Tuesday, October 19, 2010

Ileco 3 power deal with Artech onerous – NEA

By Francis Allan L. Angelo

THE board of directors of the Iloilo Electric Cooperative (Ileco 3) committed gross neglect of duty for approving the power supply agreement (PSA) with an independent power producer sans careful analysis of its provisions.

This was the main finding of the National Electrification Administration (NEA) when it investigated Ileco 3’s deal with Applied Research Technologies Philippines Inc. last year.

NEA had ordered the removal of six Ileco 3 directors for gross neglect of duty and grave misconduct. They were also perpetually barred from working in any electric cooperative.

The PSA, as claimed by former Ileco 3 board president Mateo B. Baldoza was attended by bribery after admitting that he received money at the mansion of former Iloilo governor Niel D. Tupas Sr. and at Fine Rock Hotel.

The alleged bribery happened while Artech was prodding Ileco 3 to sign the PSA.

According to the NEA decision dated October 4, 2010, Artech was not one of the power suppliers that joined the bidding conducted by Panay-Guimaras electric cooperatives.

NEA noted that only five companies joined the bidding – ASEA One power Corp., DMCI Concepcion Power Corp., Global Business Power Corp., Petroxy Corp. and Trans-Asia Oil and Energy Development Corp.

Citing Energy Regulatory Commission (ERC) rules, NEA said electric cooperatives should undertake Competitive Selection Process before entering into a PSA.

CSP refers to the process of selecting a new power provider through transparent and competitive bidding to secure lowest long-term cost of power and services.

“On this score, we find Ileco 3 not to have conducted a competitive selection process when it executed a PSA with Artech,” the NEA decisions said.

HASTILY EXECUTED

Artech presented its proposal to provide power to Ileco 3 (using diesel and later biomass sources) on March 18, 2009 while the draft PSA was presented to the board April 5, 2009.

But NEA said it did not find evidence that a “thorough and extensive deliberation/evaluation” was ever conducted on such proposal/draft PSA. Worse, the PSA was executed April 21, 2009, or 16 days after it was presented to the board.

Ileco 3 records show that it was supposed to study the draft PSA for 60 days starting March 5, 2009. The Technical Services Department of Ileco 3 also presented a comparative study to the board on April 16, 2009 showing that Artech’s proposal was disadvantageous to the cooperative.

But majority of the directors barreled their way to approving it on April 21 in Fine Rock Hotel where the second bribery occurred. In fact, the approval of the PSA was not included in the board’s agenda but was inserted by dismissed director Azur Salcedo.

NEA said there is substantial evidence to show that the PSA was railroaded:

- Salcedo insisted on placing in the agenda of the April 21, 2009 board meeting the approval of PSA with Artech;

- Basic procedure was disregarded when dismissed director Joy Fuentes was allowed to vote via text messaging;

- Instead of studying the PSA for 60 days as agreed in the April 5, 2009 board meeting, the board approved the deal four days after they were summoned by Tupas on April 16, 2009.

ONEROUS PROVISIONS

The NEA also found “grossly disadvantageous” provisions in the Ileco 3-Artech PSA.

The basic rate of P6.64 per kilowatt-hour (kWh) in the first three years of the operation of the diesel-fired power plant as baseload is implausible as the cost of fuel is pegged at P30 plus per liter.

The PSA also did not specify the target date as to when the biomass plant will start commercial operations.

Why is this onerous to Ileco 3 consumer-members?

Ileco 3’s interim power supply agreement with the National Power Corp. will expire December 2010, thus the cooperative is facing acute power shortage starting next year if it does not secure fresh supply.

Section 3 of Artech’s PSA provides that the contract will “take effect upon commercial operations of the proposed Biomass Power Plant.

Other stipulations in the PSA that must be satisfied before commercial operations start is the approval of the financing package for the project; receipt of the environmental compliance certificate; ERC approval of the PSA; and local government unit approval of the project.

“This only goes to show that the commercial operations of the Artech power plant could go even beyond the expiry date of the exiting power supply agreement which Ileco 3 has with NPC,” NEA said.

Another glitch in the Artech contract is the lack of prompt payment discount (PPD) unlike Ileco 3’s deal with Asea One which has a 3% PPD. Other power producers also afford PPD in their respective offer sheets.

The PSA’s annual projected demand growth for the 4th year of Artech operations and onwards is “highly improbable, if not totally impossible.”

From 55,750,000 kWh contracted demand for the first 3 years of PSA, the minimum off-take increased to 84,480,000 kWh (51% hike) in the 4th year and 92,400,000 kWh (66% increase) in the 5th year.

The PSA with Artech is over-contracted if the minimum off-take (or minimum amount of energy to be purchased from the producer) is compared with Ileco 3’s forecast demand based on its Integrated Computerized Planning Model.

NEA said Ileco 3 will end up paying for excess power if it honors the PSA.

Based on NEA analysis, Ileco 3 will pay P55,663,120 for 8,383,00 kWh of excess power in 2011.

In 2012, Ileco 3 will pay P30,407,520 for 4,593,000 kWh of unconsumed electricity. In 2013, the excess electricity will total 723,000 and will cost Ileco 3 P4,800,720.

But in 2014, the excess electricity in the Artech deal will reach 25,522,000 kWh and will cost Ileco 3 consumers P157,662,155.

In 2015 and onwards, consumers will pay P181,349,960 for 29,470,000 kWh of unused electricity.

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