Completion Report

Project Number: 37752 Loan Number: 2282 August 2010

Republic of the Philippines: Power Sector Development Program

CURRENCY EQUIVALENTS Currency Unit – peso (P) At Program Completion 30 June 2009 $0.0208 P48.129

P1.00 $1.00

= =

At Appraisal 2 November 2006 $0.0200 P49.800 ABBREVIATIONS

ADB CSP DOE DOF DSCR EPIRA ERC IMO IPP MW NPC PCR PEMC PSALM PSDP TransCo WESM

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Asian Development Bank country strategy and program Department of Energy Department of Finance debt service coverage ratio Electric Power Industry Reform Act (2001) Energy Regulatory Commission independent market operator independent power producer megawatt National Power Corporation program completion review Philippine Electricity Market Corporation Power Sector Assets and Liabilities Management Corporation Power Sector Development Program National Transmission Corporation wholesale electricity spot market NOTES

(i) (ii)

The fiscal year of the government ends on 31 December. In this report, “$” refers to US dollars.

Vice President Director General Director Team leader Team members

C. Lawrence Greenwood, Jr., Operations Group 2 K. Senga, Southeast Asia Department (SERD) A. Jude, Energy and Water Division, SERD Y. Zhai, Lead Professional (Energy), SERD C. Bellinger, Lead Cofinancing Specialist, Office of Cofinancing Operations K. M. Emzita, Senior Counsel, Office of the General Counsel S. Hasnie, Principal Energy Specialist, SERD

In preparing any country program or strategy, financing any project, or making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

Preliminary Assessment of Sustainability E. Effectiveness in Achieving Outcome C. Program Output C. Development Policy Letter and Policy Matrix for the Program Cluster . Relevance B. Overall Assessment B. Performance of the Asian Development Bank EVALUATION OF PERFORMANCE A. Implementation Arrangements G. Program Costs D. Program Design and Monitoring Framework 2. Disbursements E.CONTENTS Page BASIC DATA I. Relevance of Design and Formulation B. Impact OVERALL ASSESSMENT AND RECOMMENDATIONS A. II. Recommendations ii 1 1 1 1 3 3 3 3 4 4 5 5 5 5 5 5 6 6 6 6 7 7 8 14 15 III. IV. PSALM’s Liability Management Program 3. Lessons C. Program Schedule F. APPENDIXES 1. Institutional Development F. Performance of the Borrower and the Executing Agency I. Efficiency in Achieving Outcome and Output D. PROGRAM DESCRIPTION EVALUATION OF DESIGN AND IMPLEMENTATION A. Conditions and Covenants H.

Loan Data 1. 7.000. Loan Negotiations – Date Started – Date Completed Date of Board Approval Date of Loan Agreement Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions Closing Date – In Loan Agreement – Actual – Number of Extensions Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years) 8. 5. 11 March 2007 19 December 2006 0 6. London interbank offered rate (LIBOR)–based. variable 15 3 Not applicable . 5. 4.000 PCR:PHI 1171 B. 2. Appraisal – Date Started – Date Completed 2. 6. Terms of Relending (if any) – Interest Rate – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower 7 August 2006 25 August 2006 18 October 2006 20 October 2006 8 December 2006 11 December 2006 3. 4. 3.BASIC DATA A. 30 June 2009 30 June 2009 0 7. Loan Identification 1. Country Loan Number Program Title Borrower Executing Agency Amount of Loan Program Completion Report Number Philippines 2282 Power Sector Development Program Republic of the Philippines Department of Finance $450.

iii 9.Percentage of Local Costs . 450 450 450 450 0 0 450 450 450 450 0 0 Local Costs (Financed) . Disbursements a. Cost ADB-Financed JBIC-Financed Total Financing Plan ($ million) 750 0 750 750 0 750 Appraisal Estimate 450 300 750 Actual 450 300 750 ADB = Asian Development Bank. Category or Subloan Amount ($ million) Last Revised Allocation Amount Canceled Net Amount Available Amount Disbursed Undisbursed Balance Final Disbursement 20 December 2006 Original Closing Date 30 June 2009 Time Interval 0 Time Interval 30 months Original Allocation 01 Total 10. Program Data 1. JBIC = Japan Bank for International Cooperation . Program Cost ($ million) Appraisal Estimate Actual Cost Foreign Exchange Cost Local Currency Cost Total 2.Amount ($) .Percentage of Total Cost Not applicable C. Dates Initial Disbursement 20 December 2006 Effective Date 19 December 2006 b.

h = macroeconomist consultant. i a a a. b a = project team leader/energy specialist. of Persons No. g = power specialist consultant. of Person-Days Specialization of Membersa Name of Mission Reconnaissance/Fact-Finding Appraisal Consultation (Cofinancing) Monthly Meetings with Government a 19 April 2004– 17 June 2005 7–25 Aug 2006 29–31 Aug 2006 January 2007– 30 June 2009 10 1 2 3 2 a. h. c. i = financial analyst consultant . c = counsel. by Program Component ($ million) Appraisal Estimate Actual Program Performance Report Ratings Ratings Development Objectives Satisfactory Satisfactory Implementation Progress Highly satisfactory Satisfactory Implementation Period 31 Dec 2006 to 28 Feb 2007 1 Mar 2007 to 30 Jun 2009 D. Component Not applicable 4. e = private sector development specialist. d. e.iv 3. Cost Breakdown. b. f. Data on Asian Development Bank Missions Date No. b = financial specialist. g. d = senior commercial cofinancing specialist. f = governance specialist.

