Ledesma's tough act: Managing PSALM’s liabilities to lower electric bills

Manila Bulletin

By MYRNA M. VELASCO (SPECIAL REPORT)

June 24, 2011, 1:46am

MANILA, Philippines — Having raised roughly $16.0 billion in privatization proceeds from the divestments of the National Power Corporation’s (NPC) assets, no doubt that the Power Sector Assets and Liabilities Management Corporation (PSALM) was, for some time, a “show stopper” among government-run energy corporations.

But not for long – the company had to be stopped with its self-designed show when the public finally uncovered its whopping liabilities – prudently incurred or not – which the hapless Filipino consumers would eventually shoulder via the universal charge (UC) items in their electric bills.

With the constant onslaught of criticisms against PSALM, President Aquino was prompted to shake-up the company’s helm, leading to the appointment of investment banker Emmanuel R. Ledesma Jr. as the corporation’s president and chief executive officer (CEO) on September 15, 2010.

Unquestionably, Mr. Ledesma had been in for a “tough balancing act” – primarily on how to straighten out the widely-perceived “mismanagement” in PSALM’s financial affairs and how to soften the cost impact on consumers when “pass-on time” comes.

The company chief executive articulates unfeigned desire in finding solutions to the company’s financial predicaments, as he is well aware that the consequences of his actions – and that of the entire PSALM board – will not only cause adverse impacts on the wallets and paychecks of today’s consumers but also of the next generation.

There is a plan to extend the UC recovery for up to 25 years (with the addition of 10 years from the remaining 15 years of PSALM’s corporate life). Yet in a language that could be understood by all, it simply means prolonging the agony for all electricity consumers.

In this interview, I pressed for item-by-item details of the liabilities incurred by PSALM from 2001 onwards, but the PSALM chief executive just preferred giving the summarized numbers, inferring that they are still at the process of looking into specific concerns as to which caused the company’s liabilities to swell.

The same goes with the questions on the supply contracts entered into by PSALM which have not gone through the approval of the Energy Regulatory Commission – less clear is how PSALM would be able to recoup its costs from these supply pacts then. For those in-the-know, they can easily surmise that something wrong happened with PSALM’s finances; but some still refuses to acknowledge the stark truth.

To partly understand the inter-linked financial odyssey of NPC and PSALM, here are some numbers worth considering: In 2001 prior to NPC’s privatization, official documents showed that its total outstanding debt obligations had been at $9.355 billion (comprising of $6.07 billion principal component and $3.925 billion interest payments) – this took into account all the debts of NPC up to the last maturity in 2035.

To pare that debt level, the national government in 2004, assumed P200 billion (or around $3.7 billion of NPC debts) based on the prescription of Section 32 of the Electric Power Industry Reform Act (EPIRA). It was estimated at that time that the debt absorption would have similarly reduced NPC-PSALM’s interest payments by P18 billion; hence, expectations surfaced that consumers may no longer be burdened with stranded debts pass-on if PSALM would be able to maximize proceeds from the privatization of the NPC assets.

When it comes to prospective stranded contract costs, the liabilities due to lease obligations with the independent power producers (IPP) amounted to more than $9.6 billion (based on year 2001 estimates). By 2004, number-crunching suggested that this will only bloat to $27 billion if the total contingent liabilities due to the IPPs become “due and demandable” either due to factors such as contract breaches or if government loses in arbitration proceedings, among others. But without these snags, it was generally assumed that the level of IPP liabilities may still be softened with the flow of proceeds from the privatization of the supply contracts.

PSALM, of course, has been coming out with its own numbers; such as the $18 billion NPC obligations it supposedly paid; the bloat in IPP liabilities to $23 billion in 2003; and the $3.7-billion residual liabilities it will still have at the end of its corporate life in 2026. Amid all these claims, there are still other developments worth qualifying because they all helped prop NPC’s financial and operational state.

In 2003, the company booked its biggest losses of P117 billion, and based on the pronouncement of the late and former PSALM president Edgardo del Fonso then, that included some P8 billion foregone revenues due to the capping of the NPC rates as ordered by former President Arroyo in May 2001.

And given the investors’ chorus on the need to bring NPC rates closer to market (because the transition supply contracts attached to the privatization packages were pegged at NPC’s tariffs) and for the state-run power firm to recoup its losses, the ERC approved two-tiered adjustments on NPC’s rates in September 2004 at P0.9798 per kilowatt hour (kWh) and the other was P0.0556 per kWh in April 2005 – summing up to P1.0354 per kWh which was calculated to have shored up the company’s revenue stream by P30 billion to P40 billion annually.

