Tuesday, July 1, 2008

The Substance of First Gas

Let us be selective and risk being unfair. For the benefit of the misinformed, employing a modicum of sophomoric analysis, readily available data for those who can understand at least 1,000 words of English and fifth grade arithmetic, let us defend the bilateral energy supply arrangements of two indigenous natural gas-fired plants that supply Meralco.
The two are owned by First Gas which is a subsidiary of First Generation Inc., a publicly-listed company. The Sta. Rita and the San Lorenzo plants supply Meralco the cleanest blend of electrons as these are produced from natural gas-fired facilities. Compared to any within the Philippines’ largest and most urbanized franchise area, where systems losses from transmission and distribution lines are relatively lesser, net of taxes and royalties, both produce probably the most inexpensive power supplied to the Meralco franchise area.
Generating plants immediately proximate to the same radius that supply Napocor are oil, bunker, diesel or coal-fired facilities that burn imported dollar-depleting fossils. One is a decrepit diesel plant in Sucat, Paranaque; another is a decommissioned oil-fired plant near Malacanang; a third is a dilapidated oil-fired facility in Limay, Bataan. Finally there are two coal-fired baseload plants each in Zambales and Batangas.
In varying degrees of toxicity, these not only emit potentially fatal sulfur oxides and carbon nitrates that turn into acid rain, they also spew deadly mercury, arsenic, cadmium and other elements beyond the vocabulary of a fifth grader.
If you think that’s bad, it gets worse. Not only are Napocor’s plants more pollutive than First Gas’s facilities but they also deplete dollars like a sailor on shore leave.
First Gas’s fuel is indigenous natural gas where the “i” in indigenous means the fuel is indio and innate. It is local. Fuel differences account for cost differences. Unfortunately, three government pricing aberrations create extraneous values that bloat gas costs.
One, government pegged gas prices to expensive fuels. Two, government royalties intended for foreign purchasers are inflicted on local buyers. Three, the application of government VAT on a commodity already heavily taxed virtually steals from the poor to give to the rich.
Napocor’s electricity portfolio might have been cheaper if not for two other factors that aggravate an already aggravated situation.
One, government’s price-buffer plants - its hydroelectric and geothermal facilities - are located way north or far south. The hydroelectric plants in the north produce less in summer when water levels are low. For geothermal plants in the south, electrons must first pass through a transmission gauntlet in Quezon before reaching the Meralco franchise area. What is not transmitted north goes south. A 400 megawatt submarine cable transmits power from the Leyte geothermal fields to Cebu. Cebu then consumes and shares little with Negros, Panay, Aklan and Boracay.
The second factor that bloats Napocor’s blended costs is the residual composition of its portfolio. Energy officials dug us into a rut by violating privatization protocols. Bargain hunters were allowed to cherry-pick as privatization officials abandoned the approved grouping of generating plants, opting instead for piecemeal sales. Thus, a good deal of Napocor’s price-buffers have been hocked, leaving in its portfolio facilities that inflict higher-cost energy.
Beyond fuel and proximity advantages, the First Gas plants are capitalized in a manner that gives distinct financial competencies over those supplying Napocor. Here we tackle the BOO versus BOT issue.
Opponents of First Gas claim its plants under Build, Operate and Own (BOO) schemes lead to higher tariffs compared to those under Build, Operate and Transfer (BOT) covering most of Napocor’s independent power producers (IPP).
They are wrong. This is not Gloria Arroyo’s NBN-ZTE corruption-ridden fiasco where the BOT proposal is cheaper than debts negotiated by her officials. Power plants under the BOO scheme are more likely to lead to lower generating costs. To argue otherwise is to flunk Finance 101.
One, capital-funding is the same. There is no difference in financing amounts save for equity tenors. BOO is open-ended, BOT, mortal and terminal.
However, un-privatized stranded contracts and sovereign guarantees covering Napocor’s IPPs carry financial downsides that lead to universal levies. Under First Gas’s BOO projects nothing worms into taxes as it does with Napocor’s IPP contracts.
Two, Napocor has two kinds of plants. Those it owns are its assets. The rest are IPPs under BOT. These appear as liabilities in Napocor’s balance sheet where payments for contracted power are demandable. It is within these where hides the notorious PPA (power purchase adjustments) .
Because of the relatively abbreviated equity life in BOTs compared to “eternal” equity in BOOs, Napocor’s IPPs recoup capital within shorter periods and thus charge higher fees.
When BOT contracts have a lifespan of 10 to 15 years there are no compunctions to yield early. For foreign-owned IPPs under the BOT scheme, in their financial modeling, minimum hurdle rates to justify being considered starts at 18% to 25%. Actual IPP internal rates of return (IRR) range from 23% to 35% mimicking venture capital requisites.
Check with the SEC. The actual IRR of the First Gas plants average 14%.
Three, the values “transferred” to the government at the end of the BOT period is determined by depreciation. Under abbreviated lifespans, depreciation is accelerated so that the asset terminal value when the BOT contract expires is Php 1.00. Likewise when BOTs run to 15 or 20 years as they do in Napocor’s coal-fired IPPs, in the endgame, fully-depreciated plants desperately require rehabilitation where assets transferred compel substantial reinvestments and financial recapitalization burdens upon the transferee.
Because IPPs under BOT transfer assets, they are less likely to constantly upgrade. Thus plant efficiencies go down as equity is recouped and payback is attained. In the case of one plant in Pinamukan, Batangas, payback was attained within seven years under a supply contract with minimum offtakes. And yet at the end of its BOT, the plant was only being dispatched by Napocor at between 32% to 35% of its capacity.
There is no risk of unfairness where facts and mathematics are concerned. The first is founded on truth, the other on objectivity. As Ateneo de Manila Professor Onofre Pagsanghan taught us in first year high school Latin, “contra factum, non valet illatio”.
Critics continue to argue using only innuendo. They don’t do the math. They don’t even do the elementary arithmetic. They should really do their homework before they take out full-page ads or fly off the handle. At least Judy Ann Santos did hers and had a calming effect in educating us all.

