Document of The WorldBank FOR OFFICIAL USE ONLY Report No. 6999-PH STAFF APPRAISAL REPORT PHILIPPINES BACON MANITO GEOTHERMAL POWER PROJECT May 31, 1988 Industry and EnergyOperations Division Country Department II Asia Regional Office Thid doment has a re.dcled duu a mway be used by recI4ds only In te pedronmance of their offcial dudles Its contents may not owse be dscosed wihout Wodd Bak aodzallon Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 6999-PH
STAFF APPRAISAL REPORT
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
May 31, 1988
Industry and Energy Operations DivisionCountry Department IIAsia Regional Office
Thid doment has a re.dcled duu a mway be used by recI4ds only In te pedronmance oftheir offcial dudles Its contents may not owse be dscosed wihout Wodd Bak aodzallon
MMTOE - Million tons oil equivalentMMBOE - Million barrels oil equivalentBOPD - Barrels of oil per dayHT - Million tonsMW - Megawatt (1,000 kilowatts)TWh a Terrawatt-hours (billion kilowatt-hours)kWh - Kilowatt-hours (1,000 watt-hours)kW - Kilowatt (1,000 watts)kV . Kilovolt (1,000 volts).m . meter (3.2808 foot)km - Kilometer (0.6214 mile)MWh - Megawatt hour (1,000 kilowatt-hours)MkWh - Million kilowatt-hours
ABBREVIATIONS AND ACRONYMS
ADB - Asian Development BankBED - Bureau of Energy DevelopmentBEU - Bureau of Energy UtilizationCOA - Commission on AuditsDBP a Development Bank of the PhilippinesEdF - Electricitb de FranceEHV a Extra High VoltageERB - Energy Regulatory BoardGSIS a Government Services Insurance SystemsICB - International Competitive BiddingKfW 3 Kreditanstalt fur WiederaufrauKRTA - Kingston, Reynolds, Thom and AllardyceLCB - Local Competitive BiddingLIB m Limited International BiddingMERALCO - Manila Electric CompanyMIS Management Information SystemMOE - Ministry of EnergyNEA Natiohal Electrification AdministrationNEDA - National Economic Development AuthorityNPC - National Power CorporationNPCC - National Pollution Control CommissionNPV - Net Present ValueOKA Office of Energy AffairsPGI a Philippine Geothermal Inc.PLC a Power Line CarrierPNOC - Philippine National Oil CompanyPNOC-EDC a PNOC-Energy Development CorporationPNOC-EDI - PNOC-Energy Drilling Inc.
PNPP - Philiprine Nuclear Power PlantSCADA a Supervisory Control and Data AcquisitionSER a Sequence-of-Event RecordingSGS - Steam-Gathering SystemSOEs a Statements of Expenditures
FISCAL YEAR
January 1 to December 31
FOR OMCUIL USR ONLY
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
LOAN AND PROJEC SWMMARY
Borrowers: National Power Corporation (NPC)Philippine National Oil Company (PNOC)
Guarantors Republic of the Philippines
Beneficiar-y PNOC Energy Development Corporation (PNOC-EDC)
Amounts Two loans amounting to an aggregate of US$100 million,consisting of a loan to NPC of US$59 million and a loanto PNOC of US$41 million.
Lendinit Tomes Repayable over 20 years, including five years of grace,at the standard variable interest rate.
RelendinE Terms PMOC would relend the proceeds of its loan to PNOC-EDCunder the same terms and conditions as the Bank loan.
Pro4ect DescriptLons The project constitutes an integrated approach toresource development, power generation and transmLssion.the project's main objectives are to (a) develop anexisting geothermal steam field and a new 110 MM powerplant at Bacon Manitol (b) support the delineation andassessment of geothermal sites for use in Lu:.;(c) support measures for upgrading and expanding NPC'usystem facilities; and (d) support Institution-buildingand financLal recovery efforts at NPC. The projectprovides for ti) drilling of about 18 wells fordelineationlappraisal of geothermal sites, drilling ofadditlonal productian/injection wells at Bacon Manito Ifield, and construction of a steam-gathering system;(II) construction of 2 x 55 MV power plant Includingturbine generators, auxiliary equipment and 32 km of230 kV transmission line; (Iii) construction of 142 kmof 115 kV single and double circuit transmission lines,rehabilitation of substations and extension ofconmunlcatLon links; and (iv) consultancy servlces.
Rilskss The project entails no unusual twchnlcal rLsks.Extensive scLentLflc LnvestLgatLons and independentresource assessment have confirmed existence ofsufficient steam rese: ves. NPC and PNOC have staffexperlenced in supervLsLon and executlon of workssimilar to those required under this project. However,as a result of financLal weaknase, NPC could havedLfficalty realizing counterpart funds and keeping to
This document has a striced distbution and may be used by reipients only in the performanceof their official duties. its contents may not ohedwse be disclosed without Wodd Dank authodratin.
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the project implementation schedule. Measures tominimize these risks have been incorporated in theproject design.
Estimated Costss
Local Foreign Total--------US$ Million-------
PNOC-EDC
Development of Steam Field 4.9 19.3 24,2Delineation/Appraisal 30.1 17.2 47.3
Base Cost 35.0 36.5 71.5
NPC
Thermal Power Plant 12.6 46.6 59.2Transmission System 2.9 8.3 11.2Upgrading/ExpansioD 8.2 32.0 40.2Consultancy Services 0.8 3.0 3.8
III. THF BORROWERS AND THE BENEFICIARY ............................. 24
A. NPC .#.##....... *oo.... #o....... ............................ 24
Organization, Management and Staff ...................... 24Training .......................................................... 25Operations, Maintenance and Losses ...................... 25Accounting System .................... 000* ..... 25Financial Planning and Budgeting ........................ 25Commercial Systems ... ............... ......... ...... 25Audit ........ *.# ..... 26Taxes ............................. *..*... 26Insurance .................................... 26
This report is based on the findings of an appraisal mission to thePhilippines in August 1987. Mission members included Anil K. Malbotra(mission leader), Jamil Sopher, Darayes B. Mehta, Hossein Razavi (World Bank),and P.T. Venugopal (consultant).
Page No.
B. PNOC and PNOC-EDC ................................ ......... 26
PNOC ............ *. ..... ............. 27
Organization and Management ...................... ....... 27Budgeting .................................. 27Accounting and Audit ................................................... 27Insurance ..*.*..........*................................. ............ 27
Sensitivity and Risk Analysis ......... ................ 43
V. PROJECT JUSTIFICATION AND RISKS ... ........................ 44
A. Justification ........................................................ 44B. Economic Rate of Return ....... *. **.*...................... 45C. Risks ..................................................... 46
VI. AGREEMENTS ......... . ***. *****************............. * 46
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ANNEXES
1.01 NPC's Gross Generation1.02 NPC's Installed Capacity by Grid and by Plant-Type (1981-86)1.03 Load Forecast for the Luzon Grid1.04 Load Forecast for the Mindanao Grid1.05 Load Forecast for the Visayas Grid2.01 Transmission Line and Substation Projects of NPC2.02 Detailed Project Cost - PNOC-EDC Component2.03 Detailed Project Cost - NPC Component2.04 Project Implementation Committee - Terms of Reference2.05 Organization Chart for PNOC-EDC2.06 Project Organization for PNOC-EDC2.07 Project Organization for NPC2.08 Implementation Schedule - Critical Activities2.09 Implementation Schedule for PNOC-EDC2.10 Implementation Schedule for NPC2.11 Major Project Procurement Contracts2.12 Disbursements Schedule of the Project2.13 Disbursement Schedule - PNOC-EDC2.14 Disbursement Schedule - NPC2.15 Consultancy Services for NPC3.01 Organization Chart for NPC3.02 NPC - Staffing Profile3.03 Organization Chart for PNOC3.04 PNOC.-EDC - Staffing Profile4.01 NPC's Annual Financial Statements (1984-95)4.02 KPC - Action Program to Reduce Accounts Receivable and Accounts Payable4.03 NPC's Tariff4.04 PNOC and Affiliatest Financial Highlights - 1987-19924.05 PNOC and Affiliates: Income Statements, Balance Sheets, and Internal
Cash Generation (1984-1992)4.06 PNOC-EDC: Income Statements, Balance Sheets, Cash Flows (1984-1995)4.07 PNOC and Affiliates and PNOC-EDC: Assumptions on Financial Projections4.08 PNOC-EDC: Financial Analysis of Investment in the Bacon Manito I
Geothermal Project5.01 Calculation of the Economic Rate of Return (Versus Coal Alternative)5.02 Calculation of the Economic Rate of Return5.03 Estimated Loss Reduction Benefits of the TransmissionlDistribution
Components5.04 List of Documents in Project File
MAPS
IBRD 20275 - Grid Map of National Power CorporationIBRD 20278 - Existing Geothermal Power Projects in Operation
I. THE ENERGY SECTOR
A. Overview
1.1 The energy sector acquired pre-eminence in the Philippine economy asa result of the oil crisis of the last decade. At the time of the first majoroil price increase in 1973, imported oil accounted for 952 of total energyconsumption. As a result of the Government's implementation of an energydiversification/management policy, the ratio of imported oil to total energyusage declined to 56X in 1986. Also, total consumption of energy, which hadgrown rapidly prior to 1973 (at 9.62 p.a. during 1965-73), increased at themodest level of 3.82 p.a. between 1973 to 1979. After the second oil shock,consumption actually declined continuously from the peak of 9.2 million tonsof oil equivalent (MfTOE) in 1979 to 8.5 MMTOE in 1983 and 7.1 MMTOE in 1985.Several factors contributed to this decline including the low GDP growth ofthe early 19808, the decrease in GDP of the 1984-85 period, and the increaseduse of non-conventional energy. Energy usage has started to increase with therecent economic recovery; total energy consumptior. reached 7.5 MMTOE in 1986and 9.6 MHTOE in 1987, representing growth rate of 62 and 282 for 1986 and1987, respectively.
1.2 The shares of energy consumption by sector have remained stable overthe years. The residential/commercial sector's accounts for about 142 ofusage, industrial consumption 51X, and transport 31?. The share of electri-city as a proportion of energy consumption has increased considerably; powergeneration accounted for about 47X of primary energy consumptica in 1986,compared to only 222 in 1973.
B. Domestic Energy Resources
1.3 Indigenous energy resources are relatively modest and proven reservesof petroleum, coal and of natutai gas are small. The proven reserves ofpetroleum are estimated at 4 million tons of oil equivalent (MMTOE) whilepotential reserves are projected at a possible 14 MKTOE. Domestic oil fieldsat Nido, Cadlao and Matinloc produced 14,000 barrels of oil per day (BOPD) andcontributed 7.42 of total prinary energy consumption when commercial produc-tion began in 1979; since then, production rates from these fields havedecreased so that, by 1987, domestic oil's share of total energy consumptionwas only 2.22. Natural gas deposits, found in Northern Luzon, are consideredto be sub-commercial; and probable uranium reserves are estimated at about 1.2MMTOE. Its total potential coal resource is estimated at about 1,500 millionstonnes but most of it is low grade and expensive to mine. The major coalfields at Semirara (152.1 million metric tons (MT)), Cagayan (65.8 millionMT), Surigao (36.8 million MT) and Zamboanga (18.6 million HT)--which accountfor an estimated 89.42 of total proven coal reserves--contributed only 4.32 uftotal energy consumption in 1987. Philippine hydropower resources are quitesubstantial, with a theoretical power potential in excess of 10,000 MW.However, development of hydro resources is relatively costly due to thedistance of the bettor sites from the main transmission grid. Hydropowercontributed 10.22 of total energy consumption in 1985. Geothermal reservesare not yet fully evaluated, but about 4.431 MW of probable reserves, 1640 MV
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of which have been tested, but only 894 MW of capacity has been installed. In1987, geothermal energy generated about 221 of the nation's electricitysupply. biomass resources abound in the Philippines, with an estimated annualpotential of 1.0 MMTOk from agricultural wastes. This source's share of totalprimary energy consumption was 16.8? in 1985.
C. Energa Sector Institutions
1.4 The basic organization of the energy sector was established by aPresidential Decree in 1977. That decree created the Ministry of Energy (MOE)as the central policy, planning and regulatory agency for energy; in turn, MOEoperated through two major bureaus, one for energy development (BED) and theother for energy utilizatlon (BEU). The responsibilities of the PhilippineNational Oil Company (PNOC), formed in 1973 to assure the adequacy of thecountry's oil supply, were extended in 1976 to include development ofindigenous energy resources; PNOC-Energy Development Corporation (PNOC-EDC)became responsible for geothermal exploration and development. The NationalPower Corporation (NPC) (responsible for power generation and transmission),and the National Elactrification Administration (NEA) (responsible for ruralelectrification), were also strengthened by that Decree. PNOC and NPC wereattached to MOE for program and policy coordination. A committee to coordi-nate their activities was established within the Ministry, and the Ministerheld the position of Chairman of the Board cf both PNOC and NPC. NEA, inturn, was attached to the Ministry of Human Settlements. Following the changeof Government in 1986, MOE was dissolved in June 1986, and all its units wereplaced temporarily under the Office of the President. In June 1987, ExecutiveOrder 193 formally placed the Office of Energy Affairs (OEA) under the Officeof the President and gave it primary responsibility for the formulation,planning, implementation and coordination of policies and programs in thefield of energy. NPC and PNOC were brought under the direct control of theOffice of the President. The National Coal Authority was abolished and itsregulatory functions transferred to the Energy Regulatory Board (ERB). A partof BEU was transferred to ERB which was given price-setting authority overprivate sector suppliers of petroleum and electricity. The organizationstructure of the energy sector is still somewhat fluid; working arrangementsunder this structure have not yet been established. Coordination of thesector's entities would still need to be strengthened and the Bank is expectedto assist this process through the Public Resource Management Loan, theproposed project and the ongoing energy sector study (para. 1.23).
D. Energy Sector Obiectives, Issues and Strategy
1.5 Prior to the first oil price hike of 1973, the Philippines did nothave a comprehensive formulation of energy sector programs and policies.Initial reactions to the 1973 oil crisis focused mostly on securing a stableand adequate supply of crude petroleum. To complement this, a longer termprogram of (a) indigenous energy resource development and (b) energy demandmanagement was implemented. The objective of indigenous energy resourcedevelopment was met through heavy Government participation in developing oiland non-oil resources. The search for domestic crude oil sources was pursuedunder an innovative production sharing scheme. The policy of diversifyingenergy sources focused on coal development as of 1976, geothermal explorationand development as of 1978, and construction of the 620 MW Philippine Nuclear
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Power Plant (PNPP) in 1979-85. Non-conventional energy development was leftprimarily to private enterprise, with the Government providing fiscal incen-tives for research, development and utilization of these resources.
1.6 Energy demand management was initially focused on direct Governmentiiterveation via fuel allocation and rationing schemes. In 1975, the EnergyConservat-on Program was enacted; however, the Government quickly recognizedthat pricing was more permanent and effective than legislation as a policytool. Thereafter, the Government pricing policy emphasized a rapid and fulladjustment of domestic petroleum product prices to uorld market levels.
1.7 Despite the notable past success in the energy diversification andmanagement policies, the sector is now facing a number of issues with regardto its long term development strategy. These issues are all the more argentbecause of the substantial capital needed for energy development at a timewhen the country is facing other urgent economic prioritiess
(a) Until 1986, the Government was planning to meet increases in demandfor electricity in Luzon with generation from PNPP. The Government'sdecision, made in the summer of 1986, to mothball PNPP along with thedowngrading of generating capacity in Tiwi geothermal power plant andthe relatively sharp increase in power demand in 1987, created asudden need to reexamine and optimize energy options for meetingexpected increases in demand for electricity;
(b) The recent collapse in the international energy prices has introducedconsiderable uncertainty regarding the economics of domestic energyresources. In particular, the development of domestic coal, geo-thermal steam and certain hydro resources may no longer be viablealternatives to energy imports;
(c) The Government's decision to abolish MOE has led to a lack of coordi-nation of energy sector activities and, in particular, a lack ofclear direction for energy resource development;
(d) Finally, the Government's energy pricing policy needs to be reexa-mined. In particular, further rationalization of power tariffs andpricing policies for geothermal steam and coal are needed in order toeltsure the economic efficiency of their development and use.
With the Bank's assistance, the Government is planning to: (a) reexamine theeconomics of various sources of energy; (b) prepare a consolidated plan fordevelopment and utilization of indigenous energy; and (c) strengthen a coordi-nating body so that it can resume many of MOE's former responsibilities.
E. The Power Sector
1.8 Overview. The electric power industry in the Philippines is dividedinto two segments: (a) generation and transmission; and (b) distribution.The industry has a number of participating organizations, some of which arepublicly, and others privately, owned. By far, the largest organization isNPC, which is responsible for the generation of bulk power and its transmi;-sion through a number of grids that serve virtually the entire country except
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for remote rural areas and smuJl outlying islands. Power is distributed tomajor urban areas by a number of investor-owned utilities. Of these, thelargest is the Manila Electric Company (MERALCO), which serves Metro Manilaand accounts for about 70X of NPC's sales in Luzon. The rural areas areserved by over 100 cooperatives, a few of which are either wholly or partlyauto-generating. NEa was established to service the cooperatives by mobiliz-ing funds, providing tichnical assistance, and arranging procurement of commonmaterials.
1.9 At the end of 1986, the total installed capacity of the Philippinepower subsector was about 6,600 MW, of which 5,788 MW (88?) belonged to NPC(Annexes 1.01 and 1.02). The major part (41Z) of NPC's capacity is oil-fired,while geothermal (152), hydro (372), and coal-fired (7?) plants comprise therest. Currently, NPC operates 19 oil-fired, 17 hydro, 4 geothermal and 1coal-fired power plants. Total genexation from NPC facilities was 19.2 kWh in1986, accounting for about 902 of the Philippines' total generation. Theresidential sector accounted for 23X of electricity sales; the commercialsector, 22?; industry sector, 502; and the Government, street lighting andwater supply, 5Z. Losses exceeded 20? of gross generation.
1.10 Currently, NPC's facilities are organized into separate systems forLuzon, the Visayas and Mindanao. Among them, Luzon is the largest. Totalenergy sales in 1986 were 17.6 billion kWh from which the Luzon grid accountedfor 76?; Mindanao, 17?; and the Visayas, 7?. The growth of electricityconsumption was well above 15? p.a. in the 1960s and the early 19709.Following the steep rise in oil prices in 1973, the corresponding increases inpower tariffs reduced the growth rate to 122 p.a. for 1973-79. The slow-downin the economy further reduced the growth rate to 4.9? p.a. for 1980-86.Electricity sales in Luzon, which grew during 1980-83 at 4.6?, declined by4.8? in 1984 and by 0.8? in 1985. A modest rebound of 2.5? and a sharpincrease of 10.5? were experienced in 1985 and 1986 respectively. Growthrates of 6? and 55? are projected for 1988-90 and 1990-95, respectively.
1.11 Power Sector Investment Program. The existing generating capacityin Luzon is 4,100 MW, consisting of 1,925 MW of oil-fired, 1,226 MW of hydro-power, 660 MW of geothermal, and 300 MW of coal-fired plants. The oil-basedpower plants have not been maintained adequately in the past and have deterio-rated to conditions of poor reliability and low thermal efficiency. However,the Malaya power plant units No. 1 and 2 (300 MW and 350 MW respectively) arebeing rehabilitated and are scheduled to be recommissioned in 1988. Sucatunits No. 1 and 4 (150 MW and 300 MW respectively) are scheduled for rehabili-tation in 1988-89. Rehabilitation of other units at these plants, however,must be delayed until some new generating capacity is added so that the systemwill have sufficient capacity while the units to be rehabilitated are takenoff line. Thus, the actual capability of the oil-fired power plants is, andwill be, substantially lese than their rated capacity, at least until early1990s. In addition, from the 660 MW of geothermal power, 220 MW of Tiwi plantwill be retired during 1989-90 due to technical problems related to the steamsupply. Therefore, the total available capacity, after rehabilitation of oil-fired plants, will be about 3,000 MW. In contrast to installed capacity, theLuzon grid's current peak demand of 2,500 MW is projected to reach 3,200 MW by1992. No new generating plant is under contruction despite the (a) projectedincrease in load, (b) decrease in installed capacity due to the unexpected
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retirement of the geothermal units at Tiwi, and (c) mothballing of the nuclearplant. As a result, system reliability is expected to fall very sharply; theloss of load probability (LOLP) is expected to increase from its present levelof 2 days/year to 7 days/year in 1989 and more than 30 days/year in 1991.
