PCIJ REPORT: Ramos friends got best IPP deals

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Philippine Center for Investigative Journalism ( Conclusion )

At the other end of the spectrum is a small independent power producer (IPP) that supplies the needs of firms inside the Cavite Export Processing Zone (CEPZ). But the relatively tiny size of the 63-megawatt diesel power plant has not made it less susceptible to involvement in alleged anomalies.

The plant is run by the Magellan Cogeneration, Inc. (MCI), a wholly owned subsidiary of Covanta Energy Philippines, Inc. Covanta’s parent firm is Covanta Energy Corp., a publicly listed company that recently filed for bankruptcy in the United States.

The Cavite plant, which is currently being sued by its clients, probably has the most well-documented violations in an IPP contract. Nongovernmental organizations have also made an example of the IPP to justify their refusal to pay high PPA costs.

The MCI contract is among the IPPs entered during the implementation of the Electric Power Crisis Act of 1993 that gave state agencies the authority to enter into negotiated deals. Former Ramos energy officials said the contract enjoyed strong backing from a brother of then chief legal counsel Antonio Carpio Jr. MCI hired the Carpio sibling, but later fired him after his influential brother no longer worked in Malacañang.

An inter-agency government review committee recently signaled out the MCI Cavite plant for buying cheaper electricity from Napocor through its One-Day Power Sale (ODPS) window and then turning around and reselling them to the CEPZ locators at a higher price.

Napocor’s ODPS window caters mainly to customers with self-generating units or who buy their own requirements from their own IPPs. The committee, which submitted its report to President Arroyo earlier last month, said that MCI stands out as "the only Napocor IPP availing itself of the ODPS." It said this violates MCI’s contracts with Napocor and the Philippine Export Zone Authority (PEZA), which oversees CEPZ, that require the IPP to generate its own electricity.

Since the plant is located inside an export zone, the IPP also enjoys additional sweeteners such as fiscal, tax and other economic incentives on top of a Napocor fuel subsidy. Yet the MCI plant has been experiencing operational and financial difficulties in honoring its contract, said the Citizens Review Commission on the IPPs, a network of NGOs that conducted a parallel IPP review.

From January 2000 to December 2001, a summary of its grid and island operations showed the MCI plant trips each time it has to generate enough power to meet the CEPZ demand. To service CEPZ efficiently, the IPP buys power from Napocor. As of last year, the IPP owes Napocor P248 million from its ODPS availment, an amount it is disputing.

Covanta Energy president Oliver Cruz justifies the plant’s practice: "Many people seem to be forgetting that ODPS is good for Napocor. ODPS enables Napocor to sell electricity from idle capacity and revenues generated directly offset liabilities from the PPA."

But the IPP’s critics say Covanta does not even pass on to its clients the savings it derives from buying cheaper electricity. Last January, PEZA terminated its contract with MCI/Covanta Energy after foreign locators in the CEPZ complained about the unreliable power supply. Covanta, however, hit back with a TRO. The case is still pending.

Exclusion from review

In the meantime, anti-PPA groups are protesting the exclusion of the Manila Electric Co. (Meralco) from the government review. After all, they say, Meralco’s franchise area is home to a quarter of the entire population and its IPPs are now starting to eat into the Napocor’s market.

Meralco was heavily engaged in power generation until the late president Ferdinand Marcos seized the assets of the Lopez family who own the utility and gave the monopoly to Napocor.

The Aquino government, through Executive Order 215, allowed private-sector participation in power generation again. This was one of the many concessions Aquino gave the Lopez family, whose members were her late husband’s fellow exiles in the US during the martial law years. Previously just a buyer of Napocor power, EO 215 turned Meralco into a direct competitor of the state utility.

The Ramos administration only helped make Meralco an even stronger company. Barely two months into office, the Ramos government lent its credit standing to the Lopez firm when it asked the Asian Development Bank (ADB) for a $138-million loan to expand and upgrade Meralco’s distribution system.

Since the amount was higher than allowed under ADB’s private sector window, the government, through the Philippine Export and Foreign Loan Guarantee Corp., acted as loan guarantor.

Then in 1994, when prospects for the development of the Camago-Malampayas natural gas find in Palawan were becoming rosy, the Ramos administration turned to Meralco to provide a market for half of the 3,000 MW it expected Malampaya to generate. The other half was taken up and bid out by Napocor.

Almost simultaneously, Meralco entered into a 10-year contract with Napocor, agreeing to supply the private distributor 3,500 MW until November 2004.

The natural gas supply offer enabled the First Philippine Holdings Corp., the holding company of all the Lopez group’s generation assets, to put up a joint venture with United Kingdom’s British Gas, which runs the Sta. Rita and San Lorenzo plants in Batangas. Aside from First Gas, Meralco also has an IPP contract with Quezon (Philippines) Power Corp., a joint venture with InterGen and Covanta Energy.

In 1995, a year after it signed the agreements with the government, Meralco rose to become the country’s highest grossing company, next to Napocor. While Napocor’s net profit went down 47 percent that year, Meralco’s surged by 21 percent to P4.4 billion.

At the time, the Ramos administration did not seem to mind the potential conflict arising from having Meralco both as a monopoly distributor and generator of electricity that could pose stiff competition to Napocor, In the runup to the 1998 presidential elections, however, the Energy Regulatory Board (ERB) suddenly ruled that Meralco had been overcharging its customers from 1994 to 1997.

The business community criticized Malacañang for the ERB decision, which it saw as politically motivated. The Lopezes were supporters of presidential candidate Alfredo Lim, who had Sergio Osmeña III as running mate. Osmeña is married to a Lopez. Ramos, meanwhile, was supporting the presidential bid of House Speaker Jose de Venecia.

Meralco’s finances since then have been corroded by the ERB decision. The company has taken the case to court, where it is now pending. But despite its financial woes, Meralco is still faring much better than the rest of the Lopez companies, which have been taken a heavy beating in the last few years. The fear now is that Meralco is being forced to subsidize its sister companies and passing on the cost to its customers.

To some extent, this may already be happening. Data culled from Meralco’s latest petition with the Energy Regulatory Commission (ERC) showed that while First Gas did not generate any electricity from January 2001 to January 2002, Meralco paid it nearly P15 billion for the period. The amount was passed on to customers in the Meralco franchise area as higher PPA.

First Generation Holdings Corp. president Peter Garrucho Jr. said the Meralco payment represented "capacity fees" that the private distributor was obligated to pay under its agreement with First Gas whether the IPP was used or not.

Meralco president Jesus Francisco also admitted as much, but said that the situation arose from the apparent oversupply that had Napocor using from October 2000 to end-2001 its own IPPs instead of Meralco’s Sta. Rita natural gas plant.

Despite the fact its IPPs were not dispatched for the entire 2001, First Philippine Holdings was still the biggest saving grace to its parent firm Benpres Holdings Corp.’s bottom line. As of March 2002, it booked revenues of P5 million or 20 percent higher than the previous year’s level.

In its proposed debt restructuring plan, Benpres said it is counting on revenues from its power generation business to provide the main source for the group’s future income streams.