This may sound like a defence for meralco but at least it explains the atmospheric cost of our electricity.-me

Foreign debt caused crisis

Ever since the food and energy crisis came out in the open, a raging debate involving public institutions, big business, and key government officials, including President Arroyo, erupted. Yet, while the exchanges were intense and sometimes dramatic, the substance of the discussions was rather superficial, if not one-dimensional.
Finger-pointing, mudslinging and populist posturing dominated the supposedly joint pondering for concrete proposals and solutions. We believe, at the very least, all parties wanted to wash their guilty hands of any responsibility regarding the current mess. At best, everybody wants to rake in huge profits, politically and economically, out of the predicament by cutting each other’s throats.
Nowhere in the picture was any truthful search for the derivation of all these crises and economic maladies in order to arrive at sound proposals. Except for the social movements, cause-oriented groups and well-meaning economists, almost all were contented in throwing all sorts of prescriptions, proposals and recommendations without the benefit of a clear and thorough diagnosis of the problem.
Many are asking: What caused this problem? Certainly, there are many legitimate causes and all must be dealt with decisively. But, truth be told, if we really want to seriously answer the question why we are in this mess in the first place, we in the Freedom from Debt Coalition (FDC) assert that one just needs to look at the Philippines’ enduring debt problem in order to find out.
Due to the failure of succeeding post-Marcos administrations to concretely solve the compounding debt problem—an elemental social-justice issue before and after the fall of the dictatorship— today’s generation of Filipino citizens are paying for that historical disappointment with such tremendous consequences.
In the agriculture sector alone, succeeding administrations from the time of President Corazon Aquino had used borrowings as a major source of financing, heavily depending on debt to implement its programs and projects.
The agricultural agencies themselves facilitated this by calling on lenders to finance domestic projects, labeled as foreign-assisted projects, usually through official development assistance and other forms of “concessional” financing, many of which were challenged as fraudulent or anomalous, if not illegitimate.
Why? Because a large part of the people’s resources are being allocated to debt payments instead of to social and economic services. Proof of this, the combined real national government expenditure for agriculture, agrarian reform and natural resources per capita dropped from a meager P 121.24 during the end of the Marcos years to an insulting P 104.91 under Mrs. Arroyo.
Moreover, the sector became increasingly vulnerable to the conditionalities attached to many loans such as liberalization, deregulation and privatization. For example, in the Grain Sector Development Project of the Asian Development Bank (ADB) contracted in 1998, and which calls for the privatization of the National Food Authority, the government’s rice-procurement agency which sets the prices for palay, we are still paying an average of $4 million a year until 2024. This is regardless of the fact that the project was already canceled.
Due to these conditionalities, foreign competitors came rushing in to the domestic rice market, thereby wiping out local producers whose value cannot compete with their cheap prices. Simply put, we became dependent on imported rice.
However, agricultural production is increasing; from 7.65 million metric tons in 1980, it jumped to 16.24 million metric tons in 2007. The policy conditionalities simply pushed us to import more and more, from 192,020 metric tons in 1984 to 2.1 million metric tons in 2008.