1.12 Rectification of this deteriorating situation will require some heavyinvestment, precisely at a time when both NPC and the Government are facingresource mobilization constraints. Short term relief can only be providedthrough projects involving low lead time for which substantial financing canbe obtained on attractive terms. Longer term investment decisions need to beoptimized in order that finite available resources can be stretched as far aspossible. In this regard, NPC currently plans to: (a) address peakingrequirements in 1989 and 1990 by installing two gas turbines (150 MW and200 MW); (b) address base load requirements for 1991 and beyond byconstructing the Bacon Manito geothermai power plant; and (c) address longerterm requirements by optimizing the economic and technical aspects of othercandidate plants and use sound financial practices to develop the optimalcandidates. Although the relative economic merits of geothermal versusimported coal are not clearly established, the Bacon Manito geothermal plantis clearly the least-cost option to supply the next increment of base loadgenerating capacity because of the investment which has already been incurredin developing the steam production wells; from the total capital cost ofUS$73.3 million for geothermal development, more than 702 has already beenexpended. The economic viability of other geothermal candidate plants will,however, need to be investigated in a least-cost framework. In conjunctionwith the ongoing Energy Sector Study, the Bank and NPC are conducting a jointreview of NPC's investment program through the year 2000. At negotiations,NPC agreed that it would review its investment program annually with the Bank.In conjunction with the Energy Sector Study, the Bank ascertained that NPC wasdeveloping methodologies for investment program formulation that weresatisfactory; therefore, the annual reviews of NPC's investment program couldfocus as mtuch on the methods used for investment optimization as on theconstituents of the program.
F. The Geothermal Sector
1.13 The share of geothermal in total energy use has been steadilyincreasing during the last five years. In 1979, consultants visited 25 of themajor geothermal manifestations in the Philippines and identified 11 aspriority areas for further investigation. In addition to these 11, explora-tory drilling is planned or already under way in a number of additional areas;also, where ongoing geoscientific work is likely to lead to drilling prospectsin still additional areas. Based on exploration to date, the total geothermalresources of the Philippines are estimated at 8,000 MW. Four fields, Tiwi andMakiling-Banahaw (MakBan) on Luzon and Tongonan and Palinpinon in the Visayas,are currently operating and drive a combined generating capacity of 894 MW,thus ma'ing the Philippines the world's second largest producer of geothermalenergy (after the USA). As of the end of 1986, more than 320 geothermal wellshad been drilled in the Philippines, principally in the four fields underdevelopment; in turn, geological, geophysical and geochemical analyses havebeen completed at a number of other sites. But during the period 1984-86,geothermal exploration and development activity slowed considerably; PNOC-EDC's drilling activity dropped from 26 wells in 1983 to six in 1984, four in
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1985 and one in 1986. Attempts are now being made to accelerate theexploration and development program and PNOC has proposed a program to drill171 wells providing an additional 1,290 MW geothermal steam capacity for theperiod 1987-1994.
1.14 The first 2.5 kW geothermal power plant on Luzon was put into opera-tion at Tiwi in 1969 and the first commercial geothermal power station inLeyte, supplying 3 MW of electricity to Ormoc City, was put into operation in1977 at Tongonan. Large-scale geothermal power production began in 1979 inboth the Tiwi and MakBan areas, when a 110 MW power station was commissionedin each area. Currently, Tiwi and MakBan both have 330 MW installed capacity;both fields are operated by Philippine Geothermal Inc. (PGI) under a servicecontract with NPC. PNOC-EDC operates two geothermal fields, both supplyirg112.5 MW plants, at Tongonan on Leyte and at Palinpinon on Southern Negros.
1.15 Geothermal Exploration and Development. Geothermal exploration anddevelopment is govez-nsd by Presidential Decree No. 1442 (The GeothermalExploration and Development Act, 1978). The terms apply equally to foreignand local contractors and joint ventures. Contracts were administered earlierby the Ministry of Energ, through its BED. With %'he recent constitution,BED's functions have been transferred to the Office for Energy Operationswithin OEA.
1.16 From a resource development perspective, geothermal steam has manyparallels with oil and gas; in the Philippines, they are administered compar-ably. The basic features of the service contracts previously entered into byBED for geothermal exploration, drilling and production paralleled those ofpetroleum production-sha,.ing segments. Although details may be negotiated andvariations may occur, the contractor must in all cases take all explorationand development risks, meeting all costs as incurred and recovering thosecosts from a share of future production (the contractor's take is a maximum of401 of net income). The Government's intention was for NPC to purchase thesteam at the "power plant fence" on a cost-related approach, with a firmcontract price based on estimated costs plus a target rate of return. Theservice contract is supplemented by two prior contracts for geoscientificstudiess a geophysical survey contract, providing an exclusive right to acontract area; and a geophysical permit, providing a non-exclusive right to anarea. Foreign companies considering operating in the Philippines generallyregard the contractual arrangements as satisfactory and their relations withthe Government, OEA and PNOC to be good. But world-wide, few companies parti-cipate in geothermal development and even fewer (less than 10) operate inter-nationally.
1.17 Difficulties inhibiting further geothermal development have alsoarisen because of the need to agree with NPC to a steam price in advance ofcommencing exploration, a need arising from both lack of major alternativeuses for steam in most locations and the relatively low initial risk offailing to find a commercial resource. Almost no international precedentsexist for steam pricing! and further study and contract initiative are neededto ease and accelerate the contractual process, and to provide for uncertain-ties which may arise during geothermal field production. In the past, Caltexand Total had proceeded with basic geothetmal exploration in advance of asteam contract, and Union Oil has continued on the basis set out in its
existing geothermal license (1970) (Union Oil's license for geothermaldevelopment is different from current practice; it was issued prior to thePresidential Decree and provides for development to be on a cost-reimbursablebasis to be met from future earnings, but without formal limitations on thecontractor's take); but other interested companies have been extremelycautious and have not been prepared to undertake even basic exploration inadvance of reaching an agreed steam selling price. PNOC-EDC, as a subsidiaryof a state company, has undertaken exploration in advance of any steamcontract in the interests of national energy development objectives. A numberof highly promising areas, not being explored by PNOC-EDC, are still availableto the private sector; in any case, PNOC-EDC is willing to consider seriouslysuitable joint venture proposals. The Government has established within OEA aspecial inter-Governmental committee charged with the responsibility toresolve the steam pricing issue on the basis of the recommendations of arecent Steam Pricing Study fostered by an existing Bank geothermal project.
G. Bank Lending for the Sector
1.18 Since 1957, the Bank has made nine lending operations (eight loansand one credit) to the power sector, amounting to US$290.2 million equivalent,and one for geothermal exploration amounting to US$36 million equivalent.These lending operations include sever to NPC, for a total amount of US$218.2million to finance three hyd opower projects, two thermal power plants, andone transmission project. Apart from considerable slippage in the projectconstruction schedules and a consequential cost overrun on the fifth and sixthprojects, all projects were completed without major problems and the resultantfacilities are operating satisfactorily. The seventh loan, which was theBank's last operation with NPC (1460-PH, US$58 million, 1977) and whichfivanced the expansion of the transmission system in Luzon and construction ofa load dispatching center, was closed in 1985. Bank group lending to thePhilippine power sector has also includeds (a) a loan to NEA for US$60million in 1978, to help finance the 1979/80 portion of the rural electrifica-tion program; and (b) a commitment by the International Finance Corporation(IFC) of US$12 million equi. lent to MERALCO in 1967. The role of geothermalenergy was considered in some detail in the energy assessment undertaken by ajoint World Bank/Asian Development Bank (ADB) mission in 1980 and a project(Loan 2203-PH, US$36 million, 1982) comprising a 25-well exploration programat the Bacon Manito and Palinpinon fields, is scheduled for completion in end-1988. Two of the aforementioned projects have been audited: the Fourth PowerProject (PPAR No. P-0980, January 1976)--a thermal plant at Bataan; and theRural Electrification Project (PPAR No. P-5372, June 1985). Both auditreports identified major problems, such as implementation delays and costoverruns, and their causes, such as project design changes, cumbersomecontract award procedures and weak project management.
H. Sectoral Issues
1.19 Because solutions to the power sector's problems are so capitalintensive, the prevailing uncertainties in energy sector development andcoordination can have a substantial cost to the economy. The power sector isnow facing a number of issues in the areas of resource allocation and utili-zation. In the area of resource allocation, the sector needs to optimizeinvestment, but currently lacks a clear direction regarding the economic
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advantages of various sources of supply. This problem became particularlyurgent after the decision to mothball the nuclear plant, which had beenplanned to meet all increments of electricity demand in the Luzon grid through1994/95. Thus, the plant's capacity of 620 MW needs to be replaced with moreconventional power generation. New plants powered by domestic or importedcoal, geothermal steam or hydro resources, as well as rehabilitated existingoil-fired plants are all feasible fuel alternatives for meetirg future growthin demand. However, except for the proposed geothermal plant, which is econo-mically justified based on its incremental cost., the other candidates cannotbe optimized because a reliable basis for cost comparison is lacking. Toresolve this issue, a thorough examination of the development cost of coal,geothermal and hydro resources, together with a comprehensive analysis oftheir economic positions within a consolidated investment program, is needed.In addition, the option of rehabilitating several existing oil-fired generat-ing facilities should be weighed against each of the other alternative sourcesof capacity expansion.
1.20 Pricina. Adjacent to the above issue are problems related to steamand coal pricing. In brief, these resources need to be priced in a way thatreflectt their relative economic merits. Currently, pricing of both resourcesis being disputed by concerned entities and has created a bottleneck in NPC'splanning for new, and operation of existing, coal-fired and geothermal powerplants. For NPC and PN0C, the price of geothermal steam must fall between thecost of production and the 'avoided cost' of using alternative fuels; however,the specific parameters to be used in the computation of cost of productionand 'avoided cost' must still be developed and agreed between the two partiesbefore a specific pricing structure can be fixed. An ADB-financed study hasprovided an important tool for resolving the issue. It includes a model forgeotherna) steam pricing. The Government has appointed an inter-Governmentalcommittee to establish a price to cover the steam needed to power the proposedBacon Manito project, and to develop a long term steam pricing policy based onthe study. The Bank is expected to assist in (a) providing information on themost important input into the model, namely the least-cost power developmentprogram, and (b) addressing the financial and fiscal implications of variouspricing policies.
1.21 In addition to optimizing investment programs, NPC and the otherpower sector participants need to ensure that they are as efficient aspossible at managing their businesses and producing revenues. In particular,transmission losses need to be kept at existing levels, distribution lossesneed to be reduced, tariff structures need rationalization and the financialperformance of NPC, MERALCO and NEA need substantial improvement.
1.22 Losses. System losses within Luzon have increased from 142 in 1978to 242 in 1986. NPC appears to have been effective at controlling transmis-sion losses; however, distribution losses are excessive and need to bereduced. MERALCO, which supplies 752 of the total electricity used in Luzon,by itself recorded losses In excess of 202 in 1986.
1.23 Tariffs. Rationalization of power tariffs has alreauy receivedconsiderable attention. A tariff study was completed recently; it concludedthat, although average revenue realizable from aggregate electricity sales isconsistent with the average aggregate production and delivery costs, the
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structure of the tariff, as well as the allocation of rates between demand andenergy charges, needs to be altered substantially in order for rates toreflect efficiently the cost of providing service to each consumer. TheGovernment has adopted a policy of revising present tariffs to reflect themarginal cost of power supply and is currently developing guidelines forchanges to both bulk rates and retail tariffs.
1.24 Financial Restructuring. A number of factors have had a negativeimpact on the financial performance of NPC, MERALCO and NEA. These organiza-tions all have had serious accounts receivable problems; as a result, to meetsome of their working capital requirements, all three have stretched theiraccounts payable beyond reasonable limits. All are undercapitalized, with NPCnot being able to raise peso denominated long term loans bearing appropriatematurities and MERALCO having insufficient paid-in equity capital. Thisproblem has constrained NPC's cash flows and has affected some of MERALCO'sinvestment and resource maintenance decisions. NPC, with Government support,has already implemented measures which would relieve its cash constraints, atleast for the next year or two. MERALCO's problems can only be resolvedthrough an action program to attract fresh equity capital that will need someyears to implement.
1.25 In discussions regarding the proposed project with the NationalEconomic Development Authority (NEDA), NPC, PNOC, MERALCO and OEA, all partiesnoted that the aforementioned issues needed to be addre3sed within a compre-hensive and consolidated framework. Accordingly, these organizationsindicated their interest that the Banks (a) provide assistance through theproposed project to (i; reduce distribution losses, (ii) facilitate the coor-dination among the concerned entities, especially with regard to geothermaldevelopment and steam pricing, (iii) relieve NPC's cash constraints, and(iv) rationalize MERALCO's financial structure; and (b) conduct a sector studyaimed at developing an action plan to resolve medium and long term energyissues. The sector study, initiated in early 1988, would: (a) assess thegeothermal reserves and review the cost estimates of future exploration anddevelopment activities; (b) carry out a technical and economic analysis ofvarious coal de;elopment schemes; (c) develop a concensus regarding NPC'sleast-cost investment program for the period through 2000; (d) proposeguidelines for the pricing of geothermal steam, coal and petroleum products;(e) review the technical and economic aspects of plant rehabilitation and lossreduction; and (f) analyze the various instruments available for enhancing thecapitalization of power sector organizations.
I. Rationale for Bank Involvement
1.26 The efficient development of the Philippine power sector requiresclose cooperation and coordination among the principal parties--NPC as thegenerator and wholesaler of power, PNOC as the primary supplier of fuels toNPC, and the major private and public distribution franchisees. Through itspast operational involvement, the Bank has developed constructive relation-ships that enable it to facilitate important interactions between NPC, PNOCand PNOC-EDC. The Bank can play a significant role in resolution of issuessuch as coal and steam pricing, and on the consequent analysis of investmentstrategies. The sector's institutions all have considerable scope forimprovement of operational performance, financial stability and investment
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planning. The project would afford the Bank an opportunity to assist NPC andMERALCO in implementing financial recovery measures. Finally, by using Bankprocedures for procurement, the real cost of investment in the project can beoptimized. The Government is keenly interested in the Bank's continuedinvolvement in a sector which is critical for the country's industrialization.
II. THE PROJECT
A. Background
2.1 Several Bank missions during 1984-86 reviewed with NPC, PNOC andPNOC-EDC the development of the power and geothermal sectors in Philippines.An examination of NPC's least cost power development program indicates thatdevelopment of a 110 MW power plant at Bacon Manito in southern Luzon shouldbe NPC's next development priority. PNOC has already invested US$51.5 millionin developing the Bacon Manito geothermal steam field to sustain a productionlevel of 70 MW and needs an incremental investment of about US$24 million toupgrade the field to 110 MW. To optimize the efficiency of investments ingeneration, there is a need to upgrade and expand the facilities of NPC'ssystem.
B. Proiect Objectives
2.2 The main objectives of the project are to:
(a) support the delineation and assessment of geothermal resources foruse in Luzon, and thereby reduce the need to rely on imported fuelfor power generation;
(b) develop an existing geothermal steam field at Bacon Manito I and anassociated 110 MW base load power plant that would provide a newsource to meet demand growth in the Luzon grid;
(c) support measures for upgrading and expanding NPC's system facilities;and
(d) support institution-building and financial recovery efforts at NPCduring this critical stage of the economic recovery period.
C. Proiect Description
2.3 The project includes the following components:
(a) Geothermal Steam Exploitation and Distribution
(i) development of the Bacon Manito I geothermal field includingdrilling of additional production and injection wells, andengineering, procurement, installation and commissioning of thesteam-gathering system;
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(ii) delineation/appraisal of geothermal sites for power supply tothe Luzon grid. This includes drilling of about 18 wells to anaverage depth of 2,800 meters, and studies for assessing theextent of geothermal resources and the feasibility of theirdevelopment.
(b) Power Plant and Associated Transmission System
(i) construction of the 2 x 55 MW Bacon Manito geothermal powerplant including turbine generators, auxiliary equipment, steamcondensing and gas extraction systems, cooling towers and the230 kV switching system;
(ii) construction of about 32 km of double circuit 230 kV transmis-sion line for evacuating power from the generating station.
(c) Upgrading and Expansion of NPC's System Facilities
(i) expansions of Bantay, Balintawak, San Jose, San Esteban, Laoag,Olongapo, Dasmarinas and Binan substations, construction of21 km of 230 kV double circuit Balintawak-San Jose and 121 km of115 kV single circuit San Esteban-Laoag transmission lines andrehabilitation of substation transformers and switchgear in theLuzon grid; expansions at Lugait, General Santos and Davaosubstations in the Mindanao grid; and expansions at Tunga, SantaBarbara, Panitan, Medelin and Bacolod substations in the Visayasgrid (Annex 2.01);
(ii) extension of the communication link to Mindanao and Visayas andexpanding telecommunication facilities of the Luzon grid loaddispatch system; installation of computer hardware and softwarefor enhancing NPC's Management Information System (MIS); andprocurement of mobile environmental monitoring units for NPC'senvironmental division; and
(iii) rehabilitation of instrumentation and controls for the 50 MWcoal/oil-fired unit at the Naga thermal power station.
(d) Consultancy Studies for
(a) establishing the feasibility of transmitting power from Leyte toLuzon;
(b) Tongonan Geothermal Power Plant Siting and Development;
(c) establishing the feasibility of transmission interconnections tothe islands of Masbate, Mindoro, Marinduque, Romblon,Batanduanes and Basilan;
(d) developing cost estimating techniques for power systemcomponents, and a computerized data base;
(e) developing norms for cost of power supply outages; and
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(f) establishing feasibility of the latest techniques in theconstruction of hydro-electric dams.
2.4 Development of Bacon Manito Geothermal Field. The first reconnais-sance survey of the Bacon Manito geothermal field, located about 600 km southof Manila in southern Luzon, was started in May 1977 by PNOC and GeothermalEnergy of New Zealand, Ltd. During 1977-85, PNOC carried out detailedgeophysical, geological and geochemical studies and delineated a geothermalfield, about 10 sq. km. In Bacon Manito, a total of 24 wells have alreadybeen drilled and only three additional wells are needed to complete theproduction and reinjection requirements of the 110 MW plant. Of the totalwells drilled, only 16 are presently hookable to the steam-gathering system,while four wells could be used in the future for power on a modular concept.The current production capacity is 102.5 MW, and the additional wells willenable attainment of the plant rated capacity of 110 MW, plus an additional 10MW reserve capacity. An independent resource assessment completed in 1985concluded that the site has reserves sufficient to supply a 110 MW power plantfor 25 years. This conclusion has been confirmed by an independent expert,who assisted the Bank in 1987. The project component includes the drilling ofadditional three wells so as to develop the first section of the Bacon Manitogeothermal field, and construction of the required steam-gathering system.The steam-gathering system (SGS) is comprised of a piping network, threeseparator stations, cross-country steamlines and reinjection lines. The SGS,designed to drive as a base load station, although provisions for load peakingwill be included, will have a fully automatic control system with a secondaryprovision for full blow-off capacity to take care of major plant operatingupsets.
2.5 Delineation and Appraisal of Geothermal Sites for the Supply of Powerto the Luzon Grid. Geoscientific studies, including geological, geophysicaland geochemical studies, will be conducted to identify appropriate locationsand targets for drilling operations. The project includes the drilling of 19confirmatory wells on the basis of the above geoscientific studies and/orbased on results of drilling already undertaken earlier. Three wells will bedrilled to an average depth of 2,800 - 3,000 meters to complete the eightwells that are necessary to define an area for a 110 MW development at BaconManito II, including both the production and reinjection wells; five wellswith an average depth of 2,800 - 3,000 meters which will be drilled inPinatubo are necessary to complete the ten wells required to delineate aresource area capable of sustaining a 110 MW development; and approximatelyten wells will be drilled to an average depth of 2,800 - 3,000 meters in oneor more of the following areass Del Gallego, Mariveles Natib, and GreaterLeyte area to confirm the resource potential of the chosen area. Oncompletion of geoscientific surveys and drilling, studies of geothermalresource and feasibility of development will be carried out. An independentresource assessment and feasibility study by an internationally reputedorganization will confirm and establishs (a) the existence of an exploitablegeothermal resource sufficient to support a first stage development of up to110 MW on two sites; and (b) the future drilling and development plans.
2.6 Bacon Manito Geothermal Power Plant. A feasibility report detailingthe parameters of the Bacon Manito geothermal power plant has been prepared by
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NPC, and a site for the power plant has already been selected. The projectconstruction includes a power house installed with two 55 MW generating units,auxiliary equipment and controls, steam condensing and gas extraction systemsand the cooling water system including cooling towers. Power from the genera-tors would be sterped up to 230 kV by transformers leading to an adjacent gasinsulated metalclad 230 kV switching station. A 10 km long 230 kV doublecircuit transmission line will convey power to the nearest 230 kV switchingstation at Daraga and thence to Manila by the 500 kV EHV system currentlyunder construction. The project would provide the Luzon grid with a source ofadditional firm energy of about 800 GWh annually from 1991/92.
2.7 Upgrading and Expansion of NPC's System Facilities. To meet theprojected increases in power demands in its Luzon, Mindanao and Visayas grids,NPC has formulated a sizeable investment program (US$6,337 million equivalentover the period 1989-1995) to strengthen its system facilities. This programenvisages construction of new transmission lines and substations, augmentationof transforming and reactive control capacity at existing substations andrehabilitation of transmission lines and substation equipment. For moreefficient system operation, NPC plans to extend its communication facilitiesand enhance its management information system. A portion of NPC's investmentprogram for the 1989-91 period is expected to be financed by an ADB's powersector loan currently under appraisal. The proposed project includes compo-nents (para. 2.4(c)) which would complement the ADB project.
