The Pros and Cons of a MinPoCor

Recently, there are initiatives to push for the refiling of house bills, which seeks for the creation of Mindanao Power Corporation or MinPoCor, according to a Businessworld report. The new entity will be a government owned and controlled agency (GOCC) that will manage the Agus and Pulangi hydropower plants.
The report cited the interim head of the Mindanao Power Monitoring Committee (MPMC), Glenn Jay Reston saying that the MinPoCor “will help maintain affordable electricity rates in Mindanao and assure that the revenues earned will also be reinvested in the island.”
The House of Representatives of the last Congress passed a consolidated bill on the establishment of the MinPocor. However, the said bill failed to pass the scrutiny in Senate. Under the bill filed in the lower house, MinPoCor will operate as a stand-alone GOCC and will raise funds to operate and maintain the remaining power assets of the government in the region.
Now that the discussion on the MinPoCor has been revived, let us ask the following questions: Is it beneficial to create such a GOCC? What are the pros and cons of having the Mindanao power corporation?
On the one hand, having MinPoCor will address the power crisis in the island. It will be an entity that will focus on the needs of Mindanao’s energy sector. After all, the appalling power situation in the region is a result of the long neglect of the national government through poorly crafted government policies.
To stress this point, a report from the Asian Correspondent said that in 2009, the Philippine Chamber of Commerce and Industry already stressed that the island was in need of additional 100 Megawatts to keep up with the economic activities in the region. Plus, business and industry leaders were already asking the national government to address the need for additional capacity as estimates show that Mindanao will likely suffer from power shortages by 2011 if no new capacity were to be installed.
However, the previous administration failed to heed the calls for the additional base load capacity. It was no surprise then that a full blown power crisis interrupted in 2012, with the island suffering from at least 8-hour rotating black outs.
Given the above slow response of the national government to focus on the power situation in Mindanao, it might be in the best interest of Mindanawons to have an entity that concentrates on the power situation in the region.
However, there is also a downside to the creation of MinPoCor.
Being a GOCC, it is still a government entity and will suffer the same problems of a government monopoly, as well as bureaucratic issues.
The possible lack of funding for MinPoCor could create bigger problems as it could delay the much-needed repairs and rehabilitation of the hydro complexes in the region.
The essence of EPIRA is to privatize the government-owned energy assets. The government, after all, has limited funds for the maintenance and operation of assets. This said, it is probably better for the private sector with deeper pockets to take the commercial, operational and constructions risks of operating and maintaining the power plants. Otherwise, the government will need to borrow additional funds and pay for the interest of borrowing money.
There are various ways of going about the privatization of the hydro plants. In my opinion, the Power Sector Assets and Liabilities Management or PSALM could enter into a 25-year power supply agreements before bidding out the hydro plants. This is to ensure that low prices are kept low despite the privatization for the benefit of NAPOCOR’s existing clients including distribution utilities and industries directly sourcing their power from the said plants. Of course, this will be much more complicated given the implementation of the Competitive Selection Process or CSP but still can be done if the government acts on it.
Additionally, Pete Ilagan, President of the National Association of Electricity Consumers for Reforms Inc has suggested privatization through “cooperativization” where cooperatives will own the assets. According to Ilagan, this will ensure that consumers welfare prevails over the interest of big businesses.
We also have to consider that the creation of a new entity always comes with challenges. For one, the efficiency of a GOCC is questionable. GOCCs work under a framework of a democratic government where there is a separation of powers. A democratic government is, almost by definition, designed to be inefficient – there are strict rules on checks and balances. So, if one desires to have an “efficient” company, going through the GOCC way may not be the answer.
However, one can separate the ownership of an asset like the Mindanao power plants and the management of these plants. As government way of running things is based on a democratic framework– it does not have the discipline of profitability and efficiency that private capital will require. So, therefore, there is a way to compromise: the government can keep the ownership of the assets, but the management, including future investments, can be done by the private sector.
Before opening the management to the private sector, the government can enter into long-term power contracts with all existing customers. The government can, for example, fix the current power rate and maybe index to CPI for the next 25 years. This will ensure two things: the government asset will not compete with private generators and second, low power rates from these hydropower plants are assured for the next 25 years.
The private sector entity that comes in will then face the challenge of improving the efficiency of the assets by rehabilitating them and improving operations and maintenance to have an upside on their investment.
So, this is the challenge of a MinPoCor: have the discipline that the private sector (and consumers) require but operate within a framework of a democratic government. Otherwise, there will be no change in the cost structure nor ability to maintain these plants. It is essential to form a management team for the MinPoCor that is not only knowledgeable and transparent but also can approximate or surpass private sector management efficiency. Otherwise, the reforms needed to push the national government to pay attention to the power problems of Mindanao will remain unsolved due to the problems within the organization.
This is not to say the GOCCs cannot be run efficiently. I have seen some GOCCs and government agencies that are at par with the standards set even for private sector companies. These GOCCs are often those that have had the luck of having someone with a vision of running the GOCC effectively. However, these are few and far in between. As a whole and in the long run, the need to adhere to the principle of separation of powers will wear down on efficient management set in place by different administrations.
So, are the hydro complexes better off in the hands of a GOCC? While some may say the jury is still out, others disagree outright.
According to UP economist, Gerardo Sicat, there are several studies showing the success of privatizing hydropower plants:
“There is growing evidence that the privatization of the hydroelectric power plants in the whole country is working well. With the government being relieved from the task of operating the generating plants, gains in efficiency and in service delivery improvements have become noticeable among the privatized plants.”
So, just how beneficial is the creation of the Mindanao Power Corporation? It’s also advantageous to have an entity that is dedicated to the needs of the island. But on the other hand, the possible lack of funding and management problems may exacerbate the woes of Mindanao’s power sector further. There is a way out – the government can keep the assets and maybe even transfer these assets to MinPoCor.
In summary, one need not privatize the ownership of an asset – it is the management of these assets that may need private sector discipline. Further, to ensure a fair level of power rates, the government can enter into long-term power sales contracts with all current consumers of Mindanao. If the management of these assets is privatized, the private investors should have the incentive to invest in the rehabilitation of the power plants so that its efficiency is enhanced thus giving the investors the upside that they are looking for.
In the end, everyone wins: the Mindanao consumers are happy because their low rates are assured for the next 25 year and the government and the local governments should be happy because the assets are not privatized. The MinPoCor proponents can even lobby to have these assets transferred to MinPoCor. Plus, the private sector is happy because a chance to invest in the power sector is open to them.