and (iv) increase public confidence in the reforms. through a program loan. 2005. however. . and to create the necessary conditions for the privatization of major power sector assets. for restructuring to succeed. 1 2 ADB. (iii) boost confidence in regulatory performance. Further details of program achievements can be found in the Program Design and Monitoring Framework (Appendix 1). its design was assessed to be sound and its formulation adequate. prompted the government to decide not to pursue subprogram 2 as planned. ADB. Country Strategy and Program: Philippines. 2005–2007. the sector had to regain its financial viability. to help meet part of the costs of power sector restructuring. In December 2006. the PSDP was designed as a cluster program consisting of two subprograms. and a political risk guarantee to facilitate private sector investment in power generation and transmission. EVALUATION OF DESIGN AND IMPLEMENTATION Relevance of Design and Formulation 2. the restructuring of the power sector in the Philippines had reached an important juncture. The table below summarizes the program’s output at appraisal and at program completion. PROGRAM DESCRIPTION 1. Support for the power sector in particular would sustain fiscal consolidation. The PSDP as implemented remains highly relevant to ADB’s country strategy and the government’s development objectives. II. Program Output 4. 2006. and (iv) smooth the transition to competitive markets.I. 3.2 The CSP drew clear links between the development constraints and the three sector policy reform targets—power. At the completion of the program. The legal. and governance. (ii) create the necessary conditions for substantial progress in privatization under subprogram 2. Subprogram 2 was envisaged to include a partial credit guarantee to support PSALM’s debt management. and inspire greater confidence in private sector investors. Manila. regulatory. The PSDP was seen to reduce the losses at the National Power Corporation (NPC) and make the Power Sector Assets and Liabilities Management Corporation (PSALM) more creditworthy. In July 2005. financial markets. The success of subprogram 1 and substantial progress of the privatization program. B. At appraisal. Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster and Program Loan to the Republic of the Philippines for the Power Sector Development Program. But. (iii) improve the conditions for privatization. and institutional framework for privatization and competition was largely in place. ADB approved the Power Sector Development Program (PSDP)1 to (i) correct the long-term financial problems in the sector. the Board endorsed the Philippine country strategy and program 2005– 2007 (CSP). A. Manila. improve its regulatory performance. The government needed the support of the Asian Development Bank (ADB) in all these areas to strengthen the restructuring process. In close consultation with the government and other stakeholders. ADB developed the PSDP to deal with the largest sources of the fiscal imbalance in the public sector caused by losses among the public power agencies. The objectives of subprogram 1 were to (i) provide financial assistance to the government. In 2006. (ii) reinforce regulatory performance.

0 achieved in PSALM’s As the universal charge was not approved by ERC. ERC = Energy Regulatory Commission. NPC = National Power Corporation. The rest of NPC’s eligible generation assets By 30 May 2010. 3. TransCo concession awarded by the end of TransCo concession was awarded in December 2007 2008 and turned over to the winning concessionaire in January 2009 after Congress approved the TransCo Franchise Law.38 in 2008 to 0. Promoting private sector participation in the power sector Significant part of NPC’s eligible generation By the end of 2008.365 MW of capacity already awarded at the time of the program completion review (PCR) mission. A major concern is PSALM’s failure to achieve a debt service coverage ratio (DSCR) of 1. Improved ERC institutional capacity has drawn private sector investors. TOU = Time-of-Use. IPP = independent power producer. operations from 2009 onward the DSCR was only 0.0 by 2010 . 2.76 in 2009. To give more protection to vulnerable consumers. Ensuring the financial viability of the power sector DSCR of 1. had been privatized.146 MW. 3.76 in 2009) because of the . All consumers with monthly average peak demand above 1 MW are eligible for PSOP. and the output related to the regulatory framework and market competition also substantially achieved. ERC in December 2009 proposed changes in some provisions of the Magna Carta for Residential Electricity Consumers. In summary. or sold by the end of 2010 91% of total eligible assets for privatization in Luzon and the Visayas. MW = megawatt. PSALM is implementing a liability management program to enable it to achieve a DSCR of 1. 5. Improving consumer welfare and protection Adequate social protection mechanism for ERC studied lifeline rates for poor consumers. or 44% of the contracted capacity of the IPP contracts for Luzon and the Visayas) had been appointed.0 in 2009 (though improved from 0. Strengthening the regulatory framework for the sector ERC’s institutional capacity strengthened by ERC’s credibility has improved. Restructuring the market toward competition WESM operations expanded to the Visayas WESM trial operations started in May 2009.365 MW of generation capacity. and appeals and the end of 2008 complaints against ERC’s rulings have dropped significantly in number. Five IPP administrators (for 2. the output of the privatization program largely exceeded expectations.2 Output of the Power Sector Development Program At Appraisal At Completion (as of May 2010) 1. Lifeline the poor implemented by the end of 2007 rates have been approved for all distribution utilities. TransCo = National Transmission Corporation. Meralco = Manila Electric Company. Consumer choice program for TOU rates The Customer Choice Program was implemented in started in 2007 for consumers with 1 MW or the Meralco franchise area in January 2007 and higher loads in Meralco’s franchise extended to all ERC franchise areas in January 2010 through the issuance of the rules for the implementation of the Power Supply Option Program (PSOP). DSCR = debt service coverage ratio. 2.172 MW of generation capacity assets (at least 30%) sold by the end of 2008 had been privatized. PSALM = Power Sector Assets and Liabilities Management Corporation. WESM = wholesale electricity spot market 5. as the success of the privatization program shows. But by the end of 2007 commercial operations have not been launched because of power generation shortages in the Visayas grid. 4. with 3.

