Policy Lapses and Gaps on the Formulation of Energy Laws of the Philippines:The Case of Iligan Diesel Power Plants

POLICY LAPSES AND GAPS ON THE
FORMULATION OF ENERGY LAWS OF THE
PHILIPPINES :
THE CASE OF ILIGAN DIESEL POWER PLANTS
Ariel P.
Anghay Title

In The early 1990’s, a severe lack of
generating capacity resulted in power cuts of 10
hours a day. The government solution was to
allow national power corporation (NAPOCOR) to
enter into supply contracts with private
energy/power generating companies. When the
companies responded, there was an excess of
capacity since it wasn’t clear how many suppliers
would answer the needed power. The healthy
economic growth sustained the operations of the
suppliers (Mclean,2005).
Ariel P.
Anghay
Introductio
n
CHAPTERI
THE PROBLEMANDITS BACKGROUND

With the decrease in economic growth triggered by
the Asian financial crisis, NAPOCOR had to honor
contracts with suppliers by buying power they supplied
even if there was little or no demand for it. The losses
translated to purchased power adjustment charge were
paid by consumers. Hence, electricity prices in the country
are among the highest in the world because the rates
include the cost of power that NAPOCOR can’t sell. The
contracts did not provide for adjustments of purchased
power when demand decreased. Also, the suppliers had
to be protected from reduced revenues due to lower
demand. Hence, the policy protected the suppliers at the
expense of the consumers and the government.
Ariel P.
Anghay
Introductio
n

Among the key elements for attracting private
finance for the energy sector, “rules of law and contract
enforceability” protected the suppliers of electricity from
reduced power purchase by NAPOCOR due to decrease
in power demand. The government embarked on a
program of privatization and liberalization of the power
industry by allowing private sector participation in the
generation of electricity and broadening applicability of
BOT to all public infrastructure projects. These are bold
measures that ushered a change in government from an
authoritarian régime to a more open, transparent and
democratic administration.
Ariel P.
Anghay
Introductio
n

Executive order no. 215, promulgated in 1987, laid the basis for
the entry of private sector into power generation, which had been a
monopoly of the national power corporation (NPC), while republic act
no. 6957 authorized the financing, construction, operation, and
maintenance of infrastructure projects by the private sector. This means
the independent power producer (IPP) participants were assured through
a comfort letter that the government would ensure that the NPC would
be able to comply with its commitments in implementing foreign
exchange control to assure that earnings and capital could be remitted.
Thus, by the end of 1994, a total of 1,481.3MW, representing 16.3
percent of total installed capacity of 9,067.9MW, were owned and/or
operated by the private sector. In the Luzon grid, 20 percent of the total
6,558.1 MW generating capacity was in the private sector by end of
1994(Austria,2000).
Ariel P.
Anghay
Introductio
n

To address the crisis of insufficient electrical
generating capacity to avert the daily deficiency for
262 megawatts, President Marcos built a 620 MW
nuclear power plant constructed by Westinghouse. The
project was completed but the Aquino government
decided not to use the facility because it was located on
a seismic fault. Thus, the government embarked on
solutions such as gas-turbine plants (500MW) and
expansion of the rural electrification program (Dolan,
1991).
Ariel P.
Anghay
Introductio
n

Mindanao is highly dependent on hydro plants for
electricity, accounting for 55.22 percent electricity
source in 2008; the department of energy power
statistics in 2008 has shown. This hydro-driven
generation capacity makes Mindanao vulnerable to a
prolonged dry spell that lowers water inflow that
powers the turbines of hydroelectric plants. With
climate change triggering reduction of water during
sunny days, the power industry is indeed vulnerable
(Rosauro, 2010).
Ariel P.
Anghay
Introductio
n

During the administration of former president
fidel V. Ramos, the island of Mindanao also experienced
the power crisis of the country because of the long
drought caused by the El Niño phenomenon. To solve
the problem, the Philippine Congress in April 1993 gave
former President Ramos emergency powers that allowed
him to negotiate independent power producer (IPP)
contracts and bypass the usually long and tedious
process required to bid out government projects. Pres.
Ramos became known for the phrase “fast-track,” used
to describe swift approval of contracts and projects.
Ariel P.
Anghay
Introductio
n

In Mindanao, the first IPP (independent power
producer) contracts were the two (2) ALSONS
(Alcantara and sons)/ TOMEN (phil. /Japan) diesel
power plants with a company’s name – Northern
Mindanao power plant (NMPC) under a ten-year “build
operate transfer” contract with an estimated cost of US
$60 million with a contracted rated capacity of 113 MW
and runs on a bunker C and / or diesel fuel types for its
start-up and shut down operations. NMPC plant 1
became operational in 1993 while NMPC plant 2 was
operational in 1996.
Ariel P.
Anghay
Introductio
n

However, the energy generated by these plants did not solve
the Mindanao problem because of its location, which is near the
Agus hydro grid. The capacity of Agus hydro grid, situated along
marawi city, Iligan city, and Lanao provinces, was ample enough to
supply the whole Mindanao electricity needs at the time.
The BOT contract stipulated a capacity fee of around php60
M per month and a fixed operation and maintenance fee ofphp17 M
per month with or without generation or a total fixed purchased
power cost of not less than php900 M per year. With the ownership
issue, however, NPC is shouldering payment of php53 M a year for
the Iligan city’s real property tax assessment.
Ariel P.
Anghay
Introductio
n

In the operation and maintenance of the power plants- IDPP 1 and IDPP
2, power sector assets and liabilities management (PSALM/ NPC) incurred
financial losses at an annual average of about php405.53 M during the period of
2006-2009, resulting in a subsidy paid by the electricity consumers of about
P17.35 KWH based on the average electricity production cost of IDPP 1 and
IDPP 2 of Php 20.48 per KWH against the average selling rate in Mindanao of
Php 3.13 per KWH for the same period. Despite these losses, IDPP 1 and IDPP 2
were operated to augment power requirements as a result of the power generation
deficiency of the NPC’s hydroelectric power plants.
The factor of the two power plants has been embroiled by the issue of
ownership status. Alcantara and sons (ALSONS) continued to pay its real estate
taxes on the lands, the cooling system, and the fuel holding tank in which the
IDPP 1 and IDPP 2 are located, whereas, NPC did not pay the real estate taxes of
the diesel units that accumulated Php 392, 527,159.46.
Ariel P.
Anghay
Introductio
n

