Government Contracts With Independent Power Producers MS Report No. 2005 09

Management Services
Report No. 2005-09

Sectoral Performance Audit
Government Contracts
with
Independent Power Producers
Republic of the Philippines
Commission on Audit
MANAGEMENT SERVICES
Commonwealth Avenue, Quezon City, Philippines
Telephone Nos. 931-9235, 931-7455
March 29, 2007
HON. CYRIL C. DEL CALLAR

President, National Power Corp.
Agham Road cor. Quezon Avenue
Quezon City
Sir:
We are pleased to transmit the report on the sectoral performance

audit of Government Contracts with Independent Power Producers. The audit
was conducted by a team from the Management Services, this Commission,
pursuant to COA MS/TS Office Order Nos. 2005-036 and 2005-036A dated
July 6 and November 11, 2005, respectively. The results of the audit were
transmitted to that Office and other concerned agencies for comment on
January 4, 2007. All comments forwarded to this Office were evaluated and
incorporated in the report, where appropriate.
The audit was conducted to assess the propriety of IPP contracting and
effectiveness of contract management in ensuring the provision of
uninterrupted power supply at reasonable cost taking into consideration the
contracted capacity, contract arrangements and fuel management.
We look forward to the implementation of the audit recommendations

and we would appreciate being informed of the actions taken thereon within
one month from receipt thereof.
We acknowledge the cooperation and assistance extended to the team

during the audit by the officials and staff of the NPC.
Very truly yours,
By Authority of the Chairman:
SUSAN P. GARCIA
Director IV
Contents Page
Part I Executive Summary 1
Introduction 2
Audit Objective 2
Audit Scope & Methodology 3
Audit Conclusion 4
Part II The Electric Generation Sector 9
Introduction 10
The Electric Power System
Before RA 9136 13
Electric Power Industry Reform Act 13
Implementing/Participating Agencies
and Linkages 13
Part III Contracts with Independent Power Producers 17
Introduction 18
IPP Contracts 18
Project Status 20
IPP Contract Review 21
Part IV Audit Observations 23
Chapter 1 Adequate Contracted Capacity 24
Introduction 25
Observation 26
Management Comments and Team’s
Rejoinder 43
Chapter 2 Reasonable Contract Arrangements 48
Introduction 49
Observations 49, 54, 56, 58, 59, 62,
63,66
Rejoinder 51, 55, 57, 61, 62, 66, 69
Contents Page
Chapter 3 Efficient Fuel Management 74
Introduction 75
Observation 75, 81, 86, 89, 90
Rejoinder 79, 85, 88, 90, 92
Part IV Recommendations 95
Part I
Executive Summary
1
EXECUTIVE SUMMARY
INTRODUCTION
The issuance of Executive Order No. 215 on July 10, 1987 opened to the
private sector an opportunity to participate in the electricity generation sector.
It was believed that the generation of electricity by the private sector can
provide a means of increasing power capacity to meet the projected increase in
power demand in the future without in anyway requiring financial assistance or
guarantee from the government. This paved the way for the entry of
Independent Power Producers (IPPs).
The participation of the private sector was enhanced under RA 6957 issued on
July 9, 1990 authorizing the financing, construction, operation and maintenance
of infrastructure projects by the private sector. All government infrastructure
agencies including government-owned and controlled corporations and local
government units were then authorized to enter into contract with any duly pre-
qualified contractor for the financing, construction, operation and maintenance
of any viable infrastructure facilities through the build-operate-and-transfer
(BOT) scheme or any of its variants.
At the height of the power crisis in 1993, RA 7648 was issued granting the
President of the Philippines authority to enter into negotiated contracts for the
construction, repair, rehabilitation, improvement and maintenance of power
plants, projects and facilities subject to certain requirements.
Pursuant to these laws, the National Power Corporation (NPC) entered into 42
IPP contracts under different contractual arrangements. Under these contracts,
NPC is under obligation to pay the IPPs, capital recovery fees among others, to
recover the IPPs’ capital investment with corresponding return on investment.
The total capacity fees payable to IPPs for the duration of the co-operation
period where ownership of the plant will be transferred to NPC at the end of co-
operation period are recognized outright in the books of the NPC as Electric
Plant under Capital Lease Plant. As of December 2005, there were 13 IPP
contracts recorded in the NPC books with an aggregate balance of P596 billion.
AUDIT OBJECTIVE
The audit was conducted to assess the propriety of IPP contracting and
effectiveness of contract management in ensuring the provision of uninterrupted
power supply at reasonable cost taking into consideration the
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EXECUTIVE SUMMARY
following factors:
Contracted capacity
Contract arrangements
Fuel management
AUDIT SCOPE AND METHODOLOGY
The audit covered the evaluation of IPP contracts and their implementation in
line with existing laws, rules, regulations and policies adopted by the following
agencies:
National Power Corporation (NPC)

Department of Energy (DOE)
Power Sector Assets and Liabilities Management (PSALM)
National Transmission Corporation (TransCo)
The team considered the following key criteria for assessing the propriety of
IPP contracting and effectiveness of contract management:
Adequate Contracted Capacity

Reasonable Contract Arrangements
Efficient Fuel Management
To achieve the audit objective, the team adopted the following audit techniques:
Analyzed available relevant reports of energy plants specifically on energy

generation capacity and reported actual generation from 1994 to 2004;
Reviewed relevant laws, circulars and guidelines on IPP’s contract
management schemes;
Interviewed concerned officials of NPC, TransCo, DOE, PSALM, PNOC-
EDC and Investment Coordination Committee-National Economic
Development Authority (ICC-NEDA) and attended briefings conducted by the
said agencies;
Examined selected contracts to determine consistency, reasonableness and
compliance of provisions with pertinent rules and regulations;
Reviewed procedures and guidelines in the implementation and management
of fuel agreements;
Inspected power plants and administered questionnaires to concerned officials
and employees; and
Confirmed data gathered from the concerned agencies with the data
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EXECUTIVE SUMMARY
maintained at the selected generating plants.
The audit was conducted from July 27, 2005 to May 13, 2006 pursuant to COA
MS/TS Office Order Nos. 2005-036 and 2005-036A dated July 6 and
November 11, 2005, respectively.
AUDIT CONCLUSION
The audit concluded that IPP contracting may not be considered properly
undertaken and contracts were not effectively managed. Thus, while power
supply was uninterrupted, the corresponding cost may not be considered
reasonable adversely affecting public interest. This is manifested in excessive
contracted generation capacities, unfavorable contract arrangements and lapses
in fuel management which contributed to NPC’s substantial losses as illustrated
below:
While the reported existing generation capacity as of December 1994 were

already sufficient to meet the forecasted peak demands for 1995 to 2000, 12
additional IPP contracts were still entered into between 1995 to 1999. This
then resulted in excessive generation capacity which the NPC is obligated to
pay under the contracts contributing to NPC’s substantial losses. NPC’s
average generation costs on IPP plants representing fees paid to IPPs and fuel
costs alone already amounted to P4.98 in CY 2004 and P5.34 in CY 2005 per
kwh. During this period, NPC was only allowed by the Energy Regulatory
Commission (ERC) to charge generation costs per kwh of P3.4236. This
resulted in NPC’s losses amounting to P1.5564 and P1.9164 per kwh in CYs
2004 and 2005, respectively, for IPP fees and fuel costs alone. The costs of
plant site lease, salaries of NPC employees and other operating costs incurred
in the management of IPP contracts and unconsumed natural gas of P 31.280
billion as of December 31, 2005 were not yet considered in the analysis.
Some contract arrangements were not protective of NPC’s interest as

manifested below:
In a number of IPP contracts, the warranty as to title of the property,

fitness and absence of defects of the power station at the time of transfer
to NPC were excluded. There is therefore no assurance that the power
stations to be turned-over to NPC at the end of co-operation period would
be free from encumbrance and lien and perform at the guaranteed
capacity.
While spare parts were required to be maintained by the IPPs to ensure

uninterrupted operations, these are not required to be turned-over to NPC
at the end of co-operation period. The absence of spare parts then resulted
in cannibalization of some generation units to make other units
operational.
4
EXECUTIVE SUMMARY
The IPPs were allowed under the contract not to operate for a defined
period to undertake pre-arranged or planned outage, normal inspection,
maintenance or repair. In several cases, the defined period was not
consumed during the year and the unutilized balances were allowed to be
carried forward to the following year. This policy of forwarding unutilized
balances to succeeding year may affect the ability of NPC to meet energy
requirements on the affected year as IPPs were then allowed not to operate
for a longer period than necessary without being penalized.
Construction of power plants under the BOT arrangement on a site not

owned by the NPC resulted in substantial expenses during and after the
co-operation period. It costs the NPC P685.034 million to transfer a plant
to another site from a site with market value of only P186 million and
P24.645 million for back rentals and possible additional P43.4 million for
lot acquisition of another plant. Three other sites were being leased by
NPC at monthly rental fees ranging from P722,681.25 to P946,631.40
with provisions that any permanent improvements thereon would redound
to the landowner at the end of the contract. This negates the benefit under
the BOT scheme where NPC was supposed to own the power plant at the
expiration of the co-operation period.
Costs for the conduct of performance, efficiency and other tests are
chargeable to the account of the NPC when it is the IPPs’ responsibility to
demonstrate the plant capability to produce the contracted/guaranteed
capacity and net heat rates. Thus, in a number of cases, NPC did not
strictly require or even waived the conduct of testing to avoid the cost to
be incurred. This may not be considered appropriate as payments of IPP
fees were supposed to have been based on the results of tests. There was
therefore no assurance that the contracted plants are capable of delivering
the guaranteed electricity which are being paid for by the NPC.
Lapses in fuel management resulted in excessive contracted quantities that

merely formed part of accumulated fuel and stored fuel inventories valued at
P34 billion as of December 2005, uncontrolled fuel consumption for activities
without energy generation, and provision of fuel for energy generation
intended for another client of the IPP. This condition unnecessarily tied-up
NPC’s resources, which are funded from loans and may result in possible
inventory losses and additional carrying cost. These cases are illustrated
below:
The annual contracted quantities of natural gas for CYs 2002 to 2005 were
excessive being 141% to 195% of the forecasted need and 122% to 191%
of the total consumption. The unconsumed natural gas as of December 31,
2005 was recognized in the NPC’s books as stored fuel – Ilijan valued at
P31.280 billion. This amount, which was charged to the net government
share from Malampaya and deferred payment facilities, was unlikely to be
recovered and would eventually form part of NPC’s losses.
The minimum fuel inventory levels set for seven (7) IPPs were way
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EXECUTIVE SUMMARY
beyond the IPPs’ actual requirements resulting in accumulation of fuel

inventories. These are good for 6 to as long as 686 months consumption.
Other fuel contracts with oil companies amounting to P2.113 billion were
likewise not based on forecasted fuel requirements resulting in excessive
fuel inventories which amounted to P2.654 billion as of December 31,
2005.
Seven (7) IPP contracts have no prescribed fuel limitations for activities
without energy generation such as start up, shutdown, and the like while
five others with different rated capacities and heat rates have the same
prescribed fuel limitations. For CY 2004 alone, fuel utilization of these
IPPs for this purpose ranged from P.280 to P20.620 million.
NPC supplied fuel to an IPP for the generation of energy to be delivered to

other client of the IPP. This resulted in accumulated receivable by the
NPC from the IPP which reached P656.186 million as of July 2006.
While NPC was prohibited under the EPIRA law to enter into new contracts for
the purchase of power, the management of existing IPP contracts still remains
with NPC. Hence, the team’s recommended measures under Part V of the report
were addressed to the NPC.
MANAGEMENT’S REACTION
The team forwarded the draft audit report to NPC, PSALM, DOE, and
TRANSCO on January 4, 2007 for comments. The DOE Secretary in turn,
forwarded a copy of the draft report to the Secretaries of Finance and Justice
and the Director-General of the National Economic Development
Administration for their comments, as members of the committee that reviewed
the IPP contracts.
NPC acknowledged the audit observations as true and correct with some
reservations. Detailed comments were incorporated in the report, where
appropriate. The NPC’s salient explanations were shared, in one way or
another, by TRANSCO and PSALM. They claimed that:
installed capacities are affected, among others, by deterioration or de-rating of

plant capacity due to aging, limited water inflows, and plant and transmission
line maintenance. Hence, evaluation should be based on dependable
capacities;
the additional contracts were entered into because of the looming power
shortage in Mindanao and to sustain the forecasted high power demand and
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EXECUTIVE SUMMARY
reduce the country’s dependence on imported and costly fuel oil as well as
those hydro projects that have no power benefits. They, however,
acknowledged that the high economic targets were not attained and the actual
demands were below the forecasted peak demand targets. Thus, some IPPs
were underutilized during the period as dispatch was constrained. They
explained that the generating capacity would have been just sufficient to meet
the required reserve levels had the forecasted demand growth been realized.
they require the conduct of capacity and efficiency tests and inventory of
spare parts six months prior to end of contract
they based the contracted fuel quantity on generation and fuel consumption
forecasts and that the shortfall in the take-or-pay quantity for natural gas is
attributed largely to the Biňan-Dasmariňas line constraints which were
corrected only in February 2005. The minimum inventory level considers
procurement lead time and suppliers lead time for production of petroleum
products and restrictions in the logistics of fuel deliveries.
The comment of the DOJ that recommendations were in order was, however,
not shared by the DOE. The DOE considers the recommendation to negotiate
with the IPPs to lower the fees as non-doable as the Inter-agency Review
Committee had already submitted its recommendation to Malacaňang on July 2,
2002. It, however, concurs with the team that it is necessary to require the IPPs
to conduct performance tests prior to turn-over of the power plant to NPC.
TEAM’S REJOINDER
It is true that the team used the installed capacity as of December 1994 due to
the absence of any information on dependable capacity as of that date. The
Power Economics was able to provide data on dependable capacity only for
year 1997 and onwards. However, even in 1997, the reported installed and
dependable capacities were almost the same. This only shows that in 1994,
these plants were even more dependable.
The claim that additional contracts were entered into due to looming power
shortage in Mindanao was also unfounded. The five (5) additional plants
located in Mindanao were contracted during 1996 to 1998 when the two (2)
previously contracted IPP plants, NMPC 1 and 2, were claimed by NPC to be
on extended economic shutdown. This only manifests that installed capacities
already exceeded the requirements.
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EXECUTIVE SUMMARY
It was also noted that the objective of reducing the country’s dependence on
imported and costly fuel oil was not served as two (2) of the additional
contracted plants were likewise run by diesel.
Moreover, NPC was already aware as early as 1997 that the forecasted demands
in 1994 were not being sustained and that a number of IPP plants were already
underutilized. Yet, seven (7) IPP contracts were still entered into between May
1997 and November 1998 and two (2) others renewed in 1999.
On the other hand, the benefits from requiring the conduct of capacity and
efficiency tests prior to the expiration of the contract may be negated by the
contract provision excluding warranties as to fitness and absence of defects of
the power station at the time of transfer.
Records would also prove wrong the claim that contracted fuel quantities were
based on fuel consumption forecasts as nine (9) IPPs without forecasted fuel
requirements were just the same included in the contract for the supply of fuel.
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Part II
The Electric Generation Sector
9
THE ELECTRIC GENERATION SECTOR
INTRODUCTION
NPC was created under Commonwealth Act No. 120 dated November 3, 1936
which nationalized the hydroelectric industry and reserved for the use of NPC,
all streams, lakes and springs in the Philippines where power may be
developed.
On September 9, 1971, by virtue of Republic Act No. 6395, the NPC charter
was revised and its activities and functions decentralized to be carried out by
three (3) regional offices to be established in Luzon, Visayas and Mindanao.
The scope of energy sources for power generation was also expanded under this
Act to include nuclear, geothermal, and other sources and mandated NPC to
undertake the establishment and operation of power transmission nationwide.
Thus, under Presidential Decree No. 40 dated November 11, 1972, NPC was
held responsible in setting up transmission line grids and construction of
associated generation facilities in Luzon, Visayas and Mindanao and major
islands of the country.
Under this Decree, the private sector participation in the electric industry was
limited to:
areas not embraced by the NPC grid, where the state may permit cooperatives
and private utilities to own and operate isolated grids and generation facilities;
such existing privately-owned generating facilities which the NPC may allow
to remain in operation; and
the distribution of electric power which may be undertaken by cooperatives,
local government units, and private utilities over their respective franchise.
In line with the NPC’s policy to centralize all generating capacities in Luzon
under its operation as part of the unification of the so called Luzon grid, the
government purchased the thermal plants of Meralco consisting of Malaya 1 in
Pililia, Rizal; Gardners1 and II, and Synders I and II in Sucat, Paranaque; and
fuel storage facilities in San Pascual, Batangas.
In 1987, by virtue of Executive Order No. 215 issued on July 10, 1987, the
construction and operation of the following types of electric generating plants
were opened to private corporations, cooperatives or similar associations
subject to existing rules and regulations:
Cogeneration units, defined as production of electric energy and forms of

useful thermal energy (such as heat and steam), used for industrial,
commercial, heating, or cooling purposes through sequential use of energy;
10
Electric generating plants, intending to sell their production to the grids,

consistent with the development plans formulated by the NPC;
Electric generating plants, intended primarily for the internal use of the owner,
which also plan to sell excess production to the grids; and
Electric generating plants, outside the NPC grids, intending to sell directly or
indirectly to end-users.
A parallel policy to encourage private sector participation and investments is

EO 226 or the Omnibus Investments Code of 1987, enacted on July 27, 1987.
Among its investment policies are the following:
To consider the private sector as the prime mover for economic growth. In this
regard, private initiative is to be encouraged, with deregulation and self-
regulation of business activities to be generally adopted where dictated by
urgent social concerns.
To play a supportive role, rather than competitive one, providing the
framework, the climate and the incentives within which business activity is to
take place.
The private sector participation was expanded upon issuance of RA 6957

(known as the Build-Operate-Transfer Law) enacted on July 9, 1990, as
amended by RA 7728 approved on May 5, 1994. This law authorized the
financing, construction, operation and maintenance of infrastructure projects by
the private sectors under the following contractual arrangements or schemes:
Scheme/
Features
Variant
Build - Operate The project proponent is responsible for the following:
and Transfer
(BOT) • To undertake construction, including financing, of a given
infrastructure facility, and the operation maintenance thereof.
• To operate the facility over the fixed term during which it is allowed
to charge facility users appropriate tolls, fees, rentals, and charges
not exceeding those proposed in its bid or as negotiated and
incorporated in the contract to enable the project proponent to
recover its investment, and operating and maintenance expenses in
the project.
• To transfer the facility to the government agency or local
government unit concerned at the end of the fixed term which shall
not exceed fifty (50) years.
Build and The project proponent undertakes the financing and construction of a
Transfer (BT) given infrastructure or development facility and after its completion
turns it over to the government agency/local government unit
concerned which shall pay the proponent on an agreed schedule its total
investments expended on the project, plus reasonable rate of return
thereon. This arrangement may be employed in the construction of any
infrastructure or development project, including critical facilities which
for security or strategic reasons, must be operated directly by the
government.
11
Scheme/
Features
Variant
Build - Own and Project proponent is authorized to finance, construct, own, operate and
Operate (BOO) maintain an infrastructure or development facility from which the
proponent is allowed to recover its total investment, operating and
maintenance costs plus a reasonable return thereon by collecting tolls,
fees, rentals or other charges from facility users; Provided, that all such
projects, upon recommendation of the Investment Coordination
Committee (ICC) of the National Economic and Development
Authority (NEDA), shall be approved by the President of the
Philippines. Under this project, the proponent which owns the assets of
the facility may assign its operation and maintenance to a facility
operator.
Build - Lease and The project proponent is authorized to finance and construct an
Transfer (BLT) infrastructure or development facility and upon its completion turns it
over to the government agency or local government unit concerned on
a lease arrangement for a fixed period after which ownership of the
facility is automatically transferred to the government agency or local
government unit concerned.
Build - Transfer The public sector contracts out the building of an infrastructure facility
and Operate to a private entity such that the contractor builds the facility on a turn-
(BTO) key basis, assuming cost overrun, delay and specified performance
risks. Once the facility is commissioned satisfactorily, title is
transferred to the implementing agency. The private entity, however,
operates the facility on behalf of the implementing agency under an
agreement.
Contract - Add and The project proponent adds to an existing infrastructure facility which
Operate (CAO) it is renting from the government. It operates the expanded project
over an agreed franchise period. There may, or may not be a transfer
arrangement in regard to the facility.
Develop - Operate A contractual arrangement whereby favorable conditions external to a
and Transfer new infrastructure project which is to be built by a private project
(DOT) proponent are integrated into the arrangement by giving that entity the
right to develop adjoining property, and thus, enjoy some of the
benefits the investment creates such as property or rent values.
Rehabilitate - A contractual arrangement whereby an existing facility is turned over
Operate and to the private sector to refurbish, operate and maintain for a franchise
Transfer (ROT) period at the expiry of which the legal title to the facility is turned over
to the government. The term is also used to describe the purchase of an
existing facility from abroad, importing, refurbishing, erecting and
consuming it within the host country.
Rehabilitate - Own A contractual arrangement whereby an existing facility is turned over
and Operate to the private sector to refurbish, operate with no time limitation
(ROO) imposed on ownership. As long as the operator is not in violation of its
franchise, it can continue to operate the facility in perpetuity.
The BOT Program has been expanded under the streamlined Private Sector
Participation (PSP) Program, to cover not only the above BOT variants but also
other modalities such as joint venture agreements, Rehabilitate-Operate-
Maintain and Manage (ROMM), Build-Rehabilitate–Operate and Transfer
(BROT), among others.
12
THE ELECTRIC POWER SYSTEM BEFORE RA 9136
Prior to the passage of Republic Act 9136, the generation of energy was
monopolized by NPC which is responsible for the transmission of electricity to
the distributor (like MERALCO) and large industrial users through its high
voltage wire comprising the transmission grid highway interconnecting the
main islands nationwide.
ELECTRIC POWER INDUSTRY REFORM ACT
The Electric Power Industry Reform Act (EPIRA) of 2001 or Republic Act No.
9136 was signed into law on June 8, 2001 and became effective on June 26,
2001. It was designed to improve the delivery of power to end-users by
encouraging greater competition and efficiency in the electric industry and to
bring down electricity rates.
Among the major reforms embodied in RA 9136 are the restructuring of the
electric power industry and the privatization of the NPC. The restructuring of
the electric industry covers the separation of the different components of the
power sector into generation, transmission, distribution and supply sectors. On
the other hand, the privatization of the NPC would involve the sale of its
generation assets to private investors and award of the operation and
maintenance of the transmission assets to a concessionaire. Under this set-up,
the generation of energy shall be competitive and open to all qualified
generation companies and shall no longer be regulated. The transmission and
distribution shall be regulated and subject to the ratemaking power of Energy
Regulatory Commission.
IMPLEMENTING/PARTICIPATING AGENCIES & LINKAGES
The provision of total electrification is under the responsibility the following

agencies:
13
Office Mandate/Functions/Responsibilities
DOE Under the Implementing Rules and Regulations (IRR) of EO 215,

the DOE has overall jurisdiction in the accreditation of qualified
Private Sector Generating Facilities. The review, evaluation, and
accreditation of qualified private sector proposals shall be
undertaken by Energy Industry Administration Bureau of the
DOE, pursuant to Section 12 (c) of RA 7638.
Under RA 7638 dated December 9, 1992, the DOE is responsible

to prepare, integrate, coordinate, supervise, and control all plans,
programs, projects, and activities of the Government relative to
energy exploration, development, utilization, distribution, and
conservation. In addition to its existing power and function, the
DOE shall supervise the restructuring of the electricity industry
and perform the following function:
• To formulate policies for the planning and implementation of a

comprehensive program for the efficient supply and economical
use of energy;
• To prepare and update annually, a Power Development Program

(PDP) to be integrated to Philippine Energy Plan (PEP);
• To ensure the reliability, quality and security of supply of electric

power;
• To encourage private sector investments in the electricity sector

and promote development of indigenous and Renewable Energy
Sources including small-scale renewable energy generating
sources;
• To facilitate and encourage reforms in the structure and

operations of Distribution Utilities for greater efficiency and
lower costs;
• To educate the public on restructuring of the electricity sector

and privatization of NPC assets;
• To establish Wholesale Electricity Spot Market (WESM) and

formulate detailed rules governing the operation thereof;
• To develop policies and procedures and, as appropriate, promote

a system of energy development incentive to enable and
encourage Electric Power Industry Participants to provide
adequate capacity to meet demand including, among others,
reserve requirements;
• To monitor private sector activities relative to energy projects in

order to attain the goals of restructuring, privatization, and
modernization of the electric power sector as provided for under
existing laws;
14
• To assess the requirement of, determine priorities for, provide

direction to, and disseminate information resulting from energy
research and development programs for the optimal development
of various forms of energy production and utilization
technologies;
• To devise ways and means of giving direct benefits to the

province, city, or municipality, especially the community and
people affected, and equitable preferential benefits to the region
that hosts the energy resource and/or the energy- generating
facility; Provided, however, that other provinces, cities,
municipalities, or regions shall not be deprived of their energy
requirements;
• To formulate rules and regulations as may be necessary to

implement the objectives of the Act.
NPC The NPC’s responsibilities are defined under the following laws
and regulations:
Law/Date Responsibility
RA 6395/ To undertake the development of hydroelectric generation
9/10/71 power and production of electricity from nuclear,
geothermal and other sources, as well as transmission of
electric power on a nationwide basis.
PD 40/ To set up transmission line grids and construct associated
11/7/72 generation facilities in Luzon, Mindanao and major islands
of the country including the Visayas.
EO 215/ For the strategic and rational development of the country’s
7/10/87 power grids including construction of generating facilities
and setting up of transmission grids in Luzon, Visayas,
and Mindanao.
RA 9136/ NPC is responsible, among others, for the following:
6/8/01
• To perform the missionary electrification function through
the Small Power Utilities Group (SPUG) and provide
power generation and associated power delivery system in
areas not connected to the transmission system;
• To operate Agus and Pulangui complexes, which shall be

owned by PSALM;
• To generate and sell electricity only from the undisposed

generating assets and IPP contracts of PSALM.
National Recommends to the DOE, applications of electric cooperative to

Electrification build and operate power generation facilities for self-generation or
Administration to contract their power supply requirements with Private Sector
(NEA) Generating Facility.
TRANSCO Under RA 9136, it assumes the transmission functions of the NPC
which includes planning, construction and centralized operation
and maintenance of the high voltage transmission facilities and
grid interconnections.
PSALM Under RA 9136, it is responsible to:
15
Take ownership of all existing NPC generation assets, liabilities,

IPP contracts, real estate and all other disposable assets. All
outstanding obligations of NPC arising from loans, issuances of
bonds, securities and other instruments of indebtedness shall be
transferred to and assumed by PSALM;
Formulate and implement a program for the sale and

privatization of NPC’s Debts and Stranded Contract Costs in
accordance with the Act;
To assume all outstanding financial obligations of Electric

Cooperatives (ECs) to NEA and other government agencies
arising from their respective Rural Electrification Program.
As of audit date, NPC is still managing IPP contracts.

