I remember sitting around the 2nd floor conference room table at the California Energy Commission along 9th Street between “P” and “O” Streets in downtown Sacramento in the Spring of 2003. All state government agencies with influence on the electricity supply supply had been called to devise ad-hoc initiatives for avoiding brownouts in the State for the upcoming summer peaks – with the still-fresh memories of previous years’ brownouts and their political repercussions.
And as I read through the Philippine DOE’s list of initiatives for the Visayas, I recognize the similarities. The DOE list is a very good list – if implemented diligently.
I suggest we not forget that this situation is primarily a failure of the National Power Corporation (Napocor) to meet its contractual obligations to the electric cooperatives (ECs) and other distribution utilities in the Visayas. The ECs, in particular, have done the appropriate things – they entered into binding contracts on a timely basis primarily, but not exclusively, with the Napocor to secure adequate power to meet their customers’ load requirements. Napocor, however, has been unable to fulfill those commitments. I would, however like to hear Napocor’s viewpoint on this. Maybe they will engage with us here in the comments. Even PNOC-EDC (since partially privatized) has failed to meet certain contractual supply commitments from the Northern Negros field.
From a technically legal perspective, Napocor has an “out” in their contractual language, so they are not in technical abrogation of the contracts, I would suppose. But I suggest they are effectively not meeting the contractual performance requirements everyone expected them to meet. In fact, the expectation was so high that, for example, I doubt seriously the Energy Regulatory Commission would have ever permitted any distribution utility to pass on to customers the hedging costs that would have been required to cover the “outs” that Napocor has in the contracts, since the contracts supposedly “covered” the load requirements of the ECs.
So one additional initiative I see no hint of here in the DOE game plan is a mechanism to permit the distribution utilities to enter into emergency supply arrangements with private sector entities to meet or to hedge that part of the Napocor’s obligation that Napocor may not be able to meet. To make this work, there needs to be concomitant and appropriate contractual relief to the distribution utilities that frees up some of the payments that otherwise would have gone to Napocor (who is not performing) so that such funds can be redirected to these new, and possibly contingent contracts. And the ERC would need to allow cost recovery of such emergency contracts on a basis that does not unduly “add” risk to the utilities’ ability to recover such supply power costs from consumers who ultimately benefit from such action. This is a possibly complex, but probably effective, way forward – and may be worth the effort to implement since we are talking about two years worth’ of exposure (the remaining term of most NPC contracts).
Secondly, the ECs and private distribution utilities need to get serious about the procurement process for replacing the (non-performing) Napocor contracts after 2010. This means that both the DOE and ERC have to also get serious about the procurement process – something both agencies have given scant attention to.
In California, the regulator carried through on the short-term, stop-gap initiatives for the summer of 2003 with far reaching reforms of the procurement process to avoid having to do the stop-gap planning measures every year. It’s time we too move in that direction of power procurement reforms – before we reach critical shortages in Luzon, which would be yet even more devastating than the are shortages in Visayas.
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Good informative post.
Knowing that NPC, MERALCO, Big Three oil companies, etc. are all “Masters of the Game” and how the regulators, the energy deregulation law was a big mistake.
RP got suckered and in all these privatization, liberalization, deregulation BS during the time of former president FVR.
Strategic industries should never have been legislated away by the State. Not with a vastly interested members of Congress, weak regulators, incompetent or blind officials of the Executive branch, etc.
Of course, hindsight is always 20/20.
yes, great post.
the star article said that there is a undercapacity in (generation?) supply.
you said the NPC was unable to supply power. is this because of undercapacity as well? is this the out that you mentioned?
i.e. its not their fault, more capacity is coming on line next year…
also, if EC would have emergency supply aggreements with private entities, then it should be contingent right? we’ve had so many problems with contracts that force payment even if the power is no longer needed…
Gabby – Yes, it’s an undercapacity problem – it’s NPC’s undercapacity problem. These are not surprise loads. They have contract obligations to meet either through operation of their existing assets or procurement of new capacity. They are already procuring small, high speed diesels (very very expensive to run, by the way) to help meet part of the Panay shortages.
The “out” is that if there is not enough capacity on the grid, then they don’t have to supply the contract. Well heck, what kind of contract is that? NPC does the planning and procurement for the grid – at least to the extent required to fulfill their contractual load commitments – and therefor has some obligation.
Admittedly it is a challenging problem they now find themselves in with no easy solutions for all of us – but it is a problem that NPC had the obligation to anticipate and prepare. Water over the bridge. Similar to California. Now we all have to roll up our sleeves and figure out workable solutions.
Yes – new capacity is being built. The undercapacity situation may (stress may) be an interim problem. That is why a lot of the programs of the DOE mentioned in the news article are appropriate.
Phil Manila – Well you raise up (almost from the dead) certain valid issues. But hindsight is not 20/20. And we’re on a path that, if appropriately blazed, has the potential to give tremendous control (or influence) and transparency to the consumers. Or not. It depends on how we move forward from here with restructuring.
I too was talking about this back in 2005. See this that will surprise many of my colleagues. I no longer have that opinion given where we are today. ERC is already making progress (but we’re not there yet) on one of the root problems I mentioned here back in 2005. And we still have to face up to this fundamental challenge on missionary electrification.
Nick,
I thought the idea was for Napocor to get out of power generation itself through privatization of its assets? Isn’t it the failure of that plan which has led to this? I’m all for appropriate “regulation” but have we truly all become Socialists?
DJB – I agree. The idea is to get Napocor out of the generation business. But they’re not out. They’re in. They supply most (not all) of the power to the cooperatives in the Visayas through the end of 2010 under regulated tariffs. That’s just the reality. We still have to step from point A to point B, where Point B = No Napocor and we’re in the middle of that stride.
I do digress. We need to discard this business-as-usual relying on NAPOCOR or its successors. If we depend too much on NAPOCOR to supply the electricity to Luzon, Visayas and Mindanao grid, we have to expect that the electricity cost will keep on increasing year after year. So many has fattened their wallet at NAPOCOR on procurement of equipment, coal, diesel, plants, commissions on contracts, etc.
Coupled with the privatization of Transco (now National Grid Corp), transmission cost will also move upward as they need to recover their investment and make a windfall.
Several petitions were filed at the ERC by power producers, Meralco and NGC for the increase in their charges.
When will the increase in power rates end? What’s the solution then? Development of indigenous resources or renewable energy, even if they are localized (distributed) small power generators which is now encouraged by the Renewable Energy Act of 2008. It will not only create price pressure to large power generators but also allow generation of needed job employment and small businesses. Yes, the elusive balanced development will be attained coupled with reduction in greenhouse gas emissions. Grid-wide blackouts will then be a thing of the past as each province or municipality will have their own small renewable power source. The next issue would be, there will be another rent-seeking group that will target this area as new source of corruption (hope they wont if they still have any conscience left).
What ever happened to the fleet of power barges we had in NPC in the past? I used to supply the spare parts to the Niigata bunker-fired lowspeed gensets. I can’t remember now how many but in Navotas alone, there were about 4 or 6 back in the mid-80′s. Good preventive maintenance practices can make these work for life. And works well for emergency cases like that of Bohol or Negros.
In the immediate future, two years tops, we won’t be needing new power in Luzon after the last loadbreak switch in Intel and other large plants have disconnected huge loads off the grid. Practically, all manufacturing activity have scaled down. NPC, NGC, and distributors will find themselves in a tight fix due to the lower revenues and debt payments due soon. Credit is even more difficult even if just to cope with the present, loans for new plants or upgrading old ones are near impossible.
I won’t be surprised if ERC will be flooded with rate increase petitions anytime soon.