On April 25, 2007, the city government through the Sangguniang
Panlungsod, after exhausting all legal remedies, sold the IDPP 1 and IDPP 2
(power plants) at a public auction but were subsequently sold to the city of
Iligan pursuant to section 263 of the local government code due to the
absence of bidders during the auction sale.
On November 10, 2008, Conal holdings corporation (Conrado
Alcantara who happens to be the owner of the realty land where IDPP power
plant 1 and IDPP power plant 2 are currently situated)offered P 275, 000,
000.00 (P275 M) to the Iligan city government as purchase price, but the
resale of the LGU-confiscated / levied properties did not push through
because of the lone bidder. The amount of the bid price was lower than the
estimated power plant value of P 4.2 billion under the prevailing brand new
cost of Warfzila diesel plant, which is one million ( US $1.00 million ) per
one megawatt and IDPP 1 and IDPP 2 has a total capacity of 100 megawatt.
Ariel P.
Anghay
Introductio
n

On September 4, 2010, the Sangguniang Panlungsod
passed resolution no. 10-551 authorizing the City Mayor
Lawrence Cruz to enter into a “compromise agreement” with
Conal holdings corporation, which increased its offer from P
275 M to 300 M without prejudice to the conduct of a Swiss
challenge (mode of bidding). The 14th
city council in its July 4,
2011 regular session unanimously approved and adopted the
terms of reference (TOR) for the SWISS CHALLENGE process
for the sale of Iligan diesel power plants 1 and 2 facilities. The
TOR sets the pre-bid conference relative to the disposal of
IDPP’s 1 and 2 on August 15, 2011.
Ariel P.
Anghay
Introductio
n

There are three (3) interested bidders, first is the Conal
holdings corporation (CHC), the family-owned realty where IDPP
power plant is located; second in the consortium of PGMC –
platinum group metals corporation/ Atayde group/ one Subic of
Mike Romero and Borja group; and third is the Energy Developer
Co. Ltd./ Korea Midland Power Company Ltd (KOMIPO). Of these
three groups interested to buy the IDPP’s 1 and 2, the Conal
holdings of Alcantara had an upper hand since it owned the land
where the power plants are currently situated. Under the terms of
reference of the “Swiss challenge”, the bid proposal covers only the
sale of the Iligan diesel power plants 1 and 2 facilities, excluding
the land, the water supply piping for the cooling system, and other
facilities which the Iligan city government does not own, on an “
as- is- where- is” basis.
Ariel P.
Anghay
Introductio
n

The Iligan City government ownership of the IDPP 1
and 2 includes only the buildings and machineries being the
only tax delinquent assets owned formerly by NPC/PSALM.
Both two interested bidders- the Atayde/PGMC and KEPCO of
South Korea-manifested their reservations since the power
plants- IDPP 1 and 2-were acquired by the city due to the non-
payment of taxes, which was the subject of the “Swiss
challenge”, and yet the land/ realty where the plants are located
is owned by the Alcantara group of companies, which is one of
the interested bidders.
Ariel P.
Anghay
Introductio
n

Under the TOR, the bid price will start at higher
than the negotiated price of CHC of php300 M. Conal
Holdings corporation, being the first to tender its offer in
the November 2008 failed bidding, shall have the right to
match the highest qualified and complying bid purchase
price submitted.
Ariel P.
Anghay
Introductio
n

One of the active non-government organizations in the city,
the Lanao Power Consumer Federation (LAPOCOF), a consumer-
protection advocate and strong lobbyist against the NPC Agus-
Pulangi hydroelectric power plant privatization, wrote President
Simeon Benigno Aquino and the Department of Energy Secretary
Rene Amendras for a proposal that NPC/PSALM may enter into a
MOA with the Iligan city government to rent or to share income of
the proceeds of the operation of the IDPP through a joint ownership
managed by the LGU and NPC/PSALM and/or form IDPP’s
operation group through a cooperative management or contract out
the management of the IDPP’s. These proposals offered by the
LAPOCOF are now under review by the committee on power and
energy in the city council.
Ariel P.
Anghay
Introductio
n

The study explored the policy lapses and gaps in the energy laws of
the Philippines as context of the IPP problems in Iligan City.
Specifically, the study sought answers to the following questions:
1. What are the policy lapses and gaps in the following energy laws?
1.1 Republic Act No. 7648 Electric Power Crisis Act of 1993
1.2 Republic Act No. 9136 Electric Power Industry Reform Act of
2001
2. What are the manifestations of the policy lapses and gaps as
observed in the IPP problems in Iligan City?
3. What are policy recommendations that could be advanced to
enhance the implementation of energy laws?
Ariel P.
Anghay Statement of the Problem

The study was guided by the following objectives:
1. To analyze the policy lapses and gaps in
Republic Act No. 7648 and 9136;
2. To describe the manifestations of the policy lapses and
gaps in the IPP problems of Iligan City; and,
3. To recommend policy inputs for enhanced
implementation.
Ariel P.
Anghay Objectives of the Study

Ariel P.
Anghay
This qualitative study employed content
analysis of existing documents, which
served as basis for policy
recommendations.
Methodology of the
Study

Ariel P.
Anghay
Scope and Limitation
The study delved on the policy lapses and
gaps in the energy laws of the Philippines
as context of the IPP problems in Iligan City.
It was limited to the content analysis of
Republic Acts 7648 and 9136 in relation to
the disposition of IPP’s assets acquired by
the local government of Iligan City.