References:

http://www.econ.upd.edu.ph/perse/?p=913

http://www.bworldonline.com/content.php?section=Economy&title=mindanao-power-corp.-backers-push-for-law-ahead-of-agus-pulangi-privatization&id=135866

http://www.philstar.com/nation/2015/05/27/1459319/bill-creating-mindanao-power-corp.-passes-house-joint-committee

Energy Book by Myrna Velasco

http://opinion.inquirer.net/83960/better-way-to-privatization

 

 

Is IPPA necessary?

Published in Mindanews.com

http://www.mindanews.com/mindaviews/2015/05/14/commentary-mindanao-privatization-is-ippa-necessary/

I was asked to speak in a “Mindanao Power Forum” hosted by the Institute of Electrical Engineers in Cagayan de Oro last month. It was a relatively well-attended forum with Congressman Edgardo Masongsong, Energy Regulatory Commission Executive Director Atty. Francis Juan, among others, in attendance.

The topic was about the issues surrounding the privatization of the Agus and Pulangi complexes and the Independent Power Producer Administrator (IPPA) issues. After all, PSALM was ready to bid out the IPPA contracts at that time (PSALM has announced that there are a total of 12 firms that are vying for the IPPA contract of the STEAG coal-fired plant few days after). And it was correct to discuss both the privatization of Agus and Pulangi and the IPPA since these two issues are intertwined.

It was, however, unfortunate that the Power Sector Assets and Liabilities Management Corp. or PSALM was not represented in the forum as it is the agency that can address the concerns raised about the IPPA. During the discussion, Dave Taule, formerly of CEPALCO, delivered an impassioned plea to scrap the plans to conduct a bidding for the IPPA of STEAG, as well as to recall the IPPA for Mt. Apo Geothermal, which was won by Filinvest Group through the FDC Misamis Power Corp. last September.

Despite the discussion on IPPAs, one key question remained unanswered: Is it necessary to sell the remaining energy output of the existing Mindanao power plants to a private IPPA, a broker, who will be allowed to make a margin?

My answer to this question is simple: No.

To understand my answer let me put in context what an IPPA is and its role in a market like Mindanao.

An IPPA is an entity chosen by PSALM, which administers, conserves and manages the contracted power output between an Independent Power Producer (IPP) and the NPC. The IPPA is a post EPIRA invention concocted to supposedly take away the market risk from National Power Corporation or NAPOCOR or PSALM by passing on the risks to the private sector. “Market risk” is present presumably because there is stiff competition and the government is not in a position to take on such risks. After all, the EPIRA’s thrust is for the privatization of government-owned power assets to promote competition among the power sector players.

