Napocor's huge debt, colossal losses
Wednesday, September 29, 2004
Edgardo M. Del FonsoInquirer News Service
(First of a series)
NATIONAL Power Corp. (Napocor) is once again in the eye of the storm for the umpteenth time in its checkered history. This time the condemnation is raining down hard on Napocor for its huge losses, colossal debt and rising tariff.
Accusations are coming in torrent, as if there is brisk demand for them: Napocor is run by incompetent, corrupt people who brought financial ruin to the company and who should therefore have their salaries cut, discharged from service, or (hopefully with tongue in cheek) electrocuted. Napocor itself should be placed under closer supervision, closed down, or (again hopefully with tongue in cheek) bombed out of existence.
Napocor executives and other officials are shuttling between the two houses of Congress to explain its losses in endless hearings before a confusing array of committees, all ostensibly in aid of legislation.
No one can begrudge Congress for exercising its right to conduct inquiries to address pressing issues of national concern, curb abuses of the executive department, or to craft better laws. Any man-made problem should be susceptible to solution through a dispassionate exchange of views and perspectives in good faith among reasonable men and women. If that is what hearings are really after.
The problem with these hearings is that they are less an effort to uncover the truth or to understand the fundamental reasons behind a given problem, than a rush to judgment to pin the blame on some hapless public officials, past or present, for a perceived wrong. We see self-absorbed legislators fulminating with self-righteous, if somewhat self-conscious, indignation and subjecting hapless witnesses to public ridicule with not even the slightest pretense at elementary courtesy or civility. Especially while TV cameras are rolling.
Public ridicule
The atmosphere at these hearings is at once accusatory, and one seeing the tableau from the sidelines could not help feeling that a lynching party is at work. The objective seems to be to unsettle, even to demean the witnesses from the start to soften them up for the inquisition to follow.
One such hearing started with the witnesses, all government officials, being asked to state one by one, under oath and the glare of TV cameras, their total salaries and allowances, as if to prove they are making unconscionable salaries. All they got was the revelation that the president and chief executive officer of the biggest Philippine corporation in sales and assets is taking home no more than a mid-level manager in a mid-sized private company.
And yet when the hearings started in earnest, the witnesses never got the chance to discuss fully the ostensible reason for the hearing, which was to get to the bottom of Napocor's losses and level of debt. Committee members took turns pummeling the witnesses with questions as if there's some kind of contest to find out who could bring maximum discomfort to the witnesses. So the hearing ended without resolving anything, other than to hold the witnesses to public ridicule.
Some legislators have solemnly intoned that Napocor should be closed down because of its debt and its losses. But the debt and losses are just symptoms of the underlying problems. Closing Napocor or capping its debt will remove the symptoms, perhaps, but the underlying problems remain. The government still has to run the power plants until they are privatized, and its debt, all guaranteed by the national government, still has to be paid. So a debt cap or Napocor's closure will not bring any lasting solution.
The bald fact is that Napocor has been used as a vehicle to provide hidden subsidies for the consumers. Napocor was tasked to build power plants entirely on borrowed money, then forced to sell electricity below cost. Out of necessity, it incurred huge debts -- almost entirely in foreign currency -- to finance its expansion.
That is not necessarily a bad thing if Napocor can sell power for more than what it takes to produce it. But Napocor has been unable to obtain a tariff structure that will fully cover its costs. That is bad enough, because it would need to borrow yet again to pay maturing loans and interest. But if the peso also depreciates against foreign currencies, as it continues to, the effect is catastrophic.
Flawed policies, priorities
It is now time to pony up for those subsidies. It is not Roger Murga's fault as Napocor president, or of those before him, that Napocor went on a building and borrowing spree but was prevented from collecting a decent tariff from its customers. The losses and the debt are the consequence mainly of past legislation; the flawed policies and priorities, actions or inaction of different administrations, and regulatory decisions that went against Napocor.
They had said Roger Murga should be fired as Napocor president for presiding over this wretched state of affairs. If Michael the Archangel were running Napocor, they also would be asking for his head (or his wings) in no time at all. But to expect anyone to overcome these problems is a little like sending Roger out with another Light Brigade to walk-trot-march against a horseshoe of massed artillery, cavalry and infantry, and expecting him to rout the enemy.
A multi-awarded outstanding alumnus of the University of the Philippines, and with a distinguished career in the private sector behind him, Roger can be as good as anyone in running any corporation. But not with the impossible odds he, like Lord Cardigan of Balaclava, had faced.
This paper is intended to discuss the dimensions of Napocor's financial problems and to understand how it got to where it is now. In the process, it will attempt to address the putative reasons for Napocor's financial distress, and bring to light other forces and developments that have had a major impact on the state company but which have not been acknowledged in all the debates so far.