Ariel P.
Anghay
Significance of the Study
1. Congress of the Philippines. The study provides the
lawmakers of the House of Congress with inputs on the
lapses and gaps of RA Nos. 7648 and 9136 for legislative
review.
2. Local Government Units. The study provides the
LGU executives and legislators with information regarding
the consequences of the take-over of large assets particularly
in the various forms of encumbrances on the sale of assets.

Ariel P.
Anghay
3. Power Sector Assets and Liabilities Management
Corporation (PSALM Corp.). The study provides insights
into the actual problems encountered in the disposition of
real estate assets acquired from NPC.
4. Sangguniang Panlungsod of Iligan City. The study
provides some explanations for the lapses and gaps in the
policy on Build-Operation-Transfer and how such lapses
and gaps impact the acquisition of real estate assets by the
LGU.

Ariel P.
Anghay
5. University of Makati (CGPP). The study serves as
reference material for students and faculty of the graduate
studies on the impact of policy lapses and gaps on the
disposition and acquisition of real estate assets.
6. Development management and governance as a field
of study. The study is useful in development management
and governance as this provides an actual case of theories
and concepts for effective and transparent public
governance.

Ariel P. Anghay
THEORETICAL PARADIGMS AND RELEVANT
LAWS
Globalization and the rapid development of
information and communication technology have
resulted in the interdependence of depressed
economies around the world. Markets are opened
allowing producers to penetrate more markets and
consumers to have greater choices. The new
competitive setting requires greater competitiveness
so that each nation can participate in and benefit from
globalization (Austria, 2010).
CHAPTER 2

Ariel P. Anghay
Theoretical Paradigms and Relevant Laws
The development experience during the past two
decades has shown that the necessary step to enable a
country to face globalization and participate in
economic integration is by having domestic industries
that are efficient and competitive. Economic integration
presupposes that participating economies have already
attained a high level of competitiveness and maturity of
their production structures to be able to face regional
and global competition.

Ariel P. Anghay
Every deregulation started in the hydrocarbon sector with
the dismantling of government monopolies. This was in response
to the 1970’s oil price shock that made government support
monopolies with subsidies and ignore their unsustainable financial
performance. Energy deregulation is oriented towards increasing
competition in different parts of the supply chain and choice in
energy demand. The electricity sector leads in this direction.
Energy deregulation has implications on the economic, societal,
and environmental fronts – the three dimensions of sustainable
development (Lefevre and Todoc, 2001).

Ariel P. Anghay
Energy deregulation is defined in broad terms and
encompasses privatization, the sale or transfer of
government assets to the private sector, and restructuring,
the move towards more competitive markets. Energy
deregulation also implies transition from regulated or
controlled to market-based energy prices. Asia covers
selected countries in East Asia and the Pacific (Southeast
and Northeast Asia) and South Asia and these sub regions
taken together.

Ariel P. Anghay
In the power industry, the opening up to private and
foreign direct investments led to the mushrooming of independent
power projects in the region in response to the strong growth in
electricity demand and the inability of these economies to finance
the needed capital investments. IPP’s have been successful in
meeting the expected growth in demand, but the financial crisis in
1997-1998 has expressed flaws in this kind of arrangement, which
is typical of a single buyer model and called for more competitive
arrangements or ultimately consumer choice. The financial crisis
has renewed the thrust towards privatization, which is viewed as
the long-term solution to structural weaknesses not only in the
energy industries but also in the economics as a whole.

Ariel P. Anghay
Independent Power Producers
The entry of Independent Power Producers (IPP) has
created a paradox. While there was increasing supply of power
generated by the state-owned National Power Corporation
(NAPOCOR), there was a higher electricity rate for consumers,
largely because of ill-advised contracts it drew with the numerous
IPPs. NAPOCOR has entered into 48 IPP contracts since 1991,
when there was crippling power shortages with more than half of
these contracts made during Ramos’ Presidency.
The Philippine Center for Investigative Journalism study
revealed that Ramos personally pushed for the fast approval of
some of the most expensive power deals despite warnings from
within the government and the World Bank that an impending
oversupply for electricity could push prices.

Ariel P. Anghay
NAPOCOR paid a variety of fees, often in excess of what it should
be paying the IPPs. These payments came in the form of fixed operating
and maintenance cost for power plants that were hardly running.
NAPOCOR was paying much more than it should for the electricity
generated by the IPPs that were overcharging capacity fees, or the amount
the IPPs collected to recover their investment.
IPP operations cost the government $14 billion excluding the fuel
that NAPOCOR pays for and supplies to the power plants, and which cost
it Php. 35 billion. NAPOCOR pays IPPs and Php 4 billion every month for
the fixed cost of energy whether or not the plants actually generated or
supplied the electricity. To recover the expenses in dealing with the IPPs,
NAPOCOR passes on the burden to consumers in the form of a Purchased
Power Adjustment (PPA) rate. So, the consumers pay both the power
consumed and the PPA – a 30-to-50 percent addition to the average bill.

Ariel P. Anghay
The Philippines has the second highest electricity
rate in Asia after Japan. This prompted Senator Sergio
Osmeña III to state in his speech in 1995: “The kindest thing
I can say is that this is gross mismanagement. They over-
contracted overpriced power plants. The IPPs probably
provided the government with executive incentives to allow
such onerous contracts. This is tantamount to graft and
corruption because under the law, anyone who enters into a
contract that is disadvantageous to the government should
be held liable.”

Ariel P. Anghay
Relevant Laws
1. Republic Act No. 8525 – An Act prescribing urgent related
measures necessary and proper to effectively address electric
power crisis and for other purposes. This Act is otherwise known
as the Electric Power Crisis Act of 1993.
This Act discusses negotiated contracts in which the President,
acting in the public interest and whenever advantageous to the
government, may enter into negotiated contracts for construction,
regain, rehabilitation, improvement, or maintenance of power
plants, projects and facilities. Such contracts must meet three
criteria, to wit: (1) proven competence and experience in similar
projects, (2) competent key personnel and sufficient and reliable
equipment, and (5) sound financial capacity.