2.8 Extension of NPC's Communication System. The Luzon-Visayas-Mindanaomicrowave link, which will establish an integrated communication network forNPC, will provide communication channels needed among the NPC offices inLuzon, the Visayas, and Mindanao. The channels will be used to transmit data(computer, telex, facsimile) and voice information between the regionaloffices and the head office. This will also allow communication between thedifferent plants, substations and offices of NPC and will contribute to anefficient and effective operation and management of the corporation. Theexisting microwave system will be extended to the south from Kalayaan to Tiwiand to the north from La Trinidad to San Esteban. Power Line Carrier (PLC)equipment will be used to replace equipment which was installed and commis-sioned a decade ago and provide for expansion of PLC channels to plants/sub-stations that cannot be reached via microwave. The upgrading of the microwavesystem in Luzon will provide the communication channels needed for improvedhigh voltage transmission line protection, supervisory control and data acqui-sition (SCADA) computer terminals of plants/substations, centralized sequence-of-event recording (SER), telephone, telex, facsimile and other communicationfacilities required in plants, substations and offices. Microwave and PLCequipment will be used to establish a communication network among the islandsof Visayas. The communication channels will be used for telephone, telex andfacsimile, transmission line protections, SCADA, centralized SER and computerterminals.
2.9 Enhancement of NPC's MIS. With the rapid power expansion program ofthe 70s, information systems did not evolve to match NPC's growth. In 1982,NPC engaged Computer Information Systems (a subsidiary of MERALCO) to formu-late its MIS plan. This plan envisaged development of 43 MIS software modulesand installation of a total of 27 computers for major offices and plants.Currently, NPC has three Burroughs mainframes for commercial work and a VAX
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computer for engineering applications. While NPC has made substantialprogress in the implementation of the Materials Management and ProjectManagement Information systems, considerable work still needs to be done forthe Financial Management, Maintenance Management and AdministrativeInformation Systems. In order to complete the MIS System Plan, NPC needs topurch4se additional hardware and software including four mainframe computersand eight minicomputers, software, and consulting assistance for theMaintenance Management and Project Management systems. The four mainframeswill serve as regional computers whereas the eight minicomputers will handleMaintenance and Materials Management systems at eight major power plants.
2.10 Consultancy Studies. Draft terms of reference for all the studies,including cost estimates, are presented in Annex 2.15. These drafts werediscussed and confirmed at negotiations.
(a) Establishing the feasibility of transmitting power from Leyte toLuzon. This study will determine the feasibility of transmittinelarge blocks of power (500-1200 MW) from the Tongonan GeothermalProject in Leyte to the Luzon grid over a distance of 460 km (23 kmsubmarine). The study will consider a.c. versus d.c. transmissionand establish the least cost technically feasible transmissionoption. The feasibility study carried out in Phase 1 will befollowed by engineering studies and preparation of procurementdocuments in Phase 2. This study is estimated to require 70 man-months of consultancy services.
(b) Tongonan Geothermal Power Plant Siting and Development. This studywill determine the least cost technically feasible alternative forsiting, sizing and interconnection of power plants in the vastgeothermal steam complex at Tongonan. This study is estimated torequire 30 man-months of consultancy services.
(c) Establishing the feasibility of transmission interconnections to theIslands of Masbate, Mindoro, Marinduquie, Romblon, Catanduanes andBasilan. This study will determine the feasibility of transmittingelectricity from the mainland grids to the nearby islands mentionedabove, thus mitigating the need for expensive local diesel powergeneration on the islands. The feasibility study carried out underPhase 1 will be followed by engineering studies and preparation ofprocurement documents under Phase 2. This study is expected torequire 70 man-months of consultancy services.
(d) Developing cost estimating techniques for power system components anda computerized data base. This study will establish techniques forestimating the cost of major power system components such as thermalpower plants, hydroelectric power plants, transmission lines,substations and civil works. The study which will be followed bypreparation of a computerized data base and a cost estimated manualwill assist NPC in major planning exercises for power systemdevelopment. This study is expected to require 25 man-months ofconsultancy services.
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(e) Developing norms for the cost of power supply outages. This studywill establish norms for the determination of cost of power supplyoutages in the various grids of PNC, which would assist NPC indeveloping its future generation expansion plans. This study isexpected to require 25 man-months of consultancy services.
(f) Establishing feasibility of the latest techniques in the constructionof hydroelectric dams. This study will determine the applicabilityof latest techniques in dam construction in the Philippines withparticular reference to the application of Roller Compacted Concrete.The study will review in detail the design of seven prospectivehydroelectric dams and recommend the most cost-effective constructiontechniques. This study is expected to require 25 man-months ofconsultancy services.
D. Project Costs
2.11 The total project cost is estimated at US$216.3 million excludinginterest during construction, of which about US$147.5 million is expected tobe in foreign exchange. A summary of project cost is shown below in Table 2.1for the two agencies executing the project.
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Table 2.1s PROJECT COST ESTIMATE
Foreign CostPescs Miltlon US$UMillton as X of
Local Foreign Total Local Foreign Total Total
PNOC-EDCDevelopment of Bacon Manito I Steam Field 100 898 496 4.9 19.8 24.2 79.8Delneaotlon-Cum-Appraseal 617 a85 970 B0.1 17.2 47.2 36.6
NECBacon Manito Thermal Power Plant 258 955 1,213 12.6 46.6 59.2 78.7Transmission System for Bacon Manito s0 170 230 2.9 8.8 11.2 74.1Upgrading and Expansion of NPC'o System
TOTAL PROJECT COST /p 548 8,601 5,186 68.8 147.5 218.3 88.2INTEREST DURINO CONSTRUCTION - 219 219 - 10.7 10.7
TOTAL FINANCING REIJIRED 1.684 8.720 5.B54 80.8 158.2 227.0
/n This project Is exempt from duties and taxes.
NOTES: (1) December 1967 price levels.(2) Exchange Rates US$1 u P 20.6.
2.12 Annexes 2.02 and 2.03 give detailed cost estimates for the projectcomponents for PNOC-EDC and NPC, respectively. All costs are based onDecember 1987 prices; physical contingencies are at 10X. Cost estimates forthe Bacon Manito geothermal power plant are estimated based on budgetaryestimates obtained by NPC in mid-1987. Price escalation for costs expressedin terms of foreign exchange (US dollars) is calculated according toanticipated international price movements of 1.0Z for 1988-90, and 3.5? for1991 and thereafter. Price escalation for costs expressed in local currency
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is calcul..ted according to projected local inflation :at.es of 6.5Z for 1988-90and 8.02 for 1991 and thereafter. The cost estimates assume that exchangerate adjustments would, on average, maintain "purchasing power parity' duringthe project implementation period.
E. Financina Plan
2.13 The financing plan for the project is presented in Table 2.2 below:
A protocol soft loan being offered by the Government of Italy will finance theforeign cost and a portion of local cost for the Bacon Manito power station.At negotiations the Government of Italy indicated the expectation that thisprotocol loan would become effective not later than December 31, 1988. TwoBank loans will cover the proposed project's remaining foreign exchangerequirements, including interest during construction. The remaining expendi-tures will be financed by PNOC-EDC and NPC using internal cash generation.US$41 million would be lent to PNOC (PNOC Loan) for 20 years, including fiveyears of grace on repayment of principal, at the standard variable interestrate. PNOC would relend the proceeds of that loan to PNOC-EDC on the sameterms and conditions as the PNOC Loan, and PNOC-EDC would bear the foreignexchange risk. Execution of a Subsidiary Loan Agreement, satisfactory to theBank, between PNOC and PNOC-EDC would be a condition of loan effectiveness.US$59 million would be lent to NPC (NPC Loan) at the standard variableinterest rate for 20 years, including five years of grace on repayment ofprincipal.
2.14 The aggregate amount of the proposed Bank loans is US$100 millionequivalent. The Republic of the Philippines will guarantee the two Bankloans.
F. Proiect Imnlementation and Schedule
2.15 In order that the two separate organizations involved in projectimplementation coordinate their activities in the most effective manner, NPCand PNOC-EDC have formed a Project Implementation Committee, consisting of therelevant managers of each of the two implementing organizations. Thiscommittee has functions and powers agreed by all parties; a draft of thoseterms of refereace is given in Annex 2.04. At negotiations, NPC and PNOC-EDC
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indicated that each will comply with such functions and powers for the ProjectImplementation Committee as are satisfactory to these two organizations and tothe Bank.
2.16 DNOC-EDC will have overall responsibility for implementing the geo-thermal component of the project. It is organized in four technical operaLinggroups (Annex 2.05) composed of highly capable technical and professionalstaff whio have gained extensive experience in geothermal technology from thePhilippines experience, as well as training extended through various bilateralagreements with New Zealand, Iceland, Italy, Japan and USA. PNOC-EDC willcontinue to retain Kingston, Reynolds, Thom and Allardyce (KRTA), New Zealand,to provide experienced staff to assist them in the specialized areas of geo-sciences, drilling, production and system engineering through the projectduration for an estimated 28 man-months. For the development of the BaconManito I steam-gathering system, PNOC-EDC agreed at negotiations to appoint aconsultant to provide support for project execution services. In addition,PNOC-EDC agreed that, after completion of appraisal ard delineation drillingat prospective geothermal sites, it will retain an independent consultant forstudy of resource assessment and techno-economics of field development. Theterms of reference for these studies shall be drawn up in consultation withthe Bank on completion of the drilling program at each site. The project isbased on a detailed feasibility study prepared by PNOC-EDC, in consultationwith KRTA, and verified independently by NPC. The overall engineering designhas been developed by PNOC-EDC after optimization studies have been carriedout in consultation with NPC. The detailed engineering will also be revie-qedby KRTA before the end of 1987. The corporate structure for undertakirgdrilling, as well as development activities, already exists with PNOC-EDC, whohave carried out similar works successfully in the past at Palinpinon andTongonan. The project will be executed through a project team constituted forthis purpose (Annex 2.06). The 21 wells under the proposed project would bedrilled by PNOC-EDC. PNOC Energy Drilling Inc. (PNOC-EDI), the drillingsubsidiary of PNOC, which has drilled over 100 geothermal wells and 10 oil andgas wells in a technically efficient and cost effective manner, has recentlybeen made a part of PNOC-EDC. The PNOC-EDC drilling crews will use their ownrigs and staff, while all other drilling equipment, materials and serviceswill be obtained from the international market as needed. Implementation ofthe steam-gathering system will be procured through seven contracts for thepurchase of materials and services and a single installation-cum-erectioncontract.
2.17 NPC will have overall responsibility for implementing the powergeneration and transmission lines component of the project. NPC has carriedout an indepth feasibility study of the Bacon Manito geothermal power plant,and has prepared the specifications, drawings and bid documents for procuringthe entire power plant including civil works on a single responsibility basis.NPC has also prepared the bid documents for the transmission lines and substa-tions. Having been associated with the design, construction and operation ofthe Tiwi and MakBan geothermal plants, which have six 110 MW units, the staffof NPC has the experience and capability to undertake the pToposed projectwithout outside assistance. Detailed designs and drawings for the power plantwhich will be produced by the contractor, will be reviewed by NPC's engineersto ensure compliance with the specifications. NPC's field staff will providenecessary supervision and exercise quality control over the contractor's
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activities during construction, testing and commissioning. The proposed NPC'sorganization which will function exclusively for implementation of the BaconManito geothermal plant is shown in Annex 2.07 and is considered to beadequate. The project manager and other key staff have already beenappointed. NPC also has in-house capability for designing, engineering andimplementing the other project components including the transmission lines andsubstations, communication, instrumentation ar4 control systems, with engage-ment of local civil works and erection contractors as necessary to supplementNPC's own forces. Limited consultancy assistance will be needed for themaintenance management system of the MIS; the overall design of the latter hasalready been formulated.
2.18 Implementation Schedule. Annex 2.08 gives the critical activities inthe implementation schedule of the Bacon Manito geothermal power plant.Annex 2.09 gives the implementation schedule for installation and erection ofthe steam-gathering system for Bacon Manito I, and for the drilling programfor the delineation-cum-appraisal component of the project. The commissioningof the steam-gathering system is scheduled to be completed by the middle of1991. The 21 wells to be drilled under the project are scheduled to becompleted by the first quarter of 1990. Annex 2.10 gives the implementationschedule for the NPC component of the project. The first 55 MW unit isscheduled to be commissioned by April 1991 and the second unit by July 1991.The associated transmission system will be available on time for evacuation ofpower from the first unit. The system upgrading and expansion components areprojected to be completed by 1991. The entire project is scheduled forcompletion by end 1991.
G. Procurement
2.19 The procurement arrangements fcr the project are summarized inTable 2.3 below.
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Table 2.3s SUMMARY OF PROCUREMENT ARRANGEMENTS(US$ million)
Procurement MethodProject Component ICB LCB Other/a N/A/b Total Cost
NOTEs Figures in parentheses indicate financing from the two Bank loans.
/a Includes limited international bidding, direct contracting, force accountand bilateral funding.
/b Refers to expenditures on engineering and administrative overheadsIc Technical assistance from XRTA on contract exiansion./d Rigs are owned by PNOC-EDC./e Financed by the Government of Italy to the extent of US$60 million.
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2.20 Equipment and services financed under the proposed Bank loans wouldbe procured by International Competitive Bidding (ICB) in accordance with theBank's Procurement Guidelines except as noted in paras. 2.21, 2.22 and 2.23below. The power plant will be procured on a single responsibility turnkeybasis from an Italian firm. For all ICB procurement, local manufacturers willbe permitted to participate where appropriate and, at PNOC-EDC's and NPC'soption, will be eligible for a preference of 15Z of the CIP cost of theimported goods or the prevailing customs duties and other import taxes,whichever is lower, in the evaluation of bids. All essential procurementdocumentation for goods and services financed by the Bank and estimated tocost over US$1 million equivalent will be subject to the Bank's prior review.Procurement packages valued at approximately 80Z of the loan amount are likelyto be reviewed.
2.21 All major packages of materials, equipment and services for PNOC-EDCshall be procured via ICB, except for the followings
(a) Contracts for services and equipment needed for well-related opera-tions, e.g., cementing, directional drilling, pipe inspection andother highly specialized operations available only from a limitednumber of suppliers which do not exceed in the aggregate the equi-valent of US$4,000,000, may be awarded in accordance with LimitedInternational Biddings (LIB) procedures. All qualified bidders willbe invited to bid on these packages.
(b) Contracts for equipment and materials that are proprietary or toensure standardization and compatibility with existing equipment andfacilities which do not exceo.d, in the aggregate, the equivalent ofUS$1,000,000 may be procured by direct contracting under terms andconditions acceptable to the Bank.
(c) Approximately US$16.8 million for drilling of wells on force accountbasis using PNOC-EDC's own drilling rigs and crews; these items willnot be financed by the Bank loan.
2.22 Minor packages for equipment, spare parts, materials, consumables andservices (not exceeding US$200,000 per contract up to an aggregate amount ofUS$3 million for NPC and US$2 million for PNOC), may be procured in accordancewith local competitive bidding procedures which have been reviewed by theBank, and are considered acceptable to the Bank, or international shoppingprocedures based on comparing price quotations from at least three qualifiedsuppliers.
2.23 Conductors for NPC's transmission lines will be fabricated locallyfollowing LCB procedures from ingots procured through ICB. The local condu%.-tor manufacturing industry is efficient and this mode of procurement is notexpected to affect satisfactory implementation of the project in terms ofcost, efficiency and completion time. Local fabrication of conductors willnot be financed from the Bank loan. Poles for transmission lines and civilworks for substations and transmission lines will be procured locally throughLCB procedures. These procedures are acceptable to the Bank.
2.24 The major packages for procurement on the project are shown inAnnex 2.11.
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2.25 Consulting services financed under the Bank loan would be engaged inaccordance with the Bank Guidelines for the use of consultants.
2.26 Retroactive financing would be permitted to the extent of US$2 mil-lion equivalent for payments made after March 31, 1988 by NPC, and US$1million for payments made after March 31, 1988 by PNOC-EDC to cover advancedcontracting for materials and services.
H. Disbursements
2.27 The Bank loan would be disbursed against (a) 1002 of the foreignexpenditures of directly imported equipment and materials; (b) 100? of localexpenditures ex-factory of locally manufactured items procured through ICB;(c) 502 of local expenditure for materials and works procured locally;(d) 100? of total expenditures for consulting services; and (e) for fuel,disbursement would be made against 502 of cost (the estimated foreign exchangecomponent) and, for imported goods procured locally (e.g., chemicals), 80? ofthe cost.
2.28 Reimbursements of expenditures relating to contracts valued at lessthan US$200,000 equivalent would be made on the basis of statements of expen-ditures (SOEs). Documentation supporting the SOEs need not be submitted tothe Bank but should be retained by PNOC-EDC and NPC and made available forreview by the Bank supervision missions. To facilitate project disbursements,a Special Account in a fully convertible currency will be established in abank on terms and conditions satisfactory to the Bank for each agency. Theauthorized allocation to the Special Account will be US$4 million for NPC andUS$2 million for PNOC-EDC, representing four months, average projectexpenditure. Replenishments to the Special Account would be made quarterly orwhenever the account is drawn down by about 50? of the initial deposit. Thestandard procedure for auditing SOEs will apply.
2.29 Annexes 2.12, 2.13 and 2.14 give the disbursement schedules for theproposed Bank loan for the project, PNOC-EDC and NPC, respectively. There isno information available on typical disbursement profiles for similar powerprojects in Philippines, no meaningful comparison can be made in that respect.However, the disbursement schedules up to the year 1993 for the NPC componentsare in line with the Bank's profile of disbursements for power projects in theEast Asian region and the PNOC-EDC component is expected to be fully disbursedby 1991. The closing date would be Deoember 31, 1993.
I. Monitoring and Reporting
2.30 Satisfactory procedures for monitoring the progress of the project interms of physical execution and financial reports have been agreed. PNOC-EDCand NPC will furnish quarterly progress reports. At negotiations, PNOC-EDCagreed to furnish annually to the Bank its exploration program for the nextyear for areas covered by the project.
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J. Environment
2.31 The potential environmental problems of steam field development andoperation are taken very seriously by PNOC and NPC, who wish to avoid environ-mental damage. At Bacon Manito and other sites, maximum use would be made ofdirectional drilling, which would minimize the amount of land to be levelled.Flow testing operations are planned so as to restrict the temporary dischargeof geothermal fluid to the amount capable of being carried by local streamswithout permanent harm, and testing would be deferred rather than permittingfluid to exceed that level. Operational effluent would be reinjected. Safetyprocedures have been designed for each well, and appropriate industrypractices are followed regarding disposal of fluids recovered in tests,borehole cuttings, and other waste materials normal to drilling operations.
2.32 There are very few inhabitants in the immediate area of the proposedpower plant, the vegetation is sparse and there is little wildlife. Specialattention has been given to the problem of hydrogen sulphide in the design ofthe system so as to eliminate unventilated areas, and deep pits or trencheswhere the gas may accumulate. Disposal of gases would normally be through a24 m high stack which has been designed to provide adequate dispersion anddilution so as to conform with recommended allowable ground level concentra-tion. The ground level concentration of H2S will be kept below 20 parts perbillion (Philippine National Standard) in the plant areas. Further, a sensi-tive HBS monitoring system will be installed to give alarm and shut down theplant in the event H2S concentrations exceed specified levels. Periodically,it would be necessary to blow off steam for pressure stabilization and wellmaintenance, but with suitable protection the noise would be within acceptablelimits for the operators, who would normally be stationed in an air-conditioned control room. Housing of the operating staff would be locatedsome distance away so that objectionable gases would be diffused and seldomreach the area, and the noise level much reduced. Waste water containinglarge quantities of salts would be reinjected to the reinjection wells wherethe water would seep deep into the ground.
2.33 Transmission lines will be designed to international practices andwill have no adverse impact on the environment. Within the urban areas, highvoltage lines will be run on poles meeting necessary safety codes. Substa-tions in built-up areas will be indoors depending on availability of space.
2.34 The Environmental Management Bureau has granted an EnvironmentalCompliance Certificate for the proposed Bacon Manito Geothermal Power Projectbased on compliance with the Environmental Impact Assessment. The Certificateis issued subject to the project authorities ensuring (a) that Boron andArsenic discharge do not exceed the levels set by the National PollutionControl Commission (NPCC), and that this is adequately monitored; (b) H2Semissions are kept within acceptable limits and H2S control facilities areinstalled according to the specifications set forth in the EnvironmentalImpact Statement, and that continuous monitoring of H2S is effected; (c) noiselevels are kept within NPCC set levels and (d) monitoring of water quality inaffected river systems is institutionalized. NPC and PNOC-EDC have furnishedto the Bank updated environmental reports showing that they have incorporatedthe design parameters needed to enable compliance with the regulations of theEnvironmental Management Board and with environmental standards satisfactoryto the Bank.
