COA reports: DOE loses P1.7B for not penalizing delayed royalty pay by contractors

The Department of Energy reportedly lost the chance to earn at least P1.7 billion when it failed to enforce penalty and interest over delayed remittance of royalties from the Philippine National Oil Company.

This finding was contained in a Commission on Audit report, which reviewed the existing geothermal service contract between the DOE and the PNOC-Energy Development Corporation for the geothermal plants in Tongonan at Leyte, Palinpinon at Negros Oriental, and Bacman at Sorsogon and Albay.

The contracts were done in 1981 but bureau circular 83-01-02 was later issued to include an amendment to certain provisions in the contract, which ordered the imposition of penalties and interests against delayed remittances of royalties from PNOC-EDC to the government.

COA cited that Section VII of the model service contract, under the circular, provides that the contractor (PNOC-EDC) will recover gross value, equal to the total operating expenses but not exceeding 90 percent of the gross value.

The provision also stipulates that the contractor shall remit, within 60 days after the end of each calendar quarter, to the DOE the royalties or the amount equal to 60 percent of the net value. '

Any un-remitted amount however should carry a 25 percent penalty, which should be computed starting from the day immediately following the end of the calendar quarter, the provision further stated.

These directives were not in the original contract but then the DOE and the PNOC-EDC have subsequently agreed to include these as amendments for cost recovery of the service contractor.

On October 1986, the DOE and PNOC-EDC executed the first amendment to the contracts with the cost recovery rate raised from 60 percent to 90 percent.

The COA recently recommended to the DOE the imposition of this penalty clause but it was found out later on that the department failed to do so, causing it to lose revenues of over P1.7 billion from accrued penalties starting 1997 until December 31, last year.

The DOE explained however that these penalty and interest provisions were not imposed because the government has a national program that encourages exploration, exploitation, development and extraction of energy resources.

The model contract that the COA mentioned was only a working draft or a guide for future negotiation thus it could not be applied on a retroactive basis, the DOE said.

The increase in the recoverability of the contractor's operating expenses from 60 percent to 90 percent was an additional incentive to encourage service contractors to develop more geothermal resources, said DOE.

DOE further said that imposing the penalty provision would not attract investors on geothermal development. "If we impose the penalty provision on the three pioneer service contracts, these operations may not be realized as this will not be attractive for (them)."

COA argued however that the DOE could still impose penalties now because these contracts would still run for 26 years more until October 2031.

An assessment of the financial condition of the contractors should be undertaken to reach an agreement on the imposition of penalties, the COA contended. - Ferliza C. Contratista/RAE