The Pied Piper
JAYWALKER - Art Borjal () - May 27, 2002 - 12:00am
(Part 1)
As a child. I never quite understood the story of the Pied Piper of Hamelin. It did not make sense how the hero, after ridding the town of Hamelin of its problems, could turn so cruel by taking away the town’s children as payment for the good deed. I was so bewildered by the short memories of the townsfolk and the ingratitude they displayed towards the Pied Piper. As one gets older and we see human nature for what it is, we constantly notice the story unfolding and repeating itself over and over again. In real life, the Pied Piper is not a hero or an institution turned cruel but more a series of actions and related consequences which remind us that in life there is no such thing as a free lunch. Lately, the front pages of all major dailies are filled with the unending saga of power industry where yet again we see the story of the Pied Piper of Hamelin unfolding, albeit with a different cast of characters.
* * *
All the brouhaha on high power rates was brought to a head by suspending NPC’s portion of the PPA and the Energy Regulating Commission threatening Meralco to do the same, citing the technicality that it was not properly consulted. It perplexingly claims the utility had no right to cushion the impact of high PPA charges on consumers by arbitrarily deferring such charges to the later.
* * *
Congress is now making legislative amendments to the Electric Power Industry Restructuring Act (EPIRA or RA 9136) which hope to make the suspension permanent or create a mechanism to legitimize the deferral on the future generations. Being discussed is something in the realm of a 20 year recovery period for these deferred charges.
* * *
The PPA is a component in our electricity bills that automatically adjust for increases in the cost of producing power beyond that approved in a certain base year. When a distribution utility gets a rate increase approval (Meralco’s last one was 1994), the ERB takes the existing cost of power production and labels such cost the Basic Rate. The Basic Rate is frozen until the next rate increase approval. Any subsequent increases in the cost of producing power since that time are the PPA charges of distribution utilities. Theses adjustment appears in the consumers bill as PPA until the next rate increase is approved for that utility, after which all PPA charges are incorporated into new Basic Rate and PPA is again reset to zero.
* * *
Daily, we are barraged by accusations from both right and left that IPPs and their onerous contracts must be rescinded. Bayan Muna and FDC talk about the horrific "take-or-pay" provisions in these contracts which obligates NPC or the private utilities to pay for kilowatt-hours, whether or not they are consumed.
* * *
"Take-or-pay" was a standard feature in contracts for power plants all over the world. Unlike the production on other manufactured products, power plants can only sell their kilowatt-hours to the electricity grid it is connected to. If NPC or the utilities refuse to buy during times of excess supply, such as what we have now, the electricity cannot be packed and shipped to areas with power shortages. Nor the plant can be simply dismantled or as in the case of airlines or ships, transported to the other parts of the world where they might be more useful. With the staggering amounts involved, no investor or lender would commit funding to putting up an investment that could potentially end up becoming a white elephant.
* * *
Contracts with "take-or-pay" provisions greatly facilitated raising billions of dollars in project finance and reneging on them now would jeopardize our own credibility to contract for a new capacity in the future. As former Energy Secretary Viray puts it, our only other viable alternative to IPP contracts would have been for NAPOCOR to borrow, build and own all these plants themselves. Under that scenario neither would we have been spared the cost of overcapacity, since such plants would have likewise been included in the NPC’s rate base thus also resulting in higher rates.
* * *
But that is no longer an option; RA 9136 was passed precisely to rid the government of the burden of financing the country’s power needs estimated to hit more than US$ oneBillion dollars every year.
* * *
Of late, the PPA component in our bills has reached abhorrent proportions. The twin culprits mainly responsible for this fly-up in rates have been the so-called "take-or-pay" provisions in all the IPP contracts and the slowdown in demand for electricity from the 1997 Asian crisis and Sept. 11.
* * *
In the early 90’s, when these blocks of capacity were being planned, most GDP growth estimates for the year 2000 and beyond exceeded 9.5 percent per annum, far in excess of our actual growth these past few years. By NAPOCOR’s own account, we have more than 12,800 MW of power plants ready to serve only 7,800 MW of demand, thus a 40 percent over capacity.
* * *
What is puzzling, however, is that most countries always consider having a safety reserve margin of at least 20 percent overcapacity. Anything less would be downright irresponsible. This reserve is likewise incorporated in the electricity rates paid for by all consumers as part of the electricity providers service. Thus, our real surplus is only the remaining 20 percent which could easily disappear, together with a huge chunk of PPA charge, in less than five years even if our economy only grows at 3 percent p.a.
* * *
The twin culprits, therefore, do not explain the whole story of the sky-high PPA today. Other nefarious factors also contributed generously towards inflating the PPA.

The last few months of Erap’s term saw him fighting for political survival. The joyride was coming to an end, and the Edsa Dos forces were mounting stiff opposition to his administration. Even the macroeconomic environment, namely rising oil prices and forex movements, seemed like it was part of the grand conspiracy, together with the country’s elite to remove him from power. Movements in both oil and the peso dollar rate put heavy pressure on the cost of power production that should have led to immediate and automatic adjustment of the PPA. Instead of biting the bullet, Erap ordered Napocor to hold back from raising rates.
* * *
Meanwhile, the magnitudes had grown so large that when Finance Secretary Jose Lito Camacho took over as Secretary of Energy. He was reportedly horrified to find out how much PPA had been deferred and the effect on rates if he were to incorporate them immediately. Camacho, however, was prevented from passing it on, as he should have because of the onset of the June elections. In the meantime, with no one willing to bite the bullet, pressure on the PPA dam continued to build. (To be continued)
* * *
Thoughts For Today:

Dream what you want to dream.
Go where you want to go.
Be what you want to be,
because you have only one life and one chance
to do all the things you want to do.
* * *
May you have enough happiness to make you sweet,
enough trials to make you strong,
enough sorrow to keep you human,
enough hope to make you happy.
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My e-mail addresses: and

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