Growing Old When I was Young: Experience in Project Management

There were several big-ticket power projects that I managed when I was the CEO of National Power Corporation (NAPOCOR). Some of the notable ones are the Leyte-Cebu and Leyte-Luzon Submarine cable projects, San Roque Hydro plant, Masinloc Coal-Fired power plant, Pagbilao, Ilijan and Sual plants and Leyte Geothermal power plant. All these projects were developed and executed simultaneously, generating close to 4,600 megawatts. It’s also worthy to emphasize that these projects were completed at a time when NAPOCOR was already drained of its financial resources.  After all, the projects involved a lot of civil, electrical, and mechanical engineering; we had to do a lot of financial engineering.

Given the magnitude of these projects, I have always admitted that I grew old when I was young. However, with that “ageing” process I also gained wisdom on how to handle these complex projects and motivate project teams to work well together.  I had the luxury of having over 10,000 people working on all these projects plus the day-to-day management of running the power plants.  Plus, I had the good fortune of having a DOE Secretary, Sonny Viray, who provided not only policy directions, but sometimes direct technical advice to our project teams. Finally, I had a direct line to President Fidel Ramos who gave NAPOCOR all the support he could muster to make project execution smoother.

Of course, I am applying whatever lessons I gained from years of heading a government institution now that I am in the private sector.  While there are similarities, there are also wide differences.  For one, in NAPOCOR we were bound by very strict bidding rules. This discouraged creativity. As a result, we were faced with congressional censure in government, again dampening enthusiasm to be more effective.  The most important difference is that if we lose in a project, we lose our jobs – there was no Civil Service Commission to protect my job.

I have been asked quite a number of times how I manage to lead or oversee simultaneous power projects in the private sector. My answer is simple: use the proper tools for proper project management. There is no guarantee that the project will not fail, but we work to make that probability low.

But just what does proper project management entail?  Let us look at a typical development of a geothermal power plant project to demonstrate how the proper application of project management tools is crucial to the success of any project, energy-related or otherwise.

Geothermal Power Development Risks

Project development is all about developing a project by taking away risks, often called “de-risking” the project. A project has, as expected, many risks. One has to be astute in identifying these risks and finding creative and economically efficient ways to mitigate these risks.

For a geothermal project, we can categorize the risks involved into four:

  1. Social acceptance,
  2. Market risks
  3. Resource
  4. Operations

The lack of social acceptance of the community of a project is always a factor to consider when developing any power plant project. The local community, of course, often fears displacement when renewable energy developers come into their area. In my experience, one can overcome this risk by starting early and establishing ties and relationships to the community at least two years before starting with the project execution.  Project developers should make their presence felt in the area by living in the community, hiring local personnel, breaking bread with the leaders and the community, and conducting information and educational campaigns down to the purok level.

How does one measure acceptance by the community?  The Environmental Clearance Certificate (ECC) issued by the DENR is an objective way of saying that the community has accepted our project. Aside from the issuance of the ECC, we can also measure social acceptance by looking at the degree of receptivity of local officials to our ideas.

Addressing market risk in the Philippine power sector means either taking a WESM risk or a long-term bilateral power sales agreement (PSA). No one takes a WESM price risk, so generally, a long-term PSA is the route. The challenge for a geothermal project, however, is when one considers exploration or resource risks, the upfront cash is so high. And unless there is a mechanism to mitigate this risk, it will be almost impossible to finance even with private equity.

It is essential that a geothermal development company enters into a power supply agreement (PSA) before starting with the drilling. Otherwise, developers will risk spending tens of millions of dollars without an assurance that we have a market to sell the geothermal power to after finding the resource. Unlike commodities like oil and minerals, geothermal energy is a location-specific resource.

Mitigating Resource and Operations Risks

As soon as a PSA is obtained and approved by the appropriate government authorities like the Energy Regulatory Commission, the project can now proceed with addressing two risks: resource and operational risks.

Resource risk is the single biggest risk in project development. Resource risk, in this case, is the risk that the resource for power generation that the table or surface studies showed as either present or absent or is at a level insufficient for economic operation.  The problem with this risk is that there is no other way to mitigate it except to actually drill.  The cost of drilling is what sets geothermal resource risk apart from all other forms of renewable energy. Keep in mind that exploration can cost 40 to 60 percent of the total project cost.  So, we need to drill first before we can say the resource risk has been managed.

Operations risk for the geothermal project is simply the ability of the company to manage the steam field resource in a sustainable manner.  We need to ensure that the steam field can provide the power we need for the next 25 years.