But what competition are we referring to in Mindanao ? Competition only exists if there are sufficient buyers and sellers in the market and the government is simply ineffective in capturing market share. But is it? And for Mindanao, how can there be competition in a market that has power shortage? Even Davao is suffering from brownouts!

The power situation (or the lack of power supply) has been a perennial problem of the region. At present, the region is experiencing rotating brownouts due to the reduced capacity of Agus 6, low water inflow of Pulangi and the emergency shutdown of one of STEAG’s units. Agus and Pulangi supplies half of the power for Mindanao and both are about to be privatized.

It is unlikely that the power situation in Mindanao will improve any time soon. The power outlook for Mindanao, according to the National Grid Corporation, is usually in yellow alert, which means that the region does not have sufficient power reserves, making it non-compliant to the required reserve-level. So, there is no competition in the power sector in the region to speak of, as of this time. Of course we are all hoping that the ALSONS’ and Aboitiz’s plants will come in on time. Even then, by 2020 my view is we will be short again.

There is another reason why IPPAs are unnecessary: IPPAs increase generation charges unnecessarily.

Keep in mind that IPP generation costs are composed of administration, fixed and energy charges. The administration charge is just an added cost that increases the generation cost.

The Cagayan de Oro forum pointed out the case of the Mt. Apo geothermal power plants. As mentioned above, the said plants were privatized through an IPPA last year. As a result, the generation cost increased from P3 per kilowatt hour (kWh) to P5.37 per kWh, according to the Association of Mindanao Rural Electric Cooperatives or AMRECO.

The AMRECO said that the significant increase in the generation charges was due to the administration cost charged by the IPPA. If these figures are correct, the difference of P2.37/kwh is what we in finance call an “arbitrage” because the profit is made out of an extraordinary market condition. At that spread, one can already put up a coal-fired power plant!

The important question to ask is: why do we have to pay additional costs when the goal of ensuring stable power supply and promoting competition in the market are far from being achieved?

So, no, there is no need to enter into IPPA contracts for now. An IPPA may be helpful if the market conditions are such that the government cannot take a competitive position. In Mindanao, the government has a dominant position and can therefore smooth out the market prices for the benefit of the consumers. Instead of an IPP contract, it is essential for PSALM to secure the market first by stabilizing the power supply and bringing down the cost of power over the long term. This has immediately two advantages: a) it signals the market that the output of all the government plants have already been contracted out and therefore is no longer in play for any competition from new private sector investments in generation; b) it “locks in” the low price that the consumers are enjoying today and over the long-term. Everybody gains, nobody loses.

Just recently, Energy Secretary Jericho Petilla has said that he wants to ask PSALM to defer the bidding of the STEAG power plant, to be moved to next year until such time the power plants of Aboitiz and San Miguel are already in operation, to avoid power spikes in the meantime.

My suggestion is for the DOE to reconsider the plans of selling the remaining power output of the remaining Mindanao power plants to the private sector altogether, and instead, focus on securing the system by stabilizing power supply and bringing down the costs. And putting more renewable energy in the power supply mix for the region is the key to energy security in the region, and elsewhere in the country.

As I said in other articles, this suggestion will be a challenging one to energy planners if they continue to use the traditional “least cost” method. This method favors traditional power plants over renewable energy plants for several reasons. First, traditional power planners tend to compute the least cost of stand-alone plants. Second, renewable energy is deemed “expensive” by many if one is to use the least-cost method of computing for costs of energy generation. As I have always argued, this is wrong.

Studies have shown that renewable energy that contributes to a “fixed price” component into the system increases value to the economy. In fact, it can bring down over-all power cost. A study conducted by the late Shimon Awerbuch, a renowned adviser on electricity market, shows that adding renewable energy in an energy portfolio indeed reduces the over-all cost of energy. This was proven in the case of Mexico, where the cost of energy went down by US$00.038/kWh after increasing wind and geothermal power in the mix by 9 and 10 percent, respectively. This despite the fact that wind generation is US$0.05/kWh higher than gas.

Going back to my point, not only is it wrong to bid out the IPPA contracts for reasons I have already given, we have misplaced our priority as well. We should be focusing on bringing in new power generation to Mindanao and especially a balanced portfolio of conventional and renewable energy power plants. Only when we have attained long-term stability (as required by EPIRA) should we tinker around with privatization.