Ariel P. Anghay
Relevant Laws
1.Republic Act No. 8525
Furthermore, the Act provides for each House of
Congress oversight committees composed of five (5)
members each to over see the implementation of this Act
and to submit periodic reports, evaluations and
recommendation to the Senate and the House of
Representatives.

Ariel P. Anghay
2. Republic Act No. 9136
An Act ordaining reforms in the electric power industry,
amending for the purpose certain laws, and for other
purposes. The Act is known as the “Electric Power Industry
Reform Act of 2001, the EPIRA Law.
The Act delves on the organization and operation of the
National Transmission Company (TRANSCO). It also covers
wholesale electricity spot market, retail competition and
opens access, NPC stranded debt and contract cost recovery,
universal charge, regulations, returns and tax rates for
indigenous energy resources, unbundling of rates, and
functions.

Ariel P. Anghay
The Act defines the role of the Department of Energy,
regulation of the electric power industry, compensation and
other emoluments for ERC personnel cross ownership, market
power abuse, and competitive behavior. Moreover, it deals on
the privatization of these assets of the National Power
Corporation and the creation of the Power Section Assets and
Liabilities Management Corporation (PSALM Corp.).
Moreover, the Act also discusses the promotion of rural
electrification particularly conversion of electric cooperatives
and additional mandate of the National Electrification
Administration (NEA).
2. Republic Act No. 9136

CHAPTER 3
UNIT ANALYSIS
Geographical Location and
Socio-economic Profile
Ariel P. Anghay

Iligan City is situated in Northern Mindanao, Region 10,
approximately 800 kilometers southeast of Manila. It was created as
a city on June 16, 1950, through Republic Act 525. The land
sprawls across 81, 337 hectares (813.37 sq. km.). The climate is a
pronounced dry spell for one to three months with rainfall evenly
distributed throughout the year. The population of Iligan City is
308, 046 as of August 2007 National Statistics Office Census.
There are 44 barangays in Iligan City. The religion is
predominantly Roman Catholic. The main dialect is Cebuano. The
city’s classification is highly urbanized. There are 11 major
industries, 24 banks (14 public; 20 private), 23 waterfalls, 8 springs,
and 15 caves.
Geographical Location and Socio-economic Profile
Ariel P. Anghay

Ariel P. Anghay
The city has 181 schools (106 public; 75 private; 17 madrasah)
including vocational and technical schools. The literacy rate is
94.71 percent. There are 5 hospitals (4 private; 1 public), 49
barangay Health Centers, and one Main Health Center. The city
has one public seaport-9 private and 2 fishing ports.
Churning for industrialization are three hydro-electric power
plants. The communication infrastructure includes 4 digital
telephone systems, 2 wireless telephone systems (Smart Comm.
Inc. and Globe), 2 cable stations, 1 TV station, 8 radio stations,
managerial agencies and cargo forwarders, 1 post office, 4
newspaper publications, 4 Internet service companies (Iligan
Global Across Network, MARANET, Weblink, Philweb) and other
private Internet cafes located within the city.

Ariel P. Anghay
As to the transport system, the city has two bus
companies and four shipping lines.
Iligan City is multicultural with a mix of Christians,
Muslims, and other ethnic tribes. Although peace and order
has been occasionally marred by bomb explosions and
national calamities, the city has remained resilient and is
able to sustain the socio-economic needs of the residents.

CHAPTER 4
POLICYANALYSIS
AND
CRITICAL DISCUSSION

POLICY ANALYSIS AND CRITICAL DISCUSSION
A. STAKEHOLDER ANALYSIS
Brief History of Energy Regulation
The regulation of public services started way back in 1902 with the
enactment of Act No. 520 that created the Coastwise Rate
Commission. In 1906, Act No. 1507 was passed creating the
Supervising Railway Expert. The following year, Act No. 1779
was enacted creating the Board of Rate Regulation. Then, Act No.
2307, which was patterned after the Public Service Law of the
State of New Jersey, was approved by the Philippine Commission
in 1914, creating the Board of Public Utility Commissioners,
composed of three members which absorbed all the functions of
the Coastwise Rate Commission, the Supervising Railway Expert,
and the Board of Rate Regulation (www.doe.gov.ph, downloaded
June 19, 2012).
Ariel P. Anghay

Thereafter, several laws were enacted on public
utility regulation. On November 7, 1936,
Commonwealth Act No. 146, otherwise known as the
Public Service Law, was enacted by the National
Assembly. The Public Service Commission (PSC) had
jurisdiction, supervision, and control over all public
services, including the electric power service.
A. STAKEHOLDER ANALYSIS
Ariel P. Anghay

Ariel P. Anghay
On September 24, 1972, then President Ferdinand E. Marcos
issued Presidential Decree No. 1, which ordered the preparation of
the Integrated Reorganization Plan by the Commission on
Reorganization. The plan abolished the PSC and transferred the
regulatory and adjudicatory functions pertaining to the electricity
industry and water resources to then Board of Power and
Waterworks (BOPW).
On October 6, 1977, the government created the Department of
Energy (DOE) and consequently abolished the OIC, which was
replaced by the creation of the Board of Energy (BOE) through
Presidential Decree No. 1206. The BOE, in addition, assumed the
powers and functions of the BOPW over the electric power
industry.

Ariel P. Anghay
On May 8, 1987, the BOE was reconstituted into the Energy
Regulatory Board (ERB), pursuant to Executive Order No. 172 issued
by then President Corazon C. Aquino as part of her government’s
reorganization program. The rationale was to consolidate and entrust
into a single body all the regulatory and adjudicatory functions
pertaining to the energy sector. Thus, the power to regulate the power
rates and services of private electric facilities was transferred to the
ERB.
On December 28, 1992, Republic Act No. 7638 was signed into law,
where the power to fix the rates of the National Power Corporation
(NPC) and the Rural Electric Cooperatives (RECs) was passed on to
the ERB. Non-pricing functions of the ERB with respect to the
petroleum industry were transferred to the DOE, i.e., regulating the
capacities of new refineries.

