Manila Bulletin
SPECIAL REPORT
By Myrna M. Velasco
Published: July 23, 2013
It’s a tie-up far from being considered “a match made in heaven” -- that is, if the wrangles in the negotiating table will be taken as gauge.
Rarely have these glimpses of ‘clashes of corporate giants’ been thrown to public view, but the much-awaited confirmation came from no less than Energy Secretary Carlos Jericho L. Petilla.
He disclosed to media the “intense and diametrically opposed” stance of the relevant parties -- referring to AP Renewables, Inc. (APRI) of the Aboitiz Group and Philippine Geothermal Production Company (PGPC) who are on their continued talks to seal a geothermal resource sales contract (GRSC) for the steam supply of the privatized 650-megawatt Tiwi and Makiling-Banahaw (MakBan) geothermal power assets.
To be clear, the GRSC will be in compliance to the Compromise Agreement (CA) entered into by the National Power Corporation-Power Sector Assets and Liabilities Management Corporation (NPC-PSALM) with Philippine Geothermal, Inc. (PGI), the precursor firm of PGPC. And it was mandated to be re-assigned to the buyer of the Tiwi-MakBan assets.
The negotiations for a revised GRSC had been hinged on various conditions, including the rehabilitation of Units 5 and 6 of the MakBan plant with date-specific completion in May 2013 and for their capacities to be brought within installed at 55MW; and the other on PGPC’s creation of a Filipino company (Filco) which it had done so by engaging Allfirst Equity Holdings Inc. of the Sy group that assumed 60-percent equity in PGPC to comply with the change in Constitutional policy on ownership restriction for companies engaged in renewable energy (RE) ventures. It was originally anchored on the provisions of Presidential Decree 1442 (PD 1442) which was the prevailing policy prior to the enactment of the Renewable Energy (RE) Law.
While a renegotiated GRSC is not yet in place, a transition agreement (TA) binds the supply of steam to the Tiwi and MakBan plants so APRI can continuously run and provide electricity to the Luzon grid.
‘Delicate’ puzzles
The most delicate puzzles in the negotiations are not just about the numbers that will eventually be set for the steam cost or the price-per-kilowatt hour (kWh) of electricity -- but more importantly, the parameters on reaching ‘a reasoned and legally-acceptable compromise’ – and how parties would put the Filipino consumers a ‘significant middle factor’ in balancing competing interests?
PGPC president Antonio F. Yee attempted to drown the tension when he said that his company “is committed to strengthening our relationship with our off-taker APRI, to further our shared commitment of providing clean renewable energy for our stakeholders.”
But let us not kid ourselves. Tough negotiations are considerably acceptable precepts in business, especially if by design or mystery, they will push parties to set common ground on resolving issues and not tilt the balance of power on just one party.
Government intervention, of course, is seen as the last resort – and Mr. Petilla is aware of this eventuality. Albeit for now, he wants “parties to try to settle their issues,” qualifying that “if they will not reach any agreement, I will intervene.”
If truth be told, it’s certainly an issue he will need to address not only with competence as an energy secretary, but it is a task requiring the mettle of politics with a capital “P.”
Protracted legal battle
PGPC (from its predecessor firms Philippine Geothermal, Inc./Unocal Corporation and eventually Chevron Geothermal Philippines Holdings Inc) has been operating the Tiwi-MakBan steamfield assets since September 1971, or roughly 42 years now, on the strength of a service contract awarded by the Philippine government – initially for 25 years (from 1971 to 1996) and renewable for another 25 years.
The first term of the service contract was still based on the 1935 Constitution allowing foreign corporations/entities then to exploit and develop the country’s indigenous resources (including geothermal steam). But conditions changed with the promulgation of the 1987 Constitution which set nationality restriction on firms engaged in developing the State’s mineral and natural resources including renewable energy sources for energy.
Not subjecting the natural resources of the country to ordinary commerce was in part justified by the wisdom set out by one of the Constitution framers Father Joaquin Bernas, S.J., in his commentary that “with our natural resources, our sources of power and energy, our public lands and our public utilities, the material basis of the nation’s existence, in the hands of aliens over whom the Philippine government does not have complete control, the Filipinos may soon find themselves deprived of their patrimony and living as it were, in a house that no longer belong to them.”
Such development on the legal sphere necessitated Chevron Geothermal (or PGI then) to tap a local partner. Yet a matter it only accomplished after putting up fierce legal battle against state-run NPC when their contract expired in 1996. The American firm brought their ‘contractual conflict’ into an international arbitration in Singapore, while NPC filed for a declaratory relief before a regional trial court in Quezon City.
It was a long-drawn out legal tussle of eight years before the parties agreed to settle their differences out of court. The outcome was the compromise agreement that was sealed by parties on June 17, 2004.