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III. THE BORROWERS AND THE BENEFICIARY
3.1 The Borrowers of the two separate Bank loans will be the NationalPower Corporation (NPC) and the Philippine National Oil Company (PNOC). Inturn, PNOC's subsidiary, the Energy Development Corporation (PNOC-EDCI will bethe Beneficiary of the loan to PNOC. These entities are large corporationswith occasionally contiguous, though dissimilar operations. This chapter willpresent separate institutional analyses for each of the two Borrowers and theBeneficiary.
A. NPC
3.2 NPC was established in 1936 as a non-stock public corporation with amandate to develop hydroelectric power generating facilities. In 1960, NPCwas converted into a stock corporation with all shares subscrlbed by theGovernment. NPC's charter, which was issued in 1971 and was amended there-after by several Presidential Decrees, expanded its mandate into the develop-ment, construction and operation of all electric power generation and trans-mission facilities throughout the country. Since 1979, the NationalElectrification Administration (NEA) is empowered to authorize electric powercooperatives to construct and operate generating plants of less than 5 MW. InJuly 1987, the Government issued an amendment to Presidential Decree No. 40,allowing the private sector to construct and operate electric generatingplants and sell their production to grids where they exist and to end userswhere grids do not exist.
3.3 Organization, Management and Staff. NPC's corporate powers areexercised by its seven-member Board of Directors. The present NPC Board,which consists mostly of businessmen, was appointed by the Presidelit of theRepublic in July 1986. Appointments are normally for five years, and containthe possibility of reappointment. NPC's management is vested in its Presidentwho is Chief Executive of the Corporation; the incumbent is normally appointedby the President of the Republic.
3.4 NPC's organization chart is presented in Annex 3.01. In 1985, theCorporation underwent a major reorganization that had the objectives of (a)consolidating operations and construction, (b) decentralizing those functions,and (c) placing responsibility for them in the regional centers under thesupervision of regional Vice Presidents. In view of the large and geographi-cally fragmented nature of NPC's system and the often difficult communicationsbetween headquarters and the field, NPC operates as three separate businesses;therefore, the decentralized structure is appropriate for NPC.
3.5 A profile of NPC's staff, allocated according to function is presen-ted in Annex 3.02. In conjunction with its reorganization, after redeployingpersonnel with fungible skills from units that were streamlined, NPC reducedits staff from about 11,500 to about 10,600 in early-1986. Most of the cut-backs were effected in the construction department, which was reduced by about652 because of a retrenchment in the scope of NPC's in-house constructionactivities. As of mid-1987, NPC had 11,300 approved positions, of which about10,200 were filled by permanent staff and the remainder with temporaries.
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3.6 Training. NPC has an ample in-house training program. In the past,this program has focused on orientation for new employees and skills develop-ment for technicians, equipment operators, and other specialized workers. Inrelation to the reorganization, NPC promoted to newly created management posi-tions many employees lacking previous managerial experience; to developquickly the effectiveness of these new managers, NPC devised a separate in-house training curriculum emphasizing basic managerial techniques, systems andprocedures. NPC also arranges with other centers in the Philippines fordeserving staff to acquire training in relevant topics not covered in its in-house program. These training arrangements are appropriate.
3.7 Operations. Maintenance and Losses. Although NPC appears to havelarge capacity margins, especially in Luzon, much of its aging plant andequipment cannot be operated at rated capacity. NPC has operated andmaintained its assets satisfactorily, especially in view of the age and mix ofits plant, the geographic dispersion of its systems, and the resourceconstraints of recent years. Many of the NPC system improvement measuresincluded in the proposed project are expected to enable better fut're stan-dards of operation and maintenance. In recent years, NPC's combined linelosses and station use have averaged between 7-8X of energy sold, a levelappropriate to NPC's current circumstances.
3.8 Accounting System. NPC's accouating system is based on acceptedpower utility principles and procedures. It was modeled after the UniformSystem of Accounts prescribed for public utilities by the Federal EnergyRegulatory Commission of the United States of America, and adapted to suitlocal conditions and requirements.
3.9 Financial Planning and Budgeting. NPC has well staffed units forfinancial planning and budgeting. The financial planning unit has developedseveral computerized financial models, which are used primarily for reportingto the Government. These financial plans are also used for evaluating invest-ment alternatives and providing necessary information to financiers. NPCprepares budgets annually according to Government practice. The budget isrevised periodically during the year and comparisons of actual performanceagainst budget is a regular managerial exercise.
3.10 Commercial Systems. As of July 31, 1987, NPC had 245 powercustomers. MERALCO, which accounts for more than 502 of both sales andconsumption, is by far the largest. Other customers include a handful ofsmall investor-owned utilities, about 115 electrical cooperatives, a fewpublic sector consumers (armed forces installations and municipal utilities),and industrial operations with loads greater than 69 kV. None among theseother customers predominates the rest.
3.11 In the past, NPC has had severe problems collecting from MERALCO, thecooperatives, and Government sector consumers (para. 4.6). Many of thesecustomers were experiencing difficulty in realizing collections from their ownGovernment sector customers and were stretching their payables to theirlargest Government sector creditors. To assist NPC inter alia, the Governmentdecided to use a clearing-house approach for settling some transactionsbetween public sector organizations. This enabled power retailers to turn
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verifiable receivables from national Government consume s over to NPC; inturn, NPC could collect the amounts due directly from the Treasury. In addi-tion, the Government has authorized NPC to toughen its disconnection of coope-ratives. NPC has recently disconnected several cooperatives; as a result,many cooperatives have sought to reschedule their arrears while paying theircurrent obligations on time (or making strictly enforced prior arrangementsfor late payments). As of post-appraisal, NPC had concluded negotiations withMERALCO for a rescheduling of arrears; this agreement includes severe penal-ties for late payment of current bills as well as amortization of rescheduledarrears. Although NPC cannot per se disconnect MERALCO, it can applyjudicious penalties to ensure prompt payments. This combination of measuresshould enable NPC to improve its commercial operations (para. 4.6).
3.12 To cope with its own collection problems, NPC stretched its accountspayable to its largest Government sector creditor, PNOC. In connection withthe transfer of nuclear plant assets and liabilities, the Government isassuming responsibility for NPC's arrears to PNOC. In the future, withimproved collection of receivables, NPC expects to stay current with all itscreditors, including PNOC (para. 4.6).
3.13 Audit. The Commission on Audits (COA) maintains a large staff atNPC's premises year round. Much of Its activities center on pre-audit reviewsof contracts and transactions. This activity has enabled COA to complete anannual audit of NPC's accounts within three to four months of the end of eachfinancial year. COA's audits have generally been satisfactory. The auditsthemselves have emphasized reviews of transactions and verifications ofaccounts. During supervision of the proposed project, the Bank plans todiscuss with COA broader parameters for reviewing NPC's accounting policiesand practices. At negotiations, NPC agreed that, by June 30 of each year, itwill furnish to the Bank audited financial statements for the previous year,together with the certification and long form report prepared by an acceptableauditor.
3.14 NPC has an internal audit department. This unit has broad responsi-bilities; yet, its primary activities involve reviewing blocks of transac-tions. For the future, this department is developing procedures for auditingthe inputs to the computerized accounting system. This would fill an impor-tant gap in existing audit arrangements.
3.15 Taxes. NPC is not currently liable for income tax. It is exemptfrom customs duties on imports financed from official sources but not oncommercially funded imports. Net interest income is taxed at 20X.
3.16 Insurance. NPC insures its assets through a combination of self-insurance and commercially purchased policies. At appraisal, these practiceswere reviewed and found satisfactory. Recently, NPC began to study the estab-lishment of its own risk management unit. This would have the salutary effectof optimizing its expenditures on insurance.
B. PNOC and PNOC-EDC
3.17 While PNOC-EDC is the direct beneficiary of the PNOC Loan, it cannotbe analyzed independently of PNOC, its holding company. Both institutionsare, therefore, discussed below.
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PNOC
3.18 In 1973, the Government created PNOC to ensure the security andadequacy of the country's oil supply. In 1976, its responsibilities wereextended to include development of all indigenous energy resources. Underthis mandate, PNOC has arranged the supply of crude oil with several oilexporting countries and is using its five ocean-going tankers for transportingvirtually all of its oil imports. PNOC owns and operates the largest oilrefinery in the Philippines (155,000 barrels per stream day capacity) andmanages about 692 of all inter-island transport of oil product using its ownfleet of coastal tankers, tugboats, barges and floating pump stations. In theaggregate, PNOC serves nearly 37? of the domestic petroleum market, withCaltex and Shell sharing the rest. Through its 15 subsidiaries, PNOC is alsoengaged in every major facet of developing the country's indigenous geother-mal, coal, and gas resources, including the services required to support theseactivities. The Government continues, however, to maintain an open doorpolicy aimed at attracting private sector participation in oil, coal and geo-thermal exploration. Recently, in conjunction with this policy, theGovernment asked PNOC to develop a program to privatize its coal and shipyardactivities.
3.19 Organization and Management. PNOC functions autonomously; it reportsto the President of the Republic through the Office of Energy Affairs (OEA).PNOC's corporate powers are exercised by its six-member Board of Directors,which includes a part-time Chairman, a full-time President, and four part-timemembers drawn from the public sector. The Chairman and the President functionconcurrently as the Chairman and President of each of the subsidiarycompanies. The parent company provides the subsidiaries with commonly neededservices such as cash management, planning and budgeting, legal services,public relations and personnel policies. PNOC's organization chart is shownin Annex 3.03.
3.20 Budgeting. PNOC's budgeting and financial control activities arewell developed. Reviews of expenditures vis-a-vis budgets are conductedperiodically at the different management levels.
3.21 Accounting and Audit. PNOC and its subsidiaries use an accountingsystem based on accepted commercial principles; the standard internationalpractices being followed are conservative (for example, abandoned prospectsfor oil, coal and steam development are expensed in PNOC's accounts in theyear of abandonment). Accounts of both the parent company and the subsidia-ries were audited by independent private auditors until 1986; since then, COAhas taken over the auditing responsibilities. In this regard, COA conductsselective pre-audits and concentrates on the validation of transactions.These arrangements are satisfactory. PNOC agreed to provide the Bank withaudited financial statements, together with the certification and long formreport of an acceptable auditor, within six months of the conclusion of PNOC'sfinancial year. This report would include statements concerning (i) theholding company by itself; (ii) the holding company consolidated with allsubsidiaries; and (iii) all subsidiaries separately.
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3.22 Insurance. PNOC insures its assets with the Government ServicesInsurance Systems (GSIS). GSIS, in turn, reinsures wells under drilling withcommercial carriers. Contractors maintain the necessary insurance for ongoingconstruction. These arrangements are satisfactory.
PNOC-EDC
3.23 PNOC-EDC was established as a wholly-owned subsidiary of PNOC in1976. PNOC-EDC operates, however, as an independent entity, coordinating itsactivities closely with PNOC. Currently, PNOC-EDC is heavily dependent on theparent company for financial support through inter-company advances. By 1994,with the completion of its current development program and increased commer-cial production of steam, PNOC-EDC expects not only to be repaying its borrow-ings from PNOC regularly, but also to be declaring substantial dividends. Inthe late 1970s, PNOC-EDC discovered steam fields in Tongonan (Leyte) andPalinpinon (Negros Oriental); commercial production of steam from these fieldsbegan in 1984.
3.24 PNOC-EDC enters into a service contract with OEA to develop eachgeothermal steam prospect that it seeks to operate. Under these contracts,which have a term of five years and are renewable for another two, PNOC-EDCprovides all the necessary services, technology and finance needed to developthe geothermal resource. Where resources are proven to be commerciallyexploitable, the contract remains in force for the balance of the explorationperiod and for another 25 years; thereafter, the contract may be extended foranother 15 years at PNOC-EDC's option. Under these contracts, PNOC-EDC is dueto pay OEA a 'fee" equal to 60X of the net value of the steam produced in anyyear, beginning after a tax holiday (para. 4.29).
3.25 Orpanization, Management and Staff. PNOC's Chairman and Presidentserve PNOC-EDC in those same capacities. PNOC-EDC's day-to-day operations aremanaged by a full-time Vice President and General Manager, who sits on PNOC-EDC's seven-member Board.
3.26 PNOC-EDC has four operational divisionss (a) Geothermal, (b) EnergyDrilling, (c) Environmental Management, and (d) Operation Services. Separatemanagement services and computer services groups provide support to manage-ment. The Geothermal Division, which would implement the proposed project'sgeothermal component, is adequately staffed. Its complement of 1,200 staffmembers include 69 geoscientists, 136 drilling engineers and 51 engineers,several of whom have been trained abroad (Annex 3.04). The other threeoperating divisions are also adequately staffed.
3.27 Training and Technical Assistance. PNOC-EDC currently has a highlycompetent technical staff. Until 1983, a joint venture of the GeothermalTechnical Resource Corporation (a PNOC subsidiarv) and KRTA provided PNOC-EDCwith technical expertise in geothermal exploration and development. Underthis arrangement, KRTA provided PNOC-EDC with technical staff of its own andoffered training in New Zealand to designated PNOC-EDC technical staff. Partof the cost of these services was financed by bilateral aid from theGovernment of New Zealand. Similarly, training was also financed by theGovernments of Italy and Japan. PNOC-EDC is now technically self-reliant, butstill employs two KRTA experts to advise on highly specialized technical
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matters. In addition, PNOC-EDC has ample in-house training programs. Thesearrangements are appropriate.
3.28 Collections. PNOC-EDC sells all the steam it produces to NPC. Thenormal contractual terms provide for a payment term of 45 days from thebilling date; thereafter, interest is payable, currently at 12X. PNOC-EDC hasnot had difficulties in collecting its receivables. On occasion, NPC wasexcused from the "take-or-pay' provision in its contract when compliance wasnot feasible for reasons beyond NPC's control.
3.29 Accounting and Audit. PNOC-EDC follows the same accountingprinciples and practices and audit arrangements as PNOC. At negotiations,PNOC-EDC agreed to keep separate accounts for each area being dev .oped underthe proposed project and to furnish regularly to the Bank financial reportssummarizing these accounts.
IV. FINANCE
4.1 While NPC and PNOC-EDC have businesses that inter-relate, they havesubstantially different financial characters. This chapter will presentfinancial analyses separately for each of the two institutions.
A. NPC
4.2 Although wholly-owned by the Government, NPC enjoys substantialfinancial autonomy. NPC manages its financial affairs and maintains itsaccounts. Subject to Government approvals, NPC is authorized to formulate itsinvestment program, establish its tariff, enter into contract with suppliersof goods and services, and borrow for its own account from foreign, as well asdomestic, lenders.
4.3 Past and Present Financial Performance. NPC's financial performancefor 1984-86 is presented in Annex 4.01 and summarized in Table 4.1.
Financial Year Ended December 31 1984 1985 1986-------------(Actual)-------------
Power Sold ,MkWh) 17,006 17,140 17,645Average Revenue (Ctvs./kWh) 87.54 109.85 96.84Operating Revenue (P Million) 14,390 17,991 16,514Net Operating Income (P Million) 3,056 3,902 4,306Net Income (P Million) 1,069 1,096 715Rate Base (P Million) 30,803 45,702 56,742
l
Rate of Return - Revalued Assets 102 92 8XSelf-Financing Ratio 19X 56X 1171Debt Service Coverage 1.3 1.7 1.3Debt/Debt Plus Equity 71Z 722 721Operating Ratio 79X 78Z 741Current Ratio 43Z 37Z 571Accounts Receivable - Months 2.0 2.6 3.5Accounts Payable - Months 7.8 6.9 10.0
4.4 These results reflect, though hardly adequately, the financial strin-gency faced by NPC during this period. NPC is permitted, under its charter,to realize annually a 10! rate of return on revalued net fixed assets aftercovering all operating expenses; the high rates of return during the periodreflect its policy of setting rates at the maximum allowable level. Duringthe period, NPC's investment program focused on completing projects begunyears earlier; PNPP, which was then in advanced stages of construction, wasexpected to meet the full growth in demand in the Luzon grid until the early-to mid-199Os. As a result, NPC was incurring only modest capital expendituresand realizing substantial self-financing ratios. However, these two favorableindicators belied 'he cash constraints that NPC was facing.
4.5 NPC's low current ratio and debt service coverage ratio, combinedwith its high operating ratio, debt/total capital ratio and accounts receiv-able and accounts payable turnover rates are all indicators of those cashconstraints. As its own financial position worsened, NPC found itself barelyable to raise cash through new external borrowings and unable to secure newequity capital. Moreover, as its customers encountered cash flow difficultiesof their own, NPC experienced collection problems; unable to realize itsoperating revenues or raise cash from other sources, NPC itself became delin-quent in paying its bills, especially fuel bills incurred with subsidiaries ofPNOC. As importantly, NPC was having to use most of its available cash toservice debt, much of which was incurred to finance the highly over-budgetPNPP, that was increasingly becoming due for repayment. During the period,NPC tried to reduce costs; however, reductions were possible mainly for desir-able expenditures on the maintenance of physical plant and human resources.
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4.6 During 1986-87, following its decision to mothball PNPP, theGovernment deciled to relieve NPC of the financial constraints posed by thatinvestment. C-rrently, the Government is paying all expenses for maintainingthe plant and all debt service associated with loans raised to finance itsconstruction. Subject to the approval of NPC's lenders, the Governmentexpects to assume formal responsibility for PNPP by arranging to transfer theplant's assets and the corresponding liabilities from NPC's 1987 year-endbooks of accounts. The Government will also compensate NPC for the amount ofinvestment value met with internally generated cash by assuming responsibilityfor an equal amount of NPC's arrears to PNOC. Concurrently, NPC has concludedan arrangement for MERALCO to settle its outstanding arrears of P 1.7 billionwith front end payments aggregating R 0.9 billion and a six-year firstmortgage note for the remainder; and the Government is pressing the coopera-tives through NEA to restructure their arrears to NPC. These measures areexpected to make NPC current financially and to provide a fund of cash or cashequivalent credit to enable NPC to meet its local currency requirements intoVf89, assuming its customers pay for current consumption on time. Atnegotiations, NPC agreed to implement an action program, acceptable to theGovernment and the Bank, to maintain its accounts receivable and accountspayable at levels consistent with proper commercial practices. A draft ofthis program, which was discussed and confirmed at negotiations, is presentedin Annex 4.02.
4.7 Foreign Exchange Exposure. As of December 31, 1986, NPC had on itsbooks, net of borrowings raised to finance PNPP, nearly P 46 billion in loansdenominated in fore'gn currency. Many of these loans were raised inconnection with capital investments undertaken in periods of more favorableexchange rates. NPC passes the burden of debt service on these loans to theconsumer by way of a foreign exchange adjustment included in its tariff.Under these circumstances, NPC could be chary about increasing its foreignexchange exposure in the future; however, as NPC cannot obtain suitable longterm financing for its investments in local capital markets, and as most ofits investments have significant foreign cost components, it will need tocontinue borrowing substantially from foreign lenders (para. 4.13). There-fore, NPC's current practices of (a) making maximum use of concessionaryfinance, and (b) including in its tariff a foreign exchange adjustment, areappropriate.
4.8 Valuation of Assets. NPC revalues its assets and takes the resultsinto its books of accounts yearly. Each year, NPC applies a trending factor,developed from an aggregation of price indices, to the foreign and local valueof its assets. Then, the value of those assets is further adjusted to reflectchanges in the outstanding principal of loans used to finance those assets.Every four years, an independent consultant is retained to validate theadjustments to the fixed asset accounts. This validation consists of a deskstudy that considers, inter alia, the cost of replacing those assets. Aspresented, this methodology could result in some overvaluation of NPC's fixedassets. During supervision of the proposed project, the Bank plans to reviewwith NPC the methodology for asset revaluation and seek the implementation ofadjustments, considered appropriate by both parties, to that methodology.
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4.9 Tariff. NPC's tariff is presented in Annex 4.03. It includes:(a) a basic charge, consisting of demand and energy components; (b) a fueladjustment; (c) an exchange rate adjustment; (d) a coal price adjustment; and(e) a steam price adjustment. NPC's current average revenue of about USh 4.7per kWh is slightly less than the US4 5 per kWh being realized by theElectricity Generating Authority of Thailand, the region's most comparableutility. As a wholesaler, NPC sells power mainly to other utilities; itslevel of rates is, therefore, appropriate if poorer retail consumers cansatisfy their minimum need for electricity at an affordable rate while thedistribution utilities have the potential to be financially viable. NPC'scustomers supply generous blocks of electricity to residential and smallcommercial consumers at lifeline rates. The financial difficulties beingexperienced by many distribution utilities are more reflective of operatingand cost factors than of affordability constraints. Therefore, NPC's averagerevenues per kWh are appropriate.