Energy Mandated to perform the combined quasi-judicial, quasi-
Regulatory legislative and administrative functions in the electric energy.
Commission Among its power is to grant, revoke, review and modify the
(ERC) certificate of compliance issued to generation companies and
licenses issued to suppliers.
NEDA-ICC Mandated to approve BOT projects for private sector financing
including any government support and determine the rate of return
on investment for negotiated projects. The ICC review is
undertaken to determine the following:
• Technical, financial, economic and social viability of the project.

• Appropriateness of the private sector financing scheme and
contractual arrangement.
• Acceptability of support arrangement from the government.
16
Part III
Contracts with Independent Power Producers
17
CONTRACTS WITH INDEPENDENT POWER PRODUCERS
INTRODUCTION
In the light of the looming power crisis and in adherence to the liberalization,
deregulation and privatization policies, the government entered into the first
phase of privatization in the energy sector.
In 1987, then President Corazon C. Aquino opened the electricity generation

sector to private sector by virtue of EO No. 215. This paved the way for the
entry of IPPs in the Philippines and the NPC’s entering into contracts with IPPs.
The IPP contracts cover the construction, development and implementation of

power generating plants all over the country classified by fuel types as:
oil-based (diesel, gas turbine or cogeneration)

coal
geothermal
hydro-electric
natural gas
These contracts take the forms of Power Purchase Agreement (PPA) where
NPC commits to purchase power generated by IPP, Energy Conversion
Agreement (ECA) where NPC provides fuel to IPP and purchased the generated
power and variants of Operation and Maintenance (O and M) agreements.
IPP CONTRACTS
The IPP contracts entered into from 1988 to 1999 follow:
Project Co- Mode/Date of Date of

Name/ operation Contract Comm’l. Fuel Grid
No. Location Proponent Period Execution Oper’n. type Zone
UNDER AQUINO ADMINISTRATION
1 Navotas Gas Turbine Power Hopewell Holdings, 10 Negotiated / 1/91 Diesel Luzon
Station 1-3 (Navotas I Thermal)/ Ltd., Hongkong November 16,
Navotas, M.M. 1998
2 Pagbilao Coal-Fired Power Plant Hopewell Holdings, 29 Bidded / Nov. I- 6/96 Coal Luzon
(Pagbilao CFTPP)/ Quezon Ltd., Hongkong 9, 1991 II- 3/96
3 Mindanao Diesel Power Barges Mitsui/BWES, Japan/ 15 Negotiated / I-3/94 Bunker C Mindanao
Project (PB 117 & 118)/ Denmark Feb. 13, 1992 II-8/94
Compostela Valley & Agusan
del Norte
4 Mak-Ban Binary Geothermal ORMAT, Inc., USA 10 Negotiated / 3/94 Diesel Luzon
Plant (MB Ormat)/Laguna Feb. 21, 1992
5 Limay Bataan Gas Turbine ABB/Marubeni/Kaw 15 Negotiated / Diesel Luzon
Combined Cycle GTPP “ Block asaki Consortium, Feb. 27, 1992
A” (Limay CCPP “A”)/Bataan Swiss/Japan
- SC 10/94
- CC 4/94
18

6 Navotas Gas Turbine Power Hopewell Holdings, 12 Bidded/June 29, 3/93 Diesel Luzon
Station Unit 4 (Navotas II) / Ltd., Hongkong 1992
Navotas, M.M.
7 Pinamucan Batangas Diesel Enron Power Corp. , 10 Bidded/June 29, 7/93 Bunker C Luzon
Power Plant (Pinamucan) / USA 1992
Batangas
8 Iligan City Diesel Plant I ALSONS/TOMEN, 12 Bidded/June 29, 7/93 Bunker C Mindanao
(NMPC I) /Iligan City Philippines/Japan 1992
9 Limay Bataan Gas Turbine ABB/Marubeni/Kaw 15 Repeat Order/ Diesel Luzon
Combined Cycle GTPP “ Block asaki Consortium, June 29, 1992
B” (Limay CCPP “B”)/Bataan Swiss/Japan
- SC 12/94
- CC 11/93
UNDER RAMOS ADMINISTRATION
10 Nine (9) Gas Turbine Power Hopewell, Tileman 10 Negotiated / 1/93 Diesel Luzon
Barges/ Navotas Ltd., Hongkong April 1992
11 Clark Air Base Diesel Plant/ Electrobus Consolidate, 7 Negotiated / 7/92 Diesel Luzon
Pampanga Philippines July 31, 1992
12 Ambuklao Hydro Electric Power MIESCOR, 5 Negotiated / 10/95 Hydro Luzon
Plant/ Mt. Province Philippines Sept. 14, 1992
13 Iligan City Diesel Power Plant II ALSONS/TOMEN, 12 Bidded / Nov. 12/93 Bunker C Mindanao
(NMPC II)/Iligan City Philippines/Japan 19, 1992
14 Subic Zambales Diesel Power Enron Power Corp., 15 Bidded / Jan. 2/94 Bunker C Luzon
Plant II (ENRON SUBIC II)/ USA 7, 1993
Zambales
15 Subic Zambales Diesel Power Enron Power Corp., 5 Negotiated / 1/03 Bunker C Luzon
Plant I (ENRON SUBIC I)/ USA Jan. 8, 1993
Zambales
16 Bauang La Union Diesel Power First Private Power 15 Bidded / Jan. 7/95 Bunker C Luzon
Plant (BPPC)/La Union Corp., Philippines 11, 1993
17 Calaca Batangas Diesel Power Far East Levingston, 5 Negotiated / 9/93 Bunker C Luzon
Barge/Batangas Singapore/ Polar Jan. 18, 1993
18 Toledo Cebu Coal-Fired Atlas Com. Mining 10 Negotiated / 2/93 Coal Visayas
Thermal Power Plant/Cebu City and Dev’t Corp. Feb. 25, 1993
19 Binga Hydro Power Plant/Mt. Chiang Jiang Energy 15 Bidded / July 8/93 Hydro Luzon
Province Corp. , China 5, 1993
20 Cavite EPZA Diesel Power Magellan Cogeneration 10 Negotiated / 12/95 Bunker C Luzon
Plant (Magellan/MCI)/Cavite Utilities, Philippines Sept. 23, 1993
21 Engineering Island Power Sabah Shipyard, SDN, 5 Negotiated / 10/94 Naptha Visayas
Barge/Manila BHD, Malaysia Sept. 8, 1993
22 Bataan EPZA Diesel Power Edison Global, 10 Negotiated / 6/94 Bunker C Luzon
Plant/Bataan Hongkong Oct. 15, 1993
23 Navotas Diesel Power Barge East Asia Power 5 Negotiated / 9/94 Bunker C Luzon
I/Navotas Corp., Singapore Nov. 1993
24 Navotas Diesel Power Barge East Asia Power 5 Negotiated / 9/94 Bunker C Luzon
2/Navotas Corp., Singapore Nov. 1993
25 North Harbor Diesel Barges Far East Levingston, 5 Negotiated / 7/94 Bunker C Luzon
(FELS 2)/Navotas Singapore Dec. 27, 1993
26 Leyte A Geothermal Power PNOC-EDC, 15 Negotiated / 7/96 Geothermal Visayas
Plant/Leyte Philippines Mar. 4, 1994
27 Naga Thermal Plant SALCON Power 15 Bidded/March Diesel/ Visayas
Complex/Cebu City Corp., Philippines) 25, 1994 Bunker C
- CTTP 1 6/97
- CTTP 2 1/95
- CDPP 12/95
- LBGT 1 12/94
- LBGT 2 11/94
28 Leyte B Geothermal Power PNOC-EDC, 25 Negotiated / 7/97 Geothermal Visayas
Plant/Leyte Philippines May 6, 1994
29 Mindanao I Geothermal PNOC-EDC, 25 Negotiated / 2/97 Geothermal Mindanao
Plant/Mt. Apo Philippines May 12, 1995
30 Malaya Thermal Power Plant Korean Electric 15 Bidded / May 9/95 Bunker C Luzon
(Malaya KEPCO)/Rizal Power Corp 17, 1995
(KEPCO), So. Korea
31 Sual Coal-Fired Thermal Power Hopewell, Tileman 25 Bidded / May 10/99 Coal Luzon
Plant (Sual CFTPP)/Pangasinan Ltd., Hongkong 20, 1994
32 Casecnan Hydro Electric Plant National Irrigation 20 Negotiated / 4/02 Hydro Luzon
Admin. June 30, 1994
33 Zamboanga Diesel Power Plant Alsons/ TOMEN, 18 Bidded/March 12/97 Geothermal Mindanao
(WMPC)/Zamboanga Philippines/Japan 28, 1996
34 Gen. Santos Diesel Power Plant Alsons/ TOMEN, 18 Bidded / Oct. 4/98 Bunker C Mindanao
(SPPC)/Sarangani Province Philipines/Japan 26, 1996
35 Bakun A, B and C Hydro HEDCOR/AEV, 25 Bidded / Nov. I-10/00 Hydro Luzon
Electric Plant (Bakun Hydro Philippines 24, 1996 II-2/01
Electric)/ Mt. Province
36 Paragua Power/Palawan Paragua Power 10 Negotiated / 12/17/99 SPUG
Company, Philippines May 27, 1997
19

37 San Pascual Cogeneration San Pascual 25 Unsolicited Pre- LSWR Luzon
Power Production Facility / Cogeneration Corp., Proposal with terminated (Low Sulfur
Batangas USA (Swiss Waxy
Challenge) Residual)
Bidding / Sept.
10, 1997
38 San Roque Multi-Purpose Marubeni/Ital- 25 Negotiated / 5/03 Hydro Luzon
Hydro-Electric Power Project Thai/Sithe, Japan Oct. 11, 1997
(San Roque)/ Pangasinan
39 Ilijan Natural Gas Power Plant KEPCO 20 Bidded / Nov. 6/02 Natural Luzon
(Ilijan NatGas PP)/Batangas 5, 1997 Gas
40 Mindanao II Geothermal PNOC-EDC, 25 Negotiated / 6/99 Geothermal Mindanao
Plant/Mt. Apo Philippines June 1, 1998
41 Mindanao Coal Fired Thermal State/Harbin, 25 Bidded /June On- Coal Mindanao
Power Plant Project I/Misamis Philippines/China 29, 1998 going
Oriental
UNDER ESTRADA ADMINISTRATION
42 Caliraya-Botocan-Kalayaan IMPSA, Argentina 25 Unsolicited / Hydro Luzon
Hydro Electric Plants/Laguna Nov. 6, 1998
- C 2/02
- B 6/02
- KI 7/04
- KII 7/04
43 Benguet Province Mini- HEDCOR, Philippines 25 Negotiated / Renewal Hydro Luzon
Hydro/Benguet Oct. 14, 1999
44 Paragua Power/Palawan Paragua Power 10 Negotiated / Renewal Hydro SPUG
Company, Philippines Dec. 17, 1999
PROJECT STATUS
As of March 31, 2006, the IPP power plants are in various status. One (1) was
under construction, one (1) pre-terminated, twenty two (22) were under
concession while co-operation period of 18 others were already terminated:
N Capacity
o. Project Name Proponent (MW) Status
Under Construction
1 Mindanao Coal-fired Thermal Power Harbin/State Investment 200 Target operation is October 2006
Plant Project I (China)/STEAG State Power, Inc. for Unit 1 and December 2006 for
Unit 2 and Power Plant.
Sub-Total 200
Pre-terminated
2 San Pascual Cogen Power Plant San Pascual Cogen, USA 304 Project did not materialize.
Contract pre-terminated.
Sub-Total 304
Under Concession
3 Benguet Province Mini Hydro : Operational
Ampohaw Mini Grid Hydro Electric Dev’t. Corp., Phil. 18.35
Bakun Mini Grid Northern Mini Hydro Corp. 11.90
4 Limay Bataan Combined Cycle ABB/Marubeni/Kawasaki, Swiss/ 310 Operational but under preservation
GasTurbine Power Plant Block B Japan status due to high cost of fuel and
5 Subic, Zambales Diesel Power Plant II Enron Power Corp., USA 116 low dispatch
6 Mindanao Diesel Power Barges Mitsui/BWES, Japan/Denmark 200 Operational
(PB117 and PB118)
7 Limay Bataan Combined Cycle ABB/Marubeni/Kawasaki, Swiss/ 310 Operational but under
GasTurbine Power Plant Block A Japan preservation status due to high cost
of fuel and low dispatch.
8 Naga Thermal Plant Comple SALCON, Philippines 202.10 Operational
9 Bauang, La Union Diesel Power First Private Power Corp., Phil. 235.2 Operational but under preservation
Plant status due to high cost of fuel and
10 Malaya Thermal Power Plant (Unit 1 KEPCO, South Korea 650 low dispatch.
and 2)
11 Pagbilao Coal-Fired Power Plant MIRANT, Philippines 728 Operational
20
N Capacity
o. Project Name Proponent (MW) Status
12 Mindanao I Geothermal Plant Oxbow/Marubeni, USA/Japan 54.24 Operational
13 Leyte-Cebu A Geothermal Power PNOC-EDC 200
Plant
14 Leyte-Cebu B Geothermal Power 400
Plant
15 Zamboanga Diesel Power Plant ALSONs/Tomen, Philippines/Japan 113
16 General Santos Diesel Power Plant ALSONs/Tomen, Philippines/Japan 59
17 Mindanao II Geothermal Plant Oxbow/Marubeni, USA/Japan 54.24
18 Sual Coal-Fired Thermal Power MIRANT, Philippines 1,294
Plant
19 Bakun AC Hydro Power Plant Luzon Hydro Corp., Philippines 70
20 Casecnan Hydro Electric Plant NIA, Philippines 165
21 Ilijan Natural Gas Combined Cycle KEPCO, South Korea 1,271
Power Plant
22 CBK Complex IMPSA, Argentina 755.5
23 San Roque Multi-purpose Project Marubeni/Kansai Electric Power 345
Inc./Sithe Energies, Inc., Japan/USA
Sub – Total 7,562.53
Completed/Terminated
24 Subic, Zambales Diesel Power Plant I Enron Power Corp., USA 28 Contract concluded January 1998
25 Gas Turbine Power Barges Hopewell Tileman Ltd., Hongkong 270 Pre-terminated 1999
26 Clark Air Base Diesel Plant Electrobus, Philippines 50 Contract concluded January 1998
27 Binga Hydro Power Plant Chiang Jiang Energy Corp., China 100 Pre-terminated. NPC issued Notice
of Termination dated August 28,
2000
28 Calaca, Batangas Diesel Power Barges Far East Levingston, Singapore 90 Contract concluded September 1998
29 North Harbor Diesel Power Barges Far East Levingston, Singapore 90 Contracts concluded May 1999
30 Navotas Diesel Power Barges 1 East Asia Power Corp., Singapore 60
31 Navotas Diesel Power Barges 2 East Asia Power Corp., Singapore 60
32 Engineering Island Power Barge Sabah Shipyard SDN BHD, Malaysia 100
33 Ambuklao Hydro Power Plant MIESCOR, Philippines 75 Pre-terminated July 5, 2000. Plant
under asset preservation.
34 Navotas Gas Turbine 1-3 Hopewell Holdings Ltd., Hongkong 210 Contract concluded March 2003
and plants placed under
preservation status since then.
35 Toledo Cebu Coal Thermal Plant Atlas Cons. Mining & Devt. Corp., 55 Contract concluded February 25,
Philippines 2003
36 Pinamucan, Batangas Diesel Power Enron Power Corp., USA 105 Contract concluded July 2003
Plant Transferred to NPC July 22, 2003
37 Iligan City Diesel Plant I ALSON/Tomen, Philippines/Japan 58 Contract concluded July 2003 and
plant placed under asset
preservation since then. Resumed
operation on February 2004.
38 Bataan EPZA Diesel Plant Edison Global, Hongkong 58 Contract concluded June 21, 2004
39 Makban Binary Geothermal Plant Ormat, Inc., USA 15.73 Contract concluded June 2004
Turned-over to NPC June 30, 2004
40 Navotas Gas Turbine 4 Hopewell Energy Int’l. Ltd., 100 Contract concluded August 2005
Hongkong Transferred to NPC August 1, 2005
41 Cavite EPZA Diesel Plant Magellan Cogen Utilities, Philippines 43 Contract concluded December 5,
2005
42 Iligan City Diesel Plant II ALSON/Tomen, Phil./Japan 42 Plant not operational at the time of
inspection and reportedly placed
under Asset Preservation since its
turn-over on February 9, 2006.
Sub-Total 1,609.73
TOTAL 9,676.26
IPP CONTRACT REVIEW
Pursuant to Section 68 of the EPIRA Law, an inter-agency committee to be

composed of the Secretary of Finance as Chairman with the Secretary of Justice
and Director - General of NEDA as members shall be created to review the IPP
contracts.
21
The Committee has the following functions:
Undertake a thorough review of all IPP contracts;

In cases where the IPP contracts are found to contain provisions which are
grossly disadvantageous, or onerous to the Government, cause the appropriate
government agency to file an action under the arbitration clauses provided in
said contracts or initiate any appropriate action under Philippine laws; and
Submit report to the Office of the President on the results of the review of the
IPP contracts and any action taken thereon, if any.
The inter-agency committee was organized under Administrative Order No. 14

dated July 18, 2001 and was able to review 35 IPP contracts with the following
results:
No. of IPP
Results
contract
No finding of legal and financial issues. 6
Had some remedial financial issues that need to be addressed to assure that 11
the government and the public are not being financially prejudiced.
Found to have legal or financial issues that need to be referred for 16
appropriate study
Had only remedial policy issues 2
Total 35
As reported in the Philippine Energy Plan 2005 Update, of the 35 contracts,

PSALM has concluded negotiations on 20 contracts with expected savings
amounting to USD2.95 billion in nominal terms or USD1.04 billion in
discounted present value. These savings translate to an equivalent reduction of
Php0.098 per kWh over the remaining life of the contracts.
22
Part IV
Audit Observations
23
Chapter 1
Adequate Contracted Capacity
24
ADEQUATE CONTRACTED CAPACITY
INTRODUCTION
It is the policy of the state to ensure continuous, adequate and economical

supply of energy with the end in view of ultimately addressing self-reliance in
the country’s energy requirements through the economic development of
indigenous resources and efficient utilization of energy.
To achieve the above objective, the DOE was required under the Rules and
Regulations implementing Executive Order No. 215 to provide policy
directions for the formulation of power system expansion plans and programs
consistent with the approved national economic plan and policies on
environmental protection, conservation and maintenance of ecological balance.
On the other hand, NPC is responsible for the formulation and implementation
of such programs as are necessary to ensure the reliability of electricity and
power grids, consistent with the general and specific policies adopted by the
DOE. NPC may undertake generation and transmission projects through private
sector participation. For this purpose, NPC is required to submit development
program to DOE reflecting an efficient portfolio of generation and demand-side
resources, for the DOE’s review and approval.
To ensure sufficiency of electricity nationwide, NPC entered into 31

Independent Power Producers (IPPs) contracts during the period 1988 to 1994
with total capacity of 5,247.48 MW, of which 10, with total capacity of
3,026.80 MW, were to operate commercially after 1994. As reflected in the
NPC’s 1995 Power Development Plan, the total system-wide installed
generating capacity was 9,061 MW as of December 1994.
The audit disclosed that while the reported installed generating capacity as of
December 1994 was already adequate to meet the NPC’s forecasted peak
demand for the period 1995 to 2000, NPC still entered into 12 additional IPP
contracts from 1995 to 1999. This resulted in underutilized generation
capacities and high generation cost of NPC contributing to NPC’s substantial
losses.
25
OBSERVATION
Twelve (12) additional IPP contracts were entered into by NPC from
1995 to 1999 with total capacity of 3,758.25 MW despite adequate
generation capacity as of December 1994 to meet the system-wide
forecasted peak demand including the required reserves for the years
1995 to 2000. This manifests lapses in assessment of needs before
contracting. Thus, a number of IPPs were underutilized of which five
(5) were already placed under preservation status as of March 2006
due to low dispatch. As a result, NPC incurred substantial losses in
generation costs per kwh of P1.5564 and P1.9164 in CYs 2004 and
2005, respectively, representing IPP fees and fuel costs alone.
The NPC, under Presidential Decree No. 40 dated November 7, 1972, was
authorized to own and operate, as a single integrated system, all generating
facilities supplying electric power to the entire area embraced by any of its grid.
By virtue of Executive Order No. 215, issued in 1987, the government allowed
private investors to participate in electric power generation. Private sector
participation was further encouraged under the Omnibus Investment Code of
1987 and expanded upon issuance of RA 6957 issued on July 9, 1990 as
amended by RA 7718 issued on May 5, 1994.
As a result of these enactments and reportedly, in order to augment the NPC-

owned plants and meet the projected increase in power demand, thirty one (31)
IPP contracts were entered into by the NPC from 1988 to 1994 with total
capacity of 5,427.48 MW as tabulated below:
Date of Coop.
Capacity Contract Commercial Period
Project Name Proponent (MW) Execution Operation (years)
1. Navotas Gas Turbine 1-3 Power Hopewell Project Mgmt. Co. Ltd., 210 11/16/ 88 1/91 12
Station Hongkong (H.K.)
2. Pagbilao Coal-Fired Power Plant Hopewell Holdings Ltd., H.K. 2 x 350 11/9/91 3/96 – 6/96 29
3. Mindanao Diesel Power Barges Proj. Mitsui/BWES, Japan/Denmark 2 X 100 2/13/ 92 3/94 – 8/94 15
4. Mak-Ban Binary Geothermal Plant ORMAT Inc., USA 15.73 2/21/92 3/94 10
5. Bataan Gas Turbine Combined Cycle ABB/Marubeni/Kawasaki SC 90 2/27/92 4/94- 10/94 15
GTPP “Block A” Consortium, Swiss/Japan CC 300
6. Navotas Gas Turbine Power Station Hopewell Holdings Ltd., H.K. 100 6/29/92 3/93 12
Unit 4
7. Pinamucan Diesel Power Plant Enron Power Corp., USA 105 6/29/92 7/93 10
8. Iligan City Diesel Plant I ALSONS/TOMEN, Phil/Japan 58 6/29/92 7/93 12
9. Bataan Gas Turbine Combined Cycle ABB/Marubeni/Kawasaki SC 90 6/29/92 11/93–12/94 15
GTPP “ Block B” Consortium, Swiss/Japan CC 300
10. Nine (9) Gas Turbine Power Hopewell Tileman Ltd., 270 4/92 1/93 10
Barges/Navotas Hongkong
11. Clark Air Base Diesel Plant/ Electrobus Consolidated, Phil. 50 7/31/92 7/92 7
Pampanga
12. Ambuklao Hydro Electric Power MIESCOR, Philippines 75 9/14/92 10/95 5
Plant/Mt. Province
26
Date of Coop.
Capacity Contract Commercial Period
Project Name Proponent (MW) Execution Operation (years)
13. Iligan City Diesel Power Plant II ALSONS/TOMEN, Phil./Japan 40 11/19/92 12/93 12
14. Subic Diesel Power Plant II Enron Power Corp., USA 108 1/7/93 2/94 15
15. Subic Diesel Power Plant I 28 1/8/93 1/03 5
16. Bauang Diesel Power Plant First Private Power Corp., Phil. 215 1/11/93 7/95 15
17. Calaca Diesel Power Barge Far East Levingston, Sing./Polar 3 x 30 1/18/93 9/93 5
18. Benguet Province Mini-Hydro Hydro Electric Dev. Corp. 18.25 10/14/99 1/93 25
12.70 1/23/93
19. Toledo Coal-Fired Thermal Power Plant Atlas Com. Mining and Dev’t Corp. 55 2/25/93 2/93 10
20. Binga Hydro Power Plant Chiang Jiang Energy Corp., China 100 7/5/93 8/93 15
21. Cavite EPZA Diesel Power Plant Magellan Cogeneration Utilities, 43 9/23/93 12/95 10
Philippines
22. Engineering Island Power Barge Sabah Shipyard, SDN, BHD, 100 9/8/93 10/94 5
Malaysia
23. Bataan EPZA Diesel Power Plant Edison Global, Hongkong 58 10/15/93 6/94 10
24. Navotas Diesel Power Barge I East Asia Power Corp., Singapore 60 11/93 9/94 5
25. Navotas Diesel Power Barge 2 60 11/93 9/94 5
26. North Harbor Diesel Barges (FELS Far East Levingston, Singapore 2 x 45 12/27/93 7/94 5
2)/Navotas
27. Leyte A Geothermal Power Plant PNOC-EDC, Philippines 200 3/4/94 7/96 15
28. Naga Thermal Plant Complex SALCON Power Corp., Phil. 185.8 3/25/94 11/94 – 6/97 15
29. Leyte B Geothermal Power Plant PNOC-EDC, Philippines 440 5/6/94 7/97 25
30. Sual Coal-Fired Thermal Power Plant Hopewell, Tileman Ltd., H.K. 1,000 5/20/94 10/99 25
31. Casecnan Hydro Electric Plant National Irrigation Admin. 140 6./30/94 4/5/02 20
TOTAL 5,427.48
As may be noted, ten (10) of these IPPs with total capacity of 3,026.80 MW
were operated commercially after 1994. This capacity was apparently not yet
included in the NPC’s report of installed generation capacity of 9,061 MW as of
December 1994 as reflected in the Power Development Program (PDP). This
brought to 12,087.60 MW the total capacity that would be available after 1994
as follows:
Installed
Location Capacity (MW)
Luzon 6,641.00
Visayas 888.00
Mindanao 1,532.00
Sub-Total 9,061.00
Commercially operated after 1994 3,026.80
Total 12,087.80
It was also disclosed in the 1995 PDP that the forecasted system-wide peak
demand for the years 1995 to 2000 would ranged from 5,277 to 9,681 MW
excluding the required reserves to ensure uninterrupted energy supply which
was computed as follows:
Load Following and

