Mindanao Power Corporation (MinPoCor) Policy Brief

POLICY BRIEF

ISSN 2467-5571 (Online) Issue No. 2015 - 0001

SEPTEMBER 2015

POSITION PAPER ON THE ESTABLISHMENT OF A MINDANAO POWER CORPORATION INTRODUCTION

MINDANAO POWER SITUATIONER

According to the Electric Power Industry Reform Act or EPIRA, the Agus and Pulangui Hydroelectric Power Complexes (APHC) are to be privatized by 2011 upon the discretion of Power Sector Assets and Liabilities Management Corporation (PSALM), in consultation with Congress.

For the past five years, Mindanao has been plagued with acute power shortfalls that seriously impact on the region’s ability to fully realize its economic development potential. In early 2014 alone, the long hours of blackout resulted to PHP 2.315 billion in economic losses1.

However, Mindanao stakeholders are clamouring for continued state ownership of APHC for the following reasons: 1) need to ensure affordable or reasonable electricity rates; 2) need to have a stable supply of power; and, 3) need to have APHC serve as a regulatory tool to cushion the effects of spikes in prices of electricity resulting from market volatility of fuels and foreign exchange fluctuations.

MinDA’s position is to transfer the ownership of APHC to a newly formed government owned and controlled corporation (GOCC) centered in Mindanao. The GOCC can then decide whether to: •

Operate and manage APHC;

•

Undertake Public-Private Partnership (PPP) to operate and manage the APHC; or

•

Undertake modified PublicPrivate Partnership where the GOCC owns the assets while the private sector operates and maintains but sales of energy are bid out in blocks

This shortage in capacity, coupled with drought, brought to the fore serious concerns on Mindanao’s long term reliance on what seems to be a relatively cheap energy resource – hydroelectric power - and how the full implementation of the privatization objective of the EPIRA can hold back targets for reliable, sustainable and affordable power supply to fuel its economic growth. Figure 1 shows the Mindano Grid including its committed, available capacity and peak demand.

Figure 1. The Mindanao Grid

Source: DOE

Mindanao’s power sector is unique since it has a very different structure than the rest of the Philippines. Majority of power in Mindanao is being distributed by Electric Cooperatives (ECs), unlike other areas in the Philippines such as Metro Manila which have their electricity supply delivered by a private distribution utility (DU). ECs are distinct from private distribution utilities because they operate on the principle of non-profit and can therefore offer lower electricity distribution rates than private DUs. Profits are reinvested for infrastructure development.

Unlike Luzon and Visayas, majority of distribution utilities in Mindanao still have existing transitional power supply agreements with PSALM Corporation and National Power Corporation (NPC). The situation relates to the fact that majority of power supply in Mindanao is currently being provided by NPC-controlled power plants. According to the National Grid Corporation of the Philippines (NGCP), the NPC-controlled power plants had an available capacity of 1,060MW which was 64.59% of the total available capacity of 1,641MW for the month of January 2015.

1 MinDA initiated study on Economic Impact of Power Outages in Mindanao.

The situation is significant because power being supplied

by NPC-controlled power plants is relatively cheaper compared to power supplied by independent power producers (IPPs). This is because approximately 66.51% of the power supplied by NPC comes from the Agus and Pulangi Hydroelectric Power Complexes (APHC). Having a majority of its power supplied by hydro power plants enables NPC to blend their electricity rates with the other sources of power like diesel and coal, resulting to a much cheaper electricity rates for NPC transitional power supply

agreements. Lastly, the Mindanao power grid is still separate from the entire national grid. Through grid interconnection, the Luzon grid is already connected to the Visayas grid via submarine transmission cables.

The Mindanao grid has yet to be connected to the Visayas grid, hence the power supply in the island is sourced solely from power plants located and connected to the Mindanao grid. Mindanao therefore has no access to the surplus power produced in Luzon or Visayas.

THE AGUS-PULANGUI HYDROELECTRIC POWER COMPLEXES Figure 2. Map of Agus and Pulangui Hydroelectric Power Complex

Source: Google Map

The Agus Power Plant Complex consists of six (6) cascading power plants snaking from the mouth of Lake Lanao in Marawi City down to the majestic Maria Cristina Falls in Iligan City. Strategically located along the Agus River, these hydroelectric power plants provide the bulk of cheap and reliable hydroelectric power supply to the Mindanao grid.

