Monday, August 08, 2005

IPPs Fight

As I See It : There's enough business for two quarreling IPPs

Neal Cruz
Inquirer News Service

LAST Friday, Aug. 5, we wrote here about an independent power producer (IPP) called Power One Corp. that, according to the congressman of Oriental Mindoro, has a capitalization of only P1.56 million and cash of P14,000 on hand. Nevertheless, this IPP landed a contract with the Oriental Mindoro Electric Cooperative (Ormeco) to build an P800-million power plant to provide electricity for the whole province. (The contract is being reviewed by the Energy Regulatory Commission for approval or rejection.)

Not true, "(w)e are fully capable of executing our power supply agreements," said Power One in a letter hand-delivered last Saturday and signed by its president, Facundo R. Yeneza. There was no statement as to how much capital the company has or how much is its cash on hand.

But the letter stated that Rep. Rodolfo Valencia and his lawyer Dante Manzo were referring to "outdated and incorrect information. We have corrected these during the mentioned public hearing in Calapan" (Oriental Mindoro).

To be fair to Power One, I will quote extensively from its letter:

"1. Power One through its project company, Mid-Islands Power Generation, is almost complete with our 9-megawatt Phase 1, which we will commission in 10 days. This P100-million phase is being completed from internal equity and with no bank loans. For the P250-million phase 2, we already have the generating equipment. Any accusation of financial or technical incapacity is belied by these facts."

(Question: Why did it go ahead with the project when the contract has not yet been approved by the ERC? Has it been assured that the contract would sail through the ERC with the greatest of ease? Why? What will happen to its investment if the contract is disapproved?)

"2. Power One's rate is lower than the rate of Mirant Philippines (which has a contract with Ormeco, which has still a number of years to run; for which reason, it is protesting the new contract with Power One) by at least 8 percent on base-load to base-load basis. Mirant's contract is only for 7.5 MW.

"3. The Power Supply Agreement between Power One and Ormeco had been certified by no less than the Department of Energy as compliant with the competitive selection process in its endorsement dated February 11, 2005. This compliance was re-certified by the Department of Energy in July 8, 2005."

(Note: There was no public bidding done prior to the awarding of the contract to Power One.)

"4. In fairness to our client Ormeco, we don't believe they ever intended to eliminate Mirant's 7.5-MW power facility. Power One was asked to install only 28 MW of the 35 MW that is needed by the province of Oriental Mindoro in preparation for the pullout of Napocor as part of the missionary subsidy reduction program. The Mirant contract, however, failed to comply with the conditions precedent for effectivity and failed to deliver half of the contracted energy in the last five years.

"5. Ormeco, we understand, has been asking Mirant to eliminate the onerous provisions in the contract to protect its member-consumers. Among these are the take-or-pay-provision which results in PPA charges similar to Mirant's Sual and Pagbilao contracts with Napocor. (Question: If there are "onerous" provisions, why did Ormeco sign the contract in the first place? Having signed it, it is duty-bound to follow the terms of the contract until its expiration.) Mirant is also demanding that Ormeco reinstate its commitment to buy 48 MW (of power) a year which is equivalent to 40 percent of the province's energy needs even if Mirant is committing to maintain only a 7.5 MW plant, which is 20 percent of the 35-MW installed capacity requirement of the province.

"6. Power One's core technical team has done 750-MW diesel power projects and has an average of 20 years experience. It is one of the most qualified in the country. Power One's former president was president of the IPP association, of which Mirant was a member.

"7. Power One is proud of the long-term, competitive solutions it is bringing to the province of Oriental Mindoro. To reduce power costs, Power One will be developing renewable energy in the province within three years and connect the island to the Luzon grid through a 69 KV submarine system by 2010. This is the correct solution (for) the province so that it will benefit from the open access market of Luzon.

"8. As the power market becomes deregulated and competitive, behemoth IPPs, (which) have been spoiled by their cash-guzzling onerous contracts with Napocor, must learn how to compete on price and service. Mirant must accept that, even for a company of their size, they cannot win them all and if they do a bad job they can lose a customer."

* * *

After examining the controversy, I don't understand why Mirant and Power One are quarreling when there is enough business in the province for both of them. Mirant's contract is for 40 percent of the province's electric requirements. The other 60 percent is being given to Power One. There is enough for both of them.

I think the reason is greed-on the part of both parties. Mirant is afraid another power supplier would get some of its business. Or, perhaps, it plans to supply the additional 60 percent itself. Power One, on the other hand, although it already has 60 percent, still plans to expand its capacity to 80 percent. Mirant therefore suspects Power One plans to take away 20 percent of its 40-percent share. Greed!

Another thing I don't understand is that there are hundreds of other islands in the Philippines needing electricity. So why doesn't one of them go to these islands instead of the two of them crowding Oriental Mindoro?