Frequency
Grid Regulation Spinning Reserve Back-up Reserve Total
Luzon 2.8% 10.3% 10.3% 23.40%
Visayas 2.8% 10.3% 10.3% 23.40%
Mindanao 2.8% 9.1% 9.1% 21.00%
Considering the maximum required reserve of 23.40%, the system-wide

forecasted peak demands for CYs 1995 to 2000 using the NPC’s 1995 PDP
would then be:
27
(In MW)
Year
Forecasted 23.40% Total
Peak Demand Reserves Requirements
1995 5,277 1,234.82 6,511.82
1996 5,855 1,370.07 7,225.07
1997 6,613 1,547.44 8,160.44
1998 7,588 1,775.59 9,363.59
1999 8,621 2,017.31 10,638.31
2000 9,681 2,265.35 11,946.35
These forecasted system-wide demands could easily be served by existing

system-wide capacity of 9,061 MW as of December 1994 and additional
capacity of 3,026.80 MW from contracts entered into between November 9,
1991 to June 30, 1994 which were not yet commercially operating as of
December 1994.
Despite sufficient existing plant capacity, NPC still entered into 12 IPP
contracts with total capacities of 3,758.25 MW and renewed two terminated
contracts from 1995 to 1999:
No. of
Months
Date of Const’n. before
Capacity Contract Comm’l period Comm’l.
Project Name/Location Proponent (MW) Exec’n. Oper’n. (years) Oper’n.
1 Zamboanga Diesel Power Plant Alsons/TOMEN, Phil/Japan 100 3/28/96 12/97 21
2 Gen. Santos Diesel Power Plant 50 10/26/96 4/98 18
3 Bakun A, B and C Hydro HEDCOR/AEV, Philippines 70 11/24/96 10/00– 4 48
Electric Plant/Mt. Province 2/01
4 Paragua Power/Palawan Paragua Power Company, Phils. 16 5/27/97 12/17/99 2.5 31
5 San Pascual Cogeneration San Pascual Cogeneration Corp., 304 9/10/97 Pre-
Power Production Facility/ USA terminated
Batangas
6 San Roque Multi-Purpose Marubeni/Ital-hai/Sithe, Japan 345 10/11/97 5/03 5.5 67
Hydro-Electric Power Project/
Pangasinan
7 Ilijan Natural Gas Power Plant/ Korean Electric Power Corp 1,200 11/5/97 6/02 4.5 55
Batangas (KEPCO), South Korea
8 Mindanao II Geothermal Plant/ PNOC-EDC, Philippines 48.25 6/1/98 6/99 12
Mt. Apo
9 Mindanao Coal Fired Thermal State/Harbin, Philippines/China 200 6/29/98 On-going - 100*
Power Plant Project I/Misamis
Oriental
10 Caliraya – Botocan - Kalayaan IMPSA, Argentina 728 11/6/98 2/02 – 3.25 39
Hydro Electric Plants/Laguna 7/04 .68
11 Mindanao I Geothermal PNOC-EDC, Philippines 47 5/12/95 2/97 1.75 21
Plant/Mt. Apo
12 Malaya Thermal Power Plant/ Korean Electric Power Corp 650 5/17/95 9/95 0.33 4
Rizal (KEPCO), South Korea
Sub-total 3,758.25
13 Benguet Province Mini- HEDCOR, Philippines 22 10/14/99 Renewal
Hydro/Benguet
14 Paragua Power/Palawan Paragua Power Company, 16 12/17/99 Renewal
Philippines
TOTAL 3,796.25
* As of October 2006
It may be noted that while the contract provides that these plants were needed to
support rapid economic growth, these were commercially operated only after 4
to 68 months with one (1) contracted in 1998 still on-going as of October 2006
and another one (1) already pre-terminated.
28
It would appear then that the basis for contracting was not established. Even
the extent of utilization of existing NPC-IPPs and NPC-Owned Power Plants
was apparently not considered prior to subsequent contracting. Records show
that during 1994 to 1996, some of the IPPs and NPC-Owned Power Plants were
only 1 to 60% utilized as illustrated below:
1994 (In KWh) 1995 (In KWh) 1996 (In KWh)

Rated Expected/ % Expected/ % Expected/ %
Power Plants Cap. Guaranteed Actual of Guaranteed Actual of Guaranteed Actual of
Generation Generation Util. Generation Generation Util. Generation Generation Util.
IPPs
Clark 48.80 367,688,160 132,576,282 36 367,688,160 134,878,152 37 367,688,160 50,570,488 14
Limay Bataan
620 1,744,000,000 2,397,716,348 137 3,904,000,000 2,758,308,000 71 3,904,000,000 2,479,194,000 63
CCPP
MB-Ormat 18.5 90,403,200 29,058,290 32 90,403,200 33,118,680 37 90,650,880 43,903,440 48
BPPC 235.5 1,540,000,000 158,274,900 10 1,540,000,000 1,342,013,800 87 1,540,000,000 1,046,000,800 68
Magellan 63 241,860,000 20,964,695 9 348,340,000 92,735,180 27 343,390,000 167,681,380 49
CTPP/Salcon 109.3 1,068,000,000 341,165,000 49 999,000,000 381,470,000 38 1,051,000,000 382,080,000 60
NMPC 1 62.7 466,000,000 113,545,800 24 466,000,000 172,641,200 37 466,000,000 2,885,400 1
PB 117 100 800,000,000 114,457,900 14 800,000,000 208,508,000 26 800,000,000 90,759,800 13
PB 118 100 800,000,000 124,702,600 15 800,000,000 313,463,600 39 800,000,000 393,391,500 49
NPC-Owned
Bacman GPP 150 624,600,000 554,097,740 89 624,600,000 715,175,140 115 624,600,000 643,529,655 103
Makban GPP 410 2,043,600,000 2,265,244,600 111 2,043,600,000 1,895,160,279 93 2,043,600,000 2,431,418,557 119
Tiwi GPP 275 1,127,100,000 2,013,598,630 179 1,127,100,000 1,722,831,945 153 1,127,100,000 1,526,211,985 135
Calaca CFTPP 600 2,488,200,000 1,050,246,000 42 2,488,200,000 1,783,665,000 72 2,488,200,000 2,040,634,000 82
Palimpinon 192.5 1,267,200,000 864,315,930 68 1,267,200,000 1,091,773,940 86 1,267,200,000 1,177,197,000 93
Panay (PDPP I) 36.5 57,390,000 72,743,900 127 57,390,000 40,873,120 71 57,390,000 48,444,000 84
Note: For NPC owned power plants, the data used in arriving at the total expected/guaranteed generation for each plant are the highest daily generation based on the daily
operation report for the period August 25 to September 25, 2006, except for Tiwi and Makban plants where the daily generation were based on the daily operation report for
the period January 25 to February 25, 2006, and multiplied by the number of days in a year net of 65 days provision for outages.
Further evaluation disclosed that the forecasted peak demand in 1995 for CYs
1995-2000 were consistently being adjusted to a lower level year after year as
illustrated below:
Forecasted Peak Demands (in MW)

Year PDP
1993 1995* 1996* 1997 1999 2000
1995 5,820 5,277 5,277
1996 6,474 5,855 5,855
1997 7,250 6,613 6,613 6,266
1998 8,274 7,588 7,588 6,895 6,479
1999 9,547 8,621 8,621 7,088 7,088 6,905
2000 10,817 9,681 9,681 7,387 7,493 7,320
* The PDP in 1995 was adopted in 1996 since there was no revision in the government’s economic targets.
In view of excessive available generation capacity and declining peak demands

from the originally forecasted demands in 1995, 16 IPPs were underutilized.
Records show that out of the expected/guaranteed generation of these IPPs for
the years 2000 to 2004, only 1% to 78% was actually generated as tabulated in
the next page:
29
2000 2001 2002 2003 2004

IPP Plant Capacity Expected/ Expected/ Expected/ Expected/ Expected/ Actual %
(MW) Guaranteed Actual % Guaranteed Actual % Guaranteed Actual % Guaranteed Actual % Guaranteed Generation utili-
Generation Generation utili- Generation Generation utili- Generation Generation utili- Generation Generation utili- Generation (KWH) zation
(KWH) (KWH) zation (KWH) (KWH) zation (KWH) (KWH) zation (KWH) (KWH) zation (KWH)
Limay CCPP 620 3,904,000,000 1,520,643,960 39 3,904,000,000 1,801,221,000 46 3,904,000,000 747,905,000 20 3,904,000,000 438,755,000 11 3,904,000,00 738,437,100 19
Pinamucan 105 825,016,800 271,867,000 33 825,016,800 346,166,000 42 825,016,800 235,196,000 29 825,016,800 140,017,000 17 - - -
MB-Ormat 185 90,650,880 48,233,520 53 90,403,200 40,302,720 45 90,403,200 37,517,370 49 90,403,200 21,806,640 24 90,650,880 4,057,200 4
Malaya-KEPCO 650 4,611,600,000 1,213,895,200 26 4,611,600,000 1,743,556,600 38 4,611,600,000 665,620,000 15 4,611,600,000 838,267,800 18 4,611,000,000 1,153,999,800 25
BPPC 235.2 1,540,000,000 289,581,800 19 1,540,000,000 390,092,600 25 1,540,000,000 218,205,000 15 1,540,000,000 247,202,500 16 1,540,000,000 235,985,600 15
Magellan 63 317,660,000 100,458,592 32 309,580,000 69,367,491 24 - - - - - - - - -
Sual CFTPP 1294 9,627,360,000 5,533,566,000 58 9,627,360,000 5,941,021,000 62 9,627,360,000 5,341,662,000 56 9,627,360,000 4,667,365,630 49 9,627,360,000 5,443,130,000 57
Ilijan NatGas PP 1271 - - - - - - 10,082,760,000 3,002,196,920 30 10,082,760,000 4,505,050,360 45 10,082,760,000 4,079,781,250 40
TPC/ACMDC© 80 481,800,000 185,742,518 39 481,800,000 193,089,823 40 481,800,000 180,836,882 38 - - - - - -
CTPP/Salcon 109.3 1,177,000,000 225,187,000 19 1,201,000,000 360,216,000 30 1,177,000,000 399,969,000 34 1,201,000,000 474,955,000 40 1,177,000,000 454,746,000 39
NMPC II 40 321,600,000 9,830,700 3 321,600,000 4,692,350 1 321,600,000 41,716,020 13 321,600,000 83,896,380 26 321,600,000 105,671,320 33
NMPC I 58 466,000,000 8,157,100 2 466,000,000 7,539,070 2 466,000,000 39,687,900 9 466,000,000 75,815,890 16 - - -
PB 117 100 800,000,000 115,931,300 14 746,600,000 175,643,580 23 746,600,000 305,887,794 41 746,600,000 492,580,400 66 746,600,000 573,909,900 77
PB 118 100 800,000,000 245,469,800 31 746,600,000 289,408,930 39 746,600,000 402,412,960 54 746,600,000 583,711,200 78 746,600,000 578,596,430 77
WMPC 113 744,600,000 11,230,800 2 744,600,000 16,407,100 2 744,600,000 51,037,600 7 744,600,000 163,589,800 22 744,600,000 311,581,200 42
SPPC 59 372,300,000 97,752,000 26 372,300,000 151,952,500 41 372,300,000 170,069,030 46 372,300,000 232,673,390 63 372,300,000 240,765,374 65
30
Considering that the NPC is obligated under the IPP contracts to pay fixed
capital/capacity recovery fees irrespective of generation, this then resulted in
NPC’s substantial losses in generation costs. The generation cost per kwh is
affected by the volume of generation. The unit cost decreases as the volume of
generation increases. For CYs 2004 and 2005, it costs NPC an average of P4.98
and P5.34 per kwh, respectively. These generation costs include only the IPP
fees and fuel costs. The costs of plant sites lease, salaries of NPC employees
and other operating costs incurred in the management of IPP contracts were not
yet taken into consideration.
On the other hand, the ERC’s approved generation rate per kwh for the period
was only P3.4236. In effect, NPC incurred losses of at least P1.5564 and
P1.9164 per kwh in 2004 and 2005, respectively, for IPP fees and fuel costs
alone.
The IPP plants operated in CYs 2004 and 2005 with generation costs ranging
from P1.02 to P2,718.39 per kwh is illustrated below:
Actual Energy
Delivered Per Total Power Total Generation Unit Cost/
IPPs *MOR (in KWh) Billing Total Fuel Cost Cost KWh
2004
1 Ilijan Natural Gas 3,957,706,226.00 P 6,721,409,873.78 P 6,866,743,382.10 P 13,588,153,255.88 P 3.43
2 Pagbilao Coal-Fired TPP 1,979,760,600.00 12,329,389,926.26 2,515,330,047.00 14,844,719,973.26 7.50
Navotas Gas Turbine 4
3 (Tileman) 117,450.00 317,500,611.56 1,774,680.00 319,275,291.56 2,718.39
Northern Mindanao Power
4 Corp. II 94,782,740.00 436,123,194.33 269,181,241.00 705,304,435.33 7.44
5 Bauang La Union DPP 470,623,000.00 2,952,683,317.33 587,495,420.00 3,540,178,737.33 7.52
6 Luzon Hydro 1 & 2 59,613,663.00 2,205,164,927.33 0.00 2,205,164,927.33 36.99
7 Sual Coal Fired TPP 1 & 2 4,537,405,050.00 14,264,308,227.53 6,913,969,961.00 21,178,278,188.53 4.67
8 Subic Zambales Diesel Plant II 231,561,900.00 1,801,028,648.76 630,527,368.00 2,431,556,016.76 10.50
9 San Roque Power Corp. 778,575,051.00 7,263,174,275.94 0.00 7,263,174,275.94 9.33
10 Leyte Geothermal PP 4,052,316,715.00 13,356,727,979.56 0.00 13,356,727,979.56 3.30
11 Cavite EPZA DPP (MCI) 8,701,000.00 9,643,647.99 26,658,387.00 36,302,034.99 4.17
12 Western Mindanao Power Corp. 312,847,694.00 1,374,342,095.01 807,281,781.00 2,181,623,876.01 6.97
Bataan EPZA Diesel Plant
13 (Edison) 17,389,700.00 215,590,537.87 69,048,336.00 284,638,873.87 16.37
14 Southern Phil. Power Corp. 237,945,598.00 734,757,777.20 651,258,086.00 1,386,015,863.20 5.82
Mindanao Geothermal I -Mt.
15 Apo I 437,880,640.00 1,352,566,430.94 0.00 1,352,566,430.94 3.09
Mindanao Geothermal II - Mt.
16 Apo II 422,297,170.00 1,227,257,653.77 0.00 1,227,257,653.77 2.91
17 Northern Mini Hydro 46,038,160.00 161,795,005.35 0.00 161,795,005.35 3.51
Bakun A, B, & C
18 HEP/HEDCOR 213,682,870.00 218,930,814.33 0.00 218,930,814.33 1.02
19 NIA Casecnan 402,219,600.00 2,114,351,791.56 0.00 2,114,351,791.56 5.26
20 Naga Thermal Plant 547,940,399.00 902,171,906.92 1,983,723,381.00 2,885,895,287.92 5.27
21 Malaya Thermal PP 1,119,932,602.00 3,454,429,420.68 3,977,365,482.00 7,431,794,902.68 6.64
22 CBK Caliraya 83,192,257.00 194,866,073.10 0.00 194,866,073.10 2.34
23 CBK Kalayaan 889,943,992.00 5,787,400,718.90 0.00 5,787,400,718.90 6.50
24 CBK Botocan 33,069,188.00 170,312,957.17 0.00 170,312,957.17 5.15
25 Makban Binary Geot. Plant 3,445,691.00 52,497,353.77 52,497,353.77 15.24
26 Limay, Bataan (Block A) 259,114,500.00 1,147,212,986.34 2,311,722,126.00 4,705,099,770.89 6.83
27 Limay, Bataan (Block B) 429,779,000.00 1,246,164,658.55
28 Power Barge – PB 117 546,376,600.00 558,587,707.54 1,181,497,484.00 1,740,085,191.54 3.18
29 Power Barge – PB 118 545,470,200.00 538,975,877.35 1,266,130,299.00 1,805,106,176.35 3.31
Total 22,719,729,256.00 83,109,366,396.72 30,059,707,461.10 113,169,073,857.82 4.98
2005
1 Ilijan Natural Gas 6,422,855,397.00 6,962,613,346.96 12,604,311,248.00 19,566,924,594.96 3.05
2 Pagbilao Coal-Fired TPP 2,441,262,900.00 12,574,776,194.64 3,475,013,602.00 16,049,789,796.64 6.57
3 Navotas Gas Turbine 4
(Tileman) 1,427,850.00 188,397,584.11 5,109,974.00 193,507,558.11 135.52
4 Northern Mindanao Power
Corp. II 120,798,813.00 606,301,941.46 461,499,001.00 1,067,800,942.46 8.84
31
Actual Energy
Delivered Per Total Power Total Generation Unit Cost/
IPPs *MOR (in KWh) Billing Total Fuel Cost Cost KWh
5 Bauang La Union DPP 37,953,600.00 P 2,949,881,854.18 P 148,182,513.00 P 3,098,064,367.18 P 81.63

6 Luzon Hydro 1 & 2 57,429,197.00 2,570,320,214.87 0.00 2,570,320,214.87 44.76
7 Sual Coal Fired TPP 1 & 2 3,674,497,332.00 14,541,039,142.92 7,017,692,692.00 21,558,731,834.92 5.87
8 Subic Zambales Diesel Plant II 51,023,100.00 1,801,677,114.49 198,403,923.00 2,000,081,037.49 39.20
9 San Roque Power Corp. 539,272,029.00 7,151,153,183.67 0.00 7,151,153,183.67 13.26
10 Leyte Geothermal PP 3,768,346,198.00 13,870,176,926.10 0.00 13,870,176,926.10 3.68
11 Cavite EPZA DPP (MCI) 5,645,000.00 14,571,614.33 16,748,706.00 31,320,320.33 5.55
Western Mindanao Power
12 Corp. 401,136,500.00 1,473,437,102.41 1,447,740,602.00 2,921,177,704.41 7.28
13 Southern Phil. Power Corp. 244,433,306.00 785,987,569.50 917,460,028.00 1,703,447,597.50 6.97
Mindanao Geothermal I - Mt.
14 Apo I 423,174,180.00 1,270,183,722.38 0.00 1,270,183,722.38 3.00
Mindanao Geothermal II - Mt.
15 Apo II 421,285,930.00 1,270,644,935.83 0.00 1,270,644,935.83 3.02
16 Northern Mini Hydro 50,022,800.00 193,995,115.24 0.00 193,995,115.24 3.88
Bakun A, B, & C
17 HEP/HEDCOR 228,573,060.00 239,091,624.54 0.00 239,091,624.54 1.05
18 NIA Casecnan 395,399,936.00 2,247,275,318.72 0.00 2,247,275,318.72 5.68
19 Naga Thermal Plant 479,898,380.00 743,650,985.89 2,249,687,884.00 2,993,338,869.89 6.24
20 Malaya Thermal PP 13,729,240.00 3,635,066,100.41 71,591,386.00 3,706,657,486.41 269.98
21 CBK Caliraya 78,850,483.00 197,906,463.00 0.00 197,906,463.00 2.51
22 CBK Kalayaan 929,920,015.00 5,994,989,605.26 0.00 5,994,989,605.26 6.45
23 CBK Botocan 37,945,070.00 176,447,797.00 0.00 176,447,797.00 4.65
24 Limay, Bataan (Block A) 42,860,000.00 1,234,009,024.95 337,355,847.00 2,863,506,278.81 35.93
25 Limay, Bataan (Block B) 36,833,000.00 1,292,141,406.86
26 Power Barge - PB 117 629,318,100.00 554,174,590.50 2,208,340,679.00 2,762,515,269.50 4.39
27 Power Barge - PB 118 678,127,500.00 576,128,492.10 2,352,262,458.00 2,928,390,950.10 4.32
Total 22,212,018,916.00 85,116,038,972.32 33,511,400,543.00 118,627,439,515.32 5.34
The computed costs exclude unconsumed natural gas intended for Ilijan Natural
Gas Power Plant amounting to P9.129 billion billed by Shell/Oxy. These were
charged against the share of the government from the net proceeds on Quarterly
Assigned Petroleum Amount from Malampaya in the amount of P1.659 billion
and Deferred Payment Facility of P7.470 billion for CYs 2004 and 2005. As of
December 31, 2005, unconsumed natural gas recognized in the NPC books
already amounted to P 31.280 billion.
Analysis of IPPs’ generation data, fees charged to NPC and other records,
interviews and results of ocular inspection conducted by the team on selected
IPP and NPC-owned plants disclosed the following information:
Power Plants Remarks

IPP
1. Northern Mindanao Power A base load plant expected to operate 24
Corporation 2 (now, Iligan Diesel hours daily, 365 days per year, except on
Power Plant 2), Iligan City scheduled maintenance at guaranteed annual
energy generation of 321.6 GWh. During
CYs 2000 to 2004, actual generation ranged
from only 4.692 to 105.671 kwh or 1% to
33% of the guaranteed generations.
Generation cost per kwh increased from
P7.44 in 2004 to P8.84 in 2005.
The plant was not operational at the time of

inspection. This was reportedly under Asset
Preservation since its turn-over to NPC on
February 9, 2006.
32

2. Navotas II Gas Turbine Navotas,
Metro Manila Units 4 @ 100 MW
Navotas, Metro Manila A dispatchable base peaking and load plant
that is expected to operate 24 hours per day
with actual generation in 2003 and 2004 of
only about 1% and .02% of the contracted
generation, respectively. The generation
significantly increased in 2005.
The unit was, however, placed under

preservation status since August 1, 2005 as
this was reportedly not needed within the
Luzon Grid.
3. Bauang Diesel Power Plant

Bauang, La Union A base load plant which is expected to
operate 24 hours daily except during
scheduled maintenance. However, in CYs
2000 to 2004, its actual generation ranged
only from 15% to 25% of the guaranteed
annual energy generation of 1,540 gwh.
During actual inspection, the plant is under

economic shutdown and being operated
only for a heat run test. Based on Monthly
Operation Report, it was on economic
shutdown in January, February and July to
October 2005. This explains the significant
increase of generation cost per kwh from
P7.52 in 2004 to P81.63 in 2005.
4. Bakun AC Hydro Power Plant

Alilem, Ilocos Sur
A run-of-the-river power plant which is
expected to operate, subject to seasonal
variation of water, at its dependable
capacity except during scheduled
maintenance.
Its generation cost per kwh was P1.02 and

P1.05 in 2004 and 2005, respectively. Unit
2 is operating at 5.52 MW due to
insufficient water supply while Unit 1 is
under Allowable Downtime Schedule from
February 25 to March 12, 2006.
33

5. Sual Coal Fired Thermal Power Plant A dispatchable base load plant expected to
Sual, Pangasinan operate 7 days per week. Its generation
from 2000 to 2004 ranged from 56 to 62%
of the contracted capacity. Generation cost
per kwh was P4.67 in 2004 and P5.87 in
2005.
Unit 1 is under economic shutdown due to

low system demand. Unit 2 is operating at
225 MW.
6. San Roque Multi-Purpose Project A dispatchable peaking plant guaranteed to

(345 MW) San Roque, San Manuel, operate satisfactorily at not less than 85
Pangasinan MW at the generator terminal during the
designated peaking period for 8 hours each
day maximizing the water available. If
additional water is available, it shall be used
during the remaining hours of the day.
Its generation cost per kwh increased from
P9.33 in 2004 to P13.26 in 2005.
The power plant capacity is 345 MW but
due to transmission line limitations, it is
operating at 270 MW which is sufficient to
meet the contracted capacity of 85 MW.
7. Bataan Combined Cycle Power Plant Each block guaranteed electrical energy
(Block A & B) consisting of 8 units production of 872 GWh for the first six (6)
Limay, Bataan months and 1,952 GWh thereafter.
Actual generation in CYs 2000 to 2004
ranged from 11% to 46% of the
guaranteed generation.
Generation cost per kwh was P6.83 and
P35.93 in 2004 and 2005, respectively.
The plant, composed of 7 units, is
currently under economic shutdown since
July 2005. Another unit (ST KIA) under
plant outage is about to be commissioned
on inspection date.
8. Subic Bunker-fired Diesel Power
Plant II Subic, Zambales A base load plant with contracted capacity
of 108 MW expected to operate 24 hours
daily except during scheduled
maintenance.