First, an understanding of the size and reasons for Napocor's 2003 losses is useful in providing context. The consolidated loss of Napocor and National Transmission Co. (Transco) -- Transco is still officially part of Napocor -- is P117 billion: P113 billion for Napocor, P4 billion for Transco. (Transco actually lost money due to its proportionate share in the interest and foreign exchange losses).
Interest, forex losses
Napocor's other expenses, coincidentally, also reached P117 billion, consisting mostly of interest and foreign exchange losses. One could argue that if not for these other expenses, Napocor would have broken even in 2003. Of these other expenses, P78 billion-or two-thirds of the losses -- is directly linked to a bookkeeping change.
Until 2002 foreign exchange losses on loans and IPP [independent power producer] obligations could be spread out over the remaining life of the underlying loans or contracts, some of which stretch as far out as 2028. Indeed, that is exactly how the obligations will be discharged.
But, in a major swing of the pendulum towards obsessive conservatism, the accounting profession decreed through Statement of Financial Accounting Standards 8A that companies should take the hit on foreign exchange losses immediately and in full. Thus, an innocuous-sounding guideline magnified Napocor's losses by three times, compared to what it would have reported under previous accounting fiat.
Note that the P78 billion is a translation loss payable over a period of time, not an out-of-pocket cost payable this year or next. A lot of people have made a lot of noise and issued dire predictions on the assumption that the P78 billion is a recurring charge that calls for immediate cash payment.
Of all the laments over Napocor's parlous financial condition, none has attracted more blame than the President's decision in May 2002 to cap the Purchased Power Cost at P0.40 per kilowatt-hour. Citing it as a concession to populist sentiment, critics claim that this decision is the single largest blow to Napocor's viability, costing the utility almost P30 billion yearly in lost revenue.
There are three things wrong with the analysis and the conclusions that flowed from this:
• The P0.85 per kilowatt-hour (kWh) cost under-recovery was only for Luzon. The PPA per kWh in May 2002: P1.25 for Luzon, P0.79 for the Visayas and P0.54 for Mindanao. The average for the Philippines was P1.09. With a cap of P0.40, the under-recovery was therefore P0.69, and not P0.85 as has been generally believed.
• In October 2002 the Energy Regulatory Commission (ERC) unbundled generation rates, as required by law. The total generation rate Napocor could charge its customers remained the same, but the classification of charges was changed. Now there are three components: Fuel, Purchased Power Cost, or PPC, and basic charge. The cost of the IPP contracts was split between the PPC -- the amount subject to the cap set by the President -- and amortization of capacity fees, classified under basic charge.
Because PPC is now lower, then necessarily the un-recovered amount would also decline. With the cap remaining at P0.40, the under-recovery was reduced further from P0.69 in May 2002 to an average of P0.34 through July 2004. Of the P0.34, Napocor has recovered P0.11 by virtue of subsequent ERC rulings, leaving just P0.23 per kilowatt hour, equivalent to P16 billion, as the amount that has remained unrecovered from the May 2002 decision. That is a long way from the P60 billion that some critics are claiming.
The third reason why the predictions about the impact of the PPA cap will not happen is that the absolute level of the PPA will decline in due course, as some of the more expensive oil-fired plants are retired from service. Eight IPPs with a total capacity of 756 megawatts have expired, and six more with 577 megawatts of capacity will terminate by 2008.
Savings from the re-negotiation of IPP contracts will also help reduce the overall amount of the PPA. These reductions, coupled with the increase in volume of sales over time, will bring the PPA down sharply from its peak in 2002. By 2006, the unadjusted PPA will be at P0.35 per kWh, below the P0.40 cap.
Not completely lost
What all these say is that the sound and fury over the President's decision to cap the PPA is all for nothing. Of Napocor's loss in 2003 of P117 billion, P8 billion, or less than seven percent, was due to the PPA cap, and even that will eventually be collected. Critics will have to bark up another tree.
There are two more points in relation to the President's decision to cap the PPA. Far from being a knee-jerk reaction to the public's clamor for lower power rates, the underlying analytical basis for capping the PPA came from the Napocor privatization plan, prepared by Power Sector Assets and Liabilities Management Corp. (PSALM) in conjunction with NM Rothschilds, a respected international investment bank.
PSALM submitted the privatization plan to the Joint Congressional Power Commission in November 2001, months before the PPA decision.
The main body of the privatization plan described the proposed modality, sequence, timing and valuation in selling the assets of Napocor and Transco. It devoted a section on IPP liability management, a function that PSALM assumed under the Electric Power Industry Reform Act, or EPIRA.