These hydroelectric power plants are: Agus I, Agus II, which are located within the ARMM territory; and Agus IV, Agus V, Agus VI and Agus VII which are outside the ARMM territory.

The Pulangui IV is a 255-MW hydroelectric power plant

located in Maramag, Bukidnon. With three (3) generating units, the Pulangui IV HEP is a run-off the river type of power plant using the most advanced hydroelectric power technology.

It was commercially operated on December 21, 1985 and since then, it had generated more than 24,742,534 MWH. Pulangui IV, unlike the other hydroelectric plants being considered in this study is not on the Agus River and does not derive its water from Lake Lanao. It is currently outside the territory of ARMM.

Agus VII Hydroelectric Power Plant, Fuentes, Iligan City

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POLICYBRIEF EPIRA AND APHC Republic Act 9136, otherwise known as EPIRA, was enacted on 8 June 2001 and provided for the privatization of power generation and transmission facilities.

Under the EPIRA, PSALM is mandated to take ownership, manage, privatize and dispose all existing generation assets and liabilities, real estate and other disposableresources of NPC. The EPIRA set out to reform the electric power industry of the Philippines and ensure a reliable and affordable electric powe Filipinos. Unlike majority of the energy resources in Luzon and the Visayas that have been privatized, APHC is protected through a 10-year moratorium under Section 47(f ) of the EPIRA.

The moratorium already lapsed in 2011, but the Joint Congressional Power Committee has deferred its decision to the Mindanao lawmakers opposing APHC’s privatization.

Since then, the planned privatization of the hydro complexes continues to face several issues that were raised by several stakeholder groups across Mindanao. President Aquino has indicated that the government is currently undertaking a study of possible ownership and operational options and is quoted as saying “The question here should not just be whether to privatize or not the Agus-Pulangui hydroelectric power complex but what would be best to do with it.”

Table 1. Agus and Pulangui Hydroelectric Power Plants Installed Capacity

Source: NPC - Mindanao Generation

OUR POSITION: MAINTAIN STATE OWNERSHIP OF APHC THRU A NEW GOCC MinDA supports the creation of a GOCC to own and manage the APHC complex. This GOCC should be empowered to acquire the APHC for its rehabilitation, operation, management and maintenance. This acquisition would give beneficial resolution to pestering blackouts in Mindanao by allowing effective and efficient administration of the power industry in the region; and, security against the skyrocketing of electric power rates.

Currently there are three (3) bills filed in Congress which serve the same purpose of creating this GOCC, to be known as the Mindanao Power Corporation (MINPOCOR). These are House Bill (HB) 676, HB 2621, and HB 4883 filed by Congressman Edgardo R. Masongsong, Congressman Celso L. Loregat, and Congressman Rufus Rodriguez respectively.

The passage of either of these bills would be needed to implement this option.

Once created, MINPOCOR may choose to adopt any of the

three modalities listed: •

Operate and manage the APHC. This option maintains the full ownership, control, and management of the asset to MINPOCOR;

•

Undertake Public-Private Partnership for the operations and management of the APHC. This option still retains full ownership of the asset to the national government but the operations and management of the APHC will be sub-contracted to the private sector; and,

•

Undertake modified Public-Private Partnership where MINPOCOR owns the assets while private sector operates and maintains it, but sales of energy are bid out in blocks. This scheme aims to privatize the power plant output (Kwh) as well as the operations and maintenance, while government maintains ownership of the power plant assets.

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Comparison of different modalities under MinPoCor are as follows:

COMPARATIVE MATRIX OF THE DIFFERENT APHC MANAGEMENT AND OWNERSHIP OPTIONS

Figure 2. Map of Agus and Pulangui Hydroelectric Power Complex (Source: Google Maps) Source: MinDA (2015). An Assessment on the Agus-Pulangui Hydroelectric Power Complex Ownership and Management Options

THE MAIN BENEFITS FOR CREATING THE MINPOCOR ARE THE FOLLOWING: Large hydroelectric power plants under government control enables Mindanao to ease the adverse impact of increase in electricity rates brought about by volatilities in either supply or world market prices. The APHC serves the crucial role of a “security plant� for the government by providing the cushion mechanism from external shocks.