4.10 A tariff study, financed by ADB and conducted by Electricitb deFrance (EdF) in 1986, established that NPC's tariff produces revenues that areconsistent with marginal cost pricing; however, the tariff structure deviatessubstantially from marginal cost principles. A Presidential Decree, issued inJanuary 1987, ordered all power utilities to adjust their charges in line withlong run marginal cost. The distribution utilities are waiting for NPC tomake its adjustments before formulating their own; in turn, the Governmentasked NPC to adjust appropriately the structure of its tariff by late 1987.NPC is concerned that it may not be ready to introduce full marginal costpricing so soon and may instead introduce an interim tariff shortly.
4.11 NPC has enjoyed considerable autonomy in setting prices. NPCnormally resets the adjustments every month automatically in accordance withparameters published in its tariff; in the past, it has not been required toclear monthly changes in the adjustments with any regulatory body. Periodi-cally, NPC's management formulates, and its Board promulgates, changes in thebasic charge and the formulas used in computing the adjustments. In the past,such changes were cleared informally with the Office of the President prior tointroduction. Recently, the Government decided to require NPC to submit ratechanges to ERB for approval; the manner of implempnting this decision is stillunder discussion. At negotiations, the Government gave an undertaking that,in futr.re regulatory reviews of tariff proposals, NPC's financial requirementsas well as other factors will be taken into consideration.
4.12 FinancinA Plan. NPC's financing plan for 1988-92, the period ofexpenditure on the proposed project, is presented in Table 4.2:
Capital Expenditures 68,358 3,335 59Debt Service 45,125 2,201 39Bond Sinking Fund 4,333 211 4Increase in Working Capital (3,310) (161) -3Increase in Deferred Charges (27) (1) 0Payment of Dividend 735 36 1
NPC's component of the proposed project represents 4X of its investmentprogram for the period. The NPC Loan and the Italian protocol soft loan eachaccount for about 1X of its financing requirement.
4.13 During this period, NPC expects to finance about 33X of its invest-ment program from internal cash generation. NPC has experienced little diffi-culty in obtaining foreign borrowings; during the period, NPC expects to meetmore than 902 of its foreign exchange requirements with foreign borrowings,the bulk of which it expects to raise from official sources, on terms that arecomparable to or more favorable than commercial loans. NPC is expecting tomeet much of the remainder of its financing requirement from locally issuedfive-year debt. This finance will be needed to meet the portion of its pesodenominated investment program not covered by internal cash generation (142 ofits aggregate investment program). Currently, no such instrument of debtenjoys extensive use in the Philippines and the Government nas been reluctantto authorize NPC to issue bonds with such a seemingly long maturity; moreover,given the capital intensiveness and term of construction of NPC's investments,the usefulness of a five-year instrument is limited (para. 4.15).
4.14 Future Financial Performance. Detailed financial projections for theperiod 1987-95 are presented in Annex 4.01. A summary of key financialindicators is given in Table 4.3.
4.15 The projections indicate that NPC can expect relative financial easeduring 1987-89; thereafter, it should face increasingly severe constraints.This pattern highlights the impact of (a) the quasi-restructuring of NPC inconjunction with both the transfer of PNPP to the Government and the refinanc-ing of receivables and (b) the absence of a suitable instrument for financingthe local currency gap (para. 4.13). Much of liquidity tightness forecast forthe 1992-95 period results from the need to refinance principal repayments onthe five-year debt floated from 1989 and thereafter. The Government will needto consider whether (i) the high cost of bridging the local currency gapshould be borne by the consumer; (ii) it should provide relief by infusingsome equity; and (iii) it should assist NPC with the development and use of anew long term financing instrument. This matter will be pursued further withthe Government during the forthcoming energy sector study; thereafter, theGovernment will need to consider the policy implications of the variousalternatives. At negotiations, NPC agreed that, by December of each year, itwill review with the Bank (i) its bud&et for the next sear, and (ii) itsfinancial plan for the next five years, paying close attention to the specificinstruments it plans to use to meet its local currency financing requirements.
4.16 This projected financial performance is based on NPC's continuing itspolicy of setting rates at levels aimed at meeting the 10? rate of returntarget allowed under its charter. This implies that average revenues per kWh
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would increase at a compound annual rate of 5.7X, representing about 20t lessthan inflation projected for the period, to levels about 552 above currentcharges. To encourage this policy while acknowledging the inevitability ofdelays in matching cost increases with tariff increases, at negotiations, NPCagreed that it will maintain its annual operating revenues at levelssufficient to realize, after meeting operating costs (including depreciatior)and taxes (if any), an 82 rate of return on revalued net fixed assets inoperation. The projections also assume that NPC will collect its receivableseffectively and pay its bills on time. On this basis, NPC is expected togenerate cash sufficient to meet an average self-financing ratio of 352 during1988-92, dropping to about 202 in 1993-94 (largely because of a need toservice the five-year debt); at the same time, debt service coverage isexpected to average 1.6 in 1988-93, and drop to about 1.4 in 1994-95. Toencourage efficient cash and debt management, at negotiations, NPC agreed thatit may incur additional debt only if a reasonable forecast of its net revenuesafter expenditures for each year during the term of the debt to be incurredshall be at least 1.3 times its projected debt service requirement.
B. PNOC AND PNOC-EDC
4.17 PNOC-EDC is a wholly-owned subsidiary of PNOC. Although erjoyingconsiderable operating autonomy, PNOC-EDC is still highly dependent on PNOC'sfinancial support. In view of this dependence, the financial conditions ofboth the parent company and the subsidiary are discussed below.
PNOC
4.18 CaDital Structure. Although PNOC is a Government corporation with amandate to ensure the adequacy of the country's energy supply, it receives nospecial privileges, and, in all of its activities, it competes directly withthe private sector. As of December 31, 1986, PNOC had total assets ofP 20,831 million that were supported by a satisfactory capital structure(Table 4.4). Most of PNOC's current profitability is derived from its oilactivities. Coal operations yielded marg1nal losses in 1986, mainly as aresult of price deregulation and a liberalized coal import policy. Geothermalsteam production, which began only in 1984, yielded a small profit in 1986;this activity is expected to contribute significantly to PNOC's futureearnings.
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Table 4.4t PNOC'S CAPITAL STRUCTURE (AS OF DECEMBER 31, 1986)
Capital # Million Percent
Issued Capital Stock 1,904 15Retained Earnings 4,347 34Other Credits (Mainly Special FundAllocations by Government) 1,555 12
Long Term Debt 5,027 39
Total Canital 12.833 100
4.19 All of PNOC's capital stock is owned by the Government, whichfinanced its stock subscriptions from an Oil Industries Special Fund. ThisSpecial Fund, which itself was financed from petroleum taxes, was dissolved inlate-1984. PNOC was still due to receive an allocation from that Fund of1 1.2 billion; in late-1986, the Government decided to meet this commitmentand has already remitted one installment of 1 250 million. PNOC's retainedearnings largely represent income from petroleum operations, which accrue fromrevenues for the sale of refined petroleum products net of (a) operatingexpenses, (b) the duty paid on the delivered cost of crude oil, and (c) thecost of the imported petroleum. PNOC's existing long term debt consistsentirely of loans from foreign commercial and official sources. Some of theseloans are covered by the restructuring arrangements concluded for the publiccorporate sector by the Government and a consortium of foreign financialinstitutions. Some 1 505 million of undisbursed funds remain available toPNOC from the Bank's Loan 2203-PH, which financed geothermal development, andfrom an ADB loan, which financed refinery modification and miscellaneousitems. As of December 31, 1986, PNOC recorded about 1 7,998 million incurrent liabilities, accruing primarily from the company's trading activities.The company has supported these current liabilities with substantialliquidity. PNOC has provided its subsidiaries with easy access to inter-company advances and expects to continue doing so. Considering the nature ofPNOC's business, its financial structure is appropriate.
4.20 Financial Performance. As summarized in Table 4.5 and detailed inAnnex 4.05, PNOC's financial position as of December 31, 1986 was satisfac-tory. This soundness resulted primarily because a number of previouslyunsolvable issues were resolved, including (a) assumption by the Government ofresponsibility for NPC's accounts receivable; (b) remittance of the firstinstallment of the previously suspended equity financing from the Oilindustries Special Fund, together with assurances that future installmentswould be forthcoming; and (c) reinstatement by the Government of foreigncurrency lines of credit for petroleum imports. PNOC's financial ratiosduring 1984-86 were satisfactory, and its internal cash generation wassufficient to cover capital investments and debt service. PNOC used itsinternally generated cash to finance its working capital requirements andborrowed from abroad to finance its foreign exchange needs.
4.21 Asset Valuation. PNOC is predominantly a trading company, withcurrent assets exceeding 502 of total assets. Much of its property and equip-ment has been financed from foreign loans. Foreign exchange gains or lossesarising from trading transactions are reflected in income; however, exchangeadjustments on foreign currency liabilities that were incurred in acquiringproperty and equipment are capitalized to the corresponding asset. As aresult, the peso value of PNOC's fixed assets tends to appreciate. Otherwise,PNOC does not have a systematic procedure for periodically revaluing itsassets. During supervision of the proposed project, the Bank will review withPNOC various approaches to regular asset revaluation and will seek the imple-mentation of a methodology considered appropriate by all parties.
4.22 Tariffs. PNOC is primarily concerned with the adequacy of saleprices for petroleum products. ERB fixes and regulates these prices with theaim of balancing the interests of the consumer, the oil companies, and theGovernment. The consumer pays prices correlated as closely as possible to theposted price in the Singapore market; the oil companies retain net revenuessufficient to enable reasonable profitability; and the Government realizesrevenues through taxes and duties on petroleum. Some oil-related revenueswere used to establish an Oil Price Stabilization Fund aimed at protecting theconsumer from overly volatile retail price changes and insulating the oilcompanies froa sudden changes in crude oil prices.
4.23 Future Financial Performance. Financial projections for PNOC during1987-92 are presented in Annexes 4.04 and 4.05, and summarized in Table 4.6.These projections indicate that PNOC is likely to (a) maintain satisfactoryliquidity; (b) remain conservatively capitalized; (c) operate profitably; and
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(d) generate internal cash, net of debt service, sufficient to meet about 601of its affiliates' capital expenditure during the period. This performancesuggests that PNOC should be able to provide PNOC-EDC with the support thatwill be needed during the project implementation period.
4.24 PNOC-EDC functions as an autonomous company with responsibility forcontrolling costs and realizing profits. It maintains its own financialaccounts and compiles annual financial statements that are subject to audit.Among its accounting activities, PNOC-EDC maintains separate accounts for eachgeothermal area. PNOC-EDC began commercial operations in 1984. From a steamproduction capacity (at both the Tongonan and Palinpinon fields) that wassufficient to power 225 KW of generation and yield a maximum of 1,478 GWh of
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energy, the steam volume actually sold yielded only 330 -"h of electric energyin 1984, 578 GWh in 1985, and 605 GWh in 1986. These lo levels of salesresulted from the slow growth in demand for electricity in Leyte and Negros,the islands where these steam fields are located. PNOC-EDC reduced its explo-ration and field development: activities during 1984-86, as a result of theGovernment's decision to curtail investments in response to the country'seconomic difficulties. Table 4.7, which presents PNOC-EDC's capital expendi-tures for 1976-86, shows the regular increase in investment levels until 1983and the sharp curtailment of investment thereafter.
Table 4.7: PNOC-EDC'S ANNUAL CAPITAL EXPENDITURES(P million)
4.25 Capital Structure. PNOC-EDC has depended on its parent company forfinancial support. This support has been extended through (a) equity invest-ments, and (b) inter-company advances (usually indefinitely renewable three-month promissory notes, currently bearing an interest rate of 8X). Thisdependence is expected to continue until about 1994, when PNOC-EDC's sales ofgeothermal steam are expected to produce internal cash generation sufficientto enable substantial self-financing. PNOC-EDC's capital structure ispresented in Table 4.8.
Table 4.8: PNOC-EDC'S CAPITAL STRUCTURE(as of December 31, 1986)
Long Term Debt (Foreign) 1,292 1,559 2,177PNOC Advances 2,069 2,463 2,691Stockholders' Equity 1,180 1,219 1,571Total Assets/Liabilities 4,673 5,434 6,603
Current Ratio 4.2 2.5 3.6Debt (Incl. PNOC Advances)JEquity 74:26 77:23 76:24
Capital Expenditure 244 20 126
4.27 Taxes. PNOC-EDC may seek for the commercial operations of each areaunder development an exemption from income taxes for up to six years. TheGovernment has decided to make available, based on the merits of an applica-tion, such a tax holiday to any developer of a new industry. After the taxholiday, PNOC-EDC will be required to pay OEA a 'fee' (including income tax)equal to 602 of its net revenues. Since this fee is higher than the 35?income tax rate applicable to most companies in the Philippines, PNOC-EDC hasasked the Government to rationalize this requirement. In conjunction with theforthcoming sector study, the Bank will review with OEA, PNOC and PNOC-EDC thebasis for this fee, and will seek implementation of adjustments consideredappropriate by all parties.
4.28 Tariffs. An ADB-financed study on the pricing of geothermalresources recommended that the principle of 'avoided costs' be followed indeveloping the price NPC would pay for geothermal steam; the price itselfshould be competitive with the cost to NPC for alternative fuels while alsoenabling revenues sufficient for PNOC-EDC to recover its full cost of produc-tion (including the cost of the investment). This principle is expected toform the basis of a future steam pricing policy. In connection with theproposed project, NPC and PNOC-EDC will need to agree on a price, acceptableto OEA, for the steam needed to drive the Bacon Manito geothermal powerstation. The Bank has received a memorandum of understanding specifying theterms on which NPC will purchase the steam needed for the Bacon Manito powerstation, inter alia including a steam price (USI 2.7 per kWh) that falls
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within the range defined by PNOC-EDC's cost of production and NPC's avoidedcost. Execution by NPC and PNOC-EDC of a purchase contract, based on thememorandum of understanding, will be a condition of effectiveness of theproposed loan.
4.29 Future Filancial lPeformanne. PNOC-EDC's expected financial perfi.r-mance during 1987-95 is presented in Annex 4.06, with the underlying assump-tions in Annex 4.07; the projection through 1992 is summarized in Table 4.10.This projection reflects PNOC's decision to finance PNOC-EDC's explorationexpenditures using equity infusions and, correspondingly, to decrease the useof inter-company advances. Moreover, the projection reflects PNOC's decisionto treat these advances as long term debt in the future. By 1994, with thecompletion of currently planned development programs and the correspondingincreases in steam production, PNOC-EDC is expected to make regular repaymentsof its borrowings from PNOC and also declare substantial dividends.
Current Ratio 5.7; 3.1 1.8 1.1 1.3 1.2Debt/Equity Ratio 64s36 62:38 61:39 65:35 63:37 56:44
Debt Service Coverage 3.3 4.0 2.6 1.2 1.5 2.3
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To encourage the satisfactory performance shown in the projections, atnegotiations, PNOC-EDC agreed (a) to maintain a debt/equity ratio, net of anyreserve for revaluation of assets, of not more than 70s30 (with inter-companyadvances classified as long term debt); (b) to maintain a current ratio of notless than 1.0; and (c) to incur additional debt only if a reasonable forecastof its net revenues after expenditures (excluding depreciation), taxes, anddividends for each year during the term of the debt to be incurred shall be atleast 1.25 times PNOC-EDC's projected debt service requirements. Indetermining the debt service coverage ratio, debt will mean all indebtednessof PNOC-EDC, excludir.3 inter-company advances from PNOC. Also atnegotiations, PNOC agreed to take all actions required to enable PNOC-EDC tomeet these and other obligations under its Project Agreement with the Bank,including (a) providing PNOC-EDC with share capital and inter-company loans asnecessary and (b) enabling PNOC-EDC to use such other means as it hasavailable to raise counterpart funds.
4.30 Financial Analysis of the Geothermal Steam Component. The geothermalsteam development component of the proposed project has two partss (a) thedevelopment and subsequent commissioning of the Bacon Manito I geothermalsteam field, and (b) the delineation and appraisal of geothermal sites inLuzon. The former part represents a time-slice in the exploration anddevelopment of the Bacon Manito I geothermal steam field. Work on that fieldbegan in 1979. The Bank first supported that investment with Loan 2203-PH,which provided, inter alia, for the drilling of about 11 exploratory wells atBacon Manito I. These wells have been drilled and the steam reserves areproven. The proposed loan will help (a) complete the drilling of BaconManito I; (b) develop the steam-gathering system; and (c) bring the field intocommercial production. The financial analysis for Bacon Manito I takes intoaccount all the Investments since 1979 and projects revenues from operationsfor 25 years, beginning in 1991. A financial analysis cannot be performed onthe second part until the drilling has been completed and the extent of steamreserves can be established. At that time, future investment can bepredicated on the likelihood of satisfactory financial returns.
4.31 A financial analysis of the entire Bacon Manito I development ispresented in Annex 4.08. Total investment (in 1987 prices) is US$73.3 mil-lion. Of this amount, US$51.5 million had been expended through the end of1986. During 1987 and part of 1988, little progress is expected on thisdevelopment; thereafter, works will resume according to a schedule that wouldenable steam production to be synchronized with NPC's target for commissioningthe power plant in early 1991.
4.32 Based on the principles enunciated in the ADB-financed geothermalsteam pricing study taken in combination with the tax holiday and fee remis-sions that are likely to be available for this specific development of geo-thermal resources, the price applicable for steam to power the Bacon Manitogenerating station was estimated at the equivalent of US mils 30 per kWh in1986 prices. An equivalent price of P 0.65 per kWh (in 1987 prices) was,therefore, used in computing the financial rate of return. This price wasescalated by the local price escalation rate for the Philippines. Assumingthe tax holiday and fee remissions during the first six years of commercialsales and a reduction in the Government fee to 40X from the current level of602, the financial rate of return would be 14.1?. Based on the aforementioned
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parameters, Table 4.11 summarizes the likely benefits to PNOC-EDC and theGovernment from the Bacon Manito I development.
Table 4.11s BENEFITS O THE BACON MANITO I DEVELOPMENT(assumes a steam price based on USI 3.0 per kWh in 1986 prices)
NPV (At 14X) ofRate of Return Share of Net Project Benefits
Conditions to PNOC-EDC Income fits (in MM $)EDC Govt. EDC Govt.
4.33 Sensitivity and Risk Analysis. During the current pricing negotia-tions between NPC and PNOC-EDC, the parties have discussed a range of pricesbetween US mils 26 per kWh and US mils 30 per kWh (1986 prices). Table 4.12summarizes the likely benefits to PNOC-EDC and the Government from the BaconManito I development based on a steam price of US mils 26 per kWh (1986prices).
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Table 4.12: BENEFITS OF THE BACON MANITO I DEVELOPMENT(assumes a steam price based on US1 2.6 per kWh in 1986 prices)*
NPV (At 14?) ofRate of Return Share of Net Project Bene-
Conditions to PNOC-EDC Income fits (in MM $)EDC Govt. EDC Govt.
i An agreement has since been reached between NPC and PNOC-EDC on the steam-price in terms of which it will be the equivalent of US 2.76 per kWh
4.34 A sensitivity was run based on the assumption that completion ofconstruction of the power station might be delayed by up to one year. In thiscase, assuming a steam price at US mils 30 per kWh (1986 prices), PNOC-EDC'srate of return would decrease to 12.7X, with the tax incentives; with taxincentives, the rate of return drops to 10.9? if the steam price is US mils 26per kWh (1986 prices). Because much of the required investment has alreadybeen expended, the risk of significant cost overruns for the remainder isconsidered minor. Even so, a 10? increase in the remaining investment wouldreduce the rate of return by about 0.3S. The market risk is considerednegligible; moreover, because the 16 wells already drilled have shown reservessufficient to fuel about 102.5 MW of power generation, the risk of a shortfallof steam has been discounted.
V. PROJECT JUSTIFICATION AND RISKS
A. Justification
5.1 The project encompasses complementary components from geothermaldevelopment and delineation to power generation and transmission. The totalavailable capacity of the Luzon system is estimated at about 3,000 MW(para. 1.11). In comparison with this capacity, the system is currentlyexperiencing a peak demand of 2,500 MW which is projected to grow to 3,250 MWby 1992. If there were no addition to the generating capacity, the system'sloss of load probability would increase from its present level of 2 days/yearto 7 days/year in 1989 and more than 30 days/year in 1991. Transmission/dis-tribution losses within Luzon have increased from 14? in 1978 to 24? in 1986.Currently, no new generation plant is under construction in Luzon, while thegrid is in urgent need of peaking, as well as base-load generating capacity(para. 1.11). NPC is planning to meet the shortage of peaking capacity by
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installing two gas turbines with a total capacity of 350 MW. The base-loadgenerating capacity can be met by either geothermal power plant or a coal-fired power station. Although NPC's long term generation expansion programhas not yet been finalized, the medium term options, as well as their relativeeconomic advantages, are relatively clear. The lacon Manito Geothermal PowerProject, utilizing geothermal steam for the 110 MW power plant, presents theleast-cost option to supply the next increment in base-load generatingcapacity in Luzon. The discounted incremental cost to construct and operatethis power plant is US$121 million compared *'o a discounted cost of US$161million for an equivalent coal-fired power station, which would constitute thenext best alternative. The equalizing discount rate between the Bacon Manitogeothermal power plant and an equivalent coal plant is 392 (Annex 5.01). Thishigh rate is due largely to the treatment of the previously incurredinvestments on geothermal exploration as sunk costs. Should one take accountof all previous costs, the rate w3uld decline to about 12?.