P10.50 per kwh in 2004 to P39.20 per kwh
in 2005, as the plant was placed under
preservation status since July 19, 2005.
34

9. Southern Philippines Power Per interview during actual visit, the
Corporation (6 units with a total power plant was used as Peaking Plant
nominal capacity of 55 MW) since the start of commercial operation in
Alabel, Sarangani Province May 1998 instead of as base load as
contracted.
Its generation during the period 2000 to

2004 ranged from 26% to 65% of the
expected generation.
Generation cost per kwh in 2004 and 2005

was P5.82 and P6.97, respectively.
10. Mindanao Geothermal Power Plant 1 During actual plant visit on March 9, 2006,
& 2 (2 @ 52.3 MW gross capacity) the two (2) power plants are operating on
Mt. Apo, Kidapawan, North Cotabato full capacity, as follows:
In MW
Time Particulars Mt. Apo 1 Mt. Apo 2
0930 HRS Gross 52.50
Station Use 2.661
Net* 49.849
0840 HRS Gross 53.00
Station Use 2.455
Net* 50.545
The power plant is utilized as base load

plant and is operated 24 hours daily. Its
generation during the period 2000 to 2004
ranged from 99 to 233.29% of the expected
generation.
Generation costs per kwh in 2004 and 2005

are as follows:
Power Plant 2004 2005

1 P 3.09 P 3.00
2 2.91 3.02
11. Power Barges 117/118 (2@50 MW Generation of PB 117 and 118 during the
rated capacity each Power Barge) period 2000 to 2004 ranged from 14 to 77%
Nasipit, Agusan Norte/Maco, and 31 to 78%, respectively, of the expected
Compostela Valley generation.
While the barges were designed for base

load operation at a guaranteed net
contracted capacity of 100 MW anytime
during normal operations, effective year
2006, these were operated as peaking plants.
Actual loads of the diesel plant engines
during inspection on March 2, 2006 ranges
from 34.5 to 50 MW for PB 117 and 41.4 to
48.1 MW for PB 118.
Generation costs per kwh in 2004 and 2005

for PB 117 were P3.18 and P4.39 and for
PB 118 were P3.31 and P4.32, respectively.
35
12. Casecnan Hydro Electric Plant

Pantabangan, Nueva Ecija An on-peak energy delivery plant expected
to operate whenever sufficient water is
available for energy delivery.
Actual inspection on March 13, 2006

disclosed that only unit 1 is operating. Unit
2 has been under preventive maintenance
since March 7, 2006.
Generation costs per kwh increased from

P5.26 in CY 2004 to P5.68 in CY 2005.
13. KEPCO Ilijan Corporation

Ilijan, Batangas City The power station was intended for base
load operation with annual guaranteed net
contracted capacity of 1,200 MW. Actual
generation during the period 2002 to 2004
ranged from 30% to 45% of the expected
generation.
Energy delivered increased from 1,653 mwh

in CY 2004 to 6,483 mwh in CY 2005.
Thus, generation cost per kwh decreased
from P3.43 in CY 2004 to P3.05 in CY
2005.
Per Monthly IPP Operation and Cost Report

as of October 2005, the power plant is under
normal operation.
14. Pagbilao Coal-FiredThermal Power

Plant, Pagbilao, Quezon
The power plant is designed for base load

dispatch operation and expected to operate 7
days per week.
Generation cost per kwh decreased from

P7.50 in CY 2004 to P6.57 in CY 2005.
36
15. Caliraya-Botocan-Kalayaan (CBK)

Hydro Electric Power Plant, Laguna The generation costs per kwh in 2004 and
2005 are as follows:
Plant 2004 2005

Caliraya P 2.34 P 2.51
Botocan 5.15 4.65
Kalayaan 6.50 6.45
This is composed of three (3) plants

performing varied functions such as peaking
plant, frequency regulation plant, base load
plant and stand by reserve.
16. Magellan (Cavite EPZA), Rosario,

Cavite From January 2003 to June 2005, NPC was
practically supporting energy to MCI to
meet its commitment to CEPZA.
NPC’s receivable from MCI as of July 2006

amounted to P656,186,319.70.

P4.17 in CY 2004 to P5.55 in CY 2005.
17. Malaya Thermal Power Plant, Pililia,

Rizal
The Power Complex is guaranteed to
operate continuously at a minimum stable
load of not more than 180 MW and 150
MW for Malaya I and II, respectively.
Actual generation during the period 2000 to
2004 ranged from 15 to 38% of the
guaranteed net generation.
Per Monthly IPP Operation and Cost Report

as of October 2005, the plant is on
economic shutdown. This explains the
significant increase of generation cost per
kwh from P6.64 in 2004 to P269.98 in
2005.
37
NPC Owned
1. Northern Mindanao Power A base load plant that is expected to operate

Corporation 1 (now, Iligan Diesel 24 hours daily except on scheduled
Power Plant 1) maintenance at Guaranteed Annual Energy
Generation of 466 GWH. In CYs 2000 to
2003, its actual generation ranged from only
7.539 to 75.816 kwh or 2% to 16% of the
guaranteed generation.
NMPC I was turned-over to NPC on July

31, 2003 and was placed under asset
preservation since then and resumed its
operation only on February 2004.
Before the formal turn-over of NMPC I, one

(1) unit Diesel Generator Set (Unit 12) with
installed capacity of 5.8 MW was pulled-out
from the Complex by Alsons and brought to
Southern Philippines Power Corporation
based in Sarangani Province.
Only ten (10) units were operated after turn-

over as the parts of Unit 11 were used in
operating ten (10) other units.
NPC representative informed the team that

per Day Ahead Generation Schedule, the
generation plant was not scheduled for
dispatch at the day of inspection.
2. Navotas I Gas Turbine Navotas,

Metro Manila Units 1 to 3 @ 70 MW
or 210 MW
An IPP plant turned over to NPC in March

2003 and placed under preservation status
since then. While no rehabilitation is
needed, plant repair and maintenance has to
be undertaken at a cost of P15 million. The
3 units are reportedly operational before
turn-over but no tests were undertaken.
These are also reportedly available for
dispatch anytime at its rated capacity of 70
MW each unit.
38
3. Masinloc Coal-Fired Thermal Power

Plant - Masinloc, Zambales (2 units @
1.5
300 MW) (NPC-owned)
An NPC-owned plant where only Unit 1

was running at 150 MW as only 1 Boiler
Feed Pump is in service. 2 Boiler Feed
Pumps are under repair.
Unit 2 running @ 300 MW (at full

capacity).
At present, there are 269 personnel running

the plant at full capacity.
4. General Santos Diesel Power Plant An NPC-owned plant which was

Calumpang, General Santos City mothballed on April 6, 1998. The three
units generator sets were last operated on
the following dates:
Date of
Rated comm’l. Date of last
Unit Capacity operation operation
1 7.44 January 20, 1980 January 25, 1994
2 7.44 January 10, 1980 April 3, 1998
3 7.44 January 24, 1980 April 2, 1998
It was noted during plant visit that the 3

units 16 PC 2.5 Diesel engines were already
cannibalized. The team was informed that
the spare parts were used to run other NPC
Owned Power Plants.
5. Aplaya Diesel Power Plant Another NPC-owned plant with Units 1 and
Bo. Aplaya, Jasaan, Misamis Oriental 2 of Plant No. 1 already dismantled. The
with an installed capacity of 125 MW. team was informed that in October 1983,
one unit was dismantled and transferred to
NPC diesel power plant located in Bohol
and some parts were deployed to General
Santos while sometime in 1996, another
unit (Unit #1) was dismantled and
transferred to Mindoro and Palawan.
Some parts of Unit 5 of Plant No. 2 were

already cannibalized.
39
6. Agus IV Hydro Electric Power Plant, The plant is capable of generating a

Baloi, Lanao del Norte maximum capacity of 158.1 MW in cases
where the maximum water elevation is
between 355 to 360 meters above sea level.
It is a base load and a frequency regulating
reserve plant.
The plant is the first underground

hydroelectric plant in Mindanao and the
power cavern of the 3 generating units are
installed in about 120 meters below the
ground surface.
7. Agus V Hydro Electric Power Plant The plant is one of the six (6) hydroelectric
Ditucalan, Iligan City generating plants harnessing raw water
power potential along the Agus river. It has
two (2) units run-of-the-river type with a
combined capacity of 55 MW and is
situated between the tailwater of Agus IV
and the headwater of Agus VI.
The plant has a standby generator capable

of sustaining continued operation in case of
power failure/interruption. As of date of
visit, Unit 1 is on scheduled preventive
maintenance while Unit 2 has a current load
of 26 MW.
Interviews disclosed that malfunctioning of

the Auxiliary Trash Rack and dependence
on the water level to achieve optimum
generating capacity are considered
constraints to continuous operation.
8. Agus VI Hydro Electric Power Plant, Originally known as the Maria Cristina
Fuentes, Iligan City Falls HEP, it has five (5) generating units.
Of the seven (7) hydro sites along the Agus
River, Agus VI was the first to be
developed and completed as the site is the
most feasible, simple, and economical to
construct due to proximity to its expected
power consumers. It is operating as a base
load plant.
Interviews disclosed that proper

utilization/conservation of water is critical
as its full operation is dependent on water
level.
40

9. Agus VII Hydro Electric Power
Plant, Fuentes, Iligan City
The plant is the most downstream of the

series of HEP built by the NPC in the Agus
River from Marawi City to Iligan City. It is
operating as a base load and likewise serves
as a frequency regulator. Like any hydro
electric plant, its operation is dependent on
water level.
10. Pulangi IV Hydro Electric Power This is the first ever HEP in the Philippines
Plant, Maramag, Bukidnon to be ISO 9002 Certified in 1997 and the 3rd
recipient of this prestigious citation in NPC.
On November 15, 2005, Pulangi IV was
confirmed ISO 9001:2000 (for Quality), ISO
14001-2004 (for Environment) and OHSAS
18001:1999 (for Occupational Health and
Safety) by the TUV Management Service.
The plant is operating as a base load with

standby diesel generator capable of generating
its rated capacity of 255 MW depending on the
level of water.
Interviews disclosed that limitations on
Transmission lines, siltation of Water
Reservoir and level of water are among the
constraints in its continuous operation.
11. Ambuklao Hydro Power Plant Due to the damage brought about by
Ambuklao, Bokod, Benguet earthquake in 1990, NPC entered into
Rehabilitate Operate and Leaseback (ROL)-
Power Purchase Agreement (PPA) with a
consortium for a total co-operation period of
five (5) years to rehabilitate the plant on a “no
cure no pay” scheme where NPC will pay only
the generated electricity.
As stipulated in the contract, the consortium

shall pay NPC on a monthly basis, rental fee
for the plant’s three (3) generating units in the
fixed amount of P5 million. The co-operation
period started on September 28, 1995.
On May 25, 2000, MIESCOR temporarily

suspend all activities in the Project due to
unavailability of generating units since August
20, 1999 and while waiting for NPC’s decision
to extend the contract.
NPC terminated the contract on July 5, 2000
and MIESCOR renewed its earlier claim on
overpayment of lease due to dispute on co-
operation period. Meantime, the plant was
placed under preservation status as of July 1,
2000.
41
12. Binga Hydroelectric Power Plant (100 NPC entered into Rehabilitate Operate and
MW), Tinongdan, Itogon, Benguet Leaseback (ROL) - Power Purchase
Agreement (PPA) with China Chang Jiang
Energy Corporation Group (CCJECG) on
July 5, 1993 with co-operation period of
fifteen (15) years reckoned from August 12,
1993. The rights and obligations of the
CCJECG was assigned to Binga
Hydroelectric Plant, Inc. (BHEPI) on
January 14, 1997.
Under the contract, NPC will purchase and
pay for all power generated by the plant
while the contractor shall pay NPC a
monthly rental fee of US$210,000 per
month. On August 28, 2000, NPC’s
contract with BHEPI was pre-terminated
and NPC entered into contract with Itogon
Power Generation Corporation for the
operation and maintenance of the plant on
April 15, 2001.
The reported generation of the plant in kwh
from 1994 to 2004 ranged from
244,338,156 to 402,597,563.
13. San Pascual Cogeneration Company NPC entered into Power Purchase
International, B.V. (SPCC), San Agreement (PPA) on September 10, 1997
Pascual, Batangas for the construction and operation of a
cogeneration power production facility with
Pre-terminated on November 12, 2003 commercial operation of forty-four (44)
calendar months from the date of signing on
May 10, 2001. The commercial operation
date was eventually moved to January 1,
2004.
The extended date of commencial operation
was not met and the PPA was recommended
for termination by the Inter-Agency
Committee. Instead of terminating the PPA,
PSALM decided to utilize the PPA as a
component of the Generation Project by
requiring SPCC to directly assign all its
title, rights, interests, obligations, and
liabilities to or in the PPA to the winning
bidder of the Generation Project and
PSALM to pay SPCC Philippines a transfer
price of US$6,000,000 or P338,142,000
under the Framework Agreement dated
November 12, 2003.
In addition to the transfer price, PSALM
also paid US$1,917,050 or P105,652,459.60
to N.M. Rothschild and Sons (HK) Ltd., for
financial advisory services needed in
relation to SPCC’s IPP contract.
42
Management’s Comments Team’s Rejoinder

Provided by NPC
We can deduce that COA is referring to It is true that the team used the installed
the sufficiency of existing “installed” capacities of 9,061 MW as of December
generation capacity as of December 1994 1994 due to the absence of any
vis-à-vis the forecasted peak demands for information on dependable capacities as
the period 1995 to 1999. Please note that of that date. However, it would show that
the evaluation of supply-demand is based even during that period, the reported
on the “available” or “dependable” installed capacities are almost 100%
capacities and not on installed capacities. dependable as tabulated below:
Dependable capacities are affected among
1997
others by deterioration or derating of
Rated Dependable
plant capacity due to aging, limited water Name of Power Plant Capacity Capacity
inflows due to seasonality of hydro (MW) (MW)
resources, and plant and transmission line
maintenance, among others. Ambukalao 75.00 75.00
Angat 246.00 246.00
Bacman 130.00 132.92
Barit Mini Hydro 1.80 1.80
Bataan Oil Fired TPP 225.00 225.00
Bataan Gas Turbine PP 120.00 120.00
Binga Hydroelectric PP 100.00 100.00
CBK 226.50 226.50
Calaca 600.00 600.00
Camp O'Donnel DPP 4.00 4.00
Magat 360.00 360.00
Makban A 410.00 410.00
Malaya GT 90.00 90.00
Manila Oil Fired Thermal
PP 200.00 200.00
Masiway HEPP 12.00 12.00
Pantabangan 100.00 100.00
Sucat Oil Thermal 850.00 850.00
Sucat GT 30.00 30.00
Tiwi 330.00 330.00
BPPC 235.20 235.20
Clark 48.80 48.80
Navotas I and II GT 310.00 362.50
Nav I and 2 114.60 114.60
Limay CC (Block A) 620.00 620.00
Northern Mini Hydro 12.40 5.58
Pinamucan 110.80 110.80
Enron-Subic I and 2 145.20 135.94
Far East Levingston 1 & 2 88.30 88.30
Hydro Electric Dev Corp 18.35 8.65
MB-Ormat 15.73 7.87
Sabah GT 105.00 105.00
Edison Cogen Corp 64.20 64.20
Malaya/KEPCO 650.00 650.00
Magellan 48.00 48.00
Amlan HEP 0.80 0.80
Bohol Diesel PP 22.00 22.00
43

Leyte Geothermal PP I 112.50 112.50
Loboc Hydroelectric PP 1.20 1.20
PB 101-105, 117,118,120 349.60 347.83
Panay Diesel PP I and II 47.50 47.35
Negros Geothermal PP
I and II 192.50 192.50
PB 201-209 274.50 242.50
LBGT/Salcon 55.00 52.71
TPC/ACMDC © 80.00 80.00
CDPP I and II/Salcon 95.70 50.54
CTPP/Salcon © 109.30 87.43
Aplaya Diesel PP 96.40 94.11
AGUS I, II, IV-VII 727.10 727.10
AGUSAN MH 1.60 1.60
Gen. Santos Diesel PP 22.32 22.32
PULANGI IV Hydro PP 255.00 255.00
NMPC I 62.70 62.70
Moreover, statistics would show that as

early as 1994, there were already
indications of excess capacities as
manifested by the underutilization of the
following power plants:
Actual generation as
Power Plant % of guaranteed
generation
BPPC 10.278
CTPP/Salcon(c) 49.216
NMPC I 24.366
PB 117 14.307
PB 118 15.588
Further, when the power crisis was finally The team is not questioning the optimistic
eradicated in 1993, the Government was view of the government at that time and
very optimistic and upbeat about the setting of high projections in power
prospects of the country as the next demand but the fact that despite available
“tiger” economy in Asia. As a result, the capacity to meet the higher projected
Government set high economic targets power demand, NPC still entered into 12
which resulted in higher projections in new IPP contracts. Moreover, the
power demand as indicated in the 1993 objective of reducing dependence on
Power Development Program. To sustain costly fuel oil was not evident as out of
the forecasted high power demand, the 12 the 12 additional contracts, two (2) were
additional IPP contracts were entered into still run by diesel fuel oil while out of the
between 1995 and 1999. However, total 42 IPP plants, 23 were run by diesel
emphasis should also be given to power fuel oil.
projects that were undertaken by the
Government to reduce the country’s It would also appear that Casecnan, which
dependence on imported and costly fuel was contracted by NPC in 1994 to be
oil as well as those hydro projects that operational by year 2002, was already
have non-power benefits such as considered in 1995 as one of the hydro
Casecnan and San Roque. projects with non-power benefits.
44
Likewise, while hydro power plants

considered to have non-power benefits
were already being replaced, NPC still
contracted in 1997, San Roque hydro
power plant, another hydro power plant
considered to have non-power benefits.
The high economic targets were not Apparently, NPC was already aware as
sustained since the actual demands during early as 1997 that the demands forecasted
the period 1994 to 2000 were below the in 1994 were not being sustained and that
forecasted peak demand targets, a number of existing IPPs were already
aggravated largely by the Asian financial underutilized. Yet, seven (7) IPP
crisis in 1997. As a result, dispatch of contracts were still entered into between
some of these IPPs were constrained and May 1997 to November 1998 and
underutilized during the period. contracts for the other two (2) still
renewed in 1999.
NPC has already negotiated with IPPs for The team recognizes NPC’s efforts in
reduced NCC and MEOT as mandated by negotiating with the IPPs to reduce the
the EPIRA/IPP Contracts Review NCC and MEOT. However, it is
Committee. Some of the IPPs have agreed recommended that further negotiation be
to lower their MEOT and NCC but not made on account of the deficiencies noted
their fee rates. These IPP concessions by the team.
resulted in the extension of the
cooperation period provided in their
respective contracts.
Provided by TRANSCO
Observation may be valid on hindsight As disclosed in the report, the existing

only. However, COA should recognize system-wide capacity as of December
that a power utility must also provide for 1994 was already 9,061 MW excluding
the possibility of “Forced Outage” of the contracted capacity of 3,076.80 MW
existing plants as well as their de-ratings which were not yet commercially
over time which will eventually affect the operating. This capacity could very well
required spinning and back-up reserves cover forced outages and de-rating until
(approved by ERC). 1998 as the total requirements including
23.40% reserves from 1995 to 1998
ranged only from 6,511.82 to 9,363.59
MW.
It likewise did not consider the economics As illustrated earlier, this alleged
of using the “excess” but cheap capacity objective of replacing expensive plants
to replace the very expensive existing with cheaper plants was not manifested in
plants at that time whose role was then the IPP plants subsequently contracted by
relegated to being reserve plants. In fact, the NPC. Of the 12 IPPs contracted from
as COA implies, System Operations 1995 to 1998, two (2) were run by diesel
45

dispatched plants with lower production fuel oil. Moreover, the 12 newly
costs to reduce the overall system contracted IPPs were actually not fully
generation costs. If these factors were to utilized as six (6) of these were
be considered, it is quite possible that the generating only about 1.50% to 64.66%
“excess” capacity would be greatly of its guaranteed generation as tabulated
reduced, if not eliminated completely. below:
% of
Project guaranteed Period
generation covered
1. Zamboanga Diesel
Power Plant 1.50-41.84 1998-2004
2. Gen. Santos Diesel
Power Plant 11.33-64.66 1998-2004
3. Bakun Hydro Elec.
Plant 60.53-60.93 2002-2004
4. Ilijan Natural Gas 29.86-46.60 2002-2004
5. CBK Hydro Elec.
Plant 17.50-30.75 2002-2004
6. Benguet Province
Mini-Hydro 37.43-51-64 1999-2004
The two (2) others were not operational,

one (1) was pre-terminated while another
one was still on-going as of CY 2005.
We would like to point out also that oil- Records show that these plants were
fired thermal power plants, which were being used until CY 2000 and 2001for
used as base-load generation up to the Sucat Oil Thermal. Malaya Oil Thermal
early 1990’s, were either retired (Bataan, was even rehabilitated and was
Manila and Sucat) or mothballed operational as of audit date but was under
(Malaya) because of their high operating economic shutdown.
costs. Additional generating capacity was
put up to replace these expensive plants. As discussed earlier, of the 12 new plants
Further, some of the IPP generating contracted, two were also oil based. In
capacity was contracted before the Asian effect then, the plants claimed to be
financial crisis hit the country and expensive to operate were replaced by
dampened the expected load growth. Had equally expensive ones. Likewise, while
the forecast demand growth been it is true that some plants were contracted
realized, the generating capacity would before the Asian financial crisis, seven (7)
have been just sufficient to meet the load were still contracted after the financial
and the required reserve levels. crisis and two (2) other contracts were
still renewed.
Provided by DOE
The recommended action might not be Considering the results of the audit, there
doable as EPIRA already provided for an is a need to negotiate further with the
Interagency Review Committee and IPPs to lower the fees.
submitted its recommendation to
Malacanang on July 2, 2002. The DOE,
46