Electricity rates will be more affordable, as opposed to rates if the plants are fully-privatized. More affordable electricity rates will help attract investors to set up businesses in Mindanao. On the other hand, privatization will lead to increase in electricity rates to account for both the returns on investment and profits of new owners (government only accounts for return on investments).

Table 2 presents the rate simulation of the MinPoCor option vis-a-vis full privatization.

APHC is contributing significantly to the coffers of the government, hence making it a proven financially-viable business entity in the long term. Financial records of PSALM and NPC affirm that APHC has an exceptional 12-year record of consistent net operating profit which averages Php 6.421 Billion annually. Projecting a thirteen-year (2015-2027) net operating income would again bring continuous inflows of revenue to the government. To elaborate, a conservative

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Table 2. Rate Simulations

Table 3. Projected APHC Net Income

POLICYBRIEF Figure 3. Market Share, Mindanao Power Generation Sector

plant capacity factor of 40% to 55% daily (ranging from 393 MW to 540 MW) is assumed depending on the interplaying cyclic phenomena like El Niño which may occur in the years 2015, 2020 and 2025. Considering no change in rate (peso/kwh) and assuming moderate increase in terms of megawatt output due to scheduled replacement of major electric components of some units (2014); completion of the Balo-I Plain Flood Control Project (2017) and scheduled rehabilitation of some units in 2016, income from APHC is expected to range from Php 8 -10 Billion annually over a 13 year period. Table 3 illustrates the 13-year projected income of APHC. Net income is expected to climb from 2016 to 2017 and likely to remain steady at Php 9 Billion until 2019. This is due to the completion of Balo-I Plain Flood Control Project in 2017 that will improve the level of water reservoir. In 2020, net income will slightly plunge from Php 9 Billion in 2019 to Php 8 Billion in 2020 due to occurrence of El Niño phenomena. This temporary net income fluctuation will recover in 2021 until 2027 with the exception of year 2025 because of again, the cyclic El Niño occurrence. Regardless of industry standard assumptions and weather conditions, the APHC stands to gain positive net profit all throughout the thirteen-year financial projection.

Source: Raw data from Department of Energy (DOE)

MINPOCOR’s earnings will be ploughed back to Mindanao. MINPOCOR will be obliged to remit its anticipated earnings back to Mindanao since it is no longer being controlled by the national government like the existing NPC. The operation of the APHC presents a good opportunity for Mindanao to have assets that do not only produce power but can also become good incomegenerating facilities whose earnings can be ploughed back to Mindanao to augment central government’s financing for Mindanao’s development.

MinPoCor ownership of APHC will ensure that market dominance of the power plants will not be transferred to the private sector. Currently, APHC has the highest market share in Mindanao—a market dominance which could be transferred to the private sector through privatization. This is compounded by the fact that Mindanao’s existing power market structure is highly concentrated. Sizeable market shares in the power industry in Mindanao are limited to several entities excluding PSALM, which owns 44% of the entire Mindanao grid’s dependable capacity. (Figure 3) Under the EPIRA law, no entity shall be allowed to own more than 30% of the total capacity of a single grid. In the case of the Mindanao, whoever will get ownership of the Agus complex will exceed the said restriction. Although some have argued that the Agus complex can therefore be sold on a by plant basis, this scenario will present technical difficulties especially on the efficient operation of said complex. Being a series of cascading power plants, the efficient operation of the entire Agus complex may be affected if each plant, in the series of cascading plants, is owned by a different entity. The current scenario makes it difficult for the Agus complex to be subjected to privatization.

Agus VII Hydroelectric Power Plant at Baloi, Lanao del Norte (from top to bottom) plant entrance; presence of water hyacinth at the dam; underground tunnel; water turbines

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On the other hand, the main arguments against the creation of MINPOCOR are the following:

by other NPC plants, and to subsidize operations of the NPC-PSALM head office2.

It will be subsidized by government funds. The MinPoCor substitute bill provide that the acquisition of APHC and MinPoCor’s operations will not be subsidized by government funds, as its profits should be able to cover this.