5.2 The transmission component of the project is necessary to meet theforecast increase in power demands with acceptable levels of seer:ice qualityand reliability and to restore some of the old system components to efficientoperational state. The distribution component of the project ensures theefficiency of upstream investments, a large portion of which would otherwisebe dissipated as losses. The project has several other components which areneeded for improving the operational and institutional efficiencies of theconcerned entities. Thus, the proposed project constitutes an integratedapproach to developing new generation and transmission; rehabilitating some ofthe old facilities; and assisting the technical, commercial and financialperformances of NPC.
B. Economic Rate of Return
5.3 The internal economic rate of return (IERR) for the main Bacon ManitoGeothermal Power Project is computed based on: (a) the incremental salesrevenue and consumer surplus; and (b) the incremental economic benefit of theproject including sales revenue from the plant. The capital and operatingcost includes those oft (a) development of additional wells and steam-gathering system needed to supply the required steam for the plant; and(b) the power plant and its associated transmission line.
5.4 The IERR of the project, based on direct benefits measured in termsof sales revenues is about 19? (Annex 5.02), which is substantially higherthan the opportunity cost of capital (12Z). With the incorporation ofconsumer surplus, based on demand functions for various consumer groups, theIERR increases to 31Z.
5.5 Since the transmission/distribution and rehabilitation componentsconsist of numerous dispersed items, its benefits are not attributable to aspecific region or a specific group of consumers. Therefore, the economicrate of return for the components cannot be assessed meaningfully. However,the benefits are expected to be substantial and to justify the costs fully.
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C. Risks
5.6 The pi^oject faces no substantial physical risk in implementation.Extensive scientific investigations and independent resource assessment haveconcluded that reserves are sufficient to drive the power plant during itslifetim3, and NPC's familiarity with geothermal power plants makes the riskassociated with implementation minimal. Also, acquisition of land and rights-of-way for substations and transmission lines is not expected to cause anyserious problems. However, as a result of its financial weakness, NPC couldhave difficulty realizing counterpart funds and, thereby, keeping to theproject implementation schedule. The recently completed restructuring of NPCis a major step to minimize these risks. Because the Project ImplementationCommittee is being formed by agreement of the beneficiaries and would notfunction under the authority of a preponderant institution, the projectincludes a risk that the Committee cannot enforce the coordination needed inimplementing the proposed project. However, the need for such coordination isminimal since the institutions have agreed to steam price and to designparameters.
VI. AGREEMENTS
6.1 Agreements regarding the following items were reached duringnegotiationss
(a) For the development of the Bacon Manito I steam-gathering system,PNOC-EDC will appoint a consultant for project execution services.On completion of appraisal and delineation drilling at prospectivegeothermal sites, PNOC-EDC will retain an independent consultant forstudy of resource assessment and techno-economics of fielddevelopment (para. 2.20).
(b) PNOC-EDC would furnish annually to the Bank its exploration programfor the next year for areas covered by the project (para. 2.35).
(c) NPC will furnish to the Bank, by June 30 of each year, audited finan-cial statements for the previous year, together with the certifica-tion and long form report prepared by an acceptable auditor(para. 3.13).
(d) PNOC will provide the Bank with audited financial statements,together with the certification and long form report of an acceptableauditor to the Bank within six months of the end of each fiscal year.This report should include statements concerning (i) the holdingcompany by itself, (ii) the holding company consolidated with allsubsidiaries, and (iii) all subsidiaries (para. 3.21).
(e) PNOC-EDC will maintain separate accounts for each area to bedeveloped under the proposed project, and will furnish the Bank withfinancial reports summarizing these accounts regularly (para. 3.29).
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(f) NPC will implement an action program, acceptable to the Governmentand the Bank, to maintain its accounts receivable and accountspayable at levels consistent with proper commercial practices(para. 4.6).
(g) NPC will, by December 1 of each year, review with the Bank (i) itsbudget for the next year, and (ii) its financial plan for the nextfive years, paying close attention to the specific instruments itplans to use to meet its local currency financing requirements(para. 4.15).
(h) NPC will maintain its annual operating revenues at levels sufficientto realize, after meeting operating costs (including depreciation)and taxes (if any), an 81 rate of return on revalued net fixed assetsin operation (para. 4.16).
(i) NPC would incur additional debt only if a reasonable forecast of itsnet revenues after expenditures for each year during the term of thedebt to be incurred shall be at least 1.3 times its projected debtservice requirement (para. 4.16).
(j) PNOC-EDC will (a) maintain a debt/equity ratio, net of any reservefor revaluation of assets (with inter-company loans classified aslong term debt), of not more than 70:30; (b) maintain a current ratioof not less than 1.0; and (c) incur additional debt only if areasonable forecast of its net revenues after expenditures (excludingdepreciation), taxes, and dividends for each year during the term ofthe debt to be incurred shall be at least 1.25 times PNOC-EDC'sprojected debt service requirements (para. 4.29).
(k) PNOC will take all actions required to enable PNOC-EDC to meet theseand other obligations under its Project Agreement with the Bank,including (a) providing PNOC-EDC with share capital and inter-companyloans as necessary and (b) enabling PNOC-EDC to use other means as ithas available to raise counterpart funds (para. 4.29).
6.2 During negotiations, clarifications regarding the following wereobtained and are reflected in the minutes:
(a) In the course of the Energy Sector Study, the Bank ascertained thatNPC was developing methodologies for investment program formulationthat were satisfactory; therefore, the annual reviews of NPC'sinvestment program could focus as much on the methods used forinvestment optimization as on the constituents of the program(para. 1.12).
(b) Government will undertake that, in future regulatory reviews oftariff proposals, NPC's financial requirements as well as otherfactors will be taken into consideration (para. 4.11).
6.3 Conditions of effectiveness of the proposed loan would be:
(i) Execution by NPC and PNOC of a sales contract for the sale ofsteam to drive the proposed Bacon Manito Geothermal PowerProject (para. 4.28).
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(ii) Execution of a Subsidiary Loan Agreement, satisfactory to theBank, between PNOC and PNOC-EDC (para. 2.16).
6.4 With the above agreements and clarifications, the project constitutesa suitable basis for two Bank loans aggregating US$100 million equivalent(consisting of one loan for US$59 million to be lent to NPC and a second loanfor US$41 million to be lent to PNOC. These loans would each have a term of20 years, including five years of grace on repayment of principal, and carrythe standard variable interest rate.
PHILIPPINESSBEACON MUNITO GEOTHERMAL POWER PROJECT
DETAILED PROJECT COST - NPC COMPONENT
(A) COST EST1MATZ - 2 X 55 MW POWER PLANT AND ASSOCIATED TRANSMISSION SYSEM
I~U8S LLION)
Item Local . Forein. Total
Power PlantLand and Land Right 0.0 -- 0.01Site Development 3.04 0.02 3.06Civil Works, Buildings and Structures 1.85 3.94 5.79Turbine Generators and Accessories 2.23 16.60 18.83Condensing System 1.05 8.00 9.05Gas Extraction System 0.69 4.60 5.29Electrical Systems and Controls 0.57 3.81 4.38Pipes and Valves 0.42 2.80 3.22Balance of-Plant 1.53 4.91 6.44Supervision of Erection, Testing andCommissioning 0.21 1.80 2.01
Inland Transportation 0.12 -- 0.12Engineering and AAministration Overheads 0.89 0.15
Total Base Cost 15.55 54.91 70.46Physical Contingencies 1.56 5.52 7.08Price Coqtjngencies 1.39 4.57 5.96
TOTAL PROJECT COST 18.50 65 00 83.50
a/ Total Cost Engineering and Admin. Contract Local Labor andOverheads Work Materials Transport
3.50 0.32 2.30 0.20 0.68
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AfNEX 2.03Page 2 of 3
PHILIPPINESB=CON )WIITO GZOSIIRZML POWE. PROJECt
CE) C0t ESSTIMATE - 7PGRDING AND EXPNASION OF NPC'S sYTBM FACILITIES
Item Local Forsian Total.
UoaradinRatxw ansion of Transmisslon SYstemExpansion of Bantay Substation 0.14 0.29 0.43Expansion of Ealintavak-San Jose System 1.27 3.74 5.01Expansion of Ilocos System 1.86 2.75 4.61Expansion of Olongapo Substation 0.02 1.14 1.16Expansion of Dasmarinas4-ian Substations 1.00 4.24 3.24Expansion of Lugait Substation 0.25 0.90 1.15Expansion of Davao Substation 0.25 1.01 1.26Capacitors for General Santos and DavaoSubstation 0.02 0.13 0.15
Capacitors for Tunga, Santa Barbara, Panitanand Modelin Substation 0.05 ' 0:30
Expansion of Bacolod Substation 0.14 0.97 1.1Rehabilitation of Transformers and CircuitBreakers 0.27 1.37 1.64
Ezoans ion of Cavmauication systemCommunication Links to Mindanao and Visayas 0.94 - 6.93 7.87Telecom. Facilities for the Luxon aridDispatch System 0.ss *2.18 2.73
Engineering and Administration Overheads 0.11 - -- 0.11Total Base Cost 1.60 .L- 10.71
Exoansion of MISHardware and software for the MIS 0.30 4.56 4.86Training 0.04 0.10 0.14Consultancy Assistance 0.06 'O.lS 0.21Engineering and Administration Overheads 0.03- -- 0.03Total Base Cost -5
Total Base Cost 8.18 32.03 : 40.21Physical Contingencies 0.81 3.20 4.01Price Contingencies 0.71 2.77 3.48
TOTAL PROJECT COST 9.70 3ae00 47.70- … fin flee------ … -- …-------------- -- - - -- ---- …-------- e--------
a/ Comnosition of Local Cost tUSS Millions)
Eng. & Admin. Contract Lo4tJ Labor &Item Total Cost Overheads Work Material Transport
Upgrading/Expansion ofTransmission System 6.80 0.35 4.50 0.50 1.25
Expansion of Comm.system 1.90 0.13 0.50 0.07 1.20
ANNEX 2.04Page 1 of 2
PHIL1PPfliES
BACON MANITO GEOTHERMAL POWER PROJECT
NPC - PNOC-EDCProiect Imlementation Committee - Terms of Reference
Obiective
The primary objective of the Project Implementation Committee (PIC)is to coordinate the various related Project Component Activities of the three(3) executing agencies, namely, the National Power Corporation (NPC) and thePhilippine National Oil Company-Energy Development Corporation (PNOC-EDC).
Proiect Description
The Project is the Bacon Manito Geothermal Power Project (2 x 55 MW)which covers implementation of integrated facilities for steam production andpower generation and transmission. Its basic componeats are:
(a) Steam Exploitation and Distribution
- Development of Bacon Manito I geothermal field including drillingof additional production and injection wells, and engineering,procurement, installation and commissioning of the stean geaerst-ing system.
- Delineation-appraisal of prospective geothermal sites for powersupply of the Luzon grid.
(b) Construction of a 2 x 55 MV Geothermal Steam Driven Power Stationat the Bacon Manito Site
(c) Upgrading of NPC's Power System Facilities
- Upgrading of transmission lines and substations; extension of the-communication system; hardware and software for MIS deveropment-;:upgrading of system instrumentation and controls; and procurementof environmental monitoring equipment.
- Augmentation of maintenance facilities including procurement ofspecial maintenance equipment and mechanized maintenance/ con-struction vehicles.
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ANNEX 2.04Page 2 of 2
Committee MembershiP
The PIC shall be composed of the followings
Chairmans Marciano C. AvendanoVice-President, EngineeringNational Power Corporation
MemberssNPC Chrysogonus P. Herrera
Vice-President. Finance
PNOC-EDC Nazario C. VasquezVP/G14 PNOC-F.DC
Corazon R. EstrellaVP-Fin. & Planning
Committee Powers and Duties
The specific powers and duties of the Committee are:
(a) To formulate and adopt procedures for the coordination of relatedactivities of the various components of the Project so as to avoiddelays and promote efficient implementation.
(b) To adopt and maintain on a regular basis, a planned operati-onautschedule so that joint objectives can be met.
Cc) To determine and agree on changes in related work programs and opera-tional problems.
(d) To represent the Project in all dealings and transactions with otheroffices, agencies and ihstrumentalities of the Government, and withall persons and other agencies, private or public, consultants,domestic or foreign.
(e) To exercise such other powers that may be necessarily inferred fromthe preceding powers vested in it.
Committee Meetings
The PIC shall meet on a quarterly basis but special meetings can becalled at the request of qny member Agency. Any Agency, on a 24-hour notice,may call a meeting of the PIC to consider any emergency which requires itsurgent attention. An Agenda will accompany the notice of meeting and, exceptfor emergency meetings, shall be given at least one (1) week in advance of themeeting.
The Committee Chairman shall prepare the minutes of the proceedingsof each meeting. The summary will be forwarded to all member Agency forapproval. A copy of the minutes, as approved, shall be provided to the WorldBank by the Committee Chairman.
PHILIPPINESBACON MANITO GEOTHERMAL POWER PROJECT
Organization Chart of PNOC-EDC
ENERGY GROUP
PNOC-EX ,
VICE PRESIDENT AND GENMANAGER
MANAGEMENT EERGY COMPUTER
SERVICES DEPt SERVICES DEPT
F~~~ 1 ~~ENVIRONMENTAL OPRATIONSGEOTHERMAL EXPLORATION | ENERGY DRLLNG M ANAGEMENT SERVICES
DIVISION CORPORATION DitINDIVISION DIVISION
As of September 1987
E4051 1a4
PHILIPPINESBACON MANITO GEOTHERMAL POWER PROJECT
Organization ChartFor Project Management of Geothermal Projects in PNOC-EDC
| MPOJECT | |Geothermal | OPERATLDNS MANOER U
I~~~~~~~~~~~~~~~~~~~
F RSIENT.MAWE
ADMSTAIC ECAALSOerP FIL PODTON FILSUPR
Civ orks rF T |
loos 1 erv I
{9 3. §-l=f~~~~~~ERD_ I
L I--f--- --
1 . s|unlxEFO~
PHILIPPINESBACON MANITO GEOTHERMAL POWER PROJECTNPC's ORGANZATION CHART FOR THE IMPLEMENTATION OF
Prngaration of Bid Documwents _Bid hwlttlionBid Evahaton/Contract Awad
B PROJECT S4PLEMEWTIONContuackow MobilizationDetaid Designs and Draws . _ _-CtI WVcXs Costuctla -__ = = = = _Eqakmeat Manulaclure/DelverV--Plnt Erocboln thd -t I _
Unit - 2 co - -
Tried Operaton And lUit - I tI I X L 9CoauikMwss4o UngiMt - 2
C _ 1 2Ju f39111 ASSOCIATED T§tAN1W09SX
SY:TIJ0
A PROCIAtEMENTPregwasatn of Bid DocwmnetaBS hwitatbonBid Evalvabi/n/Contacl tAwurd
B PFlOJECT UIPLEMENTATION -
Equmient Manu(actw./D.Iva= Local Fabicatlin of COnduCtor - - - -
Traealssion Line Conabuclion - - -
Substation ConsbuctionTesling and Co_a t.m g
E405 VA 7
PHILIPPINESBACON MANITO GEOTHERMAL POWER PROJECT
IMPLEMENTATION SCHEDULEUPGRADING AND EXPANSION OF NPC'S SYSTEM FACILITIES
1988 1989 1990 | 1991 1992ACTIVITIES - - -
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
I SUIBSTATION AZ UJ
PReparation of Bid DocuamtaBid hvitatlionSWd EvabdaJon/Contkect AwardEquwnent sanufactue/Dvry - - a Constructin/CoaWCm_w a a
* ENHANCEMENT OF U15Preparation of Bd DocweonisBad hivtaMonBid Evalkation/Contracl AardEquOewnt Menufactur/OeIvery - a a -
hiSata bnCoaun/ - _ ,-
aINSAT10"n AND
Prpration of Bid Docunwa_s8id hMalwttb_Bid EvahmtaonlContract AwardEpaket Manutac.e/Ddetry
IV E V L &WONUNTSPreparaUn of Bid Documen=sBid kw*Ialio
Bid Eva*ulaoelContract Award………-
E4051 1A9
- 70 -
ANNEX 2.11
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
Maior Proiect Procurement Contracts
The major packages for procurement under ICB on the project are givenbelows
(a) Bacon Manito I steam-gathering system installation, erection andconstruction on a single responsibility basis.
(b) Materials and equipment including pipes, fittings, valves, pressurevessels, instrumentation and power supply, mechanical equipment willbe procured through five independent packages for supply to theinstallation contractor as client supplied material.
(c) Nondestructive testing services.
(d) Mud chemicals for drilling
Ce) Cement and cement additives for drilling.
(f) Bits and reamers.
(g) Casings and wellheads.
NPc
(a) Transmission line materials including towers, insulators and hardwareand ingots for line conductors. -
(b) Substation equipments including circuit breakers, disconnects,control and protection systems.
(c) Transformers.
(d) Capacitors.
(e) Communication equipment.
(f) Computers and software for the MIS.
(g) Instrumentation and control for thermal plant.
(h) Environmental monitoring equipment.
(i) Rehabilitation of transformers and circuit breakers.
(j) Consultancy services.
- 71 -ANNEX 2.12
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
DISBURSEMENTS SCHEDULE OF THE PROJECT (USS MILLION)
Disbursements Project BankCalendar Year Semester Semester Cumulative Profile Profile
1988 I 0.0 0.0 0 0II 5.5 5.5 5 2
1989 I 9.7 15.2 15 8II 23.0 38.2 38 17
1990 I 8.8 47.0 47 30IT 10.5 57.5 57 4
1991 I 9.2 66.7 68 54II 6.5 73.2 73 65
1992 I 6.5 79.7 80 73II 4.8 84.5 84 80
1993 I 4.3 88.8 89 86II 3.8 92.6 93 91
1994 I 7.4 100.0 100 100
- 72 -
ANNEX 2.13
PHILIPPINES
BACON MANITO GEOTHEfAL POVER PROJECT
DISBURSEMTS SCHEDULE - PNOC-EDC tUSS MILLION)
DisbursementsCalendar Year Semester Semester Cumulative
ForeignMan-months Local Foreign Local-__--___-- US$ millions ------------
(a) Establishing the feasibility 70 0.2 0.9 1.1of transmitting power fromLeyte to Luzon
(b) Tongonan Geothermal Power Plant s0 0.1 0.3 0.4Siting and Development .
(c) Establishing the Feasibility 70 0.2 0.9 1.1of Transmission Interconnectionsto the Islands of Musbate, Dieuls,Marinduque, Romblon, Batanduanesand Basilan
(d) Developing cost estimating 25 0.1 0.3 0.4techniques for Power SystemComponents and a computerizedData Base
(e) Developing Norms for the Cost 25 0.1 0.3 0.4of Power Supply Outages
(f) Establishing Feasibility of the 25 0.1 :0.3 : 0.4latest techniques in the cons-truction of Hydroelectric Dams
Total Base Cost 0.8 3.0. 3.8
Physical Contingency 0.1 0.3 0.4
Price Contingency 0.1 0.2 0.1
Total Cost 1.0 3.5 4.5
- 75 -
ANNEX 2.15Page 2 of 8
tb) Terms of Reference for Studies
Study ls Consultancy Study to Establish Feasibility of Transmittina Power fromLeyte to Luzon
A. Obiective. The objective of this study is to establish the leastcost technically feasible alternative for transmitting large blocksof power (500 - 1200 MW) from the Tongonan Geothermal project inLeyte over a distance of 460 km (23 km undersea) to the Luzon grid.The feasibility study would be followed by detailed engineeringstudies leading to the preparation of bid documents for the project.
B. Scope of Consultancy Services. The consultancy services would beundertaken in two phases and would cover the following:
Phase 1 Power System Studies. (Duration 6 months. Estimated man-months - 30).
(a) Review of prefeasibility study of this project, earlier done bya consultant.
(b) Computer system studies including - (i) load flow; (ii) shortcircuit; and (iii) dynamic stability - of NPCs power grid forthe years 1995-2000, with generation and loads as forecast byNPC and with assumed transfers of power in the range of 500-1200MW from Tongonan.
(c) Determination of feasible transmission alternatives with regardto (i) type of transmission a.c. versus d.c.; (ii) voltagelevel; and (iii) number of circuits and conductor size.
(d) System reliability study.
(e) Simulation studies in case of d.c.
(f) Economic analysis based on life cycle cost to determine theleast cost solution from among the feasible alternatives. -
(g) Detailed technical studies of the selected alternative including- insulation coordination, voltage profiles and voltage support,protection and control features, neutral grounding, etc.