Commingled privatization
Next came the privatization of the NPC power assets sanctioned by Republic Act 9136 or the Electric Power Industry Reform Act (EPIRA). Section 47 (g) of the law mandated a commingled privatization of the geothermal power plants and steamfield assets (i.e. the pipelines, well heads or surface assets, etc. but not to be mistaken with the steam resource which rightly belongs to the State).
Selling the geothermal assets as a complex was precisely what EPIRA required and what PSALM had done. But this is the catch. It seems that PSALM was only interested in selling the assets -- that in the negotiations for the residual GRSC obligation that it latched on to the buyer’s lap, it cannot even act as a sensible mediator.
“During the privatization of Tiwi-MakBan, it was foreseen that the two entities will be working closely together, one being the owner of the power plant (APRI) and the other being the operator of the geothermal resources (PGPC). As such, it is inevitable for them to be open to discussions on matters for their mutual benefit,” PSALM president Emmanuel R. Ledesma Jr. simply commented when asked on the matter. Well, he can only wish that things would be not be as tricky to resolve as he portends them to be.
As premised on the commingled privatization of the geothermal assets, another question emerged: is buyer APRI still obligated to negotiate for a revised GRSC with PGPC when it is the owner of both the power plants and the steamfield assets and the government may already have the discretion to offer the GSC/RE contract to any other party? There appears an inconsistency on this mandate and one thing that the government must re-examine.
Mr. Petilla offered a contrary interpretation as he reckoned that the assigned GRSC is “a contract that must be respected”, hence, he is enjoining parties to still discuss and find a common ground on resolving their disparate issues. Nevertheless, he has not totally closed doors on reviewing the EPIRA provisions relating to the “commingled privatization” of the geothermal assets.
Regrettably, however, the recent decision of the Department of Energy (DOE) to award new geothermal service contracts to PGPC based on the mandate of the RE Law has not mollified the ‘tense negotiations’ between parties, it just entangled them even more into a dizzying legal skirmish.
Mr. Yee himself announced during a recent assembly of the National Geothermal Association of the Philippines (NGAP) that “the DOE executed the geothermal service contracts on April 25, 2013 for the Tiwi geothermal field in the province of Albay, and MakBan geothermal field in the provinces of Batangas and Laguna, grating Philippine Geothermal the exclusive right to operate these fields for 25 years, renewable for 15 years.”
He added “with the fresh service contracts, we renew our commitment to deliver clean geothermal energy and strengthen our position to enhance the value of Tiwi and MakBan by implementing resource development projects over the next years.”
On APRI’s part, company assistant vice president for legal and commercial services Martin S. Yasay noted that “the GSC or the RE contract is necessary to allow PGPC to supply steam under the GRSC to APRI to allow us to generate electricity.”
Petilla’s recourse: RE contract cancellation
Mr. Petilla admitted that the energy department granted the applications of PGPC for GSCs under the RE Law with the ‘best intentions’ that such shall provide a clearer kick-off point for the company’s negotiations with APRI for the GRSC. He was wrong.
There might have also been “lack of good judgment” on the part of the DOE when it awarded the RE contracts, because the Philippine Constitution is clear on the 50-year maximum term for service contracts or production sharing agreements governing exploitation and development of RE or other natural resources.
The Constitution explicitly stated that such contracts shall only be good for a period not exceeding 25 years, renewable for not more than 25 years “and under such terms and conditions as may be provided by law.”
Applying this case to the RE contracts bestowed on PGPC, the 50-year term limit for service contracts will apparently be breached – again, noting that it has already been operating the steamfields for the past 42 years, thus, giving it another 40 years will sum that up to 82 years. Its establishment of a Filco cannot be used as a pretext because it is the same entity which just complied with the mandates of the law.
Following a review of the legal implications, Mr. Petilla declared a “change of heart” on the RE contracts granted to Chevron; and he openly stated to media his plans to cancel them.
“If they cannot agree (on the terms of the GRSC), I will cancel Chevron’s RE contract because if I will not cancel, everybody loses. The government cannot afford litigation lasting 10 years or even longer and the steamfields cannot be properly operated because of a pending legal battle,” he stressed.
The energy chief said he leans on a clause of the RE contract inferring that “it can be cancelled” if it violates a law or the Constitution. A communication on this plan was already opened with Chevron, and he indicated that the signals have been positive so far, with PGPC now just looking forward to expanding its geothermal development ventures beyond the Tiwi-MakBan assets via the other service contracts it applied for with the energy department.
With the impending nullity of the RE contracts, Mr. Petilla is hoping that the parties can finally strike mutual concessions on how to move forward with their negotiations – perhaps starting with setting a mutually acceptable effective date for their revised GRSC. And if the letters of the Constitution will have to be followed, Petilla opines that the GRSC may still bind the parties for the next 7-8 years. (To be continued) source
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