Ariel P. Anghay
 1993 Power Crisis- The Birth of R.A. 7648
RA 7648 Electric Power Crisis Act of 1993 was approved by the
Senate and House of Representatives of the Philippines that gave the
President of the Philippines, Fidel V. Ramos, and the power to implement
any measures to address the pending power crisis. The Act declares the
policy of the state to adopt adequate and effective measures to address the
electric power crisis that disrupted the country’s economic and social life
and assumed the nature and magnitude of a public calamity. It gave the
current president a power to enter into negotiated contracts for the
construction, repair, rehabilitation, improvement or maintenance of power
plants, projects and facilities to effect immediate solution to the power crisis
that hampered the growth of the nation economically and socially. In
addition, the return on rate base was established ensuring the rate of return
of investments.

Ariel P. Anghay
 1993 Power Crisis- The Birth of R.A. 7648
Rate of return is the assurance given by the government to the private
investors in the power industry to recover its investment with a fair return
through establishment of a minimum fixed rate of return. Reorganization of the
National Power Corporation, a government-owned and controlled corporation
that monopolizes the operation and maintenance of power generation and
distribution has been included to make it more effective, innovative and
responsive to the power crisis. The authority granted to the president under this
act was one (1) year.
The President had signed over 40 independent power producers’ (IPP)
contracts including the Iligan diesel power plants 1 and 2 that resulted in an
oversupply of power plants that, to this day, power consumers have to pay for
owing to the take-and-pay provision in the contracts that were all given
sovereign guarantees by the state.


Ariel P. Anghay
Iligan Diesel Power Plants
Iligan Diesel Power Plants (IDPP) 1 & 2 were the first,
majority Filipino-owned Build to Operate Transfer (BOT) fast-
track power project located in Mapalad, IliganCity. These plants
were aimed at augmenting supply of power in the Mindanao
region, which was experiencing shortage of power because of the
long drought caused by El Niño phenomenon that lowered the
output of the hydro power plants of National Power Corporation.
The go signal to fast track the establishment of IPP contacts and
bypass the usually long and tedious process for government
projects was given by the President; hence, IDPP came into
existence.

Ariel P. Anghay
IDPP was under the joint undertaking of Northern Mindanao
Power Corporation (NMPC) of the Alcantara Group and Tomen
Corporation of Japan. The Alcantara group is a diversified
Filipino-owned conglomerate based in Mindanao. A leading
manufacturer of plywood and cement, the Alcantara group is also
extensively involved in agri-business, real estate development,
transportation, and marketing. Tomen Corporation is one of the
largest Japanese trading companies.

Ariel P. Anghay
Under the BOT scheme, NMPC operates the 58mw power
plant and the 40mw power plant for ten and twelve years,
respectively. After these periods, the ownership of the two plants
would be transferred to the National Power Corporation at no cost
and consequently to the local government of IliganCity.
The plant sprawls over 7.9 hectares of private land
immediately bounded by Mapalad community at the south and
Alsons cement quarry site at the north. There are 8 major
infrastructures, namely substations, power plant no.1, power plant
no. 2, heavy oil tank farm, production office, water reservoir,
multi-purpose court and site office.

Ariel P. Anghay
On June 8, 2001, Republic Act No. 9136, otherwise known
as the Electric Power Industry Reform Act (EPIRA) of 2001 was
enacted. The Act abolished the ERB and created in its place the
Energy Regulatory Commission (ERC), which is a purely
independent regulatory body performing the combined quasi-
judicial, quasi-legislative, and administrative functions in the
electric industry.

Ariel P. Anghay

The privatization of the NPC assets intends to achieve the
following objectives (IRR of EPIRA):
To ensure and accelerate the total electrification of the country;
To ensure the quality, reliability, security and affordability of the
supply of electric power;
To ensure transparent and reasonable prices of electricity in a
regime of free and fair competition and full public accountability
to achieve greater operational and economic efficiency and
enhance the competitiveness of Philippine products in the global
market;
To enhance the inflow of private capital and broaden the
ownership base of the power generation, transmission and
distribution sectors;

Ariel P. Anghay
The privatization of the NPC assets intends to achieve the following
objectives (IRR of EPIRA):
To ensure fair and non-discriminatory treatment of public and private
sector entities in the process of restructuring the electric power industry;
To protect the public interest as it is affected by the rates and services of
electric utilities and other providers of electric power;
To assure socially and environmentally compatible energy sources and
infrastructure;
To promote the utilization of indigenous and new and Renewable Energy
Resources in power generation in order to reduce dependence on
imported energy; and
To ensure consumer protection and enhance the competitive operation of
the electricity market.

Ariel P. Anghay
The Local Government of Iligan City
Iligan City benefited from the establishment of the
Iligan diesel power plants through tax collection for it also
collected real estate taxes for the diesel units. Unfortunately,
when the diesel plants were turned over to the National
Power Corporation on CY 2003 and CY 2006 after ten years
of operation from the IPPS, NPC was unable to pay its real
estate taxes amounting to (Php 392, 527, 159.46). Hence,
Iligan City filed a resolution to take control of the power
plants through legal means. Eventually, Iligan City took the
ownership of the plants.

