Privatization Squeezes NAPOCOR Dry

The vicious cycle of debts and power rate hikes will continue unless there is a radical shift in policy. It is important for the Macapagal-Arroyo administration to go back to its own review of IPP contracts in 2002 and unconditionally rescind the most onerous of these deals. There is also an urgent need to reverse the privatization of the National Power Corporation (NAPOCOR).

By ARNOLD PADILLA
By IBON Features
Posted by Bulatlat

Sen. Joker Arroyo was right when he said that the recent rate hike of the National Power Corporation (NAPOCOR) should be blamed on President Gloria Macapagal-Arroyo.

After all, Macapagal-Arroyo allowed the onerous contracts of NAPOCOR with independent power producers (IPPs) to continue as part of government’s efforts to implement the government corporation’s privatization.

IBON estimates show that without the onerous contracts with the IPPs, NAPOCOR could have saved around P59 billion ($1.05 billion) in 2002. The amount should have been enough to offset current losses and eliminate the need for a rate hike.

The lopsided contracts with private and foreign-owned generation companies resulted instead in huge debts for NAPOCOR, discouraging investors from pouring in money.

Given the financial state of NAPOCOR, the Arroyo administration plans to absorb its debts amounting to P500 billion ($8.91 billion). A provisional P0.98 ($0.02) per kWh increase was also imposed just to convince the private sector that NAPOCOR is still a good buy.

Sweetheart deals

The “sweetheart deals” of NAPOCOR with the IPPs represent the biggest strain on government finances. To draw foreign investments in the power sector, government agreed to shoulder all the risks associated with market demand, fuel cost and foreign exchange fluctuation.

For example, the “take or pay” clause requires NAPOCOR to pay 70 percent to 100 percent of the capacity of an IPP (capacity fee). Looking at its latest available income statement, the “take or pay” clause (amortization of capacity fees) cost NAPOCOR P37 billion ($659.07 million) in 2001 and 2002.

Most of these capacity fees went to the IPPs with the most onerous contracts (e.g., with legal and financial issues based on the findings of the IPP Review Committee) with NAPOCOR like the 1,000-megawatt (MW) Sual Coal Fired Power Plant in Pangasinan.

In 2001 and 2002, NAPOCOR paid the plant’s IPP, US-based Mirant Sual Corporation, P15.6 billion ($277.88 million) in capacity fees or 42 percent of the total capacity fees for the said period. Mirant has a build-operate-transfer (BOT) agreement with NAPOCOR for 25 years (1999 to 2024).

According to the IPP Review Committee, NAPOCOR’s contract with Mirant allowed the IPP’s high-nominated capacity, which is not mandated by its BOT/Energy Conversion Agreement (ECA) with government. The contract also gave Mirant a high level of minimum energy off take, high rate of return and high escalation cost. Not surprisingly, Mirant Sual Corp. posted the third highest income of P6.9 billion ($122.91 million) in 2002.

A big portion of the capacity fees in 2001 and 2002 also went to the IPPs of the 310-MW Hopewell Power Plants 1 and 2 with P10 billion ($178.13 million); 70-MW Bakun Plant Units 1 and 2 with P4.5 billion ($80.2 million); and the 1,200-MW Ilijan Natural Gas with P2.4 billion ($42.75 million).

Meanwhile, since its contracts with IPPs are quoted in dollars, NAPOCOR also allowed the IPPs to recover losses due to foreign exchange (forex) fluctuations.

In 2001 and 2002, NAPOCOR spent P35.7 billion ($635.91 million) in its amortization of deferred forex differential (which includes forex fluctuations accruing on loans for projects under construction and on restatement of outstanding loans used for operating plants).

Of this amount, amortization of deferred forex differential for IPP plants (under BOT arrangement) accounted for P17.1 billion ($304.60 million) or 48 percent.

Another onerous provision of its contract with IPPs is the fuel cost guarantee, which required NAPOCOR to supply and pay for the fuel used by the IPPs. In 2002, NAPOCOR spent more than P29 billion ($516.57 million) for the fuel cost guarantee, of which P23 billion ($409.69 million) went to IPPs in Luzon; Visayas, P4.6 billion ($81.94 million); and Mindanao, P1.8 billion ($32.06 million).

These anomalous clauses in the IPP contracts explain NAPOCOR’s financial hemorrhage, which has been worsening in recent years. (See Table)

Anti-people power reform

The debts of NAPOCOR have rapidly accumulated, reaching P1.3 trillion ($23.15 billion) according to the latest Department of Finance (DoF) estimates. The amount accounts for 65 percent of total debts of all government-owned and -controlled corporations (GOCCs) and 25 percent of combined national government and GOCC debts as of September 2003.

NAPOCOR’s debts as a percentage of the national government debts could even be higher considering that the latter has been absorbing the state power firm’s debts to make it viable for privatization. Government’s mishandling of NAPOCOR is among the biggest reasons the country faces a fiscal crisis today.

Unfortunately, instead of canceling its onerous contracts with the IPPs which is a major reason behind NAPOCOR’s indebtedness, the Macapagal-Arroyo administration continues to honor these contracts under the Republic Act No. 9136 or the Electric Power Industry Reform Act (EPIRA) of 2001. EPIRA – the result of a strong lobby from the IMF, WB, ADB and the IPPs – is the government’s blueprint for the full privatization of NAPOCOR.

Even before the recent rate hike of NAPOCOR, consumers are already being burdened with quarterly increases in fuel, purchased power, and forex differential resulting from forex fluctuation – reflected in adjustments in the Generation Rate Adjustment Mechanism (GRAM) and Incremental Currency Exchange Rate Adjustment (ICERA) – under EPIRA.

Privatization has been bleeding NAPOCOR dry and consumers have been shouldering all the costs of this policy. Recently, government confirmed its plan to again borrow $750 million through bond offering to refinance NAPOCOR’s debts even as the President admitted that the country is in a fiscal crisis.

The vicious cycle of debts and power rates hike will go on as long as government does not shift from its policy of power privatization and neoliberal restructuring. The Macapagal-Arroyo administration can start by going back to the results of its own review of IPP contracts in 2002 and unconditionally rescind the most onerous of these deals, and reverse the privatization of NAPOCOR.

There is no other way.  IBON Features / Posted by Bulatlat

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