Power expert presses for review of some EPIRA provisions

A power industry expert is pushing for a review of some provisions in the Electric Power Industry Reform Act (Epira) which are believed to greatly impact on National Power Corp.’s (Napocor) financial condition.

In a study, former Power Sector Assets and Liabilities Management Corp. (PSALM) president Edgardo del Fonso said there are at least two provisions in the law that directly affect Napocor’s losses.

One is the mandated reduction of 30 centavos per kilowatt-hour (kwh) for all residential end-users.

"Napocor’s already inadequate revenues have been reduced by P3 billion annually because of this reduction, the basis for which remains unclear except for the fact that it is what the law says," he said.

Del Fonso also cited Sec. 32 of the Epira which has a far more serious blow to Napocor’s profitability and finances.

The provision states that Napocor may recover from its customers the full cost of IPPs (independent power producers) approved by the defunct Energy Regulatory Board as of Dec. 31, 2000.

"That means the purchased power cost (PPC) on IPPs not approved as of that cut-off – and there are eight of them – would not qualify for recovery," he said.

"It is not clear whether this prohibition was intended to chastise those responsible for these IPP contracts, or to shield the consumer from unwarranted costs," Del Fonso added.

He also noted that Napocor will have to absorb billions of losses on them, with six of these projects now operational. "They happen to have the highest investment cost among Napocor’s IPPs because these are mostly large-scale projects or multipurpose hydroelectric projects where the power component (Napocor) typically subsidizes the cost of irrigation and municipal water use," he said.

He said that through the end of 2003 the unrecovered cost of these six IPPs has reached over P50 billion. Every year, Napocor stands to lose about P25 billion due to this provision, with no hope of recovery unless Congress repeals this provision.

"Largely because of this Epira stipulation that Napocor registered an operating loss in 2003. This is the first time in Napocor’s long history that its revenues could not even cover its operating expenses," he said.

Del Fonso added that capping Napocor’s PPC at 40 centavos/kwh should not be viewed as the main cause of the state-run power firm’s financial debacle.

"Of all the lament over Napocor’s parlous financial condition, none has attracted more blame than President Arroyo’s decision in May 2002 to cap the purchased power cost at P0.40 per kilowatt hour. Citing it as a concession to populist sentiment, critics claim that this decision is the single largest blow to Napocor’s viability, costing the utility almost P30 billion annually in lost revenue," he said.

But he said the P0.85/kwh under-recovery was only for Luzon. The PPA per kwh in May 2002 were P1.25 for Luzon, P0.79 for the Visayas and P0.54 for Mindanao. The average for the Philippines was P1.09. With a cap of P0.40, the under-recovery was therefore P0.69, and not P0.85 as has been generally believed.

"The total generation rate Napocor could charge its customers remained the same, but the classification of charges was changed. Now there are three components: Fuel, Purchased Power Cost, or PPC, and Basic Charge. The cost of the IPP contracts was split between PPC – the amount subject to the Presidential cap – and Amortization of Capacity Fees, classified under Basic Charge. Because PPC is now lower, then necessarily the unrecovered amount would also decline. With the cap remaining at P0.40, the under-recovery was reduced further from P0.69 in May 2002 to an average of P0.34 through July 2004. Of the P0.34, Napocor has recovered P0.11 by virtue of subsequent ERC rulings, leaving just P0.23 per kwh, equivalent to P16 billion, as the amount that has remained unrecovered from the May 2002 decision. That is a long way from the P60 billion that some critics are claiming," he explained.