DOF, DOJ and NEDA were the members
of the said Committee.
Provided by PSALM
Twelve additional contracts were entered

into after 1994 for the following reasons:
1. Five (5) plants are located in The alleged looming power shortage in
Mindanao to augment the looming Mindanao was unfounded. These
power shortage. Power supply in contracts were entered into during 1996
Mindanao in 1994 came mostly from to 1998 when the two (2) previously
hydroelectric plants that brownouts contracted IPPs located in Mindanao,
occur in times of low rainfall. NMPC 1 and 2, were reportedly under
extended economic shutdown. This
already manifests excessive available
capacities.
2. Malaya and CBK are existing plants While it is true that CBK is an existing
and should not be considered as plant, its capacity under the contract
additional capacities. increased from 199 MW to 577.10 MW.
3. Ilijan was contracted due to This power plant was likewise

development of our natural gas underutilized with utilization rate of only
reserve. 30% to 45% during CYs 2002 to 2004.
4. Five (5) of the IPP Plants, namely Records show that these plants were
Malaya, Subic, Bauang, Limay CC utilized until 2005 and were under
and Cebu GT, were put under preservation since there were already
preservation because they are costly to excess capacities. While under
operate and there is already an excess preservation, NPC continuously pays for
capacity in as much as the projected the IPPs fixed fees.
GDP growth was not attained.
Renegotiation of contracts was already Considering the deficiencies noted by the

done through IAC Review. Further team, there is a need to further negotiate
negotiation to lower the contract fees may with the IPP.
still be done but IPP Sponsors will have
to seek the consent of all its Lenders and
Shareholders which is a very cumbersome
process. NPC has done this to the Subic
Power to no avail.
47
Chapter 2
Reasonable Contract Arrangements
48
REASONABLE CONTRACT ARRANGEMENTS
INTRODUCTION
IPP contracts were either through Build-Operate-and-Transfer (BOT) schemes

or other BOT variants like Build-Transfer-Operate (BTO), Build-Rehabilitate-
Operate-Transfer (BROT), Rehabilitate-Operate-Maintain (ROM)/Rehabilitate-
Operate-Lease (ROL) and Build-Operate-Own (BOO). BOT contracts take the
form of power purchase agreements (PPA) whereby NPC commits to purchase
power generated by IPP, energy conversion agreement (ECA) whereby NPC
provides fuel to IPP and purchases the generated power, and variants of
operation and maintenance (O & M) agreements.
Under the BOT scheme, the IPPs undertake the construction, operation and
maintenance of the power station, deliver energy to the NPC for a fee over a
fixed term not exceeding 50 years and transfer the ownership of the power
station to NPC upon termination of co-operation period.
Among the fees paid by NPC are capacity fees intended to recover the IPP’s
capital investment. Since the ownership of the power station will be transferred
to NPC at the end of the co-operation period, the total capacity fees for the
duration of the co-operation period are recognized outright in the books of NPC
by a debit to Electric Plant under Capital Lease account and a corresponding
credit to Lease Obligation.
Review of certain contract arrangements, however, disclosed that the interest of

the government, in general, and NPC in particular, was not totally protected. In
a number of IPP contracts, fitness of the power plants at the time of transfer was
not warranted, spare parts to keep the plant running were not required to be
transferred, plants were constructed on sites not owned by the NPC and conduct
of performance testing was at the expense of NPC.
OBSERVATIONS
1. In a number of IPP contracts, the warranty as to title of the

property, fitness and absence of defects of the power station at the
time of transfer were excluded. There is therefore no assurance
that the power stations to be turned-over to NPC at the end of co-
operation period would be free from encumbrance and lien and
perform at its guaranteed capacity. At present, the operating
49
conditions of the turned-over facilities are yet to be tested as these were

placed under asset preservation status.
Review of eleven BOT contracts disclosed that one of the responsibilities of

the IPP is to manage, operate, maintain and repair the power station during
co-operation period and to ensure that the same is in good operating
condition and capable of converting fuel supplied by NPC into electricity in
a safe and stable manner within the Operating Parameters. The IPP’s
responsibility to ensure the operational capability of the plant during co-
operation period, where the NPC is required to pay the corresponding fees,
was then clearly provided.
On the other hand, while the ownership of the plant will be transferred to
the NPC at the end of co-operation period, there is no warranty that the
plant to be turned over will be in good running condition and could be
operated as intended. While it was provided in two (2) contracts that the
IPPs shall arrange a maintenance schedule which should include a
scheduled overhaul of its power station to be conducted within 12 months
of the transfer date, there was no sanction in the event that this requirement
was not complied with.
As noted, the contract even provides that the power station will be
transferred on an “as is” basis and excludes warranties implied by statute or
otherwise including without limitation, warranties as to title of the property,
fitness for the purpose, the absence of patent or inherent defects, description
or otherwise of whatsoever nature and after the Transfer Date,
CONTRACTOR shall be under no liability whatsoever to NPC in respect of
the operation or otherwise of the Power Station. This provision in effect
negates earlier provision requiring IPPs to transfer to NPC, free from any
lien or encumbrance all rights and title to the plant including all
improvements thereon. In such case, there is no assurance that the power
station to be transferred to NPC would be free from encumbrance and lien
and perform at its guaranteed capacity.
As mentioned earlier, under the BOT scheme, the power stations are in
effect purchased from the IPPs as ownership is transferred to NPC at the
end of the co-operation period and investments of these IPPs were recouped
in the form of fees paid by the NPC.
Among the IPP contracts with provision on exclusion of such warranties

follow:
Pagbilao Coal-Fired Thermal Power Plant

Sual Coal-Fired Thermal Power Plant
Pinamucan Batangas Diesel Power Plant
50
Subic Zambales Diesel Plant II

Navotas I
Navotas II
Bauang Private Diesel Plan
NMPC 1 & 2
San Roque Multipurpose Project
Ilijan Natural Gas Power Plant
It was interesting to note that in the contract with Ilijan Natural Gas Power
Plant, the warranty as to title was not excluded.
The operational capability of the IPPs turned over to NPC between March
2003 and March 2006 could not be tested as these were never used by the
NPC with the following reported status:
Rated Date of
IPP/Power Capacity Turn-
Station (MW) over Status as of March 2006
Navotas I GT 210 3-24-03 No rehabilitation is needed but the plant
Units 1, 2, 3 needs repairs and maintenance at a cost
of P15 million.
The unit is on a “ready to operate”
preservation which means that
commercial operation can be attained
within a month after the conduct of
functional testing, and subject to
availability of operations personnel and
sufficient fuel.
No test was conducted prior to turnover.
The plant was placed under preservation
status since June 26, 2003.
Ormat BGPP 1 4.5 6-30-04 Needs P17.7 million for plants 1 & 2 for
&2 maintenance and repair works.
NMPC 2 40 02-09-06 The plant is on a ready-to-operate status
but will require about P65 million for
the conduct of 16,000 running hours
preventive maintenance covering the 7
units.

Provided by NPC
COA’s observation is in accordance NPC, in all cases, may not be able to

with most of the BOT contracts: impose the conduct of capacity and
Power Stations are transferred to NPC efficiency tests as these were not
on an “as is” basis. However, during required in the contract. As discussed
the transfer and final inventory of in the report, the warranty as to fitness
fixed assets, equipment, tools, plant and absence of defects of the power
spare parts and materials, NPC station were even excluded. To
51

requires the IPP to conduct Capacity protect the interest of the government,
and Efficiency Tests before these requirements should be
acceptance by mutual agreement. This specifically provided in the contract.
ensures the operation and reliability of
the Power Station.
Pagbilao and Sual CFTPP
contract provides:
1. Arrangement for training of NPC This provision may be advantageous

personnel in relation to plant for the government. However, this
operation; would not ensure that the plants to be
transferred would perform at its
guaranteed capacity.
2. Transfer to NPC free from any As mentioned in the report, while this
lien or encumbrance and without is provided for in the contract, this
the payment of any was negated by another provision
compensation, its rights, title and which states that the power station
interest in and to the fixtures, will be transferred on an “as is” basis
fittings, spare parts; and excludes warranties as to title of
the property, among others.
3. Arrangement of a maintenance The contract has no penal provision in
schedule which ensures that a the event that this requirement is not
scheduled overhaul shall occur complied with. Besides, there is no
within 12 months of the transfer guarantee that the plants would not
date. breakdown between the scheduled
overhaul and the date of transfer.
Pinamucan Batangas Diesel Upon termination, the plants were
Power Plant, Navotas I & II and pulled out and transferred to Panay as
NMPC - transferred to NPC the plant site was not owned by NPC.
Subic Zambales Diesel Plant II – While under concession period, both
Fast Track Projects and method of plants were placed under preservation
transfer is “as is” basis status due to high costs of fuel and
Bauang Private Diesel Plan– Fast low dispatch. There is, therefore, no
Track Projects and method of assurance that these plants would still
transfer is “as is” basis be in good condition at the time of
transfer.
San Roque Multipurpose Project – These contracts likewise have no
method of transfer is “as is” basis, penal provision in the event that this
requires IPP to conduct a major requirement is not complied with.
overhaul one year before the Besides, there is no assurance that the
transfer date and inventory of plants will still be in good operating
spare parts condition one year after the major
overhaul.
52

Ilijan Nat Gas – “As is” basis, There was no assurance under this
schedule of major overhaul, contract that the plant would still be in
training of personnel and conduct good condition 12 months after the
of inventory 12 months before required major overhaul.
transfer date are done
On COA’s recommended course of
action
NPC has standard operating This requirement should be provided
procedure where necessary in the contract to ensure that the
performance tests are conducted required tests are conducted prior to
in all IPP plants transferred to the transfer of plants. It could not
NPC. Although performance tests always be presumed that the IPPs
prior to transfer date are not would mutually agree to conduct some
provided for in the BOT/ECA tests not required in the contract.
contracts, these were performed
through mutual agreements with
the IPPs.
In preparation for all the transfer The team commends NPC for creating
date, NPC creates a Transfer such team. However, NPC could not
Team composed of the concerned require anything that was not provided
IPP, NPC, TRANSCO and COA in the contract.
(as witness) to ensure that the
legal, technical, environmental,
financial and other concerns are
addressed.
Provided by DOE
action
This is extremely necessary and it is
the only option available to ensure that
the power plant performs at its
guaranteed capacity and is in good
condition.
Provided by PSALM
It is a standard procedure that all IPP While the conduct of tests was
plants under BOT contracts are being considered a standard procedure, the
subjected to Performance Guarantee contract provision excluding the
Tests prior to turn-over to NPC. warranty as to fitness and absence of
Performance tests, technical and defects of the power station would
environmental due diligence were weaken the NPC’s position in case of
conducted on the following IPP plants dispute.
on dates indicated:
53
1. Pinamucan - Oct. 29-30, 2003

2. Navotas II - July 18, 2005
3. NMPC I - July 16-17, 2003
4. NMPC II - Oct. 19, 2005
Ormat - July 17, 2004
2. While spare parts were necessary to be maintained by the IPPs to

ensure uninterrupted operations, these were not required to be
turned over to NPC at the end of co-operation period. The absence
of spare parts thus resulted in the cannibalization of some
generation units to ensure continuous operation of other units.
In order to ensure uninterrupted operations due to defective/non-functional

parts or unavailability of the same, it is necessary for the operators to
maintain certain level of spare parts. It is, however, noted that while
maintenance of spare parts is considered crucial in the IPPs smooth
operation, in some contracts, the same were not required to be turned-over
to NPC together with the plant and equipment at the transfer date.
Review of eleven (11) contracts revealed that in seven (7) contracts, the
IPPs were required to transfer to NPC, free from any lien or encumbrance
created by the IPPs and without payment of any compensation, all its rights,
title and interest in and to the fixtures, fittings, plant and equipment
(including test equipment and special tools) and all improvements
comprising the Power Station. It was not clearly provided that spare parts
will likewise be transferred to NPC.
In three (3) other contracts, the transfer of spare parts was clearly provided.
However, these spare parts were not included in the inventories agreed
upon to be transferred to NPC and the IPPs were nonetheless relieved from
liability for any discrepancies between the inventories and the actual
fixtures, fittings, plant and equipment transferred.
The failure to include spare parts among the items to be turned over to NPC
may adversely affect its future operation. This is clearly manifested in the
case of NMPC 1 turned over to NPC on July 31, 2003. The plant was
placed under asset preservation from the time of turn over until January 31,
2004 and resumed operation in February 2004. After the turn-over, only
ten, out of the eleven generating units, were operated as parts of unit 11
were used to operate ten other units due to the absence of spare parts.
54

Provided by NPC
COA’s observation is true and correct. As discussed in the report, in seven (7)
However, NPC’s Standard Operating contracts, spare parts were not among
Procedure (SOP) for transfer of Power the items required to be transferred to
Station is to conduct due diligence (i.e. NPC by the IPPs at the end of the
technical, legal, environmental, contract. Thus, even if inventory is
financial) for the terminated contracts. undertaken, there is a possibility that
Conduct of actual inventory of fixed the item will not be included in the
assets, equipment, tools, spare parts inventory report. On the other hand,
and materials are done by the while the transfer of spare parts to NPC
concerned IPP, NPC and PSALM was clearly provided for in three other
witnessed by COA personnel 6 months contracts, the inventory of items agreed
prior to end of contract for Pinamucan, upon by both parties for transfer to
Navotas I & II and NMPC I & II. This NPC does not include spare parts.
SOP will be implemented in all other
BOT contracts that will expire soon.

action
Most of the IPP Contracts contained This only confirms the possibility that
provision on the inventory of principal no spare parts would be turned over at
assets including spare parts, six (6) the end of the contract. Had this been
months prior to transfer date. However specifically provided in the contract,
inventory levels of the spare may not the IPP would ensure that there are
be maintained during the last 6 months available spare parts to be transferred
of operation since spare parts may still to NPC.
be used during said period. Final
inventory will be conducted a week or
a month prior to transfer date
depending on the size and capacity of
the plant.
Provided by PSALM
In majority of the IPP contracts, the As discussed above, while transfer of
section “Transfer of Ownership” only spare parts to NPC was provided in
provide the “transfer of title and some contracts, the team noted that
interest in and to the fixtures, fittings, spare parts were not included in the
plant and equipment (including test inventories agreed upon to be
equipment and special tools) and all transferred to NPC under the contract.
improvements comprising the station”.
In Pagbilao, Sual, CBK BROT,
Mindanao Coal contract, there is a
mention of transfer of spare parts under
the section on “Transfer of
Ownership”.
55
3. The provision allowing unutilized outage balances to be carried

forward to the following year may affect the ability of NPC to meet
energy requirements in the affected year as IPPs were then allowed
not to operate for a longer period than necessary without being
penalized.
Included in the Electricity Delivery Procedures of IPP Contracts are

allowable downtimes to undertake pre-arranged or planned outage, normal
inspection, maintenance, repair and overhaul. Downtimes are regulated to
ensure that IPPs meet their guaranteed energy and that grid/system operates
smoothly.
The allowable downtime is comprised of the following:
Downtime Definition
Forced outage - The number of days, hours or kilowatt hours
per unit per year that Contractor is unable to
operate or synchronize the unit to the system
or grid when requested by NPC due to fault
of Contractor. Forced Outage shall not
include any failure to generate due to fault,
negligence, or failure of NPC, fault or a
condition in the transmission line or the grid,
dispatch instructions, insufficient water level
or other force majeure.
Planned/Maintenance - A state in which a unit is unavailable due to

outage inspection, testing, repair, rehabilitation or
overhaul inclusive of scheduled minor
repair/maintenance works during the time
when full load generation is not required
subject to clearance and confirmation from
the dispatch center. This is scheduled well in
advance and is of predetermined duration.
Review of selected contracts, however, revealed that in four (4) cases,

unutilized maintenance and/or forced outages were allowed to be carried
forward to the following year while in four (4) others, these were not
accumulated as tabulated in the next page:
56
Maintenance Outage Forced Outage

Independent Power Producers
Non- Non-
Cumulative Cumulative
Cumulative Cumulative
BOT – ECA
Bauang Private Power Corp
(BPPC) - 3 - -
Sual Coal Fired Thermal Power
Plant 3 - 3 -
Subic Power Corporation - 3 - -
Iljan Combined Cycle Power Plant 3 - - 3
Pagbilao Coal Fired Thermal
Power Plant 3 - 3 -
Corporation 2 - 3 - -
PPA
Mindanao Geothermal Power
Plant I (Mt. Apo I) - - - 3
Mindanao Geothermal Power
Plant II (Mt. Apo II) - - 3 -
Allowing IPPs to carry forward or accumulate unutilized allowable

outages may affect the ability of the NPC to meet its energy requirements
in the affected year as IPPs were then allowed not to operate for a longer
period than necessary without penalty. Prolonged downtimes of IPPs with
considerable accumulated allowable outages could affect the smooth
operation of the grid or cause brown outs.

Provided by NPC
This provision is fair and equitable to If the IPPs were able to deliver more
both parties considering that the reason energy due to savings in maintenance
for the carry over is due to savings in downtime, they were correspondingly
Maintenance Downtime because of the compensated for deliveries in excess of
early completion of the Maintenance the contracted generation. This gives
Schedule, thereby enabling them to more reason not to carry over any
deliver more energy in that particular unutilized downtimes. On the other
period. Utilizing this unused downtime hand, the carried over downtimes may
when the need arises will not put NPC eventually affect the NPC’s operations
on the losing end but will only and still NPC is obligated to pay the
compensate for the savings in the IPPs in full as this now formed part of
preceding year. authorized downtimes.
In addition to this, the use of the This maybe true in the case of
unutilized outage balances cannot be maintenance outage but not in the case
availed of without the approval of NPC of forced outages which could occur
to ensure reliable and adequate supply anytime. In such case, it may affect the
of electricity. NPC’s operation.
57

The table on Maintenance and Forced This only illustrates inconsistencies on
Outages on Page 49 is consistent with contract provision.
their respective contracts.
Provided by PSALM
Accumulation of unutilized allowable While limitation/cap is imposed, it just

outage is allowed. However, there is a the same allows certain IPPs to incur
cap on the use of the accumulated outages for a period longer than
outage by the IPPs for a given year. necessary without being penalized as
For example, Pagbilao CTPP may long as the same is within the cap.
conduct planned outage and forced
outage no longer than 90 days and 120
days, respectively per Letter of
Agreement dated 07 November 2003.
4. Construction of power plants under the BOT arrangement on a site

not owned by NPC resulted in substantial expenses during and
after co-operation period. This also defeats the purpose of the BOT
scheme for the NPC to own the power plant at the expiration of the
co-operation period as lease contracts provide that any permanent
improvements on the leased property would redound to the
landowner at the expiration of the contract.
Under the IPP contracts, the plant is either to be constructed on the site
provided by the NPC, IPP or on a leased property with the lease term
coinciding with the co-operation period as in these cases:
Lease Contract
Project/ Plant Project Site Owner/Lessor Entered into by
1. 200 MW (Unit Nos. 1-3) and Phil. Fisheries Development NPC
100 MW, Unit No. 4 Navotas Authority
Gas Turbine Power Station
2. 105 Pinamucan Bunker-fired CHEMPHIL – LMG Inc. IPP
Power Station
3. Subic Bunker-fired Diesel Subic Bay Metropolitan Authority NPC
Power Plant/ENRON II
4. 200 MW Mindanao Coal-fired PHIVIDEC Industrial Authority NPC
Thermal Power Plant
5. 58 and 40 MW (Iligan I & II) IPP – No lease agreement submitted
Diesel Power Station to the team
The audit, however, disclosed that constructing power plants on sites not
owned by the NPC resulted in substantial expenses during and after the
58
expiration of co-operation period and negates the benefits under the BOT
scheme as lease contracts provide that any improvements on the leased
property would redound to the landowner. Details follow:
a) NPC incurred about P686.267 million for dismantling and

transferring Pinamucan Diesel Power Station costing P4.855
billion from a site with market value of only P186 million to
Dingle, Iloilo after the termination of co-operation period.
On June 29, 1992, NPC and ENRON Power Development Corporation

entered into an agreement whereby ENRON will supply to NPC, a 105
MW bunker-fired diesel generator power station under a BOT
arrangement. Under the contract, ENRON will convert the fuel
supplied by NPC into electricity upon NPC’s request. All generated
electricity out of the fuel requested to be converted will be supplied to
NPC in accordance with the operating parameters. On September 4,
1992, by virtue of an Accession Undertaking, all obligations of
ENRON under the contract during the ten-year co-operation period
which expired on July 21, 2003 were performed by Batangas Power
Corporation (BPC).
As the contract requires ENRON to provide the site, BPC entered into a
Ground Lease Agreement on September 7, 1992 with Chemphil-LMG
Incorporated for a term of ten (10) years commencing from the
completion of the power station. The annual rental of $260,000 was
payable in advance on the completion date of the power station and is
subject to annual increase of not more than 15% of the annual rent for
the immediately preceding year.
Under Section 16.01 of the Agreement, upon the date of expiration of

the term of the lease, the tenant shall peaceably and quietly leave,
surrender and yield up unto the Landlord all and singular the Property
and operating supplies in the condition in which it then exists, with no
duty to repair or replace.
The lease contract entered into by BPC expired on July 21, 2003 and
the NPC entered into extended Ground Lease Agreement on July 25,
2003 with LMG-Chemphil to complete its dismantling, removal and
transfer activities.
In the Memorandum of Agreement for the turn-over of the leased

property by the NPC to the lessor, it was agreed that in lieu of the
NPC’s responsibilities to perform site and environmental clean up in
59
accordance with the provisions of the Ground Lease and Extended

Ground Lease Agreements, the NPC shall:
Pay LMG P11.200 million;

Leave at the site the following assets:
Replacement Appraised
Assets Cost Value
Guardhouse, 8.16m2 P 57,120 P 29,000
Guardhouse, 9.00m2 63,000 32,100
Guardhouse7.50m2 52,500 27,000
Guard Quarters, 30.0m3 210,000 107,100
Perimeter fence 2,198,811 1,121,400
Admin. Building 8,632,000 3,892,300
Car Shed 305,085 155,600
Canteen 1,378,160 702,900
Water Tank T-3001 9,618,180 5,193,800
HFO Tank T-1001A 14,966,380 8,081,800
HFO Tank T-1001B 14,966,380 8,081,000
Impounding Basin 1,000,000 540,000
HFO Unloading Arm 2,000,000 1,080,000
Total P 55,447,616 P 29,044,000
Demolish the foundations and/or footings up to ground level of the

following:
- Switchyard and control room

- Lube oil building
- Concrete separation wall and bund wall at the transformer
area
- Cooling tower area
- Operations area
- Tanks T-1001A and T-1001B
- Water tank area
- Concrete Oil Separator
- Sludge and API area
- Two (2) smoke stack foundations
- Sub-station and Maintenance buildings
- Dike of Tanks T-1001A and T-1001B area
For the dismantling and demolition of the structures in the plant site
and transfer and installation of eight (8) sets of generating units in its
new location in Dingle, Iloilo, NPC entered into contract with Dingle II
Consortium for P629,503,111. As of December 31, 2005, a total of
P629,006,494.52 was already paid to the contractor.
Records show that in its new location, 6 units were operational during
the period April 2005 to February 2006 while two (2) other units were
still unoperational as of October 2006. These units were operated for
only 2.3 to 361 hours a month as illustrated in the next page.
60
No. of Hours
Operated
Unit Operation Period From To
1 February to June 2006 12.6 200.6
2 Not yet operational
3 January to June 2006 9.30 282.10
4 January to June 2006 20.60 209.00
5 May to September 2005 8.00 361.00
6 May 2005 to May 2006 2.30 168.50
7 April 2005 to June 2006 48.80 359.70
8 April 2005 to June 2006 17.50 285.30
This is equivalent to only 0.32% to 50% of the total monthly operating

hours. It is also interesting to note that this plant generated only 32% to
45% of its contracted capacity from the 7th to 10th year of its co-
operation period. The team could not assess its performance during the
early years of co-operation period due to the absence of documents.
In summary, NPC incurred total expenses of P686,267,347.34 upon

termination of the co-operation period of the BOT contract which could
have been avoided had the cost of lot been included in the project cost.
The breakdown of expenses follows:
Particulars Cost
Appraised value of foregone fixed assets P 29,044,000.00
Cash payment to LMG 11,200,000.00
Lease expenses incurred during extension of Ground Lease 16,520,236.34
Agreement
Contract price for the demolition of the foundations and/or 629,503,111.00
footings of certain structures and transfer of 8 sets of diesel
generating units, its auxiliary equipment and other plant
assets from Pinamucan, Batangas to Dingle, Iloilo
Total P 686,267,347.34
As disclosed in the Memorandum dated September 1, 2004, of the NPC

General Counsel to the Vice-President, Technical and Maintenance
Service (TMS), the market value of the plant site where Pinamucan
Diesel Power Station was originally constructed is only P186 million.

Provided by NPC
COA’s observation is generally true. Actually, the said transfer from

The contract has expired and the original site costing P 186 million to
units were transferred to Panay another site at a cost of P686.267
Island by NPC. million was the subject of this
observation.
61
b) The plant site for NMPC 1 & 2 was provided by the IPP,
ALSONS International, Inc. For the use of such site, NPC
agreed to pay ALSONS an amount of P24.643 million for back
rentals. The offer by ALSONS to sell the site to NPC for P 43.4
million is still for consideration by the NPC Board.
On July 29, 1992, NPC and ALSONS International Inc. executed a

BOT Agreement wherein ALSONS shall supply NPC a 58 MW power
station in Iligan City known as Northern Mindanao Power Corp. 1
(NMPC1) or Iligan Diesel Power Plant 1 (IDPP 1) under a BOT
arrangement with co-operation period of ten (10) years. On August 10,
1992, under an Accession Undertaking, NMPC assumed all obligations
of ALSONS under the contract.
On November 19, 1992, another contract was entered into with the
same IPP for the supply of 40 MW bunker-fired diesel generating
power station (NMPC 2 or IDPP 2) incorporating therein the terms and
conditions of the original contract except as otherwise amended
including a co-operation period of twelve (12) years.
Under the agreement, NPC shall provide the site for the purpose of
building and operating the power station at no cost to the contractor.
Apparently, NPC was not able to provide the site and the IPP built the
power plant at its own site.
Upon the expiration of the co-operation period of NMPC 1 and 2 on

July 31, 2003 and February 9, 2006, respectively, the two power
stations were turned over to NPC.
During ocular inspection conducted on February 16, 2006, the team

was informed that the plant site is not yet owned by the NPC. NPC
agreed to pay ALSONS P24.643 million for back rentals while the offer
of ALSONS for the sale of the site to NPC for P 43.4 million is still
under consideration by the NPC Board.