B. SWOT ANALYSIS
Ariel P. Anghay
-Strengths
 Immediately addresses the power crisis
 Higher confidence of investors
 Investment protection
 Short-term solution
 Stable supply
 Infusion of more fresh funds
-Weaknesses
 Power rate instability
 Consumer disadvantaged
 Low government control
 Low participation of local investors due to higher competition with
foreign investors
 Onerous contract in favor of the investors
 Non-concrete solutions to the recurring problem

B. SWOT ANALYSIS
Ariel P. Anghay
-Opportunities
 Consider previous experience to improve the policy
Implement other solutions to the recurring problem
Consider other stakeholders’ opinion in addressing the recurring
problem
Enhance the advocacies of the government about the policy
Focus on the root cause of the recurring problems
-Threats
Difficulty to infuse new funds from the government
Market instability
Higher cost of power generation
Environmental concerns/ problem

CRITICAL DISCUSSION
Ariel P. Anghay
Policy Lapses and Gaps in RA No. 7648
Republic Act No. 7648 is an Act prescribing
urgent related measures to effectively address the
Electric Power Crisis and for other purposes. This
Act is known as the Electric Power Crisis Act of 1993.

CRITICAL DISCUSSION
Ariel P. Anghay
Policy Lapses and Gaps No. 1
Sec. 3. Negotiated Contracts. The law provides that the
President may enter into negotiated contracts for the
construction, repair, rehabilitation, improvement or maintenance
of power plants, projects, and facilities.
The policy lapse in negotiated contracts is the granting of
sole authority to the President, opening the vulnerability to award
the contracts to the Presidents’ favored few. The requirements are
not stringent. What are required of the contractors are (1) proven
competence and experience in similar projects, (2) competent key
personnel and sufficient and reliable equipment, and (3) sound
financial capacity.

CRITICAL DISCUSSION
Ariel P. Anghay
The requirements are perceptual. How does one
measure competence and experience? The requirement
should have been a clearance of the Commission on Audit
that proves the track record of contractors in entering into
contracts. A delinquent contractor who does not have a
pending case in court can get the negotiated contracts as
long as he is in good graces with the President. COA
clearance should be made a requirement to show that
projects entered into are delivered on time at the agreed
cost.

CRITICAL DISCUSSION
Ariel P. Anghay
The second requirement, competent key personnel and
sufficient and reliable equipment, is also perceptual. What are the
objective bases for such criterion? The policy is silent on
independent appraisers, local or foreign, that can render impartial
judgment on the competence of personnel and the reliability of
the equipment of contractors. Having independent appraiser’s
guarantees that only those who are fit can take part in negotiated
contracts.

CRITICAL DISCUSSION
Ariel P. Anghay
The third requirement is sound financial capacity. The
policy is silent on the participation of financial analysts,
local or foreign, to render judgment on sound financial
capacity. Clearance of the BIR Commissioner can be a good
mechanism in promoting responsible business practices
among the contractors.
RA 7698 is designed to fast track energy projects by
effectively paralyzing the government check-and-balance
mechanism by centralizing all powers to the President.

CRITICAL DISCUSSION
Ariel P. Anghay
Policy Lapse No. 2. Return on Rate Base
The policy provides cushion for poor households to absorb
the impact of power hikes through provision of non-increase in
power bills to households with power consumption less than 100
kilowatt hours per month. This means that the urban and rural
poor households are protected from power rate increases. The
difference is that the standard power rates will be absorbed by the
bigger households and businesses, which will also bear the brunt
of power rate increase. Hence, the business sector will pass on
the burden of the power hikes to the consumers through price
increase in their products or services.

CRITICAL DISCUSSION
Ariel P. Anghay
The electricity generated by NAPOCOR is sold in bulk
to the electric cooperatives that are mandated to affect the
socialized power rates to the consumers. Thus, the electric
cooperatives would bear the burden of having to pass on to
the business consumers and the bigger households the
higher power rates.
In effect, the state uses the private sector to subsidize
power rates through the policy, worsening the economic
crisis due to the energy crisis.

CRITICAL DISCUSSION
Ariel P. Anghay
The passage of emergency powers given to the
President to take control of the power situation is a solution
that brings advantages and disadvantages to all
stakeholders. Considering the power crisis in the 1990’s
and the current power crisis, the existing policies should be
modified so as to create a win-win situation and to bring
concrete and lasting solution to the problem.
The experience of Iligan City with the Iligan Diesel
Power Plant should be considered in formulating policies
with regard to Build-Operate-Transfer Scheme.

CRITICAL DISCUSSION
Ariel P. Anghay
Lapses and Gaps of the RA No. 9136 EPIRA LAW
1. Power Sector Assets, and Liabilities Management
The transfer of assets, liabilities, IPP contracts, real
estate, and all other disposable assets is wholesale. There is
no clear provision for the evaluation of accountability of
those involved in the IPP contracts and real estate for
possible abuse of executive authority. Thus, it was easy for
the PSALM to sweep under the rug its culpabilities for the
consequential effects of its decisions. Right from its
creation, PSALM has been saddled with liabilities and
difficulty in disposing of less performing assets.

CRITICAL DISCUSSION
Ariel P. Anghay
1. Power Sector Assets, and Liabilities Management
The stranded debts and contract cost of the NPC are
passed on to the consumers through the ERC-mandated
universal charge. Thus, the public is paying for the
irresponsible, if there is any, management decisions of
NPC.

CRITICAL DISCUSSION
Ariel P. Anghay
 Political Economy of IPPs
In 1990, the Philippine government passed the Republic Act 6957,
which provided the legal framework for the private sector participation in
infrastructure development, and promulgated the Energy Crisis Act (Republic
Act No. 7648) to empower the executive branch to fast track the IPP projects
in 1991 when the power crisis became full blown (Wu and Sulistiyano, 2010).
The prominence of IPP is a result of convergence of interest among private
investors, development agencies, and politicians. Private investors from US
and Europe were looking for investments due to excess supply in the industrial
world. Development agencies considered IPP as a move towards liberalization
and privatization of the power sector. The politicians found IPP model
appealing due to seemingly low political risks. Due to the power crisis, the
tracking of the IPP proposal was legitimized while the private sector was
backed up with financial resources and the development agencies were
supplied with intellectual capital.

