Meralco reaches agreement with 2 IPPs

The Manila Electric Co. (Meralco) and two of its independent power producers (IPPs) have struck a compromise agreement for the renegotiation of contracts worth about P44 billion, expected to result in savings of around P10 billion to consumers.

The renegotiated agreement resulted from long negotiations between Meralco management and its IPPs First Gas Power Corp.(FGPC) and Quezon Power Ltd., facilitated by Land Bank president and Meralco board member Margarito Teves who headed the Meralco Independent Review Commission (IRC).

Teves said the critical part was over but the actual success of the renegotiation. "I can narrow this issue down to the simple fact that if creditors do not accept this and Meralco collapses, no one will gain anything from the remains," he said.

He added there are still concessions that Meralco wanted from FGPC and QPL but the initial concessions were "as good as done," waiting only for the formal approval of the IPPs’ boards of directors.

Teves said the immediate savings to consumers is expected to amount to over P10 billion, or equivalent to 15 centavos per kilowatt-hour.

"The proposed agreements also include concessions such as higher penalties for non-performance and higher discounts for the power that Meralco would buy in excess of the contracted volume," Teves said.

According to Teves, the total concessions obtained from FGPC and QPL could amount to more than P44 billion over the duration of the contracts. He added that the concessions were "at least as valuable"as the concessions obtained by the National Power Corp. from their IPPs.

FGPC is a subsidiary of First Gas Holdings Corp., a joint venture between British Gas, the Lopez-owned First Philippine Holdings and the Meralco Pension Fund. QPL, on the other hand, is a consortium composed of InterGen, Ogden Energy Group, Global Power Investments, LP and the PMR Group.

Despite the concessions, however, Meralco assistant vice president for energy management Fortunato Leynes admitted that the power being purchased by Meralco from its two IPPs are still more expensive than the power it is buying from Napocor.

Leynes said Meralco is paying Napocor approximately P2.50 per kwh for its power while the combined cost of the power from FGPC and QPL is about P3 per kwh.

"But of course NPC’s rate is not reflective of the true cost of the power it is generating, it’s a regulated rate," Leynes pointed out.

Leynes explained further that FGPC and QPL are both operating at levels below the contracted "take-or-pay" volume representing the volume that Meralco is obliged to pay whether it draws the power or not.

At this level, Leynes said FGPC and QPL accounted for about 35 to 40 percent of the power consumed by Meralco while Napocor accounted for the rest. If the two IPPs would both be allowed to operate at the take-or-pay level, their share would increase to 40-50 percent. "At this level, our overall cost would be 25 centavos cheaper," Leynes explained.

According to Teves, FGPC and QPL would have to go back to their respective directors to get final approval of the renegotiated contracts but he expressed optimism that the concessions would be approved as renegotiated.

The most significant portion of the concession was the adjustment of the penalty in the event the IPPs perform below their respective contracted volume. The IPPs had agreed to adjust the penalty rate to 98 centavos per kwh, up from the previous 10 centavos, with a $10.6 million yearly cap.

Meralco, however, wanted the rate to be pegged to the fixed operating and maintenance cost plus the capacity fee and it also wants the cap to be removed. ‘That formula equals the amount we pay for the energy," Teves explained. "It is only fair that they pay us back the same amount when they do not perform."