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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