The curious case of NAPOCOR debts

The deep indebtedness of NAPOCOR was one of the strongest arguments used to justify the EPIRA (Photo from Kevin Collins on

Continued from Part 1

Proponents of EPIRA made us believe that privatization will solve the financial woes of state-owned NAPOCOR. In fact, the deep indebtedness of NAPOCOR was one of the strongest arguments used to justify the EPIRA. If state coffers are being bled dry by the debts of NAPOCOR, then why not just sell its assets to wipe out its obligations? Obviously, the public was deceived by this simple line of reasoning.

Drain in public resources

Such argument by the then Arroyo administration sounded persuasive for some because government was facing a swelling budget deficit and debt. In 2001, the budget shortfall was P147.02 billion. Including the deficit of other government units, the consolidated public sector deficit was P174.27 billion. Meanwhile, the outstanding national government debt during the period was P2.38 trillion. NAPOCOR represented the biggest drain in public resources. Its 2001 debt of $16.39 billion or some P834.29 billion (at P50.99 per US dollar) accounted for 34.9 percent of government’s outstanding debt. With the EPIRA, the Arroyo administration promised to reverse the situation.

Fast forward to 2011. According to the PSALM Corp., the remaining debt of NAPOCOR as of 2010 is $15.82 billion. Thus, after 10 years, only $570 million have been shaved from the state power firm’s 2001 debt of $16.39 billion. At $15.82 billion or P713.64 billion (at P45.11 per US dollar), the debt of NAPOCOR comprised a still a significant 15 percent of government’s outstanding debt. Meanwhile, the budget deficit ballooned to P314.5 billion in 2010, a new high in absolute terms.

While its IPP obligations have been reduced by $1.63 billion between 2001 and 2010, NAPOCOR’s debt also increased by $1.02 billion during the same period. This implies that IPP obligations have been mainly financed by new debts. (See Chart 3)

Worse, PSALM has already shelled out $18 billion to settle the obligations of NAPOCOR from 2001 to 2010. Of the said amount, $6.7 billion went to principal amortization; $4.3 billion for interest payments; and $7 billion for obligations to independent power producers (IPPs). (See Chart 4) But if government spent $18 billion in the past 10 years, why then did the debt of NAPOCOR was reduced by a mere $570 million?

New debts

PSALM itself provided the explanation. According to it, NAPOCOR contracted new debts in the past 10 years. From 2001 to 2010, NAPOCOR accumulated new debts of $12 billion, on top of its $16.39-billion pre-EPIRA debt. Of the $12 billion, 73 percent represented operational losses while the commissioning of new IPP plants accounted for the remaining 27 percent. PSALM noted that the commissioning of new IPP plants bloated the total financial obligations of NAPOCOR to $22.35 billion by 2003.

The question now is why did officials tasked to privatize NAPOCOR have to resort to more borrowings? Doesn’t it defeat the purpose of power sector reform which is to free up government from its debilitating financial woes?

Under the EPIRA, eliminating NAPOCOR’s debts primarily involves using the proceeds from the privatization of the state power firm’s generation and transmission assets and liabilities. Apparently, this has not happened because earnings from power privatization were not enough to compensate the huge financial obligations of NAPOCOR.

According to the PSALM, government has earned $10.65 billion as of October 2010 from the sale of its generation plants, transmission assets, and IPP contracts. Of the said amount, the largest, $3.95 billion, came from the privatization of the National Transmission Corporation (TRANSCO). The sale of generating plants, on the other hand, yielded $3.47 billion. Finally, the transfer of NAPOCOR’s IPP contracts to IPP Administrators (IPPAs) accounted for the remaining $3.23 billion.

Privatization debacle

However, of the $10.65 billion in total privatization proceeds, only $4.85 billion was actually collected and used to pay for NAPOCOR’s debt. PSALM reasoned that earnings from the privatization of TRANSCO and the IPP contracts will be fully collected in a number of years through a staggered collection scheme. “But in any year when maturing debts exceed privatization collections, PSALM will have no recourse but to raise funds through new loans to pay for maturing obligations,” PSALM said. This explains the $12 billion in new debts incurred by NAPOCOR in the past 10 years.

It appears that the supposed benefits of privatization in terms of addressing NAPOCOR’s financial bleeding will not be felt anytime soon. PSALM said that the debt of NAPOCOR will be significantly reduced only by 2026, with a projected residual debt of $3.78 billion. The amount is exclusively based on privatization proceeds as of 2010 and maturing financial obligations. Depending on future privatization proceeds and earnings from the universal charge, PSALM claimed that it may even liquidate the $3.78 billion before its corporate life ends in 2026.

But it doesn’t mean that NAPOCOR will be debt-free by the time PSALM expires 15 years from now. This will depend on how much government can earn from the privatization of its remaining assets and IPP contracts. If the experience of the past 10 years is to serve as indicator, it seems that there is nothing much to hope in EPIRA even in just mitigating the public sector’s fiscal burden. Why is this so?