Accurately speaking, when international markets collapse, so does our food security. The same goes with the power sector. We remind the public, the eight- to 10-hour power outages during the early 1990s were caused by Marcos’s legacy of debt, exacerbated by Aquino’s “honor all debts” dictum which drained the national coffers of money to invest in added power-generating capacity.
Ramos’s own solution had been simple yet very damaging: rely on more debt. Using the build-operate- transfer law, he proceeded to dangle lopsided contracts to attract investments on the power sector. He issued sovereign guarantees for private loans and changes in exchange-rate and oil prices, and even promised, via take-or-pay schemes, to buy a stipulated amount of electricity from those who will generate, whether or not the electricity had been generated or used. With risk-free capitalism in place, independent power producers (IPPs) rushed in to take advantage.
As a result, the National Power Corp. (Napocor) ended up at the losing end of the contracts with IPPs, running on billion-peso deficits which the government ended up assuming. Indebted, the government had no choice but to rely on multilateral lenders like the ADB and the World Bank, dangling loans with privatization of the power industry as primary conditionality. In the end, Napocor is bailed out, and we taxpayers are paying for its debts.
Talk about full circle! Burdensome debt was the culprit of our power-generating incapacity, which was allegedly solved by additional indebtedness, and yet, today, we are not only indebted but we also have the second-highest electricity rates in Asia and one of the highest in the world.
Due to this stupefying somersault of debts and conditionalities, the country’s power industry evolved into one of the most complex and esoteric cases of an enduring dilemma which have mutated into a multiple problem of corruption, mismanagement, endemic rent-seeking elites and a fundamentally flawed framework.
Therefore, if the government is serious in structurally addressing the food and energy crisis, then it must understand that photo-ops, selective reforms and “saintly” populist posturing will never fundamentally solve the problem.
While we believe all tangible actions and stop-gap measures must be done to give our people immediate relief, we also believe the government must seriously address the root causes of the problem starting with our debt quagmire—an original sin committed by subsequent debt-addicted administrations that eventually became the platform of many contemporary economic crimes and transgressions such as what we are experiencing today.
Hence, we enjoin the 14th Congress to help realize our people’s redemption and deliverance from all these social and economic ills by leading the path toward a new development paradigm, toward a reversal of erroneous economic adjustments imposed by international financial institutions and a riddance of all illegitimate debts.
Let us begin this process. In the immediate, the FDC calls on Congress to exercise its constitutional power of the purse to investigate, renegotiate and condone all fraudulent loan agreements whose interest payments they suspended in the 2008 budget but were expectedly vetoed by the President.
More important, we challenge our legislators to rise to the occasion and pass House Bill 329 calling for the amendment of Section 26, Chapter 4, Book VI of Executive Order 292, otherwise known as the Administrative Code of 1987—the archaic institutional mechanism that provides for the automatic servicing of debt.
The Filipino people have paid for these debts many times over. To let our people and their children continue paying for debts they didn’t benefit from, have only caused them further destitution or which they don’t even owe in the first place is truly and without doubt the greatest sin of all.