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
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