PSALM’s DSCR would be 0.55 billion (in principal and interest) of PSALM’s debt was due to mature in 2009–2011. The loan was closed as scheduled on 30 June 2009. about $4. 1998. . At appraisal. Disbursements 8. C. D. Report and Recommendation of the President to the Board of Directors: Proposed Loan for the Sixteenth Power (Masinloc Thermal Power) Project in the Philippines. 1990. the Japan Bank for International Cooperation provided cofinancing of $300 million in February 2007. Implementation Arrangements 10. At the time of appraisal. The privatization proceeds and PSALM’s commercial borrowings enabled the corporation to prepay various loans including the outstanding balance of the ADB loan for the Masinloc Coal-Fired Thermal Project. ERC is holding public hearings on PSALM’s application for universal charges. Simplification of Disbursement Procedures and Related Requirements for Program Loans. a shortfall of about $2. E. PSALM established a liability management program to help it to meet the DSCR of 1. Program Costs 6. 7. 3 which was successfully privatized in 2008. the National Electrification Administration. It had representatives from the Department of Energy (DOE).28 in 2010 (versus 1. NPC. which was filed in June 2009. Manila.2 with the program) and 0.71 billion. But the success of subprogram 1 and better-than-expected proceeds from privatization led to a decision not to pursue subprogram 2 as planned (para. The privatization proceeds from 2006 to 2009 amounted to $3. 3). and the Philippine National Oil Company. Without the program. the PSDP was designed as a program cluster consisting of two subprograms—one for 2007–2008 and another for 2009–2010 (tentatively). ADB.9) (Appendix 2). the National Transmission Corporation (TransCo).0 covenanted under the ADB loan.4 The government certified that the expenditures were made for the purposes specified in the loan agreement.8 billion at the end of 2008. The PSDP helped the government finance part of the adjustment costs of power sector restructuring in support of the implementation of agreed policy actions. 3 4 ADB. Program Schedule 9. F. The loan took effect on 19 December 2006 and was disbursed promptly on 20 December 2006 as provided in ADB’s simplified disbursement procedures. However.56 billion) during the period.2 billion in 2006–2010.01 billion at the end of 2007 to $5. while the remaining gap was covered mainly by PSALM’s commercial borrowings with government guarantee. In addition to ADB’s program loan.3 timing mismatch between the receipt of such privatization proceeds and maturities of PSALM’s obligations as well as delay in the approval by the Energy Regulatory Commission (ERC) of universal charges for PSALM’s stranded cost and debt. Manila.14 in 2011 (versus 0. The program implementation arrangements were adequate for the delivery of the expected output. the Philippine Electricity Market Corporation (PEMC). the government was expected to need about $9.2 billion would result in 2009– 2011. The prepayment helped reduce NPC’s aggregate debt from $7. As this amount was almost twice the expected privatization receipts (about $2. The government created the Energy Executive Committee to implement the program cluster. PSALM.

145 MW. H. Although subprogram 2 of the PSDP was not pursued. The two policy actions that have not been fully accomplished involved (i) the expansion of the wholesale electricity spot market (WESM) to the Visayas. DOE and PMEC are doing a study of governance with ADB assistance to plan the transition from the present DOE-driven market operator to an independent market operator. Three of the policy actions are yet to be fully achieved: (i) appointment of an independent market operator (IMO) for WESM. (iv) issue of notice of award for TransCo’s concession contract. The DOE has issued policy guidelines for the implementation of the Visayas Supply Augmentation Auction Program to deal with the supply deficit in the interim and smooth the transition to the implementation of the WESM in the Visayas grid. ERC proposed changes in some provisions of the Magna Carta for Residential Electricity Consumers. But power generation shortages in the Visayas grid have held back commercial operations. 4. as some consumer groups opposed the charges. Among the proposed amendments are provisions that identify options. (iii) issue of guidelines on open-access distribution to allow retail competition to start. Regarding the appointment of an IMO. as the borrower and . All 22 policy actions required for the effectiveness of subprogram 1 were fulfilled before the Board consideration on 8 December 2006 (Appendix 3). the last condition for open access at the retail level. and (v) filing of protests. (ii) start of the collection of universal charges for stranded debt and costs. Conditions and Covenants 11. 10 had been fulfilled at the time of the PCR.4 G. At the time of the PCR. As mentioned in the table under para. The amended Magna Carta is expected to be issued by September 2010. (ii) start of the Customer Choice Program. in the first half of 2011. the government has made substantial progress in implementing the policy actions envisaged before subprogram 2. PSALM applied to ERC in June 2009 for the introduction of such charges. and (iii) appointment of independent power producer (IPP) administrators. To collect universal charges. Of the 12 policy actions to be implemented under subprogram 1. As for the appointment of IPP administrators. The government submitted progress reports periodically to ADB and kept it informed about the progress in implementing the program. Performance of the Borrower and the Executing Agency 14. The Department of Finance (DOF). and (ii) the establishment of effective safety nets and consumer protection. or clarify concerns related to (i) applications for power connections. have been successfully bidded out. PSALM plans to complete the bidding by the end of 2010 to achieve 70% of the capacity. (ii) transfer and termination of electricity service. The expected operation of the 246 MW coal-fired power plant in Toledo. and (iv) issue of notice of award for the sale of a significant part of generating assets. on the basis of the study. Among the seven policy actions. Cebu. 13. and is looking into ways of protecting the vulnerable. or about 44% of the contracted capacity of the IPP contracts for Luzon and the Visayas. WESM trial operations in the Visayas started in May 2009. To strengthen the rights of consumers. (iv) billing and billing errors. in 2010 will improve the power supply and make it possible for the WESM to start commercial operation in the Visayas grid in the first half of 2011. set parameters. DOE intends to appoint the IMO. 12. ERC studied lifeline rates for poor consumers under subprogram 1. The PSDP was closed on 30 June 2009 as scheduled in the loan agreement. five plants with a total capacity of 2. ERC was still holding public hearings. five have been completed: (i) ERC’s use of part of the fees collected. (iii) liabilities of the house owner in case the applicant is a tenant of the premises to be energized.