Provided by NPC
COA’s observation is generally true.

However, may we offer the
following comments:
The project has been transferred to Under this condition, the NPC would
NPC last July 2003. There were no longer have other option but to
62

conscious efforts during the accept the IPP’s offer, otherwise, it
cooperation period to negotiate the has to transfer the plants.
purchase of the land occupied by
NMPC plant. However, no
agreement on the purchase price had
been reached until the plant was
turned-over.
c) Three other sites under the BOT arrangement were leased by

NPC from three government agencies at a monthly rental
ranging from P722,681.25 to P946,631.40. The lease
agreements provide that improvements on the site shall become
the property of the lessor at the expiration of the lease contract.
This negates the benefits under the BOT scheme for the NPC to
own the power plant at the expiration of co-operation period.
This will also result in substantial expenses should NPC decide
to purchase the site or transfer the power plant to another site
after expiration of the lease contract.
Under the BOT contract, among the responsibilities of NPC is to

provide the site for the IPP plants at no cost to the IPP from the
effective date of the contract until the end of the co-operation period.
In three cases, NPC leased the sites from the following land owners:
Power Plant Power Plant Site Owner
1. Subic Bunker-fired Diesel Power Plant/ENRON II Subic Bay Metropolitan

Authority (SBMA)
2. 200 MW (Unit Nos. 1-3) and 100 MW, Unit No. 4 Phil. Fisheries Development
Navotas Gas Turbine Power Station (Navotas I & II) Authority (PFDA)
3. 200 MW Mindanao Coal-fired Thermal Power Plant PHIVIDEC Industrial Authority
(PIA)
Under the lease contracts, NPC will pay the Lessor monthly rentals
ranging from P722,681.25 to P946,631.40 as tabulated below:
Co-op. Approximate
period rental for the
Power Plant (years) Monthly rental co-op. period Remarks
1. Subic 15 P 900,000 P 162,000,000 Monthly rental of
Bunker- P 9.00/sq. m., of
fired Diesel which P4.50 is
Power shouldered by
Plant/ ENRON, the IPP.
ENRON II
63
Co-op. Approximate
period rental for the
Power Plant (years) Monthly rental co-op. period Remarks
2. Navotas I 15 1-5 yr. P 529,200.00 105,099,120 Monthly rental
& II 6-10 yr. 582,120.00 increased from
11-15 yr 640,332.00 P640,332 to
4/05-3/06 946,631.40 P946,631.40
effective April
2005
3. Mindanao 25 Industrial lot P 678,275.00 203,482,500 Industrial lot w/
Coal-fired (annual rental total area of
Thermal P 8,139,300) 542,620 sq. m. at
Power Plant annual rental of
Offshore & foreshore 44,406.25 P15/sq. m. subject
(annual rental to increase upon
P 532,875) ------------- acquisition by the
P 722,681.25 13,321,875 lessor of another
========= lot with an area of
11,586 sq. m.
which will form
part of the leased
land.
Offshore &
foreshore lot with
total area of
213,150 sq. m. at
P2.50/sq. m.
annually
Total P 4 83,903,495
As tabulated above, substantial amounts will be spent by NPC for

rentals with expected additional expenses in case the plant will be
transferred to another site or NPC acquires the site at the end of co-
operation period.
Further review disclosed that at the expiration of the lease contracts, all
permanent improvements will be vested to the lessors, thus, negating
the benefits to be derived under the BOT scheme as illustrated below:
IPP Details/Remarks
1. Subic Bunker- On January 17, 1993, NPC (lessee) entered into a ground lease
fired Diesel Power agreement with Subic Bay Metropolitan Authority (SBMA) for the
Plant lease of a parcel of land with approximate area of ten (10) hectares.
The land shall be used as the site of the plant to be constructed by
ENRON, an IPP with a BOT contract with NPC.
The BOT contract provides that on the transfer date, ENRON shall
transfer to NPC all its right, title and interest in and to the fixtures,
fittings, plant and equipment and all improvements comprising the
power station. The intent of the provision could, however, not be
realized as under Article VI Section 6.1a of the lease contract, all
improvements erected or installed on the leased land by or on
behalf of the lessee and which have been permanently affixed to
the leased land of the facility (the “permanent improvements”)
shall become the property of the lessor. These exclude all
improvements acquired by lessee through its own funds, or funds
of the subtenant, that remain removable from the leased land
(lessee’s improvements) which shall be considered personal
property and shall remain the property of the NPC.
64
IPP Details/Remarks
2. Navotas Gas In 1988, NPC entered into IPP contract with Hopewell Project
Turbine Power Management Company Limited for the supply of a gas turbine
Station (Navotas I power station (Navotas I and II Gas Turbine Power Station) on a
& II) build, operate and transfer scheme. For this purpose, NPC entered
into contract with the Philippine Fisheries Development Authority
(PFDA) in 1989 for the lease of 29,400 sq. meters lot for 15 years.
The lease contract was renewed on April 1, 2005 covering one year
period from April 1, 2005 to March 31, 2006. Under the renewed
lease contract, the area covered was only 26,078 sq. meters.
The BOT contract stipulates that on the transfer date, Hopewell

shall transfer to NPC all its right, title and interest in and to the
fixtures, fittings, plant and equipment and all improvements
comprising the power station. The intent of the provision could
likewise not be realized as under the lease contract, all
improvements shall be transferred to PFDA, the lessor, at the end
of the contract. This was clearly established under Section 4 of the
contract which provides that at the termination of the contract,
ownership over buildings, perimeter wall and other improvements
constructed by the lessee on the leased premises shall vest to the
lessor. Only machineries, facilities and equipment may be
removed by the lessee at its own expense.
3. Mindanao Coal- On June 27, 1998, NPC entered into a Power Purchase Agreement
fired Thermal with State Power Development Corp. (SPDC) for the construction
Power Plant and operation of a 200 MW coal-fired power plant under a BOT
scheme. Thus, on February 14, 2003, NPC entered into two lease
agreements with PHIVIDEC Industrial Authority (PIA) to cover
the following areas:
Annual
rental per
Description Area sq. m.
Industrial lot to be used as the 554,206 sq. m. P 15.00
plant site
Offshore and foreshore areas for 213,150 sq. m. 2.50
the construction and use of the
jetty
The two lease contracts provide that upon their termination, the
lessor may retain any and all permanent and/or immovable
improvements on the property without any right on the part of the
lessee to claim for the cost or value of such improvements,
provided that, lessee shall be allowed to remove or otherwise
dispose of the improvements, equipment and facilities.
It was also noted that under the lease contract with the PIA, NPC was
required to pay annual rental within the first 10 days of the first month
of the year which is tantamount to advance payment. Moreover, the
contract provides for one year deposit and one year advance rental
payable upon execution of the agreement.
Thus, for the first year alone, NPC was obligated under the contract to
pay an amount of P26,016,525 representing one year deposit, one year
advance payment and one year annual rental. It would also appear that
the PIA is willing to sell the property as the contract provides an option
for NPC to purchase the site within three years from execution of the
lease agreement with the initial payments to form part of the purchase
65
price should lessee exercise its option to purchase. Apparently, NPC

did not exercise its option to purchase as it still paid rental for the
period February 2006 to February 2007 which is already the 4th year of
the lease agreement.

Provided by NPC
COA’s observation is generally true. However, may The team is
we offer the following comments: concerned that in all
these contracts, NPC
Subic PP/ENRON II would not be able to
NPC is still paying the lease to SBMA for the plant benefit from any of
site. This plant has been installed to provide reliable the assets transferred
electricity to locators inside the SBMA during the by the IPP which
Energy Crisis in the 1990s up to present. The were permanently
ownership of the Power station at the end of the attached to the
contract will remain with the government (NPC or property on lease.
SBMA).
Navotas I & II
At present, this plant is on stand-by and ready to
operate anytime. NPC is still paying annual rental to
PFDA while awaiting for the power station to be
bidded-out and privatized by PSALM.
Mindanao CFTPP
The Land Lease Agreement has the provision for
NPC to purchase the project site although at present,
NPC is still leasing the same. Negotiation for the
purchase of the project site in on-going.
On COA’s recommended course of action
NPC is seriously considering this recommendation,

specifically for the Mindanao Coal Power Plant
which is very useful to the Mindanao grid and is
expected to have a prolonged economic life after the
cooperation period.
5. While IPPs were required to demonstrate the capability of the plant

to provide contracted/guaranteed capacity and net heat rates, the
conduct of performance tests are chargeable to the account of the
NPC. Thus, in most cases, NPC did not strictly require and/or even
waived the conduct of test to avoid the cost to be incurred. There
was therefore no assurance that the plants are capable of delivering
66
the guaranteed electricity which are being paid for by the NPC.
Payment of IPP fees were supposed to have been based on the
results of tests.
Under NPC contracts with the IPPs, in general, the IPPs are required to
demonstrate the safety and reliability of the power station and its associated
equipment. One way of demonstrating the capability of the plant is through
the conduct of annual testing such as Efficiency, Capacity and Reliability
Tests. The conduct of tests would also provide an opportunity to validate
the nominated capacity of each unit. For each test conducted, the IPP and
NPC are required to issue a joint field certificate attesting to the completion
of such tests.
The team, however, noted that while this is a responsibility of the IPPs, the
costs for conducting these tests were charged to the account of the NPC.
Thus, in most cases, NPC did not strictly enforce or even waived the
conduct of testing when payments of IPP fees were supposed to be based on
the results of test.
Under this condition, there is no assurance that the power station and its
associated equipment were performing within the required performance
parameters. The required testing for each power plant and the reasons for
failure to conduct each tests are discussed below:
IPP Test Required to be Conducted Remarks
Malaya Section 8, Item 3.0 of the contract Plant testing was done only on June 8,
Thermal requires the conduct of performance 1998. No succeeding tests were done on
Plant test of the power complex and its the power plant. Thus, compliance with
equipment to cover boiler efficiency the required heat rate could not be
test; turbine heat rate test; capability established.
test; and auxiliary power consumption
test. NPC is paying for the Energy Minimum
Offtake computed at 70% of the
The Net Guaranteed Heat Rate is Guaranteed Dependable Capacity. If no
required to be maintained under testing was regularly undertaken, the
Section 6.2 of the Contract of Malaya NPC’s basis of payment may not be
I and II following the completion date accurate.
and shall not be greater than the
following heat rate (Btu/Kwh) for The conduct of heat rate tests is likewise
each Unit measured at the site important in the computation of fuel
conditions: consumption. If the unit cannot be
After BTU/KWH operated at full load due to NPC’s fault,
Rehab the basis for computing the fuel
until year Malaya I Malaya II consumption for the said period shall be
5 9900 9600
6 9950 9630
the heat rate value shown on the heat rate
7 10000 9658 curve for the year corresponding to the
8 10050 9687 average load. If the unit was not
9 10100 9716
10 10150 9745
operated at full load due to some
11 10200 9775 technical problems or due to the
contractor’s fault, the basis for
67

After BTU/KWH computing the theoretical fuel
Rehab
until year Malaya I Malaya II
consumption shall be the guaranteed heat
12 10252 9804 rate plus available tolerance.
13 10303 9833
14 10360 9862
15 10500 10200
The performance test shall be The Energy Services Department, in its

performed by the Contractor in the letter dated January 24, 2006, clarified
presence of NPC representatives that the Agreement did not clearly
during operation and maintenance specify how the test will be carried out. It
period immediately after the further stated that under Item 3.3.1,
rehabilitation of each unit. Net Heat Schedule 8 of the Agreement,
Rates at ¼, ½, ¾, and 4/4 load shall “performance test shall be conducted by
be determined and the heat rate curve the contractor within thirty (30) days
shall be established. after the completion of the rehabilitation
or annual maintenance of a unit”. It
Under the contract, NPC shall provide claimed that NPC presumed that
fuel for the conduct of testing for its KEPHILCO invoked the first. Thus, the
own account. test was conducted only once, after the
completion of the rehabilitation.
The need for yearly testing after year 5

was, however, clearly established in
Schedule 3 (Operating Parameters),
Section 6.2 of the Agreement. The
rehabilitation of the Malaya Thermal
Plant was completed on September 1995.
It follows that starting year 2000, yearly
testing was already required.
Bataan Under Clause 12 of the Contract, the Records show that performance testing
Combined IPP guaranteed that the two power was done only in 1994 and 1995 for
Cycle Power plants are capable of generating the Bock A and B, respectively.
Plant, Block total annual energy of 3,904 gwh
A&B which is equivalent to 3,904,000,000 Review of the Power Station’s
kwh generation. The guaranteed generation data for Blocks A & B from
capacity is used as basis for paying 1995 to 2004 disclosed that actual yearly
energy conversion fees by the NPC to generation ranged from 438,755,000 to
the IPP. 3,191,893,000 kwh. This represents only
11% to 82% of the total guaranteed
It was provided under Sub-Clause II generation.
that the IPP shall compensate NPC in
the event that the guaranteed available NPC claimed that it waived the conduct
energy and heat rate were not of Post C Performance test on Blocks A
attained/achieved and the IPP’s failure & B as the estimated expense of testing
is not excused under the Agreement. amounted to P8M (less net revenue from
the dispatch energy).
NPC was required under the contract
to supply the fuel, water and
dispatching services related to the
conduct of testing.
Subic Under the Eight Schedule of the BOT Records revealed that heat rate test was
Bunker-Fired Contract, the required testing on conducted only on February 22, 1994.
Diesel Power nominated capacity shall be
Plant undertaken on the commencement of In the absence of regular testing, NPC is
each year of the co-operation period, apparently paying ENRON capacity, O
if so requested by NPC. Test & M fees and heat rate bonus and
procedures to verify plant capacity at charges penalties based on results of tests
the design conditions shall be conducted in 1994.
mutually agreed to by the parties.
68
The contract requires NPC to supply

fuel and start-up electricity and water
in sufficient quantity and quality
specified in the Schedule for the
proper carrying out of such testing.
All costs related to the fuel supplied
by NPC shall be for its accounts.
Northern Schedule 14.1 provides that the heat NPC-Energy Services Department
Mindanao rate of the power station may be tested informed the team that there was no
Power at the request of NPC not oftener than available data regarding performance
Corporation once in any calendar year, and such testing of NMPC 1 while, there were no
(NMPC) 1 test shall be conducted by the data pertaining to 1996-1998 tests for
and 2 Contractor and witnessed by NPC’s NMPC 2. The last test was conducted on
authorized representative. If the NPC October 19, 2005 as part of the Transfer
test shows that the Guaranteed Heat Technical Due Diligence for NMPC 2.
Rate cannot be met, the contractor is
allowed a period of one (1) month to The absence of data on testing of NMPC
make adjustments and take corrective 1 and 2 during the above-mentioned
measures to ensure that guaranteed years would imply that NPC was not
heat rate is met. If the guaranteed heat validating the reported heat rates of the
rate still cannot be met after the power plants. In such case, the required
Contractor’s test, the contractor shall, corrective actions, should there be any,
at its own expense take corrective had not been undertaken and payment of
measures and inform NPC of its energy fees not accordingly adjusted.
readiness for further tests, provided,
however, that in such event, the
Energy Fees shall be adjusted in
accordance with the computation of
fees, commencing from the date of the
NPC Test until the date the guaranteed
heat rate is met.
The NPC shall ensure that fuel in

sufficient quantity and quality
specified in the Schedule is available
for carrying out such test. The cost of
fuel to be supplied by NPC shall be
for the NPC’s account.
Testing of power plants is necessary to ascertain and ensure that they are
safe and operating efficiently and economically at the guaranteed capacity.
Testing is likewise important in order to ascertain the propriety of fees paid
to IPPs which are stipulated to be computed on the basis of test results.

Provided by NPC
COA’s observation is true. However, Considering, however, that the required

on the issue of assurance that the plants dispatch by the NPC was less than the
are capable of delivering the contracted capacity, the possibility of
guaranteed electricity, the formula for deduction is nil. NPC would only be
69

computing the guaranteed capacity able to determine if these plants could
payments to IPPs has built-in deliver the guaranteed capacity if these
deductions if the IPPs fail to meet the were consistently dispatched at
required dispatch of NPC. contracted or guaranteed capacity.
Today, because of the WESM dispatch Just the same, if the contract would not
regime, all plants are required to be be revised, the NPC would
tested based on the contract provisions. continuously shoulder the testing costs
as stipulated in the contract.
Malaya Thermal PP
IPPCM shared the opinion of Energy This ambiguity in the contract

Services Department (ESD) as stated in provision should have been resolved
its letter to COA dated January 24, during the review of the contract prior
2006 that the ROMM Agreement for to its signing by the concerned
Malaya TPP did not clearly specify officials.
how the test will be carried out. Section
3.3.1 of the 8th Schedule could be
interpreted that KEPHILCO may opt to
conduct the Performance Test only
within thirty (30) days after the
completion of the rehabilitation of
Malaya units. Thus, Performance Test
was conducted only once.
Despite this unclear provision, NPC This showed then that test was done
persuaded KEPHILCO to conduct the only after eight (8) years for Malaya
test on both Units of Malaya during the K1 since the last recorded test was
Malampaya Maintenance shutdown done in 1998. Despite the absence of
from Nov. 22 - Dec. 16, 2006. Malaya test, NPC was continuously paying the
K1 passed the test but Malaya K2 was IPP based on contracted capacity.
not subjected to the same test due to During CYs 2000 to 2004, these units
run out of bunker fuel. generated only about 15% to 38% of
their annual guaranteed generation.
Both units however showed they can
still operate at full load when they were
dispatch at rated capacity to augment
the power supply in Luzon Grid during
the Malampaya Maintenance
shutdown.
Currently, Malaya units are on

economic shutdown but can be
dispatched under the WESM operation
considering that the units are only
subjected to heat run test every 3
months.
70

Bataan Combined-Cycle PP
The performance testing was conducted This is precisely the point. Due to
until 1997 on Block A and 1999 on expensive costs of testing, NPC is
Block B. However, the conduct of constrained to waive the conduct of the
Post-C Inspection Performance Test on same. Considering that plants, by
Block A and B was waived by NPC nature, is subject to deterioration and
since 1999 (Please refer to Attachment de-rating, it could not be assumed that
“1”). An estimated cost of P8 Million the results of testing in 1997 or 1999
(less net revenue from the dispatched are still true in 2004 or 2005. It maybe
energy) is needed to complete a Post-C true that previous performance tests
inspection performance test of a conducted in 1997 and 1999 did not
combined cycle block. With this cost reflect any deviation. This is expected
involved, there was a need to further considering that these plants are
evaluate the benefits that NPC would relatively new at that time as these
derive in the conduct of such test in the were commercially operated only in
future. As per contract, the test is 1994.
intended only as basis for NPC whether
or not to grant bonus to Alstom if the
net heat rate results are lower than
1.03% of the guaranteed heat rate or for
Alstom to compensate NPC if the
results are higher than 1.03%. Based on
the information gathered, there had
been no instances during the past PTs
that either NPC was compensated or
Alstom charged bonus as a result of
deviations or conformance to net heat
rate guarantee.
Subic Power Corporation
As per NPC’s records, performance Performance test includes guaranteed

tests were conducted at Enron capacity test and heat rate test. While
beginning 1994 up to 2005. Enron has capacity tests were conducted from
consistently been able to pass the 1994 to 2005, heat rate test was
performance test since the start of conducted only in 1994. Thus, the
cooperation period. Attached for your power plant’s efficiency in fuel
reference are the test certificates consumption was not established. It
provided by our Energy Services may be noted that the contract provides
Department (Please refer to Attachment that in the event that the heat rate is
“2”). However, NPC waived the greater than the guaranteed rate, the
conduct of performance test for Fiscal IPP shall be charged for the additional
Year 2006 since the Power Station was fuel cost associated with such higher
placed under preservation mode heat rate. In the absence of heat rate
through Heat Run Operations per unit test, the actual heat rate could not be
at full load once a month. established.
71

Further, NPC is paying Enron Capacity Due to the non-conduct of heat rate test
and O & M fees based on the results of after 1994, NPC was not able to
performance test of previous year. NPC determine whether the IPP should have
waived the conduct of performance test been charged for the higher heat rate or
for the FY 2006 and recognized the NPC should have paid the IPP for fuel
Nominated Capacity for FY 2005 as cost savings.
basis for Enron Capacity and O & M
Fees for the said year.

Corporation
NPC’s records would indicate that IPP plants while on economic

NMPC 1 had its annual test in the years shutdown were just the same being
1993, 1995, and 1999 until 2003, while paid based on contracted capacity. It
NMPC 2 had its annual test in 1995 means then that during this period,
and 1999 until 2005. However, our IPPs were paid even without any
records show no annual tests done for maintenance undertaken.
the years 1996 to 1998 due to the
extended economic shutdown of the
plants during the said period.

action
NPC and PSALM (as IPP traders) are A great portion of performance test
now requiring performance tests of costs is fuel cost which is shouldered
IPPs as mandated by WESM. The only by NPC. This is precisely the reason
cost to NPC during performance test of why NPC waived the conduct of tests
IPPs is the fuel cost net of revenue in some cases.
from the generated power.
Provided by TRANSCO
While it is true that performance tests The team recognizes the importance of
are chargeable to the account of NPC, the conduct of performance test as this
such test will prove that nominations is practically the only way to prove that
can be delivered by the plant/unit the plant would be able to deliver the
which in turn shall be the basis of contracted capacity aside from
capacity fee. NPC has the option to dispatching the same at its full
waive these tests if, in its evaluation, capacity. Since it is the responsibility
the conduct of these tests would be of the IPPs to demonstrate their plants’
costly on its part like the case of oil- capability to produce the
based power plants. contracted/guaranteed capacity, such
tests should be charged to the IPPs and
not to the NPC. As it is, NPC had to
waive the conduct of the test due to
expensive costs of testing.
72
If the IPP contract is silent on who will It would be of great help to the
shoulder the costs of the performance government and the consumers as well
and other unit tests, then it is our if the NPC and TRANSCO would work
opinion that the energy delivered for this.
resulting from the tests can be made
free of charge to NPC. This
arrangement will ensure that the IPP
will conduct the tests judiciously.
Provided by PSALM
NPC is only responsible for the supply Unfortunately, the cost of fuel which
of fuel during the conduct of the annual represents the biggest cost in the
performance guarantee test of the IPP conduct of performance test is the one
plants. All other costs relative to the being shouldered by NPC. For this
tests such as calibration of instruments reason, NPC at times waived the
(except the billing meter) and other conduct of tests.
administrative costs are for the account
of the IPP sponsors.
Performance tests for some IPP plants The irregular conduct of performance
such as Malaya, Subic, Bauang, Limay test due to the very high cost of fuel
CC and Salcon Land-based GT are not may prove disadvantageous to NPC as
being conducted on a regular basis due it may be paying for guaranteed energy
to the very high cost of fuel of said which the plants are not capable of
plants. Anyway, these plants are on producing. Moreover, while these
economic shutdown. plants are on economic shutdown, NPC
continuously pays fixed fees as
provided in the contract.
Provided by DOE

action
This is extremely necessary and it is

the only option available to ensure that
the power plants performs at its
guaranteed capacity and is in good
condition.
73
Chapter 3
Efficient Fuel Management
74
EFFICIENT FUEL MANAGEMENT
INTRODUCTION
It is the declared policy of the State that all resources of the government shall be
managed, expended or utilized in accordance with law and regulations, and
safeguarded against loss or wastage through illegal or improper disposition,
with a view to ensuring efficiency, economy and effectiveness in the operations
of government (Section 2, PD 1445). It is therefore, imperative for government
units to apply control measures that are geared towards attainment of efficient,
economic and effective operations. Such measures may be incorporated in the
agency’s policies, regulations, standard operating procedures and contracts
entered into.
Under NPC’s contracts with IPPs, NPC is under obligation to supply fuel to
IPPs for the generation of electricity, start up and shutdown cycles or
conversion into electricity in the case of Energy Conversion Agreements. For
this purpose, NPC entered into contracts with various oil companies to deliver
fuel to the concerned IPPs. For the period January 2004 to June 2005 alone,
NPC spent about P 35.73 billion for fuel supplied to IPPs.
As provided for in the ECA, the fuel to be supplied by the NPC would be based
on forecasted fuel needs to be submitted by the concerned IPPs. The team,
however, noted that apparently, NPC entered into contracts with various oil
companies for the delivery of fuel prior to determination of the actual needs
resulting in increasing inventory of fuel materials and supplies in the past three
years which accumulated to P34 billion as of December 2005.
OBSERVATIONS
1. NPC entered into contract with Shell Philippines Exploration and

Occidental Philippines, Inc. (Shell/Oxy) for the delivery of 164TJ
natural gas daily without first determining the natural gas
requirements. Thus, the annual contracted natural gas quantities
for CYs 2002 to 2005 were found to be 141% to 195% of the
forecasted needs and 122% to 191% of the total consumption. The
unconsumed natural gas which is recognized in the NPC’s books as
stored fuel was valued at P31.28 billion as of December 31, 2005.
This amount was unlikely to be recovered and would eventually
form part of NPC’s losses.
75
On November 5, 1997, NPC entered into an Energy Conversion Agreement

