of electricity such as coal, geothermal and oil which are more expensive than Hydro can be competitive against hydro.

We do believe that there are going to be incremental hikes again and again till NPC is up for bidding by 2011.

c) Gain Motive. The higher the winning bidder bids, the higher the electricity price we have to pay in the future so the winning bidder can recover its investment. Electricity rates are also expected to rise as a consequence of privatization as investors would try to recover their investments the soonest time possible.

For NPC to operate and maintain the aforesaid Agus and Pulangui generating plants, the Gain Motive is not a factor. There is only the ROI or Return on Investment to be considered

d) Free Market Trading. We must bear in mind that the heart of the EPIRA is deregulation thru privatization of generation plants. It is envisioned that with a free market in place, electricity rate will go down based on the assumption that retail competition will drive prices down.

But the experience of Luzon with the Wholesale Electricity Spot Market (WESM) which started trading in 2006, is that the recent high rate of electricity in Luzon is because of the more expensive power bought through the WESM. Contrary to its mission of providing good choice and cheap supply of electricity, the WESM has become a trading center of the most expensive electricity in the country.

In March, 2009 its peak trading was P10.68/kWh and in April, it reached almost P12/kWh. If you add to that the Transmission, Distribution, Universal Charges, etc., Luzon has one of the highest electricity rates in the world.

e) Market Power/Abuse. Since  the Agus/Pulangui Hydro Complex is 55.38% of the total  capacity available to the Mindanao Market, there is a high  possibility that a private firm owning the Agus/Pulangui Complexes would profitably drive up prices since it controls a significant chunk of the market. Given the weak regulatory tradition in the Philippines, the most likely scenario is the exercise of market power by the firm owning the Agus/Pulangui complex with price manipulation rather than competitive pricing.

Added to that is the possibility that the private firm owning the Agus/Pulangui Complexes  which can dictate the price would be able to gobble up other smaller plants which cannot withstand the competition. Or smaller plants would be forced to merge with the dominant player. With this scenario there would be no more retail competition defeating the purpose of the EPIRA.

Presently the WESM operation of Luzon brought about a transition from government monopoly to an enhanced private monopoly. Hence, instead of rate reduction, Luzon has one of the highest rates today.

f) Independent Power Producer Administrator (IPPAs).

For IPPs with contracts expiring after 2010, PSALM is required to appoint IPP Administrators or “middlemen” thru public bidding to manage the plants until such time the contracts have expired. In Mindanao, we have the Villanueva Coal Plants expiring in 2031.  These “middlemen” will surely jack up prices. But if Hydro maintains its cheap rates which will only happen if it is not sold, then these IPPAs could be controlled.

g) Cross- Ownership

Once Agus/Pulangui Complexes is sold, it may also happen that the new owner may own or may have controlling interests in distribution utilities because “cross- ownership” is allowed and may result in “sweetheart” supply contracts between distribution and generation.

II. Competitive Edge for Mindanao/ Investor Incentive

Mindanao’s greatest competitive advantage is the low cost of power it presently enjoys from our hydro plants. Effective March, 2009, the generation charge for the Philippines approved by ERC are as follows;

Luzon       =  Php 4.2648 /kwh

Visayas    =  Php 4.0339 / kwh

Mindanao =  Php 2.8177 /kwh

The reason why Mindanao has the lowest generation charge is because of the existence of the Agus /Pulangui hydro complexes. This is the edge that Mindanao has over Luzon and Visayas. In terms of infrastructure, development, peace and order, etc, we lag behind Luzon and Visayas. We cannot afford losing one edge, the low cost of electricity which could be the only major come on for investors to set up establishments in Mindanao. Investments which would generate employment that would improve the buying power of the people which in turn is a driver for businesses to thrive.

III. High RORB (Return On Rate Base)

For 2008, the rate base current audited value of all NPC-Agus /Pulangui Complexes is Php14,327 billion. The net revenue is Php 4,927 Billion which gives an RORB of 39.66%.

The high rate of return is just tremendous at nearly 40%.

IV. Sale of Other Government Assets

The Masinloc Geothermal Plant located at Zambales is valued at $930 Million. The investors paid only 40% and the remaining balance is payable for 7 years at $80 Million yearly which is actually the income of the plant itself.

NGCP put in $987.5 Million or 25 % in acquiring the right to operate TRANSCO which is valued at $3.95 Billion. The remaining $2.962 Billion or Php148 Billion (at Php50.00 to $1.00) is to be paid in 15 years. TRANSCO is earning Php15 Billion per year which is more than enough to pay NGCP’s yearly installment. In other words NGCP has only a minimal investment in its acquisition of a highly profitable jewel of our country.

EPIRA simply transferred the monopoly privileges from the state to “unbundled” interests of private and foreign state run conglomerates (Japanese, Chinese and Korean).

We must not forget our tragic experience with the privatization of the National Steel Corporation.

We are afraid that the Agus/Pulangui complexes, the Patrimony of Mindanao will be sold at a giveaway price to exploitative conglomerates which are mostly foreigners.

V. Security of Supply

a) Sabotages and other Security Risks which is an integral part of the operation and maintenance of our Power Plants which the present NPC is able to address quickly because of its experience in dealing with these situations.

We have this disturbing experience with NGCP, the concessionaire of our transmission lines. Last Nov 2008, there were 16 sabotaged towers of the 138 KV lines. Five were in the Saguiaran to Kibawe line via Bubong, Lanao del Sur. Repair has just started  this month, August 2009, (10 months).because of one reason or another. It has compromised the supply to Davao because coincidentally, Geothermal plant # 2 in Kidapawan broke down. Such that supply to Davao is insecure as of now. With TRANSCO before, these incidents would have been dealt with at once.

b) Labor Disputes

If privatized, Crippling Strikes may ensue. The employees have existing justified grievances now.

VI. Retail Competition in Mindanao

WESM began Commercial Operations in Luzon in June 2006 with 73% of NPC’s assets privatized. Presently groundwork for launching of the Visayas Supply Augmentation Auction (VSAA) is started which in time will lead to WESM operations in the Visayas.

There is yet no mention of any plan to start an open market in Mindanao.

The basis for privatizing NPC assets is for retail competition to start. Since it cannot yet start in Mindanao our Congress need not proceed with the sale of the Agus and Pulangui complexes.

In summary, there is this contradiction between the EPIRA’s goal to make electricity affordable versus EPIRA’s principle of deregulation thru privatization.  Placing priority on the latter will result in higher electricity prices, when the goal of affordable electricity must take precedence over the latter.

In Closing, we must bear in mind that the Local Government Code of 1991, Chapter 2 , Sec 294, states, “ The LGU must provide direct benefits … not only with reference to lowering electricity cost but also in lowering cost of water consumption. Electric supply and water supply cover basic services where people can really feel with satisfaction and gratitude the impact of low charges.”

Contact Person:

Dra. Melchora J. Ambalong (Of the Mindanao Commission on Women)

LAPOCOF President

Tel #’s ( (063) 221-5252, (063) 225-5094, Cel # 0922-817-6218


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