despite the high electricity rate. Nevertheless. which identified power sector reform as one of the main interventions that would ease the most important development constraints. the performance of the DOF was satisfactory. As the lead financing agency in the sector. 4. PSALM has not achieved a DSCR of 1. Relevance EVALUATION OF PERFORMANCE 16. Further. the achievement of the PSDP’s outcome and output is considered partly efficient. coordinated effectively with stakeholders and supervised the implementation of the program. Performance of the Asian Development Bank 15. Effectiveness in Achieving Outcome 17. In fact. the strengthening of the regulatory framework induced substantial private sector investments in the power sector during the implementation of subprogram 1. A. while the appointment of IPP administrators for the Luzon and Visayas grids was at 44% at the time of the PCR. . the PSDP is considered partly effective in achieving outcome. B. efficient. monthly meetings were held with the DOF and the DOE (the implementing agency). The restructuring of the power sector as envisioned in the PSDP is fundamentally sound.5 executing agency. As a result. The power sector restructuring made substantial progress in wholesale competition and privatization under the PSDP. The performance of ADB in the implementation of the program was satisfactory. C. Efficiency in Achieving Outcome and Outputs 18. Overall. 91% of NPC’s generating assets were privatized. D. Instead of yearly review missions. its unsustainable subsidies to the power sector have been eliminated. But retail competition has not been fully implemented. and to review and monitor power sector reform and privatization. The PSDP was consistent with ADB’s CSP 2005–2007 for the Philippines (footnote 2). and has had a significant positive impact on the sector and on the overall economy. and secure power supply to stop the drain on the government’s finances. and minimize the risk of power shortages that would impede economic growth. ADB also worked closely with other development partners in the power sector in the Philippines. The PSDP was highly relevant to the government’s goal of achieving a financially sustainable. such as the fiscal imbalance and the poor investment climate. ADB has continued to conduct policy dialogue. III. With the large-scale privatization and introduction of a competitive electricity market. Overall. the proximity of ADB’s headquarters to DOF allowed constant coordination on key policy issues during the processing and implementation of the PSDP.0 because of the historical debt burden and delayed approval of the universal charges by ERC. except for the electrification of unviable rural areas. the government has had its role reduced to that of policy maker and planner. Overall. and electricity rates are still relatively high compared with those in other countries in the region. As summarized in the table under para. Preliminary Assessment of Sustainability 19. ADB supported the design and formulation of the PSDP and closely monitored the implementation of the program. I. free up resources for the social sectors.

to take over NPC’s transmission assets and operations (its operations have now been taken over by a private sector concessionaire). to set rates for the captive market. In summary. put in place a legal framework to protect the interests of consumers. (b) award the concession for TransCo’s transmission operations. to perform its expanded mandate of power sector planning and supervision of power sector restructuring. and (c) take over the debt liabilities and non-transmission assets of NPC. however. (iv) PEMC. as the appointment of an IMO under EPIRA. Electricity rates in the Philippines are still among the highest in Asia. which are regulated parts of the electricity supply business. at the same time. to (a) oversee and manage the privatization of NPC’s generation assets. and for transmission and distribution. particularly in the power sector. increased access to official development assistance. (iii) An independent ERC. Impact 23. While the objective of the Electric Power Industry Reform Act (EPIRA) (2001) is to provide sustainable and affordable power supply to all consumers. facing some challenges in the short and medium term. OVERALL ASSESSMENT AND RECOMMENDATIONS Overall Assessment 24. to supervise the establishment of the wholesale electricity spot market. the electricity rate is the key parameter that affects both consumer welfare and investment profitability. A.7% of gross domestic product (GDP) in 2005 to 0. Power sector restructuring has contributed to the fiscal consolidation of the country. as a major fiscal crisis has been averted. the following institutions have been created: (i) TransCo. and with the long-term vision of the government for power sector .6 Thus. 13). a required policy action under the PSDP. is still to take place (para. the concept and design of the PSDP were consistent with ADB’s country strategy and energy policy. and (v) A reorganized DOE. led to a decline in national government debt as a ratio of GDP during the implementation period of the PSDP. Within the framework of the EPIRA and supported by various ADB assistance programs including the PSDP. Institutional Development 21. The power sector’s legal and institutional accountability framework is generally adequate. 20. Sound debt management. the power sector restructuring is considered sustainable in the long term. With the deficit declining from 2. Therefore. more financial resources are being freed up for social services and infrastructure. 22.9% in 2008. Restoring financial viability to the power sector is essential to fiscal consolidation. E. (ii) PSALM. reduced dependence on commercial borrowing. Among the above institutions. PEMC is still in a transition stage. The most effective way to bring down the rates to a more reasonable level is through further reforms that would increase market competition at the retail level and. which started commercial operations in June 2006. and eased debt servicing costs. The government is. IV. and to new investments in the power sector. F. the government is performing a delicate balancing act of mounting an adequate fiscal response to a deteriorating growth outlook in the near term while sustaining market expectations of fiscal prudence and credibility in the medium term.