(ECA) with Korean Electric Power Corporation (KEPCO)/Ilijan
Corporation (KEILCO) whereby KEILCO will build, operate and maintain
a Power Plant that will convert natural gas into electricity. The ECA was
amended on December 14, 2000. It provides, among others, that the natural
gas to be converted into electricity shall be provided by the NPC.
It was further provided under Article 6.1.b that KEILCO shall only use
natural gas to test and operate the power station, except to the extent that
the NPC otherwise requires the use of diesel fuel to test the performance of
the power station using diesel fuel.
The fuel to be supplied by NPC to KEILCO would be based on the fuel

usage and generation forecast to be prepared and submitted in accordance
with the Fuel Supply Management Agreement (FSMA) and the Schedule,
and any dispatch protocol agreed upon between NPC and KEILCO. The
KEILCO’s estimates of fuel requirements will be based on NPC’s
generation forecasts which shall indicate whether the power plant will be
dispatched on natural gas or diesel fuel.
The team, however, noted that while fuel requirements was not yet
established and still dependent on the generation forecasts, NPC already
entered into Gas Sale and Purchase Agreement (GSPA) on December 30,
1997 with Shell Philippines Exploration B.V and Occidental Philippines,
Inc. (Shell/Oxy), the Service Contractor, for the purchase of Natural Gas
from its Reservoir for the 1200 MW Ilijan Power Plant for a period of 20
years. The fuel requirements should be prepared in accordance with the
FSMA. The FSMA was entered into only in November 2000 which
requires KEILCO, among others, to submit to NPC, monthly estimates of
Natural Gas and Diesel fuel usage for commissioning and testing of the
power station, complete tests and Annual Fuel Forecast.
The GSPA provided, among others, that NPC shall pay for 164 TJ Daily
Contracted Take-or-Pay Natural Gas tendered for delivery by the Sellers,
whether taken by NPC or not. The contracted volume was adjusted yearly
by the volume properly nominated by NPC but was not delivered by
Shell/Oxy. The contracted take-or-pay quantity for CYs 2002-2005 follow:
Contracted Quantity/Take-or-pay
Year quantity ( in GJ )
2002 59,860,000
2003 59,860,000
2004 60,024,000
2005 59,860,000
76
In order to assess whether the quantity contracted by NPC to Shell/Oxy was

reasonable and indeed needed, the team evaluated the monthly contracted
quantity of natural gas from July 2002 to December 2005 in relation to the
forecasted requirements and actual utilization.
Evaluation revealed that the annual natural gas contracted quantities for the
four-year period were 141.01% to 194.57% of the forecasted requirements
and 122.42 % to 191.23% of the actual consumption as illustrated below:
IN GIGAJOULES
Monthly Contracted Qty Actual Excess
Contracted Forecasted as % of Deliveries/ Contracted Contracted Qty
Quantity Quantity forecast Consumption Quantity as % of actual
Month
(A) (B) (A/B) (C) (A-C) (A/C)
* 2002
July 5,084,000.00 3,626,514.77 140.19 2,840,115 2,243,885 179.01
August 5,084,000.00 3,593,155.36 141.49 3,319,476 1,764,524 153.16
September 4,920,000.00 3,063,217.26 160.62 2,013,719 2,906,281 244.32
October 5,084,000.00 2,186,384.58 232.53 3,015,775 2,068,225 168.58
November 4,920,000.00 2,427,612.13 202.67 2,854,200 2,065,800 172.38
December 5,084,000.00 1,293,955.30 392.90 3,069,460 2,014,540 165.63
Sub-total 30,176,000 16,190,839.40 186.38% 17,112,745 13,063,255 176.34

2003
January 5,084,000 3,169,440 160.41 3,021,479 2,062,521 168.26
February 4,592,000 2,862,720 160.41 2,851,221 1,740,779 161.05
March 5,084,000 3,169,440 160.41 3,105,911 1,978,089 163.69
April 4,920,000 3,067,200 160.41 2,981,508 1,938,492 165.02
May 5,084,000 3,169,440 160.41 2,900,776 2,183,224 175.26
June 4,920,000 3,067,200 160.41 2,824,608 2,095,392 174.18
July 5,084,000 3,169,440 160.41 2,391,323 2,692,677 212.60
August 5,084,000 3,169,440 160.41 2,415,082 2,668,918 210.51
September 4,920,000 3,067,200 160.41 2,579,581 2,340,419 190.73
October 5,084,000 3,169,440 160.41 2,919,101 2,164,899 174.16
November 4,920,000 3,067,200 160.41 2,857,242 2,062,758 172.19
December 5,084,000 3,169,440 160.41 2,689,066 2,394,934 189.06
Sub-total 59,860,000 37,317,600 160.41 33,536,898 26,323,102 178.49

*2004
January 5,084,000 2,610,000 194.79 2,650,941 2,433,059 191.78
February 4,756,000 2,910,000 163.44 2,393,413 2,362,587 198.71
March 5,084,000 3,120,000 162.95 4,020,747 1,063,253 126.44
April 4,920,000 3,090,000 159.22 2,955,710 1,964,290 166.46
May 5,084,000 3,270,000 155.47 2,815,937 2,268,063 180.54
June 4,920,000 3,100,000 158.71 3,012,403 1,907,597 163.32
July 5,084,000 1,870,000 271.87 2,729,814 2,354,186 186.24
77
IN GIGAJOULES
Monthly Contracted Qty Actual Excess
Contracted Forecasted as % of Deliveries/ Contracted Contracted Qty
Quantity Quantity forecast Consumption Quantity as % of actual
Month
(A) (B) (A/B) (C) (A-C) (A/C)
August 5,084,000 1,870,000 271.87 2,235,643 2,848,357 227.41
September 4,920,000 1,810,000 271.82 2,128,950 2,791,050 231.10
October 5,084,000 1,870,000 271.87 2,171,537 2,912,463 234.12
November 4,920,000 1,810,000 271.82 2,098,962 2,821,038 234.40
December 5,084,000 3,520,000 144.43 2,174,504 2,909,496 233.80
Sub-total 60,024,000 30,850,000 194.57 31,388,561 28,635,439 191.23

2005
January 5,084,000 2,011,785 252.71 2,314,441 2,769,559 219.66
February 4,592,000 3,369,568 136.28 2,901,242 1,690,758 158.28
March 5,084,000 3,378,471 150.48 3,618,756 1,465,244 140.49
April 4,920,000 3,926,300 125.31 5,024,132 (104,132) 97.93
May 5,084,000 3,697,680 137.49 3,728,925 1,355,075 136.34
June 4,920,000 2,780,360 176.96 4,119,371 800,629 119.44
July 5,084,000 2,288,330 222.17 5,188,765 (104,765) 97.98
August 5,084,000 4,579,500 111.02 5,385,832 (301,832) 94.40
September 4,920,000 4,467,320 110.13 3,837,002 1,082,998 128.23
October 5,084,000 3,788,560 134.19 5,413,563 (329,563) 93.91
November 4,920,000 4,746,350 103.66 4,957,498 (37,498) 99.24
December 5,084,000 3,416,520 148.81 2,407,247 2,676,753 211.20
Sub- total 59,860,000 42,450,744 141.01 48,896,774 10,963,226 122.42
Total 209,920,000 130,934,978 78,985,022
* Based on forecasted generation as per Approved Operating Budget Monthly Details for FY 2002 and FY 2004
Forecasted quantities for the first six months of CY 2002 not available
It may even be noted that while the contracted quantities could no longer be
consumed, NPC did not negotiate for the reduction in contracted quantity.
This then resulted in increasing investment in stored fuel for the three year
period which was valued at P31.280 billion in 2005 as illustrated below:
Year Balance as of year-end

2003 P 15,804,963,537
2004 26,195,665,965
2005 31,280,058,351
The cost of stored fuel is unlikely to be recovered and would eventually

form part of NPC’s losses as annual consumption never exceeded the
annual contracted quantity. As provided in the GSPA, the cost of excess
contracted quantity may only be recovered in the event that actual
consumption for the year exceeds the annual contracted quantity.
78
The contracted quantity is payable by NPC to Shell/Oxy, whether delivered

and taken or tendered for delivery and not taken. The difference between
the contracted quantity and the actual volume of natural gas delivered to
NPC were recognized in the books of NPC as Stored Fuel – Ilijan.
The NPC’s obligation under this contract was guaranteed by the National
Government. In the event of NPC’s failure to honor its obligations, the
corresponding amount is deducted by the Shell/Oxy from its dues to the
Department of Energy (DOE) representing the share of the Government
from the net proceeds or Quarterly Assigned Petroleum Amount from
Malampaya. As of December 2005, NPC’s liability to DOE amounting to
P5.438 billion is recorded in the books of the NPC as part of “Due to the
Philippine Government and its Agencies.”
In the event that the Net Government Share in a given Contract Year is still
insufficient to pay for the Natural Gas, NPC is authorized under Section 4
of Administrative Order (AO) No. 381 dated February 17, 1998 to avail
itself of the Deferred Payment Facility. As disclosed in the report of the
IPPCM-South Luzon Operation, NPC was granted a deferred payment
facility by Shell Philippines Exploration, B.V., (SPEV), et.al. of US$350
million, of which US$295.89 million was already availed of by NPC as of
December 31, 2005. All charges to the said facility is due and payable on
December 31, 2009.
It was further provided in the AO that in the event that these amounts are
still not sufficient, the balance due to the Sellers under the Performance
Undertaking shall be paid from any available government sources or funds.

Provided by NPC
The GSPA required NPC to consume It would appear then that the NPC
the 164TJ Daily Contracted Quantity proceeded in contracting 164TJ of
(DCQ) which is based on 80% capacity natural gas on December 30, 1997
utilization of the 1200MW ICCPP. The based on the 80% capacity utilization
GSPA was executed prior to NPC of the plant despite constraint in the
entering into an ECA with KEILCO. Biňan-Dasmariňas line. This deficiency
The ECA will support the viability of was claimed to have been corrected
the Malampaya Gas Project of the only in February 2005. It is worthy to
Government. The estimated 80% mention that during the period 2002 to
capacity utilization throughout the 2005, the plant is operating only from
Cooperation Period is just proper and 30% to 45% of its guaranteed
attainable since ICCPP is designed to generation.
operate as a base load plant hence, the
164TJ DCQ is a reasonable estimate of
the daily fuel requirements of the plant
79

in the absence of the FSMA. Further,
the establishment of the FSMA on
Nov. 2000 is timely and really served
the purpose considering that the Take-
or-Pay quantity was only adopted in
2002, the commercial operation of the
Ilijan gas plant. The shortfall in the
T.O.P. for the period covered by the
COA’s report is attributed largely to
the Biñan-Dasmariñas line constraints
which were only corrected in February
2005.
Lastly, the difference between the As provided under Article 9.3, the
contracted quantity and the actual cost of excess contracted quantity may
volume of natural gas delivered to NPC only be recovered in the event that
(Stored Fuel) can still be recovered actual consumption for the year
pursuant to Article 9.3(1) and 9.4 of the exceeded the annual contracted
GSPA. quantity. As discussed earlier, annual
consumption ranged only from 30% to
45% of the annual contracted quantity.
In addition, while the GSPA may be

extended for a period not exceeding
730 days for purposes of recovering the
outstanding balance of unconsumed
contracted quantity or stored fuel under
Article 9.4, Article 9.5(1) provides
that if the sellers have permanently
ceased production of natural gas but
would have to operate as a result of
such extended contract period, the
buyer (NPC) would have to reimburse
the sellers for the actual costs of
production, processing, transporting
and tendering natural gas for delivery
to the buyer. The NPC then would
have to incur substantial amount to
recover its investment.
The bases of the amounts indicated for These were the amounts reflected in the
accumulated stored fuel (P 31.2 NPC’s financial statement as of
Billion) and fuel inventories (P2.113 December 31, 2005.
Billion) as of 31 December 2005, need
to be clarified and validated.
80

Further, NPC has created a Task Force NPC need to initiate amendment of
for the review of Fuel Operation and these contracts as it is incurring
Accounting Manual (on coal and fuel substantial costs in paying for fuel
oil) and this course of action will be which the plants could hardly consume.
considered. However, for Natural Gas
the Take-or-Pay quantity reduction will
require several contract amendments
(i.e., GSPA, ECA and FSMA with
KEILCO).
2. Contracts with various oil companies amounting to P 2.113 billion

for the supply of fuel and diesel oils to nine (9) IPPs with
substantial fuel inventory balances were also entered into by the
NPC in the absence of forecasted fuel requirements. These
deliveries then formed part of the existing fuel inventories of the
IPPs unnecessarily tying up government resources which are
funded from loan. As of December 31, 2005, fuel inventories were
valued at P2.654 billion.
The Power Economics Division (PED) of the NPC is primarily responsible

for generation planning and forecasting and determination of the fuel
requirements of both IPPs and NPC-owned plants located in Luzon and
Visayas while the Operations Planning Department (OPD)-MinGen is in
charge in the Mindanao Grid.
Interviews disclosed that in the preparation of generation forecast, the PED

and OPD consider factors such as sales data, maintenance schedules of the
generation plants, plant dependable capacity, merit order, heat rate and
other plant characteristics.
On the basis of the generation forecast, the fuel requirements are

determined which are considered in the preparation of the Annual
Procurement Plan by the Fuel Management Division (FMD). The FMD, in
coordination with the Bids and Contract Services, also prepares the Tender
Documents for bidding purposes. The bidding is on a per delivery point or
on a per plant basis depending on the stipulations in the Tender Documents.
The contract is awarded by batch according to the type of fuel which may
be coal, bunker fuel oil or diesel, among others.
81
Records show that contracts for the supply of fuel and diesel oils to IPPs
with existing Energy Conversion Agreements with NPC covering the
period January 1 to December 31, 2004 were awarded to Petron Corp. and
Pilipinas Shell Petroleum Corp. in the total amount of P2.31 billion.
Analysis, however, revealed that of the total amount, P2.113 billion were
intended for IPPs without forecasted fuel requirements, and in most cases,
not also included in the Annual Procurement Plan as tabulated below:
Contracted Qty
(in kiloliters)
Plant/Barge Total Remarks
Fuel
Diesel Contract
Oil
Cost
Petron Corporation
1. Bataan CCPP 3,956 35,733 P 841,847,901 Diesel not included in both forecasted fuel requirements and
Annual Procurement Plan (APP). Fuel oil not included in the
forecasted fuel requirement but included in the APP.
2. Subic II DP 413 367 10,332,431 Diesel not included in the APP but included in the forecasted fuel
requirements. Fuel oil not included in the forecasted fuel
requirement but included in the APP.
3. Ogden-Edison DP 562 647 14,375,420 Diesel and fuel oil not included in both forecasted fuel
4. Sual CFTPP 298 5,749 57,371,218 requirements and APP.
5. Pagbilao CFTPP 9,600 - 140,678,385 Diesel not included both in the forecasted fuel requirement and
6. Ilijan NGPP 17,741 - 256,048,550 APP.
7. Rosario DP(MCI) - 62,929 751,798,852 Fuel oil not included in the forecasted fuel requirements but
included in the APP.
Sub-total 34,575 510,708 P2,072,452,757
Pilipinas Shell Petroleum Corporation

1. Bauang DP 821 - P 14,148,124 Diesel not included in the forecasted fuel requirements and APP.
2. Malaya TP 1,598 - 26,618,700
Sub-total 40,766,824
Total 10,023 128,972 P2,113,219,581
This resulted in increase of fuel inventories which accumulated to P2.654

billion as of December 2005 as tabulated below:
Particulars 2003 2004 2005
Current Assets
Materials and Supplies for operation
Fuel Oil P 615,123,621 P 1,007,837,067 P 872,331,971
Coal 231,607,383 643,343,255 992,181,202
Diesel Oil 184,909,817 339,907,857 732,847,827
Thermal Chemicals 42,425,378 45,918,381 57,032,101
Total P 1,074,066,199 P 2,037,006,560 P 2,654,393,101
As the fuels contracted were not needed, these were transferred to other
IPPs with likewise no need for the same as discussed in the next page.
82
IPP Particulars
Ilijan Natural It may be noted that the main fuel of this plant is natural gas. Diesel is required
Gas Power only for start-up and for testing performance of the power station as may be
Plant (NGPP) required by the NPC. However, as reflected in the schedule, NPC entered into
contract with Petron Corp. on June 7, 2004 for the supply of 17,741,000 liters of
diesel for the period March to December 31, 2004 for a contract price of
P256,048,550 on consignment basis.
Further evaluation revealed that before this contract was entered into, Ilijan
NGPP has inventory balance of 23,420,525 liters of diesel as of May 25, 2004
broken down into:
Quantity
Particulars
(in liters)
NPC stocks out of terminated contracts 15,120,414
stored at the IPP fuel tanks
Balances from deliveries as of May 25, 2004 8,300,111
charged against contracts entered into on
July 4, 2002 and valid until June 30, 2004
with option to extend as mutually agreed
upon
Total 23,420,525
Since Ilijan NGPP has no need for additional fuel, deliveries during the billing
period October 25 to November 25, 2004 were diverted to another IPP, the
Bataan Combined Cycle Power Plant (BCCPP) with likewise substantial
inventory balances as of October 25, 2004 of 5,565,901 liters. This inventory is
also more than the needs of BCCPP. Thus, the diverted deliveries now formed
part of its existing inventory as of April 2005 of 6,886,854 as illustrated
below:
In Liters
Drawdowns=
Consumption
Inventory, +Used for Inventory,
Billing Period Beginning Deliveries blending Ending
10/25/04-11/25/04 5,565,901.11 4,719,572.48 2,578,941.28 7,706,532.31
11/25/04-12/25/04 7,706,532.31 - 746,831.06 6,959,701.25
12/26/04-12/25/04 6,959,701.25 - - 6,959,701.25
01/01-01/25/05 6,959,701.25 - 18,382.36 6,941,318.89
01/26/05-02/25/05 6,941,318.89 - 23,902.52 6,917,416.37
02/26/05-03/25/05 6,917,416.37 - 5,906.17 6,911,510.20
03/26/05-04/25/05 6,911,510.20 - 24,655.68 6,886,854.52
Meanwhile, out of the total inventory balance of Ilijan NGPP as of June 25,
2004 of 23,420,525, only 154,440 liters were consumed as of January 25, 2005
as tabulated below:
In Liters
Drawdowns =
Inventory, Consumptions + Inventory,
Billing Period Beginning Used for blending Ending
6/25/04-7/25/04 23,480,525 21,274 23,459,251
7/25/04-8/25/04 23,459,251 5,941 23,453,310
08/25/04-09/25/04 23,453,310 26,119 23,427,191
09/25/04-10/25/04 23,427,191 19,337 23,407,854

10/25/04-11/25/04 23,407,854 47,196 23,360,658
11/25/04-12/25/04 23,360,658 33,695 23,326,963
12/25/04-1/25/05 23,326,963 878 23,326,085
Total 154,440
83
IPP Particulars
Rosario Diesel There was no forecasted fuel oil requirement for MCI in CY 2004. However, in
Power Plant or the APP, it was indicated that the IPP has fuel oil requirement of 52,441,000
Magellan liters. While the quantity indicated in the APP was only 52,441,000 liters, NPC
Cogeneration entered into contract with Petron on August 9, 2004 for the supply of 62,929,000
Inc. (MCI) liters which is 10,488,000 liters higher than what was indicated in the APP. Of
the total quantity contracted, 6,736,060 liters were delivered between July 9,
2004 to August 8, 2004 or prior to the signing of the 2004 contract.
It was further noted that fuel deliveries under this contract during CY 2004 were
consumed by the MCI to generate energy delivered to its other customers as
tabulated below:
Fuel oil (in liters)

For energy
delivered to
Beginning other Ending
Billing period Inventory Delivery customers Inventory
2004
25 June - 25 July 1,127,453 7,895,729 7,043,432 1,979,750
25 July – 25 Aug 1,979,750 5,785,426 6,705,621 1,059,555
25 Aug – 25 Sept 1,059,555 7,492,150 7,329,861 1,221,844
25 Sept – 25 Oct 1,221,844 6,821,638 7,325,031 718,451
25 Oct – 25 Nov 718,451 7,870,655 7,460,933 1,128,173
25 Nov – 25 Dec 1,128,173 7,870,473 7,941,949 1,056,697

Total 43,736,071 43,806,827
This manifests that NPC has no need for this contract.
Sual Coal- While there was no forecasted requirement and programmed procurement for
Fired Power diesel and fuel oil in CY 2004 for Sual CFPP, NPC entered into contract with
Plant (CFPP) Petron on June 7, 2004 for the supply of 298 and 5,749 kiloliters of diesel and
fuel oil, respectively, covering the period March to December 31, 2004.
Records show that prior to the signing of this contract on May 25, 2004, NPC
has existing contract for the supply of fuel oil to Sual CFPP and inventories as
tabulated below:
Quantity
Particulars (in liters)
NPC stocks out of terminated contracts stored
at the IPP fuel tanks 1,886,956.30
Delivery as of May 25, 2004 out of contracts
entered into on July 4, 2002 and valid until 1,415,043.32
June 30, 2004 with option to extend as
mutually agreed upon.
Total 3,301,999.62
While the contract with Petron was on consignment basis, NPC was obligated
under the contract to pay all unconsumed fuels at the end of the contract period
with total quantities of 1,544,235.73 liters amounting to P19,148,831.90. This
resulted in accumulated balance of 3,308,448.76 liters as of April 25, 2005.
84

Provided by NPC
NPC is not in the practice of entering The audit disclosed that the GSPA
into supply contracts with the oil fixing the minimum quantity of natural
companies without prior determination gas to be purchased was entered into on
and approval of its fuel requirements. December 30, 1997, way ahead the
The quantity for procurement is based FSMA which was only entered into in
on the generation and fuel consumption November 2000. The estimated gas and
forecast provided by the Power diesel fuel consumption then was
Economics Department and the established only in 2000.
approved Fuel Procurement Plan.
Documents provided to the team also
disclosed that contracts for P2.113
billion were intended for nine (9) other
IPPs with either no forecasted fuel
requirement (not included in the fuel
consumption forecast) or not included
in the Annual Procurement Plan or
both.
action
NPC had already conducted actual It would appear then that while NPC
transfer of fuel stock from a was aware that additional costs, in
decommissioned power plant to an addition to carrying costs, would still
operating power plant. NPC entailed be incurred in transferring excess fuel
additional cost for hauling and from one plant to another, still it is not
provisions for loading equipment and prudent enough to ensure that only
facilities required for the withdrawal of needed fuel is contracted.
fuel from the decommissioned plant.
Oil-based fuel presently stored at the This condition could have made NPC
IPPs storage tank can not be easily more prudent in its actions.
transferred to other IPP or NPC power
plants due to the absence of the loading
equipment and facilities. Installation of
this equipment and facilities may also
cause disruption in plant operations.
Technically, the transfer of fuel is
feasible but with cost as mentioned.
NPC’s fuel supply contracts with the This only shows that NPC was aware
oil companies already provide the that the contracted quantities would
transfer of fuel stock allocation from exceed the plants requirements.
one power plant to another for Instead of providing transfer of fuel
operational flexibility. The unlifted stock allocation from one power plant
volume of fuel from one plant can be to another, NPC should exercise
allocated to another plant in order to prudence in estimating the fuel needs
meet its fuel requirement. and in entering into contract.
85
3. Seven (7) IPP contracts have no prescribed limitations for each

start-up and shutdown cycle while four (4) others with different
rated capacities and heat rates were allowed the same fuel
limitation. For CY 2004 alone, the costs of fuel utilization of these
IPPs for this purpose ranged from P.280 million to P20.620
million. The absence of limitation would not provide NPC basis for
monitoring efficient fuel utilization.
Under the Plant Performance Parameters, fuel consumption is defined as

the total fuel consumed during a period and is broken down into:
• fuel consumption with generation - refers to the fuel consumed

during the period that the plant/ generating unit is in operation;
and
• fuel consumption without generation – refers to the fuel

consumed during the period that the plant/generating unit was
shutdown or not in operation. This includes fuel consumed
during start-up and shutdown.
Review of records of 12 IPP contracts revealed that during the period

December 25, 2003 to December 25, 2004 alone, these IPPs consumed
fuel with costs ranging from P.280 million to P20.620 million without
energy generation. Further evaluation revealed that of the 12 IPPs, four (4)
with different heat rates and rated capacities have standard limitations on
fuel consumption of 800 liters that can be used for this purpose while the
seven (7) others have either no Fuel Supply Management Agreement
(FSMA) or with FSMA but have no limitations provided therein or in the
contract as tabulated below:
Fuel Consumption w/out