An upward adjustment in NPC’s basic charge was also granted by the industry regulator in February 2009, amounting to P0.4682 per kWh for the Luzon grid and with corresponding adjustments for those in Visayas and Mindanao grids. Based on official pronouncements from NPC then, apart from bringing its rates to 2007 level, the 2009 adjustment was similarly enforced to enable NPC to partly recover some losses incurred from the rate refund of P0.74 per kWh which it was mandated to undertake from July 2008, although this is being contradicted by PSALM now.

Added to all these were the 15 to 16 adjustments via the Generation Rate Adjustment Mechanism (GRAM) and the Incremental Currency Exchange Rate Adjustment (ICERA) which NPC-PSALM were allowed to pass-on so it can recover losses or cut costs for consumers depending on the fluctuations of generation charges and currency exchange rates.

These adjustments, according to the ERC, similarly included cost recoveries for its ineligible IPPs (including those which came on stream from 2001 and note that these were only considered ineligible IPPs because they are not allowed to pass on stranded contract costs since their supply agreements were not approved on the EPIRA-prescribed cut-off date of December 31, 2000).

All things considered, the adjustments seem to have worked for NPC, in some periods, that former NPC president Cyril del Callar already declared dividends remittance to the national government amounting to P2.6 billion in 2006; while former PSALM president Nieves L. Osorio declared “no PSALM borrowings” in 2005.

The propping up in NPC’s bottom-line happened just before the 2008 signing of the Operating and Maintenance Agreement (OMA) – the document which is viewed by many to have caused the muddle in PSALM’s finances. Prior to that, it was clear which ones were attributable to PSALM’s privatization proceeds and liability management functions; and which items were coming from NPC operations or incurred losses.

For lack of substantive evidence, PSALM’s initial filing for stranded cost recoveries running up to more than P500 billion were dismissed by the ERC last year. It is worth watching then how much stranded debts and stranded contract costs would be filed anew by PSALM at the June 30

Ledesma’s tough act: Managing

PSALM’s liabilities to lower electric billsdeadline set by the industry regulator –and what cost components will be lumped into them – apart from the actual loans (plus interests) and the unrecoverable costs from the NPC-transferred contractual obligations.

At the crux of all these, there appears an unsettling factor in the equation which Mr. Ledesma referred to as “operational losses,” primarily those incurred from 2009 and onwards – what that really means and the details attached to them would be the biggest puzzle that must be unlocked by the ERC as its deliberates on PSALM’s UC petitions or the Joint Congressional Power Commission (JCPC) at its relentless investigation on

PSALM’s liabilities. Of course, no one would want to speculate that these lumped in the hefty bonuses and allowances that PSALM enjoyed in the past.

At the end of the day, the math must add up and that the details of the costs incurred by PSALM must be clearly laid down and understood by the consumers who will have no choice but to take the pain of paying the company’s humungous financial obligations. The “disconnects” as well as future plans are among the concerns addressed by Mr. Ledesma in this interview with the Manila Bulletin.

MB: As CEO of PSALM for close to a year, what are the experiences you did not expect would happen when you assumed office?

Mr. Ledesma: I assumed the PSALM post with an open mind, without any expectation. It’s been a good and pleasant learning experience so far, thanks mainly to the hard work, synergy and commitment of the PSALM management and employees. Also, my harmonious working relationship with Energy Secretary Rene (Almendras) has made my transition to government (from private sector) much easier.

MB: Open access has been good as declared by the JCPC, despite some other questions being resolved with the ERC. For the remaining NPC GenCo assets, what is your opinion on a proposed policy statement to retain security assets?

Mr. Ledesma: Although I support the DoE’s plan to ensure energy supply and security by retaining certain power plants under government ownership, a definite period should be set for the deferment of privatization so that we don’t run counter to the intention of EPIRA. This is to give investors timely signals when they should come in. Retention of certain power plants as security assets may also have cost implications, especially for oil-based power facilities which have higher operating costs.

MB: You mentioned that your office has been reviewing the privatization process in preparation for the forthcoming disposals (Naga, Leyte, Agus-Pulangui, etc). Can you tell us the results of your review and how this will affect the privatization process?

Mr. Ledesma: I wish to say that privatization will proceed in earnest around June or July 2011. Initially we are looking at bidding out the Naga Complex (IPPA) which is composed of Naga Coal Thermal Power Plants 1 and 2 (109 MW) and Naga Diesel Power Plant (37 MW) located at Naga, Cebu. This will be followed by Casecnan (IPPA) and Power Barges 101-104 (GenCo). We are targeting bidding for Casecnan and the Power Barges on the billsdeadline set by the industry regulator –and what cost components will be lumped into them – apart from the actual loans (plus interests) and the unrecoverable costs from the NPC-transferred contractual obligations.