Lessons 25. Future monitoring. mainly through the private sector lending window. A concrete action plan with clear milestones will be required from PSALM when a waiver for its failure to achieve the required DSCR of 1.5 In particular. B. (iii) promotion of renewable energy and energy efficiency through public and private sector partnership. Additional assistance.0 in 2009 as required in the policy matrix. the preparation of the PSDP benefited from the sector assistance program evaluation of ADB’s assistance to the Philippine power sector. As a consequence. and (iv) targeted support for the rural poor. Under the PSDP. the PSDP envisaged two subprograms with 2-year time horizons. 27. The assessment of key sector issues and the progress of the power sector restructuring indicates that additional assistance may be considered in the following strategic areas: (i) continued support for power sector restructuring. Covenants. Recommendations 26. Timing of the program performance evaluation. 30. The government chose not to pursue subprogram 2 mainly because of the better-than-expected progress of the privatization program. The financial situation of PSALM remains a key concern. Sector Assistance Program Evaluation: Assistance to the Philippine Power Sector. particularly in Mindanao. 28. (ii) strengthening of electricity distribution sector through public sector operations. as this will significantly affect the country’s fiscal situation. At the same time. ERC should strengthen the mechanism for protecting the welfare of consumers. with private sector investments being made without the assistance foreseen under subprogram 2. ADB. . the program is considered successful. A key milestone to follow up is the timing of the introduction of universal charges for stranded debt and cost. However. The design of PSDP took into account the lessons learned from previous ADB operations in the power sector. through technical assistance. without subprogram 2.6 On this basis. Further action or follow-up. Manila. but financial viability is still a challenge for the short and medium term. The covenants in the program loan agreement should retain their present form during the repayment period of the program loan particularly with regard to PSALM’s DSCR. 29. C. 2004. Target dates were set only for subprogram 1 to allow flexibility in the overall implementation schedule. the government was able to defer a key policy action that was required for the implementation of the subprogram—the introduction of universal charges for stranded debt and cost. covering 2007– 2008 and tentatively 2009–2010.7 development in the country. 5 6 ADB. Overall.0 in 2009 is considered. Completion Report: Power Sector Restructuring Program in the Philippines. PSALM could not achieve a DSCR of 1. The implementation of its liability management program should be monitored closely. It is recommended that the program performance audit be undertaken in 2011 after the expected completion of the privatization program by the end of 2010. particularly the very poor. substantial progress was achieved in strengthening power sector institutions and privatizing sector assets. 2005. Manila.

0 not achieved in 2009. currently exceeding $1 billion per year. reduced by 2010 to subsidies required for power supply on small islands not connected to the three main grids (SPUG) No power supply shortage Monitoring Mechanisms National Expenditure Program prepared by the Department of Budget and Management PSALM’s and NPC’s annual reports audited by COA DUs’ annual reports.7% of GDP in 2005 to 0.9% in 2008. efficient. and successful debt management by the government and PSALM Power sector restructuring made substantial progress with over 90% of asset privatization and the wholesale competition started in Luzon. Assumptions Macroeconomic and political stability Strong fiscal stabilization program Support of reforms by stakeholders other than the government Risk Weakening of the political will in the executive and legislative branches of the government to proceed with the restructuring Assumption ERC approval of needed tariff increases and universal charges. Financial viability of the power sector restored Debt service coverage ratio of 1. Outcome Consolidation of the power sector restructuring Wholesale electricity competition started. substantial progress in privatization.0 achieved in PSALM’s operations from 2009 onward PSALM’s annual reports audited by COA Debt service coverage ratio of 1. . and minimize the risk of power shortages Performance Indicators and Targets Government financial support for NPC.8 PROGRAM DESIGN AND MONITORING FRAMEWORK Design Summary Impact Financially sustainable. and secure power supply to stop the drain on the government’s finances. except power shortages experienced in some parts of Visayas and Mindanao due to drought situation in early 2010. DOE’s statistics as contained in the Philippine Energy Plan Assumptions and Risks Actual Achievement The power sector restructuring contributed to the fiscal consolidation of the country. The fiscal deficit declined from 2. and retail competition in line with EPIRA by the end of 2010 Semiannual progress reports prepared by DOE to JCPC on the EPIRA implementation Outputs 1. Appendix 1 No country-aide power shortage.0 from 2010. PSALM is implementing liability management program to achieve debt service coverage of 1. The retail competition is expected to be implemented in the first half of 2011.

and retail competition. Consumer choice program for TOU rates started in 2007 for consumers with loads of 1 MW or more in Meralco’s franchise area Signed contracts between suppliers and eligible consumers Appendix 1 9 . All customers with monthly average peak demand above 1 MW are eligible for PSOP.Design Summary 2. performancebased regulation for transmission and distribution. Market restructured toward competition WESM operations started in Luzon in July 2006. accounting for at least 10% of total sales PEMC’s audited annual reports Risk Technical problems with the start-up Assumption Technical and financial readiness of WESM participants WESM operations expanded to the Visayas by the end of 2007 PEMC’s audited annual reports WESM trial operations in Visayas started in May 2009. and it has issued necessary rules and regulations for the wholesale competitive market. WESM operations started in Luzon in July 2006. Meralco started the Customer Choice Program. Regulatory framework and performance improved Performance Indicators and Targets ERC’s institutional capacity and financial autonomy strengthened by the end of 2008 Regulatory framework for wholesale competition completed by mid-2006 Monitoring Mechanisms Feedback from regulated utilities and ERC annual report Rules and guidelines as issued by ERC Assumptions and Risks Risk Political and judicial interference with ERC’s decision making Assumption Continued support for ERC from USAID and other development Partners Actual Achievement ERC’s institutional capacity has been strengthened. However. The scheme was extended to all franchises by ERC through the issuance of rules for the Power Supply Option Program (PSOP) in January 2010. Assumption Technical readiness of DUs In January 2007. the ERC’s budget still depends on the budget allocation. accounting for about 15% of total sales in 2009. 3. Commercial operations are expected to be launched in the first half of 2011.

or 44% of the contracted capacity of the IPP contracts for Luzon and the Visayas) have been appointed. amendments proposed in December 2009 ERC conducted a study on lifeline rates for poor consumers.365 MW of generation capacity. Consumers informed and protected Signed contract between PSALM and the Concessionaire Magna Carta and remedial procedures for consumers as issued by ERC Adequate social protection mechanism for the poor implemented by the end of 2007 Activities 1. was privatized. Establishing creditworthiness of PSALM Action plan approved by the government DOF approved PSALM’s liability management program in May 2009. Appendix 1 5. 3.Design Summary 4. Financial viability of the power sector a. b. . Ensuring financial recovery of NPC Generation tariffs increased and operating costs reduced to levels required to eliminate NPC’s losses Action plan adopted to increase PSALM’s debt service coverage ratio to at least 1. Lifeline rates have been approved for all distribution utilities. representing 91% of the total eligible assets for privatization in Luzon and the Visayas.146 MW. Five independent power producer administrators (for 2. TransCo concession awarded in December 2007 Magna Carta and remedial procedures for consumers issued by ERC. Private participation in power generation and transmission increased Performance Indicators and Targets Significant part of NPC’s eligible generation assets (at least 30%) sold by the end of 2008 The remaining part of NPC’s eligible generation assets sold by the end of 2010 TransCo concession awarded by the end of 2008 Rights and obligations of consumers promulgated by the end of 2005 Monitoring Mechanisms Signed contracts between PSALM and private investors Assumptions and Risks Risk Lack of investor interest 10 Signed contracts between PSALM and private investors Actual Achievement By 30 May 2010.0 by 2009 ERC-approved retail tariff schedule ERC-approved generation tariffs NPC’s annual reports audited by COA Risk Tariff increases contested in courts by consumer groups Generation tariffs have been regularly adjusted to reflect the fuel price and currency fluctuations.