MINPOCOR may discourage entry of private sector participants into power generation. According to businessmen involved in power generation, Mindanao’s power shortage is due to difficulty for other generators to invest in Mindanao. They could not compete with hydroelectric plants owned by NPC which offers cheap, subsidized rates. In reality, investments in power generation are coming in, even as APHC remains under the control and ownership of government. As of 31 January 2015, committed projects for the Mindanao grid (2014-2018) is at 2,007.8 MW with estimated total project costs of Php 148.23 billion.

MINPOCOR may become another NPC. Many are concerned that MinPoCor, as a government-run corporation, may become a losing proposition, just as NPC was. It should be noted that most of the NPC assets, especially the Individual Power Producers (IPPs), were losing entities, unlike APHC (see previous explanation). In fact, the profits from APHC were used to bankroll the losses incurred

APHC AND THE BANGSAMORO BASIC LAW (BBL) Under the draft BBL, the Bangsamoro government will have exclusive powers over natural resources located within its territory. This provision can be applied to Lake Lanao which is located in Lanao del Sur and as such the Bangsmoro Government may have exclusive control over said natural resource.

Yet, Lake Lanao plays an important role in the Mindanao grid. Any reduction in the water supply coming out of Lake Lanao has a direct impact on the generation capacity of the Agus Complex.

Our recommendation, is that Congress must clarify and review certain provisions in the proposed Bangsamoro Basic Law that relate to the Agus Hydro Complex, the Bangsamoro jurisdiction over Lake Lanao, the overall Mindanao economic development, and the need for meaningful and effective interfacing for the management, ownership, and operation of APHC.

CONCLUSION AND RECOMMENDATIONS The APHC plays a very important and an indispensable role in shaping Mindanao’s power development landscape (given the substantial entry and expected enormous increase of coal as energy source to the Mindanao grid) and in realizing the government’s goal of achieving a regime of affordable, reliable and sustainable electricity.

It is therefore in the best interest of Mindanao to keep the ownership of APHC in the hands of the government while re-defining APHC role in the market to ensure that it operates in a regime of healthy competition.

Maria Cristina Falls in Iligan City

Among the various options for continued state ownership of APHC, clearly, the creation of MINPOCOR would serve the interest of Mindanawons. For one, financial statements of NPC show that APHC is indeed earning an average of PhP6B annually, even in the face of operational limitations with the lack of thorough rehabilitation in more than a decade.

This presents Mindanao with a good opportunity to earn from the operations of the plant, while benefitting from more affordable electricity rates. MINPOCOR can also help cushion us from external shocks that could lead to spikes in electricity rates.

2 Power Sector Assets and Liabilities Management (PSALM) Corporation, 2012. Official Documents to Governance Commission for GOCCs (GCG).

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POLICYBRIEF It is therefore recommended that either of the MINPOCOR bills pending in Congress be enacted into law, and that the three options for the operations and management of APHC be further studied, in order to determine the best course of action.

(left to right) Agus Hydroelectric Power Plant Complex; Pulangui Hydroelectric Power Plant in Maramag, Bukidnon

REFERENCES Google Map National Power Corporation-Mindanao Generation, Agus and Pulangi Hydroelectric Power Plants Installed Capacity.

Retrieved from www.napocor.gov.ph/index.php/mindanao-gen Department of Energy (DOE), 2014. List of Existing Plants, Mindanao Mindanao Development Authority (MinDA), 2014. Economic Impact of Power Outages in Mindanao Mindanao Development Authority (MinDA), 2015. An Assessment on the Agus-Pulangui Hydroelectric Power

Complex Ownership and Management Options Power Sector Assets and Liabilities Management (PSALM) Corporation, 2012. Official documents of

Governance Commission for GOCCs (GCG)

This publication was written by a team from the Policy Formulation Division, Finance Division, Mindanao Power Monitoring Committee and Legal Unit of the Mindanao Development Authority (MinDA).

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For further information, please contact

The Policy Formulation Division Mindanao Development Authority (MinDA) 4th Floor SSS Building, JP Laurel Avenue 8000 Davao City

Telephone Nos.: (63-82) 221-2185, 221- 4834 Fax No.: (63-82) 221-6920, 221-2180 E-mail: info@minda.gov.ph The MinDA Policy Brief is available online at www.minda.gov.ph MinDA Policy Briefs are observations/analyses based on researches and consultations done by MinDA Technical Staff on certain policy issues. The paper is holistic in approach and aims to provide useful inputs for decision-making.