At the crux of all these, there appears an unsettling factor in the equation which Mr. Ledesma referred to as “operational losses,” primarily those incurred from 2009 and onwards – what that really means and the details attached to them would be the biggest puzzle that must be unlocked by the ERC as its deliberates on PSALM’s UC petitions or the Joint Congressional Power Commission (JCPC) at its relentless investigation on PSALM’s liabilities. Of course, no one would want to speculate that these lumped in the hefty bonuses and allowances that PSALM enjoyed in the past.

At the end of the day, the math must add up and that the details of the costs incurred by PSALM must be clearly laid down and understood by the consumers who will have no choice but to take the pain of paying the company’s humungous financial obligations. The “disconnects” as well as future plans are among the concerns addressed by Mr. Ledesma in this interview with the Manila Bulletin.

MB: As CEO of PSALM for close to a year, what are the experiences you did not expect would happen when you assumed office?

Mr. Ledesma: I assumed the PSALM post with an open mind, without any expectation. It’s been a good and pleasant learning experience so far, thanks mainly to the hard work, synergy and commitment of the PSALM management and employees. Also, my harmonious working relationship with Energy Secretary Rene (Almendras) has made my transition to government (from private sector) much easier.

MB: Open access has been good as declared by the JCPC, despite some other questions being resolved with the ERC. For the remaining NPC GenCo assets, what is your opinion on a proposed policy statement to retain security assets?

Mr. Ledesma: Although I support the DoE’s plan to ensure energy supply and security by retaining certain power plants under government ownership, a definite period should be set for the deferment of privatization so that we don’t run counter to the intention of EPIRA. This is to give investors timely signals when they should come in. Retention of certain power plants as security assets may also have cost implications, especially for oil-based power facilities which have higher operating costs.

MB: You mentioned that your office has been reviewing the privatization process in preparation for the forthcoming disposals (Naga, Leyte, Agus-Pulangui, etc). Can you tell us the results of your review and how this will affect the privatization process?

Mr. Ledesma: I wish to say that privatization will proceed in earnest around June or July 2011. Initially we are looking at bidding out the Naga Complex (IPPA) which is composed of Naga Coal Thermal Power Plants 1 and 2 (109 MW) and Naga Diesel Power Plant (37 MW) located at Naga, Cebu. This will be followed by Casecnan (IPPA) and Power Barges 101-104 (GenCo). We are targeting bidding for Casecnan and the Power Barges on the fourth quarter of 2011.

We have reviewed previous privatization transactions of PSALM and we have noted contract provisions as well as improvements which could be adopted in future sale processes. We will also continuously ensure transparency and accountability in all our privatization efforts.

MB: Mr. Froilan Tampinco (NPC President) came out with a statement that PSALM has yet to fund the Agus-Pulangi rehabilitation. How will the financing be treated? Shall this form part of the UC computations? If not, how will this be paid for?

Mr. Ledesma: As Agus and Pulangui ownership was already transferred to PSALM in 2008, and since PSALM signed the Operating and Maintenance Agreement (OMA) with NPC, PSALM shall fund the Agus-Pulangi rehabilitation either through income earned from the plants’ operations or financing. The financing for this purpose, if incurred, will form part of the UC computations in accordance with the ERC guidelines for calculating the UC-SD (universal charge for stranded debts).

MB: As a finance man, what are your strategies on lowering the proposed UC? PSALM mentioned in a press statement that it already paid $18 billion in liabilities from 2001-2010, for the sake of the millions of Filipino consumers who will eventually pay for whatever debts/liabilities you may still have, can you give us specific details on these: how much debts (I’m referring to pure loans here) were actually paid; how much obligations with the IPPs were settled; and what were the other items paid by PSALM?

Mr. Ledesma: I feel that in order to lower the UC rates to be charged to consumers, we should cut further losses from the operations of plants with high operating costs by pushing for the privatization of these plants. We also intend to improve the Company’s liquidity by enhancing the collection efficiency of our receivables. PSALM management also aims to achieve more efficient utilization of our resources by establishing risk management policies and ensuring strict and consistent implementation of said policies.