Enhancing ERC’s independence. Regulatory framework and performance a. Guidelines issued by ERC Price determination methodology issued in June 2006. transmission capacity development. and open access for distribution.Design Summary Performance Indicators and Targets P200 billion of NPC’s debt liabilities absorbed by the government selected and transferred by the end of 2005 Universal charge introduced by January 2008 to cover NPC’s stranded costs and debt Monitoring Mechanisms Legal instrument to effect the transfer Assumptions and Risks Assumption Effective fiscal management by the government Actual Achievement P200 billion of NPC’s debt liabilities absorbed by the government selected and transferred in December 2005 ERC-approved wholesale and retail tariffs Risk Universal charge contested in courts by consumer groups PSALM filed application of universal charge for stranded costs and debt in June 2009. without resorting fees levied. Public hearings are in progress. issued by mid-2006 Performance-based regulation implemented by the end of 2006 for TransCo and DUs Approved ERC budget Delays in Congress ERC’s budget has been approved on a timely basis. 2. and technical competence Rolling strategic plan for ERC adopted by October 2006 Strategic plan adopted by ERC ERC has adopted a Medium-Term Strategic Plan for 2008–2011. efficiency. ERC allowed to use fees levied on regulated entities for funding prescribed regulatory activities b. with bid cap of P64 per kWh Appendix 1 Guidelines issued by ERC. and applications of TransCo and DUs approved Performance-based regulation issued by ERC. system loss cap for DUs. Completing the regulatory framework for wholesale and retail competition Guidelines on pricing methodology for WESM. and implemented by TransCo and eligible DUs 11 .

The government adopted a contingency plan for dealing with the power crisis. . National Electrification Administration set up a mechanism to encourage participation of ECs in WESM. ERC-approved signed contracts between NPC and DUs Risk Inability of the parties involved to arrive at mutually acceptable solutions All transition supply contracts were concluded in 2007. Preparing the start of wholesale competition Negotiation of transition supply contracts completed by the end of 2006 Independent operator for WESM appointed by the end of 2008 Mechanisms established by end-2006 to mitigate offtake risks. Appendix 1 3. Market restructuring toward competition a.Design Summary Performance Indicators and Targets Regulation for ECs simplified and an approach developed for reducing their number by the end of 2008 Monitoring Mechanisms Guidelines issued by ERC Assumptions and Risks Risk Political resistance at local level to EC consolidation 12 Actual Achievement A simplified benchmarking system for setting ECs’ wheeling rate was adopted in September 2009. Private participation in power generation and transmission a. and ensure power supply in case of DU suspension from WESM 4. Ensuring reliable power supply during the transition period NPC’s and TransCo’s investments prioritized by mid-2006 Contingency plan put in place by the end of 2006 Government-approved revised investment plan of NPC and TransCo Contingency plan prepared by DOE Government approved NPC and TransCo’s investment plans before their privatization. allow participation of smaller DUs. The plan was partly applied during the drought of March 2010. NPC was appointed the supplier of last resort for ECs. particularly ECs ADB-funded consultant is assisting DOE in appointing IMO by the first half of 2011. Signed contract between PEMC and the WESM operator Consultant report and DOE’s and PEMC’s decision on its recommendations Assumption Implementation of DOE action plan with the support of a World Bank loan and TA to manage creditworthiness risk of DUs.

Power Development Plan. PRG = political risk guarantee. Meralco = Manila Electric Company. TransCo issued Transmission Development Plan. MW = megawatt. US= United States Agency for International Development. ERC = Energy Regulatory Commission. PSALM = Power Sector Assets and Liabilities Management Corporation. COA = Commission on Audit. Power Development Plan every year. EC = Electric Cooperatives. Surveys of the general public by DOE b. DU = Distribution Utilities. TransCo = National Transmission Corporation. NPC = National Power Corporation. DOF = Department of Finance. Lifeline rates have been approved for all distribution utilities.Design Summary b. WESM = wholesale electricity spot market 13 . PRG amounts to be determined The loan was disbursed on 20 December 2006. GDP = gross domestic product. if necessary. Conducting public information campaigns on the rationale for power sector restructuring Public understanding of the matter improved Invitations to bid for privatization of all of NPC’s eligible generation assets were issued. Paving the way for asset sale Performance Indicators and Targets Relevant plans regularly updated and made consistent Monitoring Mechanisms Philippine Energy Plan. TOU = Time-of-Use. Award of TransCo concession by the end of 2008 TransCo’s concession awarded in December 2007 Bids called in a phased manner for NPC’s power plants 5. DOE = Department of Energy. and Transmission Development Plan issued or approved by DOE Semiannual progress reports prepared by DOE to JCPC on the EPIRA implementation Invitations to bid and bid documents issued by PSALM Assumptions and Risks Actual Achievement DOE issued Philippine Energy Plan. ERC conducted a study on lifeline rates for poor consumers. PCG = partial credit guarantee. JCPC = Joint Congressional Power Commission. SPUG =Small Power Utilities Group. Consumer information and protection a. DOE prepared the EPIRA status report every 6 months to inform the public about the progress of power sector reform. modified by mid-2008 to better target the poor ERC’s review report and ERC’s decision Regular public information campaigns were conducted in June every year on the anniversary of EPIRA. Inputs ADB loan: $450 million PCG. TA = technical assistance. EPIRA = Electric Power Industry Reform Act. Assessing the social impact of the power sector restructuring Existing social protection mechanism for lifeline tariffs reviewed and. Appendix 1 ADB = Asian Development Bank. PEMC = Philippine Electricity Market Corporation.