So, how do we go about in mitigating these two risks?

First, in my experience, I define the guiding principles to follow within the organization in going about our tasks. These principles are:

  1. Well Targeting has to be a real science; we do not continue our drilling based on gut feel
  2. Defined organizational tasks
  3. Hands-on approach by all stakeholders

Ensuring that our well targeting activities are based on science encompasses many things. This means hiring the right people for the job and matching each function according to a person’s skill. Matching function with capabilities in project management is extremely crucial. After all, project management is all about ability to lead, to coach, and to anticipate and manage risks. Thus, the selection of the right people for the job is very important. Personally, I choose consultants who are smart and are able to display their knowledge and skills through a simple explanation of his or scope of work and expertise. Of course, I like being surrounded by people who are fun to work with.

The geothermal project has to have the scientists to plan our resource, a technician to oversee the drilling plan, a manager to oversee the finances and administration of contracts, and a social scientist to handle environmental clearances and the most important person: the community relations person who will handle the Corporate Social Responsibility (CSR) function. In my project structure, I can delegate most functions, but the CSR function is one that is close to my heart. In fact any power project should be a social project first. This sets the priorities straight.

With such complex relationships between functions and team members, teamwork will be hard to achieve. And here lies the importance of proper collaboration including open and constant communication within the organization.

Just how crucial is proper organization in mitigating resource and operation risk?

In drilling a well, we need to ensure the perfect execution: we need to find the perfect spot and drill at the perfect speed. Perfect execution is critical since a less perfect one will cost us tons of money. This is the reason why we need to have open and timely communication. Decisions are made every single day like whether to continue drilling at the spot or not.

This is why we have meetings and arm ourselves with communication tools.

At the beginning of the project,  we hold a major meeting, a kick-off meeting that will include all parties– internal and external–to simulate the execution of the project.

I require that we have our face-to-face meetings weekly and monthly. This is our “townhall meeting” to introduce new staff or just to socialize and discuss project concerns.

Technology plays a big role in any organization. I prefer that our group make use of technology-based in our communication and collaboration.  My team and I  use collaborative apps like Podio, GroupMe and online conference tools like GotoMeeting and Skype.  All managers have internet access on their smartphones.

Our organization relies heavily on Apple Ecosystem. Photo c/o http://livingenterprise.net/

Our organization relies heavily on Apple Ecosystem.
Photo c/o http://livingenterprise.net/

Personally, I try to use tools that are intuitive and almost idiot-proof.  That is why our companies are Mac-centric.  In other words, we have an Apple ecosystem.  Apps in the Mac OS tend to be intuitive and integrative.  Our people no longer have to be tethered to an LCD projector system, for example, as we use “AirPlay”. We also leverage on the Merlin Project Management Software- the equivalent of Microsoft Project in the Mac OS system, “Moneyworks” for financial management and Daylite 5.0 to ensure collaboration is further strengthened.

I welcome disagreements in the organization.  In fact, the danger of having teams that are not properly managed is “group thinking.”  This happens when true dissenters do not speak up just so “harmony” within the group can be achieved.  This is bad. We should always encourage disagreements without being disagreeable. Obviously, I give a lot of weight to experts’ opinions, but at the same time encourage consensus building among the experts.  Once a consensus is reached, then that’s the decision.  Otherwise, I toss coins.

The Power Crisis in the 90s

Last year, Energy Secretary Jericho Petilla announced the looming power shortage of roughly 800 megawatts, which would take place during the summer months. This prompted the Energy Secretary to ask the president to seek emergency powers from the Congress. Under the Energy Power Industry Reform Act or EPIRA, the president can search for additional power supply with the authority of the Congress.

The Energy Department is also beefing up on its interruptible load program, asking private entities to use generators during peak hours to free up the load on the grid.

The impending power crisis and the request for emergency powers have revived talks of repealing the EPIRA, which was enacted in 2001 by the Arroyo administration–an offshoot of the policies crafted during the term of President Fidel Ramos.

The expected power shortage is nowhere near what we experienced in the 1990s, and yet, it renews debates about the country’s power supply situation, as well as other issues concerning energy.

The same questions about the power sector are being asked once more such as is it time to scrap EPIRA law? Has EPIRA achieved its objective of de-regulating the industry to promote a more competitive market that drives energy costs down? Was the Ramos administration correct in its handling of the power crisis in the 1990s or his policies resulted in higher electricity rates and lack of supply? These are some of the topics that are once again under discussion.