What the President ordered was precisely what PSALM suggested, except for the timing. PSALM proposed to "levelize" the PPA -- i.e., flatten it out at a constant amount over a period of time, rather than charge it as and when incurred.
Unadjusted, the PPA would follow a downward slope from P0.88 per kWh in 2002 to zero in 2022. Instead of imposing a high PPA in the early years, Napocor would bill consumers a constant nominal amount over a period of time and thereby give consumers relief in the medium term.
The estimate prepared at the time showed that a uniform PPA of P0.40 per kWh over a 20-year period would equate with the unadjusted PPA. The plan, however, was contingent on the ERC's approval to include a financing cost element in the PPA since Napocor could not afford to absorb the interest on additional borrowings needed to finance the PPA deferral.
A graphic presentation of this scheme is shown in the charts below. The first chart shows the annual PPA in US dollars (in bars) and the corresponding PPA per kWh. The second shows the PPA at a constant P0.40 per kWh until it drops in later years. It also shows the absolute amount of the PPA in US dollars corresponding to the per-kWh PPA.
Clamor for lower PPA
The privatization plan, including the said PPA scheme, was discussed extensively in early 2002 with the Joint Congressional Power Commission (JCPC), the committees on energy of both the House of Representatives and the Senate, rating agencies such as Moody's and Fitch and creditors such as the Asian Development Bank and the World Bank before it was eventually endorsed by the JCPC and approved by the President on Oct. 4, 2002.
The President's decision was therefore based on studies that showed Napocor could support a "levelized" PPA of P0.40 per kWh, assuming ERC would allow recovery of the financing cost.
Events did not exactly conform to plan, since it was put into place before Napocor could obtain explicit authority from ERC.
Now a word on the timing: At the time of the President's decision, there was a loud clamor from consumers, cause-oriented groups and the media to reduce the PPA. The IPPs of Manila Electric Co. (Meralco) were all operational by then, and the combined PPA from Meralco and Napocor was running at over P4.00 per kWh.
Congress took note of the clamor, and soon competing bills were filed trying to outdo one another in driving down the PPA. House Bill No. 4741 filed by the energy committee would exempt about 60 percent of residential customers from the PPA, and the rest would enjoy a moratorium of three to four years before they pay a centavo of PPA (to Napocor: Meralco will continue to charge its PPC in its franchise area).
Under Senate Bill 2140 filed by 14 senators (eight of whom are still in office), 77 percent of residential customers would either enjoy total exemption or a 50-percent discount while all others would enjoy three years of PPA-free electricity. An amendment proposed by an opposition senator would either exempt or provide discounts to 94 percent of all residential customers, for the others, the freeze stays for three years. Mercifully, all these bills would allow Napocor to recover the related financing cost, but it still would have to raise as much as P420 billion in incremental loans.
Because of the sentiment of the times, it was a foregone conclusion that Congress would pass one of those bills.
The President's move in May 2002 therefore pre-empted the snowballing move to legislate a lower PPA. That action served several purposes: it silenced the uproar over high power rates, kept the PPA at a reasonable and affordable level, and saved Napocor from having to borrow several hundred billion pesos more.
It is interesting that back then, legislators were tripping over one another trying to claim paternity to an idea that would be perceived as pro-poor. As the decision on the PPA cap has become an orphan among legislators, not one of them -- including those who sponsored the various PPA bills -- has stood up to defend or even agree with the President's decision. Some of those who sponsored bills with more generous give-aways are among the most vocal in criticizing the President on this issue.
As a final note on this subject, the "levelized" PPA was estimated in 2001 at P0.40 per kWh over 20 years. An update prepared by PSALM in April 2004 shows the "levelized" PPA will now be P0.25 per kWh in 18 years. In the end, therefore, a lot of trees died and gallons of ink spilled over a non-issue.
Deal with Meralco
Another reason mistakenly cited for Napocor's loss is the failure of Meralco to abide by the terms of its 10-year supply agreement with Napocor. As its own IPPs became operational, Meralco began to cut its purchase of power from Napocor below the contracted level. Napocor continued to bill Meralco for the full volume but Meralco refused to pay up, invoking various reasons as the basis for its action.
Napocor and Meralco eventually agreed on a compromise agreement to settle the dispute, and the agreement is now pending for the approval of the ERC. Until the matter is finally resolved Napocor continues to accrue revenues from Meralco as if the 10-year contract is still operative, and so has not booked any loss arising from the Napocor-Meralco agreement. Thus, Meralco's refusal to honor the contract has not had an impact on Napocor's profitability. It has, however, added to Napocor's financing burden as its receivables from Meralco keep piling up pending eventual settlement.
(To be continued)
The author is the former president of Power Sector Assets and Liabilities Management Corp. (PSALM)
posted by philpower @ 1:31 PM,