887 33.688 3.1 2011 (15.560 2.544 86.887 23.800 47.012 36. a Excludes universal charge that PSALM is seeking approval for from the Energy Regulatory Commission.380) 28.2 58.257) 19.813 36. Source: Power Sector Assets and Liabilities Management (PSALM) .920 37.244 0. PSALM = Power Sector Assets and Liabilities Management Corporation.556 58.698 0.111 48.575 107.868 0.491 0.142) 93.123 37.232 119. TransCo = National Transmission Company.575 95.232 94. Its application will improve PSALM’s DSCR.851 25.738 83.14 Appendix 2 PSALM’s LIABILITY MANAGEMENT PROGRAM Projected DSCR Calculations (P million) Without Liability Management Program Internal Cash Generation a Privatization Proceeds Funds Available for Debt Service Debt Service Lease Obligations Debt Service Requirement DSCR With Liability Management Program Internal Cash Generation a Privatization Proceeds Cash Flows from LMP Securitization Proceeds Less: TransCo Concession Fee Receivables Bond Exchange Proceeds Peso Bond Issuance US Dollar Bond Issuance Funds Available for Debt Service Debt Service Existing Debt Less: Bonds Exchanged Interest on New Bonds of Bond Exchange Interest on Peso Bonds Interest on Dollar Bonds Lease Obligations Debt Service Requirement DSCR 2009 (7.9 DSCR = debt service coverage ratio.935 96.980 2011 (15.756 113.816 1.123 3.012 (28.000 109.380) 28.851 25.935 13.401 65.3 2010 7.185 4.768 (17.800) 1.698 (14.76 2010 7.922) 92. LMP = Liability Management Program.402 83.

Start charging the generation tariff adjustment authorized by ERC.0 not achieved in 2009 15 . 4. NPC. (ii) by PSALM and NPC. 2. Continue to implement measures to lower NPC and TransCo’s operating costs. Financial viability of the power sector Action 1. NPC. 3. Timely adjustment of regulated generation prices through application of a formulaic approach for incremental fuel and power purchase costs. prioritize NPC’s and TransCo’s capital expenditure requirements for the period prior to privatization consistent with revised demand forecasts and having regard to demand-side and distributed generation potential. DOF to coordinate with (a)DOE for the issuance of a detailed action plan on the following: (i) by PSALM and NPC. the use of privatization proceeds to reduce borrowings. 2006 Appendix 3 DSCR of 1.DEVELOPMENT POLICY LETTER AND POLICY MATRIX FOR THE PROGRAM CLUSTER (Implementation Status as of 31 December 2009) Action Required for Completion by Before During During Before Board Subprogram Subprogram Subprogram 2 2 consideration 1 X Area A. (iii) by PSALM and NPC liability management and iv) by PSALM and NPC reimbursement of non- Agencies NPC Actual Status Continuing compliance Continuing compliance ERC and NPC X X PSALM. DOE. application for universal charges for stranded costs and debt. and DBM X Completed in Nov. and TransCo X X Continuing compliance DOF. PSALM.

a uniform system of accounts that is internationally accepted for private DUs.Area Action power costs for multipurpose projects. 2009 DOE. when necessary and in accordance with budgetary process. to (i) help PSALM b achieve DSCR of at least 1. and NPC ERC X Completed in April 2005 X Completed in Feb. Complete the transfer of about P200 billion of NPC debts to the government. Issue guidelines for universal charge (UC) for stranded contract cost and stranded debt. Issue guidelines for introduction of TOU tariffs at the wholesale level. (b)DBM in providing the assistance to PSALM. 8. NEA. respectively. (a) Filing the universal charges for stranded debt and costs. (b) Start charging the universal charges authorized by ERC. PSALM. 7. Approval to remove inter-grid and intra-grid crosssubsidies and inter-class cross-subsidies in electricity tariffs. 2007 PSALM and NPC PSALM and NPC ERC X X Completed in June 2009 Not yet done X Completed in June 2005 ERC X Completed in Oct. 6. and enforce the use thereof.DOE to coordinate and issue a detailed action plan to Agencies Action Required for Completion by Before During During Before Board Subprogram Subprogram Subprogram 2 2 consideration 1 16 Actual Status Appendix 3 DOF. 2006 ERC X Completed in Sept. 5. Issue guidelines. 9. 10.0 starting in 2009. and X Ongoing implementation . for all regulated market participants.

Adopt and implement a rolling strategic plan for ERC with respect to institutional and capacity improvement. and investment management contracts (IMCs). For ERC’s budget (a) Timely provision and release of regular budget based on applicable law in line with budgetary process and regulations. including such actions as mandatory NEA or NPC transitional management / participation in Board of ECs. efficiency and technical competencies. as appropriate. Issue Rules of Practice and Procedure to ensure efficient hearing and investigative procedures that have clear time periods. Regulatory framework and performance ERC X ERC MediumTerm Strategic Plan 2008– 2011 ERC X completed in June 2006 ERC and DBM Appendix 3 X Completed on time No progress reported X 17 . 2. 2006 B. (b) ERC to use fees collected in excess of their revenue target for the year in accordance with budgetary 1. 3. regulatory achievements and indicators for public confidence levels. Agencies PSALM Action Required for Completion by Before During During Before Board Subprogram Subprogram Subprogram 2 2 consideration 1 Actual Status of the action plan adopted in Dec. for ECs that have to rely on wholesale supplier of last resort and fail to cure the problems within a specified period.Area Action implement clear restructuring steps where ECs are not financially viable.

