generators

The DOE’s Php 10 Billion Deal

The DOE’s Php 10 Billion Deal
By Dean De La Paz
Filipino Voices

The plan was to skip the safeguards, skirt congressional debate and virtually write a Php 10 billion check for 160 megawatt (mw) generators for Mindanao. One reader says let’s cut through the crap. Let’s do that. Let us analyze this deal from the perspective of accounting, tariffs, and cost-benefits.

Freed from checks, of the amount open to risk and spending-as-they-please (anything from matches and kindling to rain dancers and glow worms), half comes from calamity funds, another, from contingencies. By applying the US$ 1.0 million per megawatt benchmark for the development of diesel-fired plants, Php 20 billion calamity and contingency funds can buy 444.50 megawatts at Php 45.00 to the dollar.

The ratio assumes capitalized expenditures (capex) depreciated over continuous annual cash flows. Of that 25% are pre-operating development plus financing charges, while from 55% (for Japanese-branded engines) to 75% (for European-branded equipment) are capex.

If diesels generators were purchased by the National Power Corporation (NPC), cost capitalization applies and capex depreciates thus allowing fewer encumbrances on downstream tariffs. Unfortunately, NPC does not have that kind of money for a crisis they predicted would hit in 2008 when Mindanao’s 1,697mw demand surpassed 1,681mw capacities.

Ad hoc cabinet gatekeepers should crunch the math before opening their mouths. Should local government units (LGU) lease or buy 160mw generators, both ways, acquisition is charged in the present.

Under government accounting protocols, equipment acquisition must be expensed in real-time. Calamity and contingent funds are not allowed depreciation when expended by LGUs. Their acquisition costs cannot be capitalized over time. Together with real-time lease charges, operation and maintenance (O&M) and fuel costs inflict inordinately heavy burdens on tariffs when we consider that the crisis is quickly washed off by the coming rains.

When the Energy Department pushed for emergency powers they estimated the cost of the Mindanao fix between Php 8 billion to Php 10 billion. Where did they get those numbers?

At Php 10 billion for leases, the effective expense of US$ 1.40 million/mw against capital expenditures ranging from US$ 550 thousand to US$ 750 thousand per megawatt is excessive. There would be no financing or pre-operating costs. For every dollar only from 39% to 54% goes to generating capacity. This raises red flags. The fudge represents funds risked to “other costs”, corruption and windfalls for middlemen.

Until the rains come in July, that’s a monthly operating expense of Php 2.5 billion against the estimates of business losses of Php 1.0 billion from revenues foregone and incremental expenses from self-generating units. If Php 2.5 billion includes fuel and O&M charges, the unsubsidized fuel-cost soars north from Php 19.60 to over Php 24.11 per kilowatt-hour. Higher if fuel costs were not included.

Why? The emergency funds must cover leasing, O&M and fuel costs. Our basis is NPC’s Small Power Utilities Group (SPUG) full costs and subsidies.

Modulars run on diesel, barges, on bunker. Bunker is cheaper. Officials want diesel-fired 160 megawatt modulars forgetting the four dormant bunker-fired 242mw barges moored off Navotas.

Fuel costs for SPUG’s bunker-fired plants range from Php 12.00/kwh to Php 18.00/kwh. When generators cost US$ 1.4 million/mw, minimum diesel costs start from Php 19.60/kwh to Php 24.11/kwh. Costs per kilowatt-hour increase given load factors of 90% and below. Sensitivity runs indicate as much as Php 25.29/kwh. Now add leasing and O&M.

Back to the bigger picture, the net effects are additional losses of at least Php 5 million where the Php 1.0 billion monthly business losses vanish but are replaced by total monthly costs of Php 2.5 billion (Php 10 billion divided by four months) and astronomical increases in tariffs.

After spending Php 10 billion, over Php 750 million in residual monthly losses will continue as the 160mw patchwork hardly covers Mindanao’s 650mw deficiency.

On logistics, because modulars come in increments of 1.0mw and 2.0mw units, 160mw entails at least eighty separate power purchase agreements (PPA) where each PPA creates a Gordian knot of stranded asset and contract costs. Because of the abbreviated crisis period, take-or-pay provisions are likely.

In summary, government accounting compels real-time expenses. The benchmark equipment costs, whether leased or purchased, allow margins that license corruption. The per kilowatt-hour charges for this 160mw scare, skirt and suck strategy show suddenly-bloated tariffs. By expensing Php 2.5 billion to mitigate Php 1.0 billion in monthly losses in the Garci and Ampatuan sandbox, this ludicrous gambit adds to the Mindanao curse as it falls short of the temporary deficiency but recklessly allows unchecked, corruption-prone leeway.