As such, I wish to share some of my thoughts by providing background and information about the energy sector– insights on the power sector. The articles are not meant to join the mounting criticisms on the government’s failure to provide a stable energy supply. Rather, the articles in this blog will provide insights on the complicated sector that is energy.

What went on before – Mindanao Against Darkness (MAD)

It is best to start the discussions by looking back at what happened in the 1990s when rotating black outs was a staple.

At the height of the power crisis in 1990s, Filipinos –especially those who live in Luzon– experienced around eight to ten hours of rotating brown outs daily. Even before the Luzon crisis, however, what got me into the power sector was the Mindanao power crisis of 1990-1991. At that time, El Niño brought in a long drought that effectively brought down the Agus Complex’s normal capacity from slightly over 700 MW to as low as 300 MW. With a peak capacity at that time of around 800 MW, this resulted to a debilitating 10-12 hour power outages in Mindanao.

NPC at that time had no immediate solution to the problem in Mindanao. So we organized various groups first in Cagayan de Oro and eventually throughout Mindanao to help address the power crisis. We launched a movement called “Mindanao Against Darkness” or

MAD, a play on the popular late evening show of Martin Nievera called “Martin After Dark”.

Our two major programs then were: a) Voluntary Load Shedding Program; and b) Trading of electricity using self-generation. The load shedding program was launched to encourage businesses to voluntarily run their generators during the day so that NPC can conserve the water in Lake Lanao during the evening. This way, residences could have power thus giving young families a chance to have their children prepare and study for school.

The first electricity “trade” in the country was probably between Philippine Sinter Corporation located in the PHIVIDEC Industrial Estate in Misamis Oriental, the city of General Santos, through their electric cooperative, SOCOTECO II. At that time, we asked companies with excess generation to share the energy with utilities that were willing to pay the marginal cost of generating that power. We then asked NPC to allow the “transmission” of that power for free (the concept of “wheeling rates” were foreign then.)

The Cory administration recognized these MAD initiatives and eventually expanded the programs to other cities in Mindanao. The idea and concept of a Mindanao Power Corporation were already brought up and presented to the NPC Board then, as well as to the Cabinet. This proposal was seen as the long-term solution for Mindanao – to finally get away from the clutches of “Imperial Manila.

Little did we know then, that the looming power crisis in Luzon beginning 1991 was going to be as bad and probably even worse than the Mindanao power crisis.

Photo from Philstar.com

Photo from Philstar.com

The Luzon Power Crisis

The Bataan Nuclear Power plant with a generating capacity of 620 megawatts (MW), which was about to start operations was mothballed by President Corazon Aquino due to allegations of corruption in the construction of the said plant. The safety issue – which NPC denied existed at that time – became an issue because the Chernobyl accident of April 1986 happened at that time when the new Cory administration had just taken over. With the leadership of the energy sector decapitated (the department of Energy had been abolished), there was no senior government decision-maker who could stand up to support the opening of the BNPP.

Likewise, the Calaca Coal fire plants were not allowed to be built because the new-found democracy under the Cory administration had to listen to the complaints of various interest groups especially environmental NGOs. The ensuing delay in the construction of the new coal-fired power plants forced the NPC to run its aging power plants. These two major decisions of President Cory Aquino’s cabinet subsequently gave NPC no choice but to postpone the needed maintenance of other existing power plants.

And the inevitable happened—the plants broke down and could not continue their operations. Unfortunately, the Aquino administration failed to provide alternative sources of power. The result was a big power supply deficit resulting in a full blown power crisis

Ironically, the only reason the outages in Metro Manila were not longer than 12 hours was the fact that the economy had stalled as a result of the coup de e’tats that marked the last years of Cory’s term. From a GNP growth of around 6.7% in 1988, this dropped to around 5.7% in 1989 and plummeted to a mere 3% in 1990.

How bad was the power shortage? The Luzon grid, for example, only had an available capacity of 2,300 to 3,100 MW, far less than the installed capacity of 4,321 megawatts. Likewise in Mindanao, the installed capacity was 1053 megawatts, but the available capacity was 600 less than the installed capacity of 1053.

The debt of NPC was growing, too. Between 1987 and 1990 the organization’s revenue losses totaled to P418.63 million. It has accumulated losses of 2.4 billion pesos in 1990 to 1991, which meant that it cannot self-finance and generate enough profits—to cover the demand for investment.