Design mechanisms that facilitate and provide incentives to demand-side participation in WESM and provide technical support 2. PEMC X Completed in June 2006 . Agencies ERC Action Required for Completion by Before During During Before Board Subprogram Subprogram Subprogram 2 2 consideration 1 X 18 Actual Status Completed in Dec. Market restructuring toward competition Action process and regulations. 2006 Appendix 3 DOE and PEMC X Only 18 ECs out of 119 registered for WESM X Plan in place DOE X 3. Put in place a contingency plan to ensure reliable power supply in line with Sec. 2006 5. 2006 6. ERC X Completed in Sept. ERC X Completed in June 2006 Completed in June 2006 Completed in Sept. 71 of EPIRA without disrupting the development of a competitive energy market. 1.Area C. 7. Start WESM commercial operations in Luzon. ERC ERC X X 8. Issue guidelines on performance-based regulation for TransCo and selected DUs Issue guidelines on recoverable system loss methodology for DUs to improve energy efficiency. Issue guidelines on price determination methodology for WESM Issue competition rules and complaint procedure Issue guidelines to enable small and/or weak suppliers to purchase energy through wholesale aggregators. ERC X Completed in March 2006 4. Request and obtain a general deputization consent for ERC to represent itself at all levels of judicial proceedings. 4.

D.Area 9. 2009 DOE X X Regularly updated Appendix 3 2. 12. and ERC X Issued in Nov. PEMC. Appoint an independent operator for WESM. Issue guidelines on open access for distribution to allow retail competition to start. Expand WESM operations in Mindanao. 13. if warranted by the initial experience in Luzon and the power supply situation. Agencies NPC and ERC Action Required for Completion by Before During During Before Board Subprogram Subprogram Subprogram 2 2 consideration 1 X Actual Status Ongoing 10. Private participation 1. Issues guidelines on a streamlined approach to regulation of ECs to reduce the number of individual price reviews required 11. Timely updating of power sector development plan to ensure consistency and adequacy of information needed for investment decisions Engagement of consultant to study on the option of having a trading advisor to advise on trading strategies DOE. PSALM and NPC X Study completed in June 2007 19 . Action Start customer choice program with time-of-use tariff for consumers with average peak demands of 1MW or more in ERC approved franchise area. if warranted by the initial experience in Luzon and the power supply situation. Expand WESM operations in Visayas. 2009 DOE and PEMC X Expected 1Q 2011 DOE and PEMC X Not considered DOE and PEMC ERC X X Expected 2Q 2011 Issued in Sept. 14.

2006 9. Complete the process of negotiation and conclusion of transition supply contracts between NPC and the DUs Issue resolution to require DUs to negotiate bilateral supply contracts with power generators. 2008 Completed Dec. Conduct public information campaign on the rationale for power sector restructuring. Promulgate a bill of rights of PSALM DOE and ERC X X Ongoing 2. ERC X Completed in Sept. PSALM X Completed in 2006–2009 X 91% awarded 10. PSALM and NPC X in 7. E.Area Action as a transition to establishment of the IPP administrator 3. 2008 Completed Dec. Appoint IPP administrators. 5. Call for bids for the TransCo concession. Issue notice of award for the TransCo concession contract. Agencies Action Required for Completion by Before During During Before Board Subprogram Subprogram Subprogram 2 2 consideration 1 20 Actual Status Appendix 3 PSALM and NPC PSALM PSALM X X X 41% of capacity awarded Completed in Sept. 4. 2007 in 6. ERC X Completed in . 2006 8. ERC X Completed in Sept. Consumer welfare and protection 1. Issue notice of award for the sale of a significant part of generating assets. Issue resolution to impose a premium on sale prices for those DUs without transition supply contract and relying on the default wholesale supplier arrangements Call for bids for the sale of eligible NPC’s generation capacity. privatization and regulatory framework.

Issue guidelines on supplier of last resort in case of retail electricity supplier’s suspension from WESM and appoint a default temporary wholesale supplier of last resort to supply to DUs and ECs that are unable to participate in the WESM and the contract market. TOU = time of use. DOE = Department of Energy. Sources: Department of Finance. IPP = independent power producer. WESM = wholesale electricity spot market a These conditions are indicative of the general direction subprogram 2 might take. modified or deleted on the basis of the results of subprogram 1. PSALM = Power Sector Assets and Liabilities Management Corporation. NPC = National Power Corporation. ERC and DUs X Completed in June 2006 X Establish periodic review DOE and X Included in and report on the impacts of ERC EPIRA progress the reforms on consumers report (in terms of access and quality of supply as well as price) and the effectiveness of safety nets and consumer protection. Publish complaint procedure. ERC = Energy Regulatory Commission. TransCo = National Transmission Corporation. establish consumer complaint desk at ERC and consumer welfare desks at all electric utilities. Department of Energy. Appendix 3 21 . and conduct training to all consumer welfare desk officers. They need to be reviewed and. DSCR = debt service coverage ratio. DU = distribution utility.Area Action residential electricity consumers. and Asian Development Bank 5. b DSCR is defined as internally generated cash (including privatization proceeds and universal charges) divided by debt service. ADB = Asian Development Bank. NEA = National Electrification Administration. 3. Agencies Action Required for Completion by Before During During Before Board Subprogram Subprogram Subprogram 2 2 consideration 1 Actual Status June 2004 Completed in June 2006 ERC X 4. PEMC = Philippine Electric Market Corporation. DOF = Department of Finance. DBM = Department of Budget and Management. if necessary. EPIRA = Electric Power Industry Reform Act.

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