CRITICAL DISCUSSION
Ariel P. Anghay
Lapses of the IPP
1. Competitive Body that could have reduced PPA prices by 25% did
not happen because exclusive bilateral negotiations took place.
2. Many IPP deals were initiated from unsolicited bid that might not
reflect the needs and preference of the planning agencies for the power
sector.
3. The outcomes of the negotiations of PPAs were not made available to
the public, effectively shielding them from the public scrutiny. Many
IPPs were developed through cronyism.
4. The political patronage and cronyism do not only explain why the
IPPs were overly expensive but also why the expansion was excessive.

CRITICAL DISCUSSION
Ariel P. Anghay
Deed of Conditional Sale between Iligan and Conal Holdings
Corporation for the Iligan Diesel Power Plant
A compromise agreement between the local
government of Iligan City and PSALM/NPC on the Iligan
Diesel Power Plant was intended to end the litigations and
to settle the ownership of these plants.

CRITICAL DISCUSSION
Ariel P. Anghay
The Iligan Power Plant was acquired by the City of Iligan
through auction on April 25, 2007, after the National Power
Corporation (NPC) failed to pay the assessed taxes even while the
CBAA case filed by NPC was still pending before the Regional
Trial Court, Branch 3, Iligan City. Since then, the assessment and
the auction sale cases have been pending before the Central Board
Assessment Appeals and the Regional Trial Court of Iligan City.
Thus, the City Mayor, Hon. Lawrence Ll. Cruz, duly authorized by
the Sanggunian under Resolution No. 10-358, entered into the
compromise agreement with PSALM/NPC (Ranulo D. Ceras,
Chief of Staff, communication to Mayor Cruz August 7, 2010).

CRITICAL DISCUSSION
Ariel P. Anghay
Through the efforts of the City Mayor upon the authority
given by the Sangguniang Panlungsod under Resolution No. 10-
323, independent appraisals were done to assess the value of the
plant. It was discovered that even if the City would have absolute
ownership of the plants, the City cannot run and maintain the
plants due to lack of technical capability. The logical option was to
sell the plants to the players in the power industry to recover the
money to replace deprived income from failure to pay taxes on real
property.

CRITICAL DISCUSSION
Ariel P. Anghay
The City decided to resell the property in a second auction on
October 10, 2008, as per Ordinance No. 08-5367 as embodied in
Resolution No. 08-611. The auction was published in the Mindanao Gold
Star Daily. However, there was no bidder during the auction. It turned
out that any buyer would have to face the problem of land acquisition
from the Alcantaras. While NPC failed to settle the tax dues on its power
plants, the Alcantaras paid taxes on their land property upon which the
power plants were established. Hence, the local government of Iligan
City could only acquire the power plant and resell it but not the lands.
The land issue could not be resolved by the local government since it
could not acquire it. The most logical buyer of the power plant would be
the Alcantaras because they own the land as well.

CRITICAL DISCUSSION
Ariel P. Anghay
The Alcantara group through Conal Holdings Corporation offered
to pay Php 275 million on November 10, 2008, for the IDPP with
conditions such as a waiver of NPC over the properties since NPC
questioned in court the sale of the property by the local government.
NPC also submitted an offer of Php 90 M, a price deemed very low for
the local government to agree to the sale.
In Resolution No. 09-96, the Sanggunian requested the City Mayor
to step up the resale of the IDPP and prompted him to negotiate with the
PSALM/NPC for its unconditional recognition of the City’s ownership
over the IDPP. Hence, PSALM/NPC cleared the way for the local
government to sell the property.

CRITICAL DISCUSSION
Ariel P. Anghay
From an initial bid of Php 275 million, the Conal Holdings
Corporation upped the offer to Php 300 million to finally seal the
deal. Moreover, Conal offered the local government its services to
man the plants after the turning over of the facilities to the city by
the PSALM/NPC.
Thus, the Compromise Agreement dated June 29, 2010, was
signed. NPC agreed to turn over the plant to the City of Iligan. The
case NPC filed at the CBAA and RTC was dismissed pursuant to
the joint motion filed by both NPC and the city of Iligan. Conal
Holdings price deal was Php 300 M.

CRITICAL DISCUSSION
Ariel P. Anghay
There was an obstacle to the peaceful sale due to the
offer made by the Atayde Group, PGMC, and the Borja
Group connected with the Iligan Light. The offer was Php
500 M as contained in a letter dated December 16, 2010. On
December 16, 2010, the City Mayor wrote back Mr. Atayde,
declining the offer since the sale of the plants has already
been made with Conal Holdings Corporation (CHC) as
approved by the Sangguniang Panlungsod.

CRITICAL DISCUSSION
Ariel P. Anghay
The offer led to a frenzy of debates and exchanges of ideas,
justifications and position papers. On March 7, 2011, the
Sangguniang Panlungsod passed Resolution No. 11-189 creating a
task force to resolve by negotiation the sale of the power plants
(IDPP and IDPP2). The task force was headed by Councilor Moises
G. Dalisay Jr.
On May 9, 2011, the Ad Hoc Committee introduced points of
reference for the sale to resolve the land issue, giving the owner of
the land a bidding advantage. One point of reference was the
awarding of the plants to Conal Holdings Corporation. The Borja
group that offered Php 500 million asserted that it won the
bidding because its offer was higher than the Php 300 M offer of
Conal Holdings Corporation.

CRITICAL DISCUSSION
Ariel P. Anghay
Deed of Conditional Sale between Iligan and Conal
Holdings Corporation for the Iligan Diesel Power Plant
The sale of the plant to Conal Holdings is under review by an
appropriate government agency, the Commission on Audit, to
determine if the appropriate procedure was observed.
To date, the ownership of the plants has not been transferred
yet to Conal Holdings.

