DOE urged to bundle assets with long-term contract

The government can improve the market value of power generating plants of the National Power Corp. (Napocor) from 30 to 40 percent more than their assessed value by simpling bundle these state-owned assets with long-term contracts with the Manila Electric Co. (Meralco) before they are privatized.

David Tan, president of the Philippine Independent Power Producers Association (PIPPA), urged the Department of Energy (DOE) to secure long-term bilateral contracts with Meralco to substantially increase the prices that independent power producers (IPPs) would pay for the Napocor gencos when they are put up for bidding under the recently approved Omnibus Power Act.

The improvement in price can be as much as 30 to 40 percent more, Tan said.

He said the additional proceeds can help reduce the resulting stranded costs of privatization which, in turn, will reduce the universal levy that consumers will pay or losses that will have to be passed on to and absorbed by taxpayers.

Tan explained that negotiations for long-term bilateral contracts between a generator and an electricity distributor are permitted under the Omnibus Power Act (RA 9136) now known as the Electricity Industry Reform Act (EIRA).

He said government-owned power plants must be first in line to secure such bilateral contracts to reduce the projected losses from Napocor’s privatization.

Tan explained that the enactment of EIRA unwittingly transferred the market domination from the supplier side to the distributor side. This is because the law allows distributors to secure up to 90 percent of their power requirements through bilateral contracts, 50 percent of which can be negotiated with a sister company, Tan said.

The DOE and the PSALM must make the law also work for the government by recognizing opportunities to secure long term bilateral contracts before they privatize the Napocor gencos. "This can result in billions of pesos in additional proceeds for the government," Tan said.

Besides, Tan explained, the so-called transition contracts provided under Section 67 of RA 9136 would not be enough to appreciably enhance the value of the state-owned power generating companies or the Napocor B-O-T (build-operate-transfer) contracts.

Tan, who is also president of Edison Global Electric, said IPPs are not in the business of owning power plant assets per se. What IPPs buy and invest in are actually cash flows.

He explained that "Gencos with predictable cash flows from long-term bilateral contracts will certainly fetch better bid prices. Aside from the fact that they are easier to finance in capital markets," Tan said.

Tan said: "I am sure Meralco will take the border and more patriotic view of helping government-owned Napocor enhance the value of its assets. After all, they need to collaborate with the government in reviewing renewals of expiring distribution franchise areas."

In addition, Tan said negotiating bilateral contracts with Meralco would be consistent with the transition mechanism that would allow the giant power distribution firm to pass on P20 billion in stranded costs to consumers.