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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 Appraisal At Program Completion
2 November 2006 30 June 2009
P1.00 = $0.0200 $0.0208
$1.00 = P49.800 P48.129

ABBREVIATIONS
ADB – Asian Development Bank
CSP – country strategy and program
DOE – Department of Energy
DOF – Department of Finance
DSCR – debt service coverage ratio
EPIRA – Electric Power Industry Reform Act (2001)
ERC – Energy Regulatory Commission
IMO – independent market operator
IPP – independent power producer
MW – megawatt
NPC – National Power Corporation
PCR – program completion review
PEMC – Philippine Electricity Market Corporation
PSALM – Power Sector Assets and Liabilities Management Corporation
PSDP – Power Sector Development Program
TransCo – National Transmission Corporation
WESM – wholesale electricity spot market

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

Vice President C. Lawrence Greenwood, Jr., Operations Group 2


Director General K. Senga, Southeast Asia Department (SERD)
Director A. Jude, Energy and Water Division, SERD

Team leader Y. Zhai, Lead Professional (Energy), SERD


Team members 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.
CONTENTS

Page

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

A. Loan Identification

1. Country Philippines
2. Loan Number 2282
3. Program Title Power Sector Development Program
4. Borrower Republic of the Philippines
5. Executing Agency Department of Finance
6. Amount of Loan $450,000,000
7. Program Completion Report
Number PCR:PHI 1171

B. Loan Data
1. Appraisal
– Date Started 7 August 2006
– Date Completed 25 August 2006

2. Loan Negotiations
– Date Started 18 October 2006
– Date Completed 20 October 2006

3. Date of Board Approval 8 December 2006

4. Date of Loan Agreement 11 December 2006

5. Date of Loan Effectiveness


– In Loan Agreement 11 March 2007
– Actual 19 December 2006
– Number of Extensions 0

6. Closing Date
– In Loan Agreement 30 June 2009
– Actual 30 June 2009
– Number of Extensions 0

7. Terms of Loan
– Interest Rate London interbank offered rate (LIBOR)–based,
variable
– Maturity (number of years) 15
– Grace Period (number of years) 3

8. Terms of Relending (if any) Not applicable


– Interest Rate
– Maturity (number of years)
– Grace Period (number of years)
– Second-Step Borrower
iii

9. Disbursements
a. Dates
Initial Disbursement Final Disbursement Time Interval

20 December 2006 20 December 2006 0

Effective Date Original Closing Date Time Interval

19 December 2006 30 June 2009 30 months

b. Amount ($ million)
Category Last
or Original Revised Amount Net Amount Amount Undisbursed
Subloan Allocation Allocation Canceled Available Disbursed Balance

01 450 450 0 450 450 0

Total 450 450 0 450 450 0

10. Local Costs (Financed)


- Amount ($) Not applicable
- Percentage of Local Costs
- Percentage of Total Cost

C. Program Data

1. Program Cost ($ million)

Cost Appraisal Estimate Actual

Foreign Exchange Cost 750 750


Local Currency Cost 0 0
Total 750 750

2. Financing Plan ($ million)


Cost Appraisal Estimate Actual

ADB-Financed 450 450


JBIC-Financed 300 300
Total 750 750

ADB = Asian Development Bank, JBIC = Japan Bank for International Cooperation
iv

3. Cost Breakdown, by Program Component ($ million)


Component Appraisal Estimate Actual
Not applicable

4. Program Performance Report Ratings


Ratings
Development Implementation
Implementation Period Objectives Progress
31 Dec 2006 to 28 Feb 2007 Satisfactory Highly satisfactory
1 Mar 2007 to 30 Jun 2009 Satisfactory Satisfactory

D. Data on Asian Development Bank Missions


No. of No. of Specialization
Name of Mission Date Persons Person-Days of Membersa

Reconnaissance/Fact-Finding 19 April 2004– 10 a, b, c, d, e, f,


17 June 2005 g, h, i
Appraisal 7–25 Aug 2006 a
Consultation (Cofinancing) 29–31 Aug 2006 1 3 a

Monthly Meetings with January 2007– 2 2 a, b


Government 30 June 2009

a
a = project team leader/energy specialist, b = financial specialist, c = counsel, d = senior commercial cofinancing
specialist, e = private sector development specialist, f = governance specialist, g = power specialist consultant,
h = macroeconomist consultant, i = financial analyst consultant
I. PROGRAM DESCRIPTION

1. In 2006, the restructuring of the power sector in the Philippines had reached an
important juncture. The legal, regulatory, and institutional framework for privatization and
competition was largely in place. But, for restructuring to succeed, the sector had to regain its
financial viability, improve its regulatory performance, and inspire greater confidence in private
sector investors. The government needed the support of the Asian Development Bank (ADB) in
all these areas to strengthen the restructuring process. In December 2006, ADB approved the
Power Sector Development Program (PSDP)1 to (i) correct the long-term financial problems in
the sector, (ii) reinforce regulatory performance, (iii) improve the conditions for privatization, and
(iv) increase public confidence in the reforms.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

2. In July 2005, the Board endorsed the Philippine country strategy and program 2005–
2007 (CSP).2 The CSP drew clear links between the development constraints and the three
sector policy reform targets—power, financial markets, and governance. Support for the power
sector in particular would sustain fiscal consolidation. 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 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, and to
create the necessary conditions for the privatization of major power sector assets. At the
completion of the program, its design was assessed to be sound and its formulation adequate.
The PSDP as implemented remains highly relevant to ADB’s country strategy and the
government’s development objectives.

3. At appraisal, the PSDP was designed as a cluster program consisting of two


subprograms. The objectives of subprogram 1 were to (i) provide financial assistance to the
government, through a program loan, to help meet part of the costs of power sector
restructuring; (ii) create the necessary conditions for substantial progress in privatization under
subprogram 2; (iii) boost confidence in regulatory performance; and (iv) smooth the transition to
competitive markets. Subprogram 2 was envisaged to include a partial credit guarantee to
support PSALM’s debt management, and a political risk guarantee to facilitate private sector
investment in power generation and transmission. The success of subprogram 1 and substantial
progress of the privatization program, however, prompted the government to decide not to
pursue subprogram 2 as planned.

B. Program Output

4. The table below summarizes the program’s output at appraisal and at program
completion. Further details of program achievements can be found in the Program Design and
Monitoring Framework (Appendix 1).

1
ADB. 2006. 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. Manila.
2
ADB. 2005. Country Strategy and Program: Philippines, 2005–2007. Manila.
2

Output of the Power Sector Development Program


At Appraisal At Completion (as of May 2010)
1. Ensuring the financial viability of the power sector
DSCR of 1.0 achieved in PSALM’s As the universal charge was not approved by ERC,
operations from 2009 onward the DSCR was only 0.76 in 2009. PSALM is
implementing a liability management program to
enable it to achieve a DSCR of 1.0 by 2010 .
2. Strengthening the regulatory framework for the sector
ERC’s institutional capacity strengthened by ERC’s credibility has improved, and appeals and
the end of 2008 complaints against ERC’s rulings have dropped
significantly in number. Improved ERC institutional