Individual/ generation
Total
Diesel Fuel oil
IPP Rated Capacity Total Remarks
Amount Amount
NORTH LUZON
Limay Bataan Gas 2 x 100 MW, P 6,703,644 - P 6,703,644 No FSMA and
Turbine Combined 6 x 70 MW/ limitation in the contract
Cycle Power Plant- 620.00
Block A & B
Bauang La Union 21 x 11.2 MW/ 1,739,185.67 - 1,739,185.67 Maximum of 800 liters
Diesel Power Plant 235.20 each start-up and
shutdown cycle
Navotas Gas 1 x 100 MW/ 280,296.30 - 280,296.30 No FSMA and limitation
Turbine Power 100.00 in the contract.
Station 4
Sual Coal Fired 2 x 647 MW/ 35,557.38 P 6,966,806.07 7,002,363.45 Maximum of 150 to 200
Thermal Power 1,294.00 liters of fuel oil and
Plant 3,157 to 146,550 liters of
bunker fuel for each start
up activity depending on
plant status.
SOUTH LUZON
Malaya Thermal 1 x 300 MW 3,718,302.09 5,874,468.81 9,592,770.90 No limitation indicated
Power Plant 1 x 350 MW/ in the FSMA and
700.00 contract.
Pagbilao Coal-Fired 2 x 364 MW/ 20,620,820.75 - 20,620,820.75 No FSMA and limitation
86
Fuel Consumption w/out

Individual/ generation
Total
Diesel Fuel oil
IPP Rated Capacity Total Remarks
Amount Amount
Power Plant 728.00 in the contract.
MINDANAO
Iligan Diesel 6 x 7 MW/ 243,685.68 431,323.25 675,008.93 Maximum of 800 liters
Power Plant II- 42.00 each start-up and
Northern Mindanao shutdown cycle.
Power Corporation
(NMPC II)
Mindanao Diesel 1 x 100 MW/ 112,337.55 1,647,149.34 1,759,486.89 No FSMA and limitation
Power Barge 117 100.00 in the contract.
Mindanao Diesel 1 x 100 MW/ 3,841,009.41 3,704,877.42 7,545,886.83
Power Barge 118 100.00
Gen. Santos Diesel 5 x 10.7 MW 244,485.95 206,558.15 451,044.10 Maximum of 800 liters
Power Plant- 1 x 5.5 MW/ each start-up and
Southern 59.00 shutdown cycle.
Philippines Power
Corp. (SPPC)
Zamboanga Diesel 10 x 11.3 MW/ 632,095.59 270,162.92 902,258.51
Power Plant- 113.00
Western Mindanao
Power Corporation
(WMPC)
TOTAL P 38,171,420.37 P19,101,345.96 P 57,272,766.33
The absence of prescribed limitations on fuel used for activities without

generation could not be considered advantageous to NPC as there would be
no basis for monitoring efficient fuel utilization. As discussed earlier, fuel
consumption ranged from P.280 million to P20.620 million.
It was also noted that the 800 liters prescribed limitations for each start-up
and shutdown cycles for each generating unit in four (4) IPPs with different
capacities and heat rates could not be considered reasonable as these would
affect fuel utilization:
No. of Rated Net Heat Rate

generating Capacity Guarantee
IPP units (In MW) (BTU)
1. Western Mindanao Power Corp. 10 units 11.3 8,187.71-8,694.17
- Zamboanga Diesel Power Plant
2. Southern Philippines Power units 1-5 10.7 8,181.17-8,687.23
Corporation unit 6 5.5
3. NMPC I & 2 – Iligan Diesel 12 units 5.7 8,651.64-8,809.42
Power Plant 7 units 6.0
4. Bauang Diesel Power Plant 21 units 11.2 8,250.00-8,795.64
The rated capacity and heat rate of a generating unit have bearing on fuel
consumption. Such being the case, fuel consumption of the above-
mentioned generating units for each start-up and shutdown cycle should not
be the same and vary from unit to unit. Allowing a maximum of 800 liters
for each start-up and shutdown cycle per unit without regard to its heat rate
or rated capacity is not also beneficial to the government. This manifests
absence of a policy in setting allowable limit of fuel for these activities.
87

Provided by NPC
Most of the IPPs listed in the tabulation

have allowable start-up fuel
consumption provided in the ECA /
FSMA. Our comments to each of the
IPPs listed are as follows:
Bauang – we agree with the

computation of fuel cost
Navotas Gas Turbine Power Station
4 - we agree with the computation
of fuel cost
Sual CFTPP – we agree with the
Malaya TPP – we agree with the
comments and computation. Efforts
are being made by NPC &
KEPHILCO to agree on allowable
fuel consumption limits as required
in the ROMM agreement.
Pagbilao CFTPP – we agree with
the computation of fuel cost
NMPC I & II – we agree with the We agree that plants of the same
computation of fuel cost. All units engines and models may have almost
of NMPC I&II are Wartsila engines the same fuel consumption. However,
of similar models and have almost these plants, with rated capacities of
the same fuel consumption for start- between 5.7 to 6.00 MW were not
up. Both contracts are BOT with the comparable with that of Bauang,
same IPP contractor (ALSONS). General Santos and Zamboanga Diesel
The 800 liter/start-up fuel limit was Power Plants with capacities ranging
agreed upon after the final design of from 10.7 to 11.3 MW. Yet NMPC I
the power plants. and II were provided the same start-up
PB 117 & 118 – we agree with the fuel limitation.
General Santos & Zamboanga – we
agree with the comments and
computation.

action
The IPP contracts already provide As discussed in the report, seven (7)
limitation on the fuel used for activities contracts have either no Fuel Supply
without energy generation. NPC will Management Agreement (FSMA) or
enforce close monitoring on with FSMA but have no limitations
compliance with this provision. provided therein or in the contract.
88
4. The Fuel Supply Management Agreement (FSMA) entered into by

NPC with the MCI may not be considered favorable to the
government. NPC is required to supply MCI fuel and power
requirements of another MCI customer deductible from the MCI
billings. As the cost of NPC’s fuel delivery to MCI is higher than
the costs of MCI’s energy delivery, NPC’s receivable from MCI
reached to P656.186 million as of July 2006 .
The NPC’s Energy Conversion Agreement (ECA) with the MCI was
entered into on September 23, 1993. This was followed by an FSMA
entered into on July 14, 1994 which provides that NPC will supply fuel not
only to be used by MCI for conversion into energy to be supplied to NPC
but likewise with its other client, the Cavite Export Processing Zone
Authority (CEPZA). The fuel used by MCI to address the needs of its other
client will be deducted from its billing to NPC. In effect then, NPC would
be supporting the operations of MCI to meet its commitment to deliver the
power requirements of CEPZA.
This provision is actually not in accordance with Article 2.9 of the ECA
which provides that the fuel to be supplied by NPC should not include the
fuel to be used to meet MCI’s obligation to CEPZA as this is supposed to
be provided by MCI or CEPZA.
During CYs 2004 and 2005, out of the total MCI fuel consumption of
130,726,734 liters, only 2,848,495 liters were used to deliver energy to
NPC as tabulated below:
Fuel delivery MCI’s Fuel Consumption(in liters)

to MCI by For energy delivered to
NPC
Period (in liters) CEPZA NPC Total
2004
25 Dec’03 – 25 Jan 4,923,915 4,076,648 - 4,076,648
25 Jan - 25 Feb 5,905,620 6,544,427 - 6,544,427
25 Feb – 25 March 6,473,279 6,156,197 - 6,156,197
25 Mar – 25 April 7,381,313 7,725,190 24,322 7,749,512
25 April - 25 May 8,440,978 7,538,733 747,835 8,286,568
25 May – 25 June 8,566,137 7,948,614 671,007 8,619,621
25 June - 25 July 7,895,729 7,043,432 - 7,043,432
25 July – 25 Aug 5,785,426 6,705,621 - 6,705,621
25 Aug – 25 Sept 7,492,150 7,329,861 - 7,329,861
25 Sept - 25 Oct 6,821,638 7,325,031 - 7,325,031
25 Oct – 25 Nov 7,870,655 7,460,933 - 7,460,933
25 Nov – 25 Dec 7,870,473 7,941,949 - 7,941,949
Sub-total 85,427,313 83,796,636 1,443,164 85,239,800
2005
25 Dec – 25 Jan 7,714,524 6,480,654.69 1,061,177 7,541,832
25 Jan - 25 Feb 7,883,165 7,740,916.32 311,544 8,052,461
25 Feb – 25 March 6,898,671 6,819,325.70 32,609 6,851,935
25 Mar – 25 April 7,862,545 7,764,131 - 7,764,131
89
Fuel delivery MCI’s Fuel Consumption(in liters)

to MCI by For energy delivered to
NPC
Period (in liters) CEPZA NPC Total
25 April - 25 May 6,895,474 7,686,007 - 7,686,007
25 May – 25 June 8,323,766 7,590,568 - 7,590,568
Sub-total 45,578,145 44,081,602 1,405,331 45,486,934
TOTAL 131,005,458 127,878,239 2,848,495 130,726,734
Apparently, the costs of energy delivered by MCI to NPC are not even
enough to pay the cost of fuel delivered by NPC to MCI for conversion into
energy delivered to CEPZA. Thus, as of July 2006, NPC’s records revealed
that receivable from MCI is now valued at P656.186 million. It maybe
mentioned that the NPC’s operation is funded from loans, part of which
was already assumed by the national government.

Provided by NPC
The amount of P656.186 million is still Irrespective of the amount to be finally

subject to reconciliation and adjustment agreed upon by the NPC and MCI, the
due to the different interpretation in the fact remains that NPC in a way
calculation of the Net Contracted supported MCI in its obligations with
Capacity (NCC) between MCI and CEPZ.
NPC which is the basis in computing
for the Energy Conversion Fees to MCI
where the cost of fuel incurred by MCI
for CEPZ load has been offset.

action
NPC has a pending case with Magellan As it is, it would still take time before
Cogeneration Inc. (MCI) on this NPC can recover from the MCI.
matter. Meanwhile, the government shoulders
the repayment of loans used to finance
the operations of NPC.
5. The minimum inventory levels set for seven (7) IPPs were way beyond the
IPPs’ actual requirements resulting in accumulation of fuel inventories.
These are good for 6 to as long as 686 months consumption.
As a matter of practice and to ensure sufficient stock of fuel to meet energy

requirements, the required inventory level to be maintained by the oil
companies at the IPPs is disclosed in the tender documents. For the past
three contracts entered into by NPC with the oil companies, the latter is
90
required to maintain minimum inventory levels of fuel oil and diesel at the
IPPs in the following quantities:
Minimum inventory level (in liter)

Fuel Oil Diesel
July 2002 to July 2002 to
Plant/Barge September 2005 September 2005 Remarks
1. Malaya TPP 35,771,000 Not specified The minimum inventory level for fuel oil
was set at 35.77 M liters for contract year
July 2002 to Dec. 2003. There were no
specified inventory levels for fuel oil for
the contract years 2004 to 2005.
2. PB 117 3,500.000 200,000 Same level of minimum inventory level set
for fuel and diesel oil through out the
3. PB 118 3,500,000 200,000
period.
4. Bauang Diesel 16,000,000 202,000 From Aug to Sept 2005, the minimum
inventory levels for fuel and diesel oil were
not specified.
5. Subic II DPP 10,400,000 114,000 Same level of minimum inventory set for
fuel and diesel oil throughout the period.
6. Ogden-Edison DPP 4,740,000 141,000 No minimum inventory level specified for
the period Aug to Sept 2005.
7. Sual CFTPP 2,400,000 680,000 Same level of minimum inventory set for
fuel and diesel through out the period
8. Rosario DPP 1,300,000 No contract No changes in the setting of minimum
inventory level for the 3 year period.
9. Ilijan CCPP Not specified 17,118,000 Same level for diesel oil set throughout the
period
10. SPPC 3,000,000 32,000 Same level throughout the period set for
fuel and diesel oil.
In order to determine whether the minimum inventory level was reasonable

and indeed needed, the team analyzed the average monthly consumption of
each IPP for the three contract periods. Considering the reported
consumption, it would appear that the minimum inventory levels set by the
NPC were way beyond the IPPs’ actual requirements resulting in
accumulated inventories which are good for 6 to as long as 686 months
consumption as illustrated below:
Average Monthly Consumption Estimated No. of months the minimum

Minimum
( liter) inventory would be consumed
Plant/Barge Stock Level
(liter) From January 2003 to June 2006 Jan.-Dec. Jan.-Dec. Jan.-Dec. Jan-
Lowest Highest 2003 2004 2005 June 2006
Fuel Oil:
PB 117 3,500,000 8,387,875.73 11,281,813.11 0.41 0.36 0.31 0.37
PB 118 3,500,000 9,034,093.87 11,856,679.14 0.35 0.36 0.30 0.39
Bauang Diesel 16,000,000 714,369.96 4,314,010.38 3.71 4.05 22.40 16.36
Subic II DPP 10,400,000 448,003.82 4,481,431.98 2.62 2.32 10.07 23.21
Ogden-Edison DPP 4,740,000 *2,430,413.38 2,609,094.36 1.82 1.95 - -
Sual CFTPP 2,400,000 366,720.59 561,119.76 6.06 4.28 6.54 4.61
Rosario DPP 1,300,000 5,827,018.33 7,252,998.58 0.18 0.18 0.22 -
SPPC 3,000,000 3,731,028.00 6,537,543.52 0.70 0.66 0.45 0.80
Malaya TPP 35,771,000 1,685,156.67 25,157,690.17 1.80 1.42 21.33 13.86
Diesel Oil
PB 117 200,000 730.07 24,405.94 8.19 29.42 273.95 225.40
PB 118 200,000 3,475.04 44,358.87 4.51 12.78 57.55 21.38
Bauang Diesel 202,000 47,746.24 201,516.51 1.00 1.02 4.23 3.51
Subic II DPP 114,000 16,675.73 125,001.69 1.10 0.91 2.00 6.84
Ogden-Edison DPP 141,000 47,372.41 *29,161.16 2.98 4.84 - -
Sual CFTPP 680,000 4,542.22 12,452.38 54.61 149.71 116.98 73.31
Ilijan NatGas PP 17,118,000 24,970.00 106,063.33 293.58 685.54 161.98 73.31
SPPC 32,000 2,724.28 8,398.71 11.75 6.46 4.05 3.81
Legend:
* - Co-operation period ended June 24, 2004
91

Provided by NPC
The range of fuel inventory mentioned

in the report does not reflect the actual
requirement for the operation of the
IPPs and even NPC-owned plants. We
offer the following comments:
NPC maintains a maximum of seven This policy should be reassessed

(7) days fuel inventory for diesel considering that the plants were not
plants at 24 hours full load being utilized at its full capacity. Fuel
operation. consumption of these IPPs may have
changed over the years. As discussed in
the tabulation, the accumulated
inventories were good for six (6)
months to as long as 686 months.
Ilijan CCPP – The 17,188,000 liters Considering that Ilijan plant could no
minimum fuel inventory level longer consume /make use of the
consumable in 686 months as available natural gas, there is no need
reported by COA seems to be to maintain contingency fuel of this
computed based on the actual fuel magnitude. Moreover, records would
consumption of the plant during show that from January 2003 to June
start up and operation without 2006, average monthly fuel
generation against the same consumption ranged only from 24,970
inventory level at the Ilijan CCPP to 106,063 liters.
fuel storage tank. This should not be
the case since the inventory level is
being maintained as a contingency
measure computed at full load in
case natural gas is unavailable.
Based on this condition and
considering that Ilijan CCPP has a
consumption rate of 3.9M liters/day
at 1200MW, the minimum stock
level of 17,118,000 liters of diesel
fuel will only last for about 5 days.
We noticed that the estimated This is done to determine the number

number of months the minimum of months these inventories could be
inventory would be consumed was consumed.
computed using the minimum
inventory level divided by the
average monthly consumption.
In the case of Fuel Oil, used as main As discussed earlier, Subic II was
fuel of oil-fired IPP power plants, among those IPPs without fuel
the inventory levels are reasonable requirements for CY 2002, yet included
92

and conservative (maximum of 4 in the contracts for the supply of fuel
months) for CY 2003 to 2004. oil.
However, for CY 2005 to 2006, the
inventory levels of Bauang DP,
Subic II DP and Malaya TP have
increased. The increase is
attributable to the reduced
generation resulting in less fuel
consumption (economic dispatch)
and eventual shutdown of the said
plants due to the increasing price of
petroleum fuel. The contracted
quantities of fuel in CY 2004 were
not fully consumed and spilled over
in CY 2005 and 2006. No fuel for
operation was procured for the oil-
fired IPP power plants in the Luzon
Grid in the said years.
With regard to Sual CFTPP, whose Apparently, while fuel oil and diesel
main fuel is coal, Fuel Oil and would be used only as start-up fuel,
Diesel are for low load and start-up substantial quantities were required to
fuel of the plant, respectively. be maintained.
Depending on actual dispatch, low
load and start-up fuel consumption
may increase or decrease
accordingly. Except for Ilijan
NGPP, Diesel Fuel is used as start-
up fuel of the IPP plants. However,
Ilijan NGPP requires Diesel Fuel as
an alternative fuel in case of non-
availability of its main fuel, Natural
Gas. NPC has a contractual
obligation to the operator of the
plant to provide the alternative fuel
that is sufficient to sustain operation
for five (5) consecutive days at full
load. Hence, the considerably high
inventory level.
We wish to inform you that the The team recognized that these factors
minimum inventory level should not would affect the inventory level.
be based on the plants’ average However, as discussed in the report,
monthly consumption alone. Other even the IPPs without fuel
factors should also be considered, requirements, which maybe due to
such as: accumulated inventories, were still
included in the contract for the supply
a) Procurement lead time from of additional fuel. This is the main
advertisement to contract approval. In
93

the case of oil-based fuel, the lead reason for increases in accumulated
time takes about 3-4 months inventories.
depending on the approving authority.
In 2002 to 2005, oil-based fuel supply
contracts worth more than P 300 M
required NP Board approval.
b) Supplier’s lead time for production of

petroleum products from crude oil to
finish product. The suppliers
normally order crude oil from abroad
for refinery processing two (2)
months in advance. The lead time is
required and should be sufficient in
order to meet the requirements of its
customers. Likewise, importation of
finished products also takes two (2)
months lead time.
c)Restrictions in the logistics of fuel

deliveries, i.e., pipeline delivery
schedules, limited number and
capacity of delivery vessels, barges
and tank trucks, receiving pier/wharf
draft limitations, delivery time from
suppliers, source to delivery
point/plant sites, etc.

action
• Item No. 12 – This

recommendation will also be
considered by the Task Force
mentioned in Item No. 8, which
shall review the inventory levels in
coordination with plant operations
and other groups.
94
Part V
Recommendations
95
RECOMMENDATIONS
RECOMMENDATIONS
To remedy the deficiencies noted, the team recommends the following courses
of action for consideration by the NPC:
1. Further negotiate with the IPPs to lower the fees considering NPC’s
financial condition at present, percentage of power plant utilization and
the IPPs responsibility under the contract to demonstrate the plants’
capability to provide the guaranteed capacity/energy.
2. Require the conduct of performance and other tests prior to turn-over

of the power plant to NPC to ensure that the plant will perform at its
guaranteed capacity and is in good condition, and capable of
converting fuel into electricity in a safe and stable manner within the
operating parameters.
3. Ensure that the power plants to be transferred are free from any liens
and encumbrances created by the IPP.
4. Require the inclusion of spare parts in the inventories to be transferred

at the end of co-operation period.
5. Ensure that availment of carried forward outages would not result in

power interruption.
6. Consider negotiating for the acquisition of the plant site as early as

possible to avoid costly rental and additional costs at the end of co-
operation period and to ensure actual transfer of power plants to NPC
at the end of co-operation period.
7. Require the conduct of test considering that payment of fees are based
on guaranteed capacities which could only be established through tests.
The cost of performance test should be shouldered by the IPP.
8. Stop the practice of entering into contracts with oil companies without
first determining the fuel needs. Considering the accumulated stored
fuel of P31.2 billion and fuel inventories of P2.113 billion as of
December 31, 2005, reduce the contracted take-or-pay quantity of
natural gas and all types of fuel to quantities actually needed as
determined from historical records.
96
RECOMMENDATIONS
9. Study the possibility of diverting excess fuel presently stored at some

IPPs which are determined no longer needed to other IPPs instead of
entering into new contracts.
10. Establish limitation on fuel used for activities without energy

generation taking into consideration heat rate and capacity and strictly
monitor compliance thereof.
11. Facilitate collection of receivable from Magellan Cogeneration

Incorporated pertaining to payment of fuel advances considering that
the Fuel Supply Management Agreement and ECA were already
terminated.
12. Set criteria in establishing the standard minimum and maximum

inventory levels of fuel taking into consideration actual usage and
industry practice.
97
Submitted in compliance with MS/TS Office Order Nos. 2005-036 and 2005-
036A dated July 6 and November 11, 2005, respectively.
Reviewed by:
Approved by:
98

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Management Services

Report No. 2005-09

March 29, 2007

HON. CYRIL C. DEL CALLAR

We are pleased to transmit the report on the sectoral performance

We look forward to the implementation of the audit recommendations

We acknowledge the cooperation and assistance extended to the team

Very truly yours,

By Authority of the Chairman:

Part II The Electric Generation Sector 9

Part III Contracts with Independent Power Producers 17

Part IV Audit Observations 23

Chapter 1 Adequate Contracted Capacity 24

Chapter 2 Reasonable Contract Arrangements 48

Chapter 3 Efficient Fuel Management 74

AUDIT SCOPE AND METHODOLOGY

 National Power Corporation (NPC)

 Adequate Contracted Capacity

 Analyzed available relevant reports of energy plants specifically on energy

maintained at the selected generating plants.

 While the reported existing generation capacity as of December 1994 were

 Some contract arrangements were not protective of NPC’s interest as

 In a number of IPP contracts, the warranty as to title of the property,

 While spare parts were required to be maintained by the IPPs to ensure

 Construction of power plants under the BOT arrangement on a site not

 Lapses in fuel management resulted in excessive contracted quantities that

beyond the IPPs’ actual requirements resulting in accumulation of fuel

 NPC supplied fuel to an IPP for the generation of energy to be delivered to

 installed capacities are affected, among others, by deterioration or de-rating of

The Electric Generation Sector

 Cogeneration units, defined as production of electric energy and forms of

 Electric generating plants, intending to sell their production to the grids,

A parallel policy to encourage private sector participation and investments is

The private sector participation was expanded upon issuance of RA 6957

THE ELECTRIC POWER SYSTEM BEFORE RA 9136

ELECTRIC POWER INDUSTRY REFORM ACT

IMPLEMENTING/PARTICIPATING AGENCIES & LINKAGES

The provision of total electrification is under the responsibility the following

DOE Under the Implementing Rules and Regulations (IRR) of EO 215,

Under RA 7638 dated December 9, 1992, the DOE is responsible

• To formulate policies for the planning and implementation of a

• To prepare and update annually, a Power Development Program

• To ensure the reliability, quality and security of supply of electric

• To encourage private sector investments in the electricity sector

• To facilitate and encourage reforms in the structure and

• To educate the public on restructuring of the electricity sector

• To establish Wholesale Electricity Spot Market (WESM) and

• To develop policies and procedures and, as appropriate, promote

• To monitor private sector activities relative to energy projects in

• To assess the requirement of, determine priorities for, provide

• To devise ways and means of giving direct benefits to the

• To formulate rules and regulations as may be necessary to

• To operate Agus and Pulangui complexes, which shall be

• To generate and sell electricity only from the undisposed

National Recommends to the DOE, applications of electric cooperative to

 Take ownership of all existing NPC generation assets, liabilities,

 Formulate and implement a program for the sale and

 To assume all outstanding financial obligations of Electric

National Power Corporation (NPC)

Adequate Contracted Capacity

Analyzed available relevant reports of energy plants specifically on energy

While the reported existing generation capacity as of December 1994 were

Some contract arrangements were not protective of NPC’s interest as

In a number of IPP contracts, the warranty as to title of the property,

While spare parts were required to be maintained by the IPPs to ensure

Construction of power plants under the BOT arrangement on a site not

Lapses in fuel management resulted in excessive contracted quantities that

NPC supplied fuel to an IPP for the generation of energy to be delivered to

installed capacities are affected, among others, by deterioration or de-rating of

Cogeneration units, defined as production of electric energy and forms of

Electric generating plants, intending to sell their production to the grids,

Take ownership of all existing NPC generation assets, liabilities,

Formulate and implement a program for the sale and

To assume all outstanding financial obligations of Electric

oil-based (diesel, gas turbine or cogeneration)

Undertake a thorough review of all IPP contracts;

The plant was not operational at the time of

The unit was, however, placed under

During actual inspection, the plant is under

Its generation cost per kwh was P1.02 and

Unit 1 is under economic shutdown due to

6. San Roque Multi-Purpose Project A dispatchable peaking plant guaranteed to

Generation cost per kwh increased from

Its generation during the period 2000 to

Generation cost per kwh in 2004 and 2005

The power plant is utilized as base load

Generation costs per kwh in 2004 and 2005

While the barges were designed for base

Generation costs per kwh in 2004 and 2005

Actual inspection on March 13, 2006

Generation costs per kwh increased from

Energy delivered increased from 1,653 mwh

Per Monthly IPP Operation and Cost Report

The power plant is designed for base load

Generation cost per kwh decreased from

This is composed of three (3) plants

NPC’s receivable from MCI as of July 2006

Generation cost per kwh increased from