(h) Environmental impact assessment.
Submission of Phase 1 Report for review by NPC and the Bank.
(b) Submarine cable route study including: (i) geologicalinvestigations; (ii) sea-bed topography; and (iii) marine
- 76 -
ANNEX 2.15PAge 3 of 8
(c) Basic design of transmission line, submarine cables, sub-stations, and coverter stations in case of d.c.
(d) Preparation of cost estimates and implementation schedule.
(e) Preparation of bid documents.
Discussion with NPC and the Bank.
C. Methodoloas. The consultant will be required to work in closecoordination with counterpart staff of NPC so that those staff obtainrequisite training to undertake such studies in future. Computerfacilities available with NPC should be used to the maximum extentpossible. The consultant should be prepared to make available to NPCspecial computer programs if so desired by NPC.
- 77 -ANNLX 2.15Page 4 of 8
Study 2: Consultancr Study for Tonionan Geothermal Plant Sitina andDevelopment
A. Obiective. The objective of this study is to develop the least costtechnically feasible layouts and interconnections of the geothermalpower plants, that should be constructed to utilize the steamavailable at the geothermal sites in Tongonan at various points andin various quantities.(Duration 6 months. Estimated man-months 30).
B. Scove of Consultancy Services. The consultancy services would coverthe following:
(a) Evaluation of steam resources to establish design parameters ofthe power station.
(b) Optimum selection of power station sites based on (i) locationsof steam supplies; tii) soil conditions for foundations;(iii) cooling water arrangements; and (iv) interconnection ofpower plants.
(c) Economic study of feasible alternatives to determine the leastcost option.
(d) Basic design of the geothermal power plants and interconnec-tionltranamission facilities.
Ce) Cost estimates and implementation schedule.
(f) Submission of report for review by NPC and the Bank.
C. Methodoloav. The study shall be carried out largely in thePhilippines with necessary minimum home-office work, and in closecoordination with counterpart staff of NPC.
- 78 -ANNEX 2.15Page 5 of 8
Study 3s Consultancy Study for Establishing the Feasibility of TransmissionInterconnections to the Islands of Masbate. Mindoro, Mavinduque.Romblon. Catanduanes and Basilan
A. Obiective. The objective of this study is to establish the technicaland economic feasibility of transmitting electricity from mainlandpower grids to adjacent islands, mitigating the need for costly localdiesel generation.
B. Scope. The study will be undertaken in two phases, and will cover.Phase 1 Feasibility Studies (Duration 6 months. Estimated man-months 40).
(a) Review of power development plans in each island;
(b) Study to establish the least cost transmission system from themainland, including transmission voltage, number of circuits,routing of lines and location of substations;
(c) Economic study comparing the life-cycle costs of grid power vis-a-vis diesel power generation development on"the islands anddetermining the optlmum timing for grid supply;
(d) Evaluation of system reliability and the need to maintain dieselplant standby.
Submission of report for review by NPC and the Bank.
(b) Route study for submarine cable, including (i) geological study;(ii) marine bed topography; and (iii) marine hazards study.
(c) Basic designs for transmission lines, submarine cables, sub-Sustations.
(d) Cost estimates and implementation schedules.
(e) Procurement documents.
Detailed report for review by NPC and the Bank.
C. Methodoloat. The study shall be carried out largely in-thePhilippines with necessary minimum home-office werk, and in closecoordination with counterpart staff of NPC.
- 79 -
ANNEX 2.15Page 6 of 8
Study 4s Consultancv Study for Developing Cost Estimating Techniques forPower System Components and a Computerized Data Base
A. Obiective. The objective of this study is to develop techniques andnorms for estimating the cost of major power system components and todevelop a computerized data base that would assist NPC in thepreparation of cost estimates.
B. Scope of Consulting Services. (Duration 5 months. Estimated man-month 25).The consultancy services would cover the followings(a) Development of a list of specific major power system components
for which straightforward cost estimating procedures are notavailable. This would include inter alia (i) thermal stationsof various unlt sizes and types, using diverse fuels and locatedin various environments; (ii) hydro power plants; (iii) highvoltage transmission lines; (iv) high voltage sub-stations;(v) communication system; and (vi) civil works.
(b) Identification of major parameters that influence gost andestablishing norms for estimating and extrapolating costs.
(c) Setting up the framework for the data bsse software developmentand required system modelling, programming and testing.
id) Preparation of a manual for cost estimation.
(e) Training of NPC's personnel in cost estimating techniques and inthe application of the data base.
C. Methodology. The study shall be carried out largely in thePhilippines with necessary minimum home-office work, and in closecoordination with counterpart staff of NPC.
.
- 80 -
ANNEX 2.15Page 7 of 8
Studt 5: Consultancy Studs for Develoving Nomsa for Cost of Power SUpD1VOutages
A. Obiective. The objective of this study is to determine for the majorgrids of NPC the cost of power outages that would assist NPC in thedeveloping its generation expansion program.
B. ScoDe. (Duration 6 months. Estimated man-month 25).The scope of services shall inter alia covert(a) Review of studies done in other countries to establish costs of
power outages.
(b) Review of NPC power development plans for the next 15 years.
Sc) Categorization of various types of loads - industrial,commercial, domestic.
Cd) Studies to determine production loss due to power supplyfailures for various classifications of industries.
te) Establishing monetary norms per kWh hour of electricity notsupplied on a disaggregate basis and aggregated for the powersystem.
(f) Study to estimate the social costs of power outages forcomercial and domestic users.
(g) Establishing criteria for reliability index for generationexpansion programs.
(h) Identifying means for minimizing the effect of outages.
(i) Establishing a computerized data base for load categories.
C. Methodology. The study shall be carried out largely in-the-_Philippines with necessary minimum home-office work, and-in closecoordination with counterpart staff of NPC.
- 81 -
ANNEX 2.1SPage 8 of 8
Study 6: Consultancl Study for Establishing Feasibility of the LatestTechniques in the Construction of Hydro-Electric
A. Obiective. the objective of this study is to determine thefeasibility of applying latest techniques in the construction of damswith particular reference to roller compacted concrete.
B. Scope. (Duration 6 months. Estimated man-month 25).The scope of services shall include:(a) Review of latest technology for dam construction with reference
to materials, equipments and skills available in the Philippinesand determining feasibility of application to proposed 7 hydropower dams.
(b) Determination of the technical and economic viability of usingRoller Compacted concrete for dam construction particularly incontrast to RCC.
(c) Review of the feasibility reports on the different hydroprojects with emphasis on the selection of dam type, height andconstruction method.
(d) Preparation of preliminary layouts/designs of the dams.
(e) Establishment of unit prices and preparation of quantity andcost estimates based on the preliminary layouts/design.- :-:
(f) Preparation of construction schedules of the proj-'sed projects.
(g) Economic evaluation including sensitivity analysis on specificfactors.
(h) Recommendation on studies to be undertaken on future projectsincluding possible changes in tae layouts/design.
Submit a report for review by NPC and the Bank.
C. Methodolo&Z. The study shall be carried out largely in thePhilippines with necessary minimum home-office work, and in closecoordination with counterpart staff of NPC.
PHILIPPINESBACON MANITO GEOTHERMAL POWER PROJECT
ORGAMIZATION CHART OF MPC
NATIONAL POWERBOARD
PRESIDEMTAND
CHIEF EXECUTIVE OFFICER
OVII> OVP OVP OVP OVPICORPORATE GEM COUNSEL fNCE AN AOISTRATION
SERVICES & CORP SEC. RESOURCES
OSVP OSvPI
OPOMIOM ~~~~~~~~~ENG*IERllNG8OPERATIONS .INLEAR
fi OVP r OVP fi OVP l m f EOPERATC6 1 OPEKTIOS ENGMERING NUCLEAR
(LUZON) JVIVSIMJ (MA POWER PLANT
NORTHERN LUZON I SYSTEM I I ViSAYASREGIONAL CENTER OPERAT REGIONAL CENTER
O vPVPMETRO MANILA II DANAO
REWN^_CZTEI IREGIONAL CENTER 1REGIONAL CIENTER REMNLCNE
.ovP- I .0I
SOUTHERN LUZONREGIONAL CENTER
- 83 -
ANNEX 3.02
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
NPC - STAFFING PROFILE (AS OF JULY 1987)
Organizational Grouping Number of Staff Percent
Management 385 3
Supervisory 1,922 17
Engineers and Technicians 1,075 10
Financial Professionals 475 ,
Other Professionals 654 6
Skilled Workers 4,860 43
Clerical Workers 54 55
Unskilled workers 271 2
Temporary Staff 1,127 10
PHILIPPINESBACON MANITO GEOTHERMAL POWER PROJECT
Organization Chart Of PNOC
CHAIRMAN
PRESDENT
VP VP VP VP VP VP
RESEARCH ENERGY COAL MARKETTING REFINIG OTRANSPORT SHPYARD
Co
FINANCE & IHUMAN PUBLIC SERIPLANNNG TREASURIER RkESOURCES AFFAIRS SRIE
OEKT SERVICE RATIO 1.32 1.73 1.32 1.78 1.64 1.50 1.60 1.70 1.99 1.55 1.42 1.38
1/ llt of retructured las21 Excludes IOC funded by IC0 3499 2)24 27J7 349 59 407 546 902 1023 1273 1659 1432
- 95 -
ANNEX 4.01Page 10 of 1.2
PULU'PINES
BACON MANITO GEOTNERMAL POWER PROJECT
NPC - Assumptions to Financial Proiections
A. Lncome Statement
1. Energy Sales (GMh) - derived according to NPC's detailed load fore-casts.
2. Average base rate (Ctvs./kWh) - derived so that average total revenueenables a 101 rate of return on revalued assets in operations, aspermitted under NPC's charter.
3. Adjustments to revenue and discounts - derived in accordance withformulas prescribed in NPC's tariff.
4. Various fuel expenses (oil, steam, and coal) - based onpxisting cQq-tractual prices, escalated according to local inflation rates.
5. Depreciations assumed at 4.1671 of gross plant in service.
6. Depletions assumed at 0.552 of grcss plaat in service.
7. Other operating expenses - based on detailed projections, operation,maiatenance and administration furnished by NPC. .
-~~~. ...... . . .5.:
-8. Interest expense - based on detailed schedules provided by NPC, whichincorporate the following assumptions regarding future borrowings:IBRD - 7.61; ADB - 7.1?; Paris Club financings - 32; foreign commer-
..-B. fSources and Auplications of Funds- - - ~~~~~~..... .................. ..
1. Government equity - the Government is not expected to invest anyequity in NPC during the projection period.
2. Foreign borrowings - NPC assumes that most of the foreign cost of allinvestment will be financed from foreign sources. otreign sources areIdentified on a project-by-project basis as efth#r IBRV, ADB, ODAfinance, or commercial borrowings.
-3. Five-year notes - this is the plus figure for the projections.
4. Capital expeneiture - derived according to NPC's detailed schedule ofproject-by-project and year-by-year expenditures. This includesphysical and price contingencies computed according to normal Bankusage.
- 96 -
ANNEX 4.01Page 1i of 19
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
NPC - Assumptions to Financial Proiections
A. I more Statement
1. Enurgy Sales (GWh) - derived according to NPC's detailed load fore-casts.
2. Average base rate (Ctvs./kWh) - derived so that average total revenueenables a 1OX rate of return on revalued assets in operations, aspermitted under NPC's charter.
3. Adjustments to revenue and discounts - derived in accordance withformulas prescribed in NPC's tariff.
4. Various fuel expenses (oil, steam, and coal) - based on existing con-tractual prices, escalated according to local 'nflation rates.
5. Depreciations assumed at 4.167! of gross plant in service.
6. Depletiont assumed at 0.552 of gross plant in service.
7. Other operating expenses - based on detailed projections, operation,maintenance and administration furnished by NPC.
8. Interest expense - based on detailed schedules provided by NPC, whichincorporate the following assumptions regarding future borrowings:IBRD - 7.6Z; ADB - 7.1X; Paris Club financings - 3X; foreign commer-cial borrowings - libor plus 314Z; domestic 5-year notes - 12.52; andother domestic borrowings - 12.5Z.
B. Sources and Apnlications of Funds
1. Government equity - the Government is not expected to invest anyequity in NPC during the projection period.
2. Foreign borrowings - N1?C assumes that most of the foreign cost of allinvestment will be financed from foreign sources. Foreign sources areidentified on a project-by-project basis as either IBRD, ADB, ODAfinance, or commercial borrowings.
3. Five-year notes - this is the plus figure for the projections.
4. Capital expenditure - derived according to NPC's detailed schedule ofproject-by-project and year-by-year expenditures. This includesphysical and price contingencies computed according to normal Bankusage.
- 97 -
ANNEX 4.01Page 12 of 12
5. Principal repayments - repayments of existing loans are assumed tofollow repayment schedules as rescheduled by the Government. Repay-ment of f4ture loans are assumed to follow schedules normal for theparticulaz, type of loan. Detailed schedules are available.
6. Changes in working capital - these are computed net of cash.
7. Dividends - assumed, beginning in 1988, at 5 of projected net income.Dividends for 1987 have been discussed and tentatively agreed by NPC.
8. Cash balances are assumed at 13? of net bank deposits.
C. Balance Sheet
1. Utility plant - includes annual revaluation of assets based on infla-tion indices and changes in foreign exchange rates.
2. Construction work in progress - adjustment for transfer of nuclearplant to Government is taken against this account in 1987.
3. Other utility plants - plants that have been retired but not yet soldfor scrap. These plants have received basic maintenance so they canbe used in emergencies.
4. Current assets - summarized in table entitled 'Working CapitalRequirements" (page 6 of this annex).
5. Appraisal surplus - revaluation reserve.
6. Long term liabilities - outstanding principal of existing andprojected loans net of maturities due within next 12 months. Theforeign exchange component of the liabilities are revalued regularlyto the actual (or expected) rate of exchange as of December 31 of theprevious year.
7. Current liabilities summarized in table entitled 'Working CapitalRequirements' (page 6 of this annex). -.
- 98 -
ANNEX 4.02Page 1 of 7
PHILIPPINES
BACON MANITO IGEOTHERMAL POWER PROJECT
National Power CorporationAction Program to Reduce Accounts Receivable and Accounts Payable
I. Accounts Receivable
A. Measures Already Undertaken by NPC
1. Offer Incentive Program to Customers
Early in 1987, incentives in the form of discounts were extended todelinquent customers in order to encourage the early settlement of overduepower accounts. Fifteen (15) out of one hundred thirty-two (132) delinquentcustomers were able to avail of this program settling a total of # 43.2million in overdue accounta. Mostly, industrial customers (10 out of 15) w"reable to settle their accounts through the incentive program. Attachment 1shows the complete list of customers that availed of the said program.
2. Filins of Collection Cases
Collection cases have been filed against twenty-one (21) delinquentcustomers with aggregate outstanding accounts amounting to P 265 million.These collection cases have actually forced some of the delinquent customersto reach an amicable settlement through the execution of restructuring agree-ments.
3. Restructuring of Overdue Accounts
Accounts restructured in 1987 totalled 1 1,855 million with 1 935million already liquidated as of October 31, 1987. The bulk of these restruc-tured accounts is MERALCO's account, which amounted to P 1,176 million as ofJune 30, 1987. As part of the restructuring agreement which took effect last-August, front-end cash payments in an aggregate amount of 1 916 million wererequired from MERALCO; these payments were received in full by October 1987.11Repayment of the balance, amounting to 1 800 million, shall commence in 1991.
Attachment 2 shows the list of customers with restructured account and thecorresponding number of months over which each account has been restructured.
1/ MERALCO's staggered front-end cash payments:
July 1 400 millionSeptember 1 100 millinOctober 1 416 million
Total 1 916 million
- 99 -ANNEX 4.02Page 2 of 7
Accounts restructured prior to 1987 totalled 1 432 million, with1 131 million already liquidated as of September 30, 1987.
With the customers' compliance with the amortization of restructuredaccounts over and above their current bills, a further reduction in NPC'spower receivables is expected. As leverage to ensure these customers' timelypayments, automatic disconnection is effected for failure to pay on due dates.However, disconnection of power service may not easily be implemented,especially when the peace and order situation in the area concerned is beingthreatened.
4. Offsetting of Accounts of Governfment Customers with the Bureau ofTreasury
NPC has an ongoing arrangement with the Bureau of Treasury, whereinallotments to some Government agencies are directly remitted to NPC (subjectto clearance from the respective Government agencies). As of October 31,1987, the total Government accounts credited to NPC amounts to # 450 million.Xost of these Government agencies are MERALCO customers, who pay to NPC forthe account of MERALCO; in addition, some direct Government customers haveoffsetting arrangements with NPC, namely the City of Bantagas, City ofOlongapo and others.
Also, just recently, the relending to electric cooperatives of anequity investment of 1 500 million in NEAI has been approved. -This amountshall be used to liquidate the arrearages of electric cooperatives with NPC.NPC shall, in turn, remit this amount to the National Government in payment ofoutstanding indebtedness.
5. Seek Support from the Office of the President
Government accolmits &re, more often than not, considered asproblematic accounts not only by NPC but also by most of NPC's utilitycustomers. For this reason, NPC has sought the support of the President inorder to ensure the timely payment of power bills by Government customers.
A complete list of NPC's Government customers and a partial list ofdelinquent Government customers of the electric cooperatives and privateutilities have been recently submitted to the Bureau of Local GovernmentSupervision, which, in turn, instructed these Government agencies to takesteps towards the early settlement of their overdue power accounts.
NPC will gather the list of delinquent Government customers fromelectric cooperatives and utilities for submission to the Bureau of LocAlGovernment Supervision regularly.
6. Manasement Takeover of the Distribution System of Problematic_Customers
- An interim takeover of the power distribution system of'thb 'CityGovernment of Batangas was effected November 1, 1987 to arrest the progressiveincrease of this customer's indebtedness, which already amounts to 1 134million and increases at an average rate of 1 4.75 million per month. Thecomplete takeover of this Government utility is still being worked out,
- 100 -
ANNEX 4.02Page 3 of 7
The takeover of the distribution system of another Government utilitycustomer, Bataan EPZA, is now under study. Bataan EPZA's overdue account hassoared to P 85 million.
B. R.ecommended Actions/Heasures to Improve NPC's Power Accounts ReceivableLevel
In order to minimize the build-up and, where possible, to reduce itspower accounts receivables, NPC shall continue to undertake the rigidimplementation of its collection policies.
NPC shall continue with its public information drive to assistcustomers' awareness in improving collections and reducing systems losses,which are actually major factors affecting the payment performance of thesecustomers. Campaigns against electricity theft shall likewise be launched.
Also, the following support shall be further requested from thePresident of the Philippines:
(a) To instruct the Department of Budget and Managementi and the Depart-ment of Finance to immediately credit to NPC's account the payment ofthe overdue and current power bills of delinquent Government units,instead of releasing the same amount directly to these units (i.e.,in addition to those with existing offsetting arrangements).
(b) To reaffirm NPC's right to cause power disconnection to delinquentcustomers, customers, the exercise of which shall be free frompolitical intervention.
C. Status of NPC Power Receivables as of September 30. 1987
NPC's total power accounts receivable amounts to P 4,088 million asof September 30, 1987, which is a net decrease of P 855 million (or 17X) fromthe year-end 1986 level. Further breaking down this change in receivableslevel, P 115 million (or 82), is due to an increase in the power consumptionof customers while P 970 million (or 282) is due to the reduction incustomers' total overdue account.
A further reduction .bl NPC's receivables level is expected by year-end due to the following factors:
(a) Inclusion of MERALCO's second layer of front-end cash payment amount-ing to P 416 million in October.
(b) Proceeds of the P 500 million NEA equity for relending to electriccooperatives expected to be released to NPC before year-end.
(c) Government support.
(d) NPC's continued collection efforts.
- 101 -
ANNEX 4.02Page 4 of 7
Ui. Accounts Payable
A. NPC Fuel Pavables. CY 1985 - CY 1987
NPC fuel payables has decreased substantially from 1 7,074 million in1985 to 1 2,627 million in 1987, or about 1 4,447 million. This improvementwas achieved due to the combined effects of the following cost-cutting/cash-saving measures which were undertaken by NPC:
(a) Improvement in Generation Mix
NPC has continuously endeavored to reduce its oil dependence throughthe shift from the more expensive oil-based generation to cheapernonoil based generation, thereby resulting to savings in oil expendi-tures.
(b) Reduction in Capital Expenditures
NPC has deferred the construction of new and low priority projects inxiew of the general tight money situation that prevailed beginning1985. As such, funds which were otherwise allocated for capitalexpenditures were used in reducing NPC's fuel payables.
(c) Nondeposit to CB Blocked Account
NPC stopped depositing to the CB Blocked Account sometime in July1985, debt-servicing of loans which were covered by the RestructuringAgreement between the Government and the foreign creditoes. Thisprovided NPC further relief in its cash position starting 1985.