INTEGRATION OF ANALYSIS
Ariel P. Anghay
The Build-Operate-Transfer (BOT)Law or Republic Act 7718
allows the private sector to construct big government projects. The
BOT scheme offers incentives or “sweeteners” to the government
such as tax holdings, profit repatriation, and duty and contractors’
tax exemptions.
Thus, all IPP contracts have attractive guarantees and
incentives to provide comfort in financing ventures that entail high
capital and risks. The lapse is that IPPs are funded by foreign loans
secured with a form of sovereign guarantee on performance
undertaking (PU). If the IPPs are defaulted, the government pays.
The PUs carry the full backing of the government and are treated
as quasi-sovereign debt enabling the power companies to raise
funds abroad rather than use their own money. While the Ramos’
administration declared IPP contracts as investments, they are in
fact the country’s future debts.

Ariel P. Anghay
Another lapse in policy is the provision in the contracts that
guarantee 15 to 25 years of IPP’s profitability whether or not the
plant operates.
1. Take or Pay. NAPOCOR is obliged to pay for most of the
power produced by the IPP whether or not NAPOCOR actually
needs it.
2. Force Majeure Provisions that force the government to pay
the IPPs even during fortuitous events like labor strikes,
insurrection, war, calamities and natural disasters.
3. Contracts are quoted in US dollars so that all exchange –
rate fluctuations are borne by the government.
4. The government could take over certain responsibilities of
the IPP during project implementation such as plant site, right of
way, transmission lines, refund of tax payments, fuel cost
guarantee that requires NAPOCOR to supply and pay for fund
used to run the plants.

Ariel P. Anghay
The Build-Operate-Transfer scheme lacks clear
provision for ownership transfer. There should be a clear
stipulation ensuring no encumbrance as to the disposal of
the BOT project controlled by the local government due to
land property. As experienced, the local government had
difficulty disposing of the BOT project due to land property
issue, that is, the BOT project was sold apart from its land
property.

Ariel P. Anghay
The sale of property such as IPP shall be done in open
bidding or Swiss challenge. In case only one bidder comes
forward, there is a declaration of no successful bidding. In
cases where the holder of the IPP happens to be the LGU,
there are no expressed provisions on the conditions by which
the IPP could be sold. Hence, the IPP can be sold at a price
too low than its assessed market value by independent
appraisers- a situation that is inimical to the interest of the
government.
An LGU that lacks the logistical and manpower supply
to maintain a confiscated property may incur heavy losses.
To avert any losses, the LGU may resort to selling the IPP
property at a much lower price.

 In view of the findings of the study, the following policy
options are recommended:
1. Amendments to R.A. NO. 7648 and R.A.
NO.9136
1.1. Limit the authority of the President in entering into
negotiated contracts. Effective controls should be put in
place to insure that the terms of the contracts are disclosed
to the public and that the basis for selection of contractors
be subject to review and verification by international
appraisers only to prevent bribery to secure contracts.
Immediate family members of the President and his wife
should be banned from participating in the negotiated
contracts to prevent nepotism.

NO.9136
1.2 Guidelines on Conditions of Turnover for expiring
IPP contracts be promulgated to include the manner of
disposition of assets in case of confiscation due to non-
payment of taxes. Moreover, the BIR should impose
stricter monitoring of and harsher punishment against IPP’s
that failed to pay yearly taxes on plants and equipment
particularly on the last 5 years prior to expiry of contract. It
is clear that the NPC purposely defaulted on taxes
because it planned to redeem at a much lower price the
confiscated property of the Iligan IPP’s.

NO.9136
1.3 Condition on the grant of IPP contract must
specify that the ownership of the plants and equipment
and the land upon which those are established should
be one person or judicial entity only. This is to ensure
that in the event of expiry of contract, the disposition of
the assets will not be hampered by separate
ownership of land and plants.

 In view of the findings of the study, the following
policy options are recommended:
2. Review the culpabilities of decision makers
involved in awarding the contracts and set up an
independent IPP Commission to implement the
findings of the review panel created for such
purpose and mete due punishment: erring officials
should be listed and barred from engaging in
government service.

3. Judicial review by the Supreme Court on the
constitutionality of the incentives and sweeteners offered
by the Philippine government as stipulated in the Build-
Operate-Transfer law. The results of the judicial review
will finally determine the need to repeal the law and/or
amend specific provisions that are onerous and inimical
to the interest of the nation.

4. Prosecute Former President Fidel V. Ramos since
all research leads to his gross mismanagement of
the power industry that compromised the
government into honoring contracts of IPP until
2028. Ramos deserves to answer for his
culpabilities.

The policy paper has led to the following
conclusions:
1. The granting by Congress to President Fidel V.
Ramos emergency powers to deal on the electric
power crisis created heavy problems and serious
economic consequential effects far beyond the term of
President Ramos’ office way down to 2028 when the
last IPP contract shall expire. What were touted as IPP
investments become long-term debts of the country.
IPP spawned more problems than solution to the
power sector crisis.

conclusions:
2. The terms to motivate energy power industry
players to join Build-Operate-Transfer scheme were
onerous and grossly disadvantageous to the political
economy of the country. That the indebtedness of the
government due to the exorbitant fees it paid to IPP’s
whether they supply power or not undermines correct
and judicious intentions and prudent management of
the energy sector by government leaders.

conclusions:
3. That the erring officials remain unpunished and
some are even back to government service smack
accountability and good public governance. The nation
cannot begin the healing and recovery process unless
the perpetrators are brought to justice and made to
account for their sins against the Filipino people.

conclusions:
4. The gross negligence of President Fidel V. Ramos
and his minions to the stark warnings of the World
Bank and the government agencies on the perils of
the decisions made to accommodate more negotiated
contracts that generate electricity more than what was
needed was evident in the transactions. This clearly
shows that BOT enriched those who were close to the
President at the expense of the country’s welfare.

conclusions:
5. The lapses and gaps in the laws on the electric
power energy created snowballing problems until
2028 that, when not addressed, will create a
permanent scar in the country’s political economy.

Policy Lapses and Gaps on the Formulation of Energy Laws of the Philippines:The Case of Iligan Diesel Power Plants

Policy Lapses and Gaps on the Formulation of Energy Laws of the Philippines:The Case of Iligan Diesel Power Plants

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