Below is the breakdown of the US$18 billion paid for the financial obligations of NPC for 2001-2010:

Debt: USD11 billion, of which:

Principal: US$7 billion

Interest payment: US$4 billion

IPP lease obligations: US$7 billion

I would like to add though that on a cash flow basis, if we are to compare the projected collections of receivables amounting to roughly US$15 billion from 2011 to 2026 (up to the end of PSALM’s life) vs. the maturing financial obligations of US$ 18.86 billion for the same period, the indicative shortfall is US$3.78 billion.

MB: PSALM, in press statements, blamed the bloat in liabilities for the commissioning of the new IPP plants in 2003, but note also that in September 2004 and April 2005, these were NPC’s basis for filing of rate increases which ERC granted at an aggregate P1.035/kWh. Note also that the rate adjustments already factored in the losses incurred by NPC for the rate freeze imposed by Malacanang in May 2001.After the cost recoveries made from the rate hikes, how much of it were still booked as liabilities onward?

Mr. Ledesma: PSALM does not blame the commissioning of the new IPP plants for the significant increase in the financial obligations of NPC. PSALM merely said that the 2001 debt level did not yet include the IPP obligations which were incurred due to the commissioning of the new IPPs that included Ilijan, Kalayaan Units 3 and 4, Bakun and San Roque plants. The inclusion of these plants increased total financial obligations to US$22.35 billion in 2003. These plants have also been continuously operating at a loss without any rate recovery prior to 2005.

The 2004 and 2005 rate increases are not two separate applications. They refer to the 2002 filing of NPC under the Basic Generation Charge (BGC). This was merely an adjustment to reflect the true cost of power from 2002 to 2004 levels, and to recover allowable annual costs from operations from 2004 onwards. This rate increase however, did not consider operational losses, losses due to mandatory caps and financial obligations incurred prior to 2004 since the 2002 BGC filing was decided upon by the ERC only in late 2004.

A significant portion of these financial obligations incurred since 2001 are being settled as they fall due and these form part of the maturities that ballooned in the years 2009, 2010 and 2011.

MB: The second ‘assault’ on NPC’s rates had been the P0.74 per kWh refund ordered by ERC in 2008, but this was propped by another round of rate adjustment for the power firm the year after, can you give specific numbers as to the extent of losses (the official figures quoted by NPC before had been P10 billion) and how much have been recouped after the rate adjustment?

Mr. Ledesma: The rate adjustment granted by the ERC in 2009 is not a recovery of the refund ordered by the ERC in 2008. The rate adjustment granted in 2009 pertains to the BGC which was allowed to reflect the cost of power at 2007 levels; hence, this rate increase provisionally authorized PSALM to recover part of its operational losses from 2009 onwards.

The refund ordered in 2008 on the other hand pertains to the GRAM/ICERA recoveries by NPC which were adjustments in Fuel and Power Purchase Costs and Foreign Exchange. This refund resulted to an additional deficit to PSALM amounting to Php24 billion since its implementation.

MB: Going back to the intent and spirit of the EPIRA which was primarily aimed at lowering electricity rates for the consumers, from the debts (straight loans) in 2001, how much have actually been paid at this point? And how much would still be factored in as component in your filing for UC-stranded debts? If we have to put some reckoning numbers: the level of computed debts in 2001 was at around $6.5 billion and IPP liabilities at over $9.0 billion. To pare the scale of liabilities, Congress also proposed absorption of part of NPC’s debts (at P200 billion).

Mr. Ledesma: The EPIRA included the Universal Charge as one of the cost-recovery mechanisms to augment privatization proceeds in liquidating the outstanding liabilities of NPC.

MB: With the privatization of the IPP contracts, how much proceeds would still flow and what would be the scale of liabilities that would still be included in your filing for UC-stranded contract costs? Again, just to be clear and straightforward about the much-anticipated UC filing by PSALM, how much would be straight debts, IPP liabilities and other cost components (OPEX, etc)? If you can’t give exact figures, can you provide at least the percentages per item?

Mr. Ledesma: PSALM is still computing the amount to be recovered through the UC following the revised guidelines released by the ERC.

MB: And given the broadened definition of stranded costs under EPIRA’s IRR on NPC obligations, what other cost components would you be including in your UC filing? I’ve known the existence of the Operating and Maintenance Agreement (OMA) between NPC and PSALM, and this somehow factored in other costs, such as OPEX, how will this impact on your UC application?

Mr. Ledesma: As earlier stated, PSALM is still computing for the UC-SCC and SD in accordance with the ERC amended rules. The ERC guidelines clearly state what costs are to be considered and excluded in the calculation.

These cost components and figures will be disclosed in due course when PSALM files its tariff application for UC-SCC and UC-SD.