(d) Transfer of PNPP to the National Government
Pursuant to Executive Order No. 55 dated November 4, 1986 as amendedby Executive Order No. 98 dated December 18, 1986, PkPP's debt-service obligations as of June 30, I9C6 were assumed by the NationalGovernment. Furthermore, NPC's outstanding fuel payables toPetrophil as of June 30, 1986 amounting to about 1 4.5 billion werealso assumed by the National Government effective the same date.
(e) Reduction in NPC's Oil Inventory Level
In order to reduce carrying costs associated with maintaining biginventory levels, NPC has embarked on reducing its inventory levelfrom thirty (30) days to fifteen (15) days beginning from the lastquarter of 1985 to the first quarter of 1986. This was laterabandoned by NPC, however, due to its adverse effects on itsoperations particularly during periods of peak energy demand.
(f) NPC's Oil Importation
As a means to further preserve/maximize its cash resources, NPC madesome direct oil importation in 1986. This enabled NPC to purchaseoil at a cheaner cost and longer credit term. This Dractice. how-
- 102 -ANNEX 4.02Page 5 of 7
ever, has been discontinued temporarily as it became more expensiveduring 1987.
(g) Imaroved Collection of Accounts Receivables
Additional collections were effected through the following effortss
tl) Extension ot 32 discount privilege to delinquent customerssubject to certain conditions.
(ii) Filing in court of collection cases against delinquent custom-ers, forcing them to enter into amicable settlement with NPC topay.
(iii) A Restructuring Arrangement with HERALCO on its overdue accountamounting to 1 1,716 million vas signed subject to MERALCO'sfront-end payment of 1 916 million.
(iv) NPC sought the assistance of Government agencies such as Bureauof Treasury, Department of Finance, Office of Budget Manageme:ntto effect offsetting of accounts with the Government customerswho receive equity allotments from the Government.
(v) NPC sought the assistance of NEA through NEA's lending of 4' 500million loan from its funds to electric cooperatives so thatthey could liquidate arrearages with NPC.
(vi) NPC sought ways and means to secure compliance of the restruc-turing agreement and automatic disconnections, except for areaswhere peace and order situation is threatened. Corollary tothis, NPC has also sought the cooperation of Governmentofficials to eliminate political intervention.
NPC will endeavor to maintain the current status of its fuel payabiesby continuously observing the above measures, whenever applicable, and by.adopting new and appropriate ones in the future.
- 103 -
ANNEX 4.02Page 6 of 7
ATTACHMENT 1
POWER CUSTOMER WHO AVAILED O NPC INCENTIVE PROGRAM
T. INDUSTRIES AMOUNT
1. Republic Cement # 3,680,007.672. Spar Development 5,689.583. Iligan Cement Corp. 2,154,061.114. Mabuhay Vinyl Corp. 1,021,971.535. Hi-Cement 12,417,943.116. Northern Cement Corp. 8,963,336.417. Central Cement Corp. 2,587,604.498. Benguet Exploration 1,310,907.549. Capital Heavy Industries 3,124.3810. Luson Aggregates 38.4S3.40
1 32,183,099.22
tI * COOPERATIVES
1* CASURECO I . 1,160,071.692. MORESCO II 425,014.403. Isabela I Electric Coop. 4,025il42.264. Zambales TI Electric Coop. 3.346.166.37
n 8,956,394.72
III. UTILITIES
1. La Union Electric Co. P 2.080.294.61. 2,080,294.61
GRAND TOTAL 1 43,219,788.55
- 104 -ANNE 4.02Page 7 of 7
-TTCMIU 2
POWR CUSTOMERS VITH EXISTING RESTRUCTURED ACCOUNTAS OF SEPTEMBER 30. 1987
(IN MIMLION PESOS)
Amount Rest'd Balance I of Mos.
1. Restructured Accounts Executedin 1987
mERALCO 1,715.83 800.00 * 78City of Olongapo 60.56 58.91 48CENPELCO 12.75 10.17 36Hun. of San Pascual 0.89 0.40 * 24ALEC,O I 6.16 2.01 * 19ALECO II 24.80 23.56 * 60cANOREcO 2.96 1.35 * 24- SURECO II 14.46 9.23 * 36CASURECO III 7.82 6.13 * 60CASURECO IV 7.20 7.17 * 60SORECO I 1.28 0.59 * 24
NPC's rates are comprised of (a) a basic rate (that may include botha demand charge and an energy charge) for each category of customer in eachgrid, supplemented by (b) fuel adjustments (separate adjustments for each(i) fuel oil; (ii) geothermal steam; and (iii) coal) and (c) a foreignexchange adjustment. Hereinafter follows:
(a) Tables providing schedules of basic rates used in each grid;(b) The formula and a schedule of the various fuel adjustments; and(c) The formula and a schedule of the foreign exchange adjustment.
A. SCHEDULE OF BASIC RATES (EFFECTIVE SINCE AUGUST 2. 1985)
LUZON GRID
UTILITIES
Applicable to electric power and energy supplied to electric utilities in Luzonserved by NPC.
Demand Charae Per Month
First 500 kV of Billing Demand P 13.20 per kWNext 19,500 kW of Billing Demand P 17.60 per kWOver 20,000 kW of Billing Demand P 24.20 per kW
EneraY Charge
First 200 kWh per kV of Billing Demand P 0.9891 per kWhNext 200 kWh per kV of Billing Demand P 1.0111 per kWhOver 400 kWh per kW of Billing Demand P 1.0353 per kWh
INDUSTRMiS AND NON-UTILITIES
Applicable to electric power and energy supplied to industries and non-utilitiesin Luzon served by NPC.
Demand Charge Per Month
First 1,000 kW of Billing Demand P 19.80 per kWNext 9,000 kV of Billing Demand P 20.90 per kWOver 10,000 kW of Billing Demand P 22.11 per kW
EnergY Charge
First 200 kWh per kW of Billing Demand P 1.0716 per kWhNext 250 kWh per kV of Billing Demand P 1.0331 per kWhOver 450 kWh per kW of Billing Demand P 1.0001 per kWh
- 106 -
ANNEX 4.03Page 2 of 6
CEBU GRID
UTILITIES
Applicable to electric power and energy supplied to electric utilities in Cebuserved by NPC.
Demand Charge Per Month
First 100 kW of Billing Demand P 15.40 per kWNext 900 kW of Billing Demand P 18.70 per kWOver 1,000 kW of Billing Demand P 22.00 per kW
Energy Charae
First 100 kWh per kW of Billing Demand P 0.9209 per kWhNext 150 kWh per kW of Billing Demand P 0.9556 per kWhOver 250 kWh per kW of Billing Lemand P 0.9937 per kWh
INDUSTRIES AND NON-UTILITIES
Applicable to electric power and enargy supplied to industries and non-utilitiesin Cebu served by NPC.
Demand Charge Per Month
First 100 kW of Billing Demand P 25.30 per kWOver 100 kW of Billing Demand P 22.00 per kW
Energv Charae
First 300 kWh per kW of Billing Demand P 1.0133 per kWhOver 300 kWh per kW of Billing Demand P 1.0018 per kWh
BOHOL GRID
Applicable to electric power and energy supplied to all customers in Boholserved by NPC.
Demand Charge Per Month
First 200 kW of Billing Demand P 13.20 per kWOver 200 kW of Billing Demand P 11.00 per kW
Energy Charge
First 100 kWh per kW of Billing Demand P 0.9131 per kWhNext 150 kWh per kW of Billing Demand P 0.9351 per kWhOver 250 kWh per kW of Billing Demand P 0.9791 per kWh
- 107 -
ANNEX 4.03Page 3 of 6
PANAY GRID
UTILITIES
Applicable to electric power and energy supplied to electric utilities in Panayserved by NPC.
Demand Charge Per Month
First 100 kW of Billing Demand # 15.40 per kWNext S10 kW of Billing Demand 1 18.70 per kWOver 1,000 kW of BillUlg Demand 1 22.00 per kW
Enermy Charge
First 100 kWh per kW of Billing Demand 1 1.1052 per kWhNext 150 kWh per kW of Billing Demand 1 1.1399 per kWhOver 250 kWh per kW of Billing Demand 1 1.1780 per kWh
INDUSTRIES AND NON-UTILITIES
Applicable to electric power and energy supplied to industries and non-utilitiesin Panay served by NPC.
Demand Charae Per Month
First 100 kW of Billing Demand 1 25.30 per kW* Over 100 kW of Billing Demand ? 22.00 per kW
Eneray Charge
First 300 kWh per kW of Billing Demand ? 1.1976 per kWhOver 300 kWh per kW of Billing Demand 1 1.1861 per kWh
Applicable to electric power and energy supplied to all customers in NegrosOriental served by NPC.
Demand Charge Per Honth
First 200 kW of Billing Demand 1 13.20 per kWOver 200 kW of Billing Demand 1 11.20 per kW
Enerav Charge
First 100 kWh per kV of Billing Demand 1 0.8814 per kWhNext 150 kWh per kW of Billing Demand 1 0.9034 per kwhOver 250 kWh per kW of Billing Demand 1 0.9474 per kWh
- 108 -
ANNEX 4.03Page 4 of 6
MINDANAO GRID
UTILITIES
Applicable to electric power and energy supplied to electric utilities inMindanao served by NPC.
Demand Charte Per Month
First 500 kW of Billing Demand ? 11.00 per kWNext 4,500 kW of Billing 1 15.95 per kWOver 5,000 kW of Bil'ng Demand 1 19.80 per kW
Eneray Charge
First 100 kWh per kW of Billing Demand 1 0.2480 per kWhNext 200 kWh per kW of Billing Demand 1 0.2810 per kWhOver 300 kWh per kW of Billing Demand 1 0.3030 per kWh
INDUSTRIES AND NON-UTILITIES . . ._
Applicable to electric power and energy supplied to industries and non-utilitiesin Mindanao served by NPC.
.Demand-Charge. Per Month
First 1,000 kW of Billing Demand 1 19.80 per kWNext 4,000 kW of Billing Demand 1 20.90 per kWNext 10,000 kW of Billing Demand 1 23.10 per kWOver 15,000 kW of Billing Demand 1 25.30 per kW
Energy Charge
First 100 kWh per kW of Billing Demand 1 0.3140 per kWhOver 150 kWh per kV of Billing Demand I 0.3030-per kWh-Next 200 kWh per kW of Billing Demana 1 0.2920 per kWhOver 450 kWh per kW of Billing Demand 1 0.2810 per kWh
- 109 -
ANNEX 4.03Page 5 of 6
LEYSE GRID
Applicable to all electric power and energy supplied to electric utilities andnon-industrial customers in Leyte served by NPC.
Straight energy charge of 1 0.6901 per kWh.
INDUSTRIES
applicable to electric power and energy supplied to industries in Leyte servedby MAPOCOR.
Demand Charge Per Month
First 1,000 kW of Billing Demand P 15.84 per kWNext 9,000 kW of Billing Demand P 16.72 per kVOver 10,000 kW of Billing Demand P 17.69 per kW
Energv Charte
First 200 kWh per kW of Billing Demand P 0.8573 per kWhNext 250 kWh per kW of Billing Demand P 0.8265 per kWhOver 450 kWh per kW of Billing Demand P 0.8001 per kWh
B. FUEL COST ADJUSTMENT
The Fuel Cost Adjustment Clause (FCA) shall be determined through thefollowing formulas
FCA - l/C (Ai x Bi)
Where A - The difference between the actual and the base price of oil,steam, coal, and other types of fuel actually used by NPC in theindividua?. grid or sub-grid during a billing period.
B - The quantity of fuel used in NPC's generating plants in theindividual grid or sub-grid during the billing period. -
C - Kilowatt hour (kWh) sales by NPC in individual grid or sub-gridduring the billing period.
i - Oil, steal, coal and other types of fuel used by NPC to generateelectricity in the Individual grid or sub-grid during a billingperiod.
- 110 -
ANNEX 4.03Page 6 of 6
Where the base prices are as follows;
Fuel oils
Luson I # 108.2064 per MBTICebu t R 4.7842 per literNegros a 1 3.6276 per literBohol I 1 4.8450 per literPanay * & 4.8527 per literMindanao a 1 4.8683 per liter
Steam (Luson) P 1 0.2526 per billing energyCoal (Cebu) t 1 455 per MT at 10,000 Btu/lb
C. FOREIGN EXCHANGE ADJUSTMENT CLAUSE
To account for changes ln the amount of foreign exchange payments andsales volume from year to year, effective January 1987 billing period, follgyig.are the FOREX adjustment rates applicable in 1987.
Monthly Adiustment Rate
For every 1 0.10 increase (decrease)In the I/US$ base rate of P 9.0017S$1.00 *- O.002261kVl&
For every $0.0001 increase (decrease) inthe US$11 base rate of US$0.004111 1.00 0.00126/kVh
- 111 -
ANNEX 4.04Page 1 of 2
PHILIPPINES
BACON MANITO GFOTHERMAL POVER PROJECT
PNOC AND AFFILIATES' FINANCIAL HIGHLIGHTS (1987-92)
OPAG. Cots:Fid. Matnt. 10 n 27 P 11t I" 1 in 27 413 3a2 575Inv.Amet. 54 61 4 51 U 51 14 i2 405 412 414Forax Amot. 9 20 2 5 a 70 0 100 118 12 172
thers 0 4 47 2a 24 to 21 as U St 42Total 73 102 1M 25 as 274 2n4 460o 0? 11,06 1,103
areas Margins 110 107 2u 27 544 106 744 1,044 1,665 2,51 3l65" 3,070a" C..t 20 70 01 47 49 Is 5 00 27 Ns 206 726Optg. Inme 00 127 154 2 4# 544 o 064 1,51 236,SU 3,47? 3,746Imt. Cbp. 102 St 7 0 so $I 1n 5 5 Su 1ei81Taxzblo lneem (12) o so 15n 415 49 602 706 1,24 1,030 3,001 3,6440W/Tako/ao I 20 20 U 1 147 162 42 S 606 6t 1,126 1 ,20Net Inc. (Le) (17) o as in 26" W 176 no we so 1,66" 2,816
- 117 -
ANNEX 4.06Pass 2 ot 8
PNOC -EDC - CONSOLIDATED PROJECTED BALANCE HEETS M ELUEION(1984-1005)
PNOC And Affiliates and PNOC-EDCs Assumitions on Financial Proiections
1. Bases
The bases underlying the financial projections are contained in Annex4.04.
2. Income Statements of PNOC-EDC
Revenues of PNOC-EDC are computed considering the following vari-ablest
- Load Factor: 75Z
- Unit Prices The price of steam used (1986 terms) are as follows:
Tongonan I 0.5395 P/kWhPalinpinon I 0.51kg P/kwHBacman I 0.6120 P/kWh (on stream in 1991)Bacman II 0.6.50 PlkWh (on stream in 1993)Pinatubo 0.6150 P/kWh (on stream in 1993)Palinpinon II 0.6150 P/kWh (on stream in 1992)
Bacman II and Pinatubo could be substituted by Tongonan II and III,depending upon the relative economic advantages of the alternatives.
Field Maintenance Costs. The costs cover work-over of xells, wellreplacement, maintenance of steam-gathering system and cost of field staff.
Investment Amortization. Amortization is done over a 25-year life.
Foreian Exchante Amortization. This is particularly relevant tO theTongonan and Palinpinon investments, where OECF loans were used and foreignexchange losses on outstanding amounts of the loans are amortized in futureperiods over the remaining lives of the properties. In regard to non-produc-ing properties, foreign exchange losses are added to the exploratory anddevelopment costs.
'Others' under operating costs of PNOC-EDC refer to drillingexpenses.
G and A costs pertain to general and administration, including over-heads allocated from PNOC headquarters office.
Interest Charges. Interest during construction is capitalized. Oncommencement of production, annual interest payable on loans specificallyavailed of for an area is charged off. On common loans to PNOC, not identi-
- 120 -
ANNEX 4.07Page 2 of 3
fied with any specific area, an elaborate allocation is made as between non-producing and producing areas and in a second stage, the allocation to theproducing areas in sub-allocated among the different producing areas. Accumu-lated interest in non-producing areas is charged off over 25 years when pro-duction commences in each area.
Government Take/Income Tax. This has been sufficiently explained inChapters III and IV.
3. Income Statement of PNOC
The accounting principles and formulas followed by the differentaffiliates are far too numerous to elaborate. No deviation from extant ruleshas been made in making the financial projections.
4. Balance Sheets - PNOC
Debt/Equity Ratio. Exploration expenditure is taken as beingfinanced by equity contributions from PNOC, with a one-year time lag. Thecondition of debtlequity being within 70:30, which is proposed is seen to befulfilled.
Trade Receivables. Credit periods are taken at 45 days, with inter-est charges due at 122 thereafter.
Investments. These are estimated on a field-by-field basis withspreads over the years as would be optimal for synchronization with offtake ofsteam by NPC.
5. Balance Sheets - PNOC
The consolidated balance sheet, as explained in the text takes noteof gradual increases in petroleum product sales, reduction in coal volumes andincreasing geothermal investments.
The major borrowings of PNOC are assumed to be the proposed loan anda follow on loan in 1991 for development of two new geothermal fields (2 x 110
6. Sources and Application of Funds - PNOC-EDC
Equity increases, onlending of the proposed loan to PNOC-EDC by PNOC,onlending of a similar future loan, inter-company advances to support localcurrency requirements for development have been provided for. Onlending termsfor the two foreign loans have been taken as the standard terms of Bank loanror Philippines.
7. Internal Cash Generation - PNOC
The Energy Regulatory Board, it has been assumed, will maintain oilcompany margins between average product price and price of imported crude atexisting levels.
- 121 -
ANNEX 4.07Page 3 of 3
Coal prices are not expected to change from the low levels of 1987.
Capital expenditure will be largely covered by the balance of the ADBloan for the refinery and the coastal fleet, by the balance of the IBRD loanfor geothermal exploration, tr the proposed IBRD loan and by a new loan forgeothermal field development in 1991 or about.
- 122 -
ANNEX 4.00
SACON NANITO OEOTHERAL POWER PROJECT
PMC-EOCs IACAL ANULY_St OF aNVw.UE SI THM BACON MANITO I OEOTHERAIL PROJECT
-oe- Paild 0.1. & a ovt. Not Cash Oovt. Net CashYeor Invest Revenve aNbnt. Adl*. Trke Flow Take Flow
ESI,MATRD LOSS REDUCTION BENEFRTS OF THE TRANSMISSION/OISTREnUTION COW4PRONMS
Power Lose Energy Lose EstimatedReduction Reductlon Benefit
PProJect tU) (MWHR) (1'000 P Year)
Cutting-in of Balintawak-Mbrikina-Aovallches 116 kY Line 0.08 229 718
Rebuilding of Bocue-Malinta 11 kV Line 0.19 698 2,129
Rebuilding of Balintawak-Sta Nrsa 115 kYLlno 0.66 2,038 6,689
115 kV Line Outlets from Sucat 6.81 80,756 56,568Construction of Gardner-Rockwell 115 kV LineConstruction of Gardnor-lCamagong 115 kV LinoReconductoring of Gardner-Papa lone 116 kYLine
Constructlon of Belintewek-Dolores 115 kV Line 1.7t 6,6O0 12,908
Construction of NOC-Parang 115 kV Lino 0 .t14 6 18
Development of Calauan 200 WVA - 115 kVSubstation 0.3# 1,406 8,874
Development of Guiguinto 280 kV - 116 kVSubstation 0.88 8,t"21 7,965
De Ilopment of MCCRRP 83 WA, 115 kV -84.6 kV Substation 0.86 1,28? 8,205
Development of Tayebus 280 kV -115 kV - 84.6 kY Substation 0.84 8,347 6,484
Installato*4 of SCADA System 1.64 U Vf,8 80,47
- 126 -
ANNEX 5.04Page 1 of 2
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
Selected Documents and Data Available in the Proiect File
A.1 The Philippiiness Selected Issues in Public resource Management; July1987; World Bank.
A.2 NPC - Mindanao Power Expansion Program - 1987-2000.
A.3 NPC - ADB Appraisal of the Third Power Development Project.
A.4 Environmental Impact Assessment Handbook; Ministry of Human Settlements,National Environmental Protection Council.
3.1 Estimation of the Geothermal Energy Resources at the lacon2Manito Geov.thermal Field; April 1965; Geothermex Inc., California.
3.2 Bacon Manito Geothermal Project Resource Reassessment; September 1985;KRTA Ltd., New Zealand.
3.3 The Bacon Manito Geothermal Project - An Environmental:Impact Asress-ment; May 1985; and 1987 Update of the 1982 Environmental Impact Assess-ment; PNOC, Philippines.
B.4 A Review of the 110 MWe Bacon Manito I Development Strategy; August1985; PNOC-EDC, Philippines.
B.5 Bacon Manito I - Project Report; September 1987; PNOC-EDC, Philippines.
B.6 Institutional Strategy Study of the PNOC; September 1986; A.D. Little,USA.
B.7 Implementation and Engineering Guide for the Steam-Gathering System;December 1986, PNOC-EDC, Philippines.
B.8 PNOC - Annual Report; July 1987; PNOC, Philippines.
