Power plant owners rap VAT’s ‘no pass provision’

The Philippine Electric Power Plant Owners Association (PEPPOA) has cautioned legislators that the "no pass-through" provision in the proposed expanded value-added tax (VAT) could result in an accelerated power crisis.

PEPPOA executive director Raquilino B. Pangan said independent power producers (IPPs) may no longer be interested in supplying power to residential customers in the event the controversial provision is passed in congress.

Pangan said generation companies "may discriminate against distribution utilities with a majority mix of residential customers."

The PEPPOA official said the IPPs might focus on sales to industrial and commercial customers, which would trigger a shortage of supply to power distributors outside of Metro Manila, whose markets consist of about 50 to 60 percent residential customers.

"Distribution utilities are dependent on the ability of the generation sector to produce. No generator to produce then we have nothing to deliver. Thus, potential shortage may come earlier than expected," he said.

It is expected that Luzon will suffer from a power crisis by 2008 if no new capacity is added to the system. With the VAT scenario, he said it could materialize as early as next year.

According to Pangan, the no pass-on provision will turn off foreign and local investors in the power generation industry "and dissuade existing generators to expand".He said electric cooperatives are now subject to VAT and requiring them to absorb the VAT component of residential customers will be fatal to their finances.

"There is a double whammy effect — no pass through provision with an increased corporate income tax. Distribution utilities’ ability to remain financially viable will be questionable," he said.

He said if generation companies (gencos) would absorb VAT the it may derail the privatization of the National Power Corp. (Napocor) as most lenders of gencos may no longer extend further credit which would have enabled them to buy the assets of Napocor.

Earlier, the Foreign Chambers of the Philippines criticized the "no pass-through provision," saying this will result to closures and lay-offs.

"For the power sector, these provisions will have the effect not only of discouraging new domestic and foreign investment in generation facilities but also erode their taxable income and long-term financial viability, forcing some independent power producers to close, thus reducing the supply of power," the group said.

The foreign chambers noted that "this could occur during a time when shortages are already present in the Visayas and Mindanao and looming within several years in Luzon".

They also noted that this scenario would have a great effect on the investment environment in the country.

"IPPs supplying power to Napocor have contractual provisions allowing the buyout by the government should taxes be significantly changed," the group said. "The government clearly has neither the intention nor the funds to acquire billions of dollars of IPP assets."

"We find it hard to believe this is the intention of the legislators and is contrary to Republic Act 9136 (Electric Power Industry Reform Act of 2001) which provides for the orderly privatization of the assets of Napocor," they said.