NAPOCOR’s financial bleeding

Even prior to the EPIRA, there were already initial efforts by government to privatize the power industry. But even then, officials already knew that power privatization can only be successful if government could package it in the most attractive way for businesses to take notice. One factor going against efforts to privatize the power sector was the small energy market of the Philippines. Being a pre-industrial, backward economy, Philippine energy consumption is not as huge as those of other countries even compared to our neighbors in Southeast Asia.

To remedy the concern over a small market, government had to offer incentives and other benefits that will guarantee the profits of private investors. IPPs, for instance, were offered a guaranteed market that was much larger than the actual electricity consumption of the country through take-or-pay contracts, on top of other benefits. These guarantees and perks were the underlying reasons for NAPOCOR’s financial hemorrhage.

Legitimizing onerous contracts & debts

Alas, EPIRA even legitimized these burdensome and unjust contracts and debts. To entice investors, Section 32 of the law mandated the government (and ultimately, the taxpayers) to automatically assume P200 billion in financial obligations of NAPOCOR.

Section 68 of EPIRA did mandate the “thorough review” all IPP contracts by an inter-agency committee headed by the Department of Finance (DOF). It also tasked the committee to take necessary actions in cases where contracts are found to be grossly disadvantageous or onerous to the government. Implementing this provision, then President Arroyo ordered a review of 35 IPP contracts. In 2002, the DOF-led review committee said that a total of 27 contracts have financial issues. A financial issue pertained to an instance when the government agency that entered into the contract agreed to shoulder financial obligations “beyond what is necessary”.

But instead of rescinding these financially onerous IPP contracts, government opted to simply renegotiate them. PSALM claimed that the renegotiations have resulted in some $1.03 billion in savings for the government Such savings, however, were not the result of striking out the take-or-pay provisions in the contracts, which remained even after the renegotiations. The reported savings mostly came from IPPs reducing their nominated capacity, or the capacity that government agreed to pay for whether electricity is actually produced or not. The renegotiations were done not to substantially rewrite the contracts. On the contrary, discussions were carried out by PSALM officials with the IPPs within the parameters set by the contracts.

Consumers’ burden

Even worse, EPIRA mandated that all the costs resulting from these contracts be borne by the hapless consumers. Section 34 of the law states that “a universal charge to be determined, fixed, and approved by the ERC shall be imposed on all electricity end-users”. The universal charge shall be collected for, among others, the recovery of so-called stranded debt and stranded contract costs of NAPOCOR.

Section 4 of EPIRA defines stranded debts as any unpaid financial obligations of NAPOCOR which have not been liquidated by the proceeds from the sales and privatization of its assets. On the other hand, stranded contract costs refer to the excess of contracted cost of electricity under eligible contracts (i.e. those approved by the ERC as of December 2000) over the actual selling price of the contracted energy output of such contracts in the market. Stranded contract costs are basically the take-or-pay capacity payments that will not be offset by the privatization of the IPP contracts and thus will still be shouldered by NAPOCOR.

In June 2009, PSALM had filed petitions before the ERC to recover almost P470.87 billion in NAPOCOR stranded debts and almost P22.26 billion in stranded contract costs for the Luzon grid. The recovery of stranded debts translates to a rate hike of 30.49 centavos per kilowatt-hour (kWh) based on a recovery period of 17 years. Meanwhile, the petition to recover the stranded contract costs in five years will translate to a rate hike of 9.20 centavos per kWh. PSALM filed another set of petitions in June 2010 to recover stranded debts for 2010 (projected at almost P54.90 billion), equivalent to almost 86.77 centavos per kWh. It also proposed to recover in three years stranded contract costs for 2009 estimated at almost P26.69 billion, equivalent to 18.79 centavos per kWh.

Fortunately, the ERC dismissed these petitions last November 15, 2010. The dismissal, however, was not because they had no basis (EPIRA allows such recoveries through the universal charge) but due to PSALM’s failure to submit supporting documents and information. In fact, the ERC decision clearly stated that the dismissal was “without prejudice to the re-filing of the same after conforming to the pertinent ERC regulations”. The relief for consumers is indeed just temporary. On or before June 30 this year, PSALM is expected to file another set of petitions to recover NAPOCOR’s stranded debts and stranded contract costs. Reportedly, PSALM is filing for 12 to 15 centavos per kWh-hike in the universal charge. (To be concluded)

Also read The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform


8 thoughts on “The curious case of NAPOCOR debts

  1. ..very interesting

    recent studies indicate that cost of electricity in the philippines is already highest in asia. the impending universal charges will make sure that you are on the #1 spot.

  2. learned much thank you…

    Apparently, EPIRA produces two pronged punishments for the Filipinos: grossly elevated electrical bills brought by the take or pay contracts and taxes being paid by every Juan and Pedro for the loans and other liabilities of the NAPOCOR absorbed by the government.

    • thanks. epira also explains why we have the highest electricity rates in asia amid serious energy insecurity. imagine, power rates in armm are twice the rates in bangkok, seoul, and beijing.

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