There was a reason for these accumulated losses of NPC. Prior to Cory’s administration, NPC’s tariff was linked to the dollar, as well as other foreign currencies based on its borrowings. Since NPC did not have any regulator, it could, in theory, borrow all the fund funds it needed for as long as the tariff currency mix reflected that of its debt mix.

For some reason (most likely political), NPC delinked its tariff to the dollar and other foreign currencies. Almost immediately after, the peso devalued against the dollar. From 1988 to 1990, the peso devalued something like 25%. The cost of fuel went up from US$18/barrel in 1989 to almost US$32/barrel by 1990 (before falling again) causing a double whammy – it increased costs and devalued the peso. And for the first time in its history, the NPC lost money in 1990 and1991.

The Ramos Administration then was faced with two major challenges. First, there was not enough power; and second, NPC finances were shattered. These twin problems limited severely the options that the Ramos Administration could explore.

Of course, the power shortages had its effect in the country’s economy. According to estimates of the Asian Development Bank, the power crisis from 1989 to 1990 led to a decrease of 6% in the country’s gross domestic product. After all, the unstable power supply caused havoc among industrial centers with some cutting down their days of operations or worse temporarily closing down.

It was then incumbent upon President Ramos to introduce reforms and provide immediate relief to the Filipinos by finding a solution to the power crisis and address the financial woes of the NPC.

Ramos, in his first state of the nation address asked the Congress to grant him emergency powers to address the power crisis. This was highly contested by some members of the congress who claimed that emergency powers are mere tools for more corruption. But due to the political will of President Ramos, the Congress passed the Republic Act No. 7468, or the Electric Power Crisis

Act of 1993 (also known as the Power Crisis Act) by April of the same year. This allowed the executive branch to enter negotiated contracts to fast track the construction, repair, rehabilitation, improvement or maintenance of power plants, projects and facilities.

The Power Crisis Act also mandated the Philippine Amusement and Gaming Corporation or PAGCOR to provide 10 percent of its annual gross earnings to NPC for five years as a form of subsidy.

Aside from this piece of legislation, there was another factor that helped solve the power crisis quickly–the personal attention provided by President Ramos. He intervened when needed particularly in cases where politics were getting into the way of solving the energy problem. President Ramos’ attentiveness helped in speeding up the power projects, which was crucial in lessening the rotating brown outs within six months time.

The Ramos administration also expanded the Build Operate Transfer law, which shortened the procurement process to entice private sector participation (which we will discuss in a later article.)This gave birth to a considerable number of Independent Power Producers (IPP).

Around $6 billion in investments were generated from the IPPs, thus producing a total of 4,800 megawatts. By 1998, there was already a total of 11,988 MW available for the country broken down as follows:

  • 8,619 megawatts in Luzon;
  • 1,554 megawatts in the Visayas and
  • 1,552 megawatts in Mindanao

54 percent of the total generating capacity came from NPC and the rest from the IPPs.

Likewise, the amendments to the BOT law resulted in seven power projects, providing a total of 900 megawatts of power.

Under the amended BOT law, private entities can enter into several types of contract namely:

  • Build-operate- transfer, Build-operate-own (BOO)
  • Build-transfer-operate (BTO)
  • Build-rehabilitate- operate-transfer (BROT)
  • Rehabilitate- operate-maintain (ROM)
  • Rehabilitate- operate-lease (ROL)

Under all these schemes, the private sector takes care of the planning, design, construction and maintenance of the power facilities. On the other hand, the government through the National Power Corporation pays the private proponents for a guaranteed off-take of electricity for the specified cooperation period. There were also other programs implemented to address the power shortage.

The Ramos administration created the Voluntary Load Programs where around 1600 business entities arranged their production shift to adjust with the available times with power.

Additionally, the NPC worked on attaining self-sufficiency in power by diversifying the fuel mix of the NPC-owned generation plants, resulting in the exploration and development of the Camago-Malampaya field off northwest of Palawan and promotion of renewable energy – solar, biogas and geothermal.

The Ramos administration also crafted a 30- year energy plan the ELECTRIC POWER INDUSTRY CODE, which, unfortunately, was not passed by the Congress due to lack of time.

References:

Cayabyab, M. http://newsinfo.inquirer.net/639878/luzon-visayas-may-face-800mw-power-shortage-in-2015
Aldaba, R. , Regulatory Policies and Reforms in the Power and Downstream Oil Industries 2004
FVR column in Manila Bulletin
Energy Guidebook by Myrna Velasco
The Energy Report by KPMG 2013-2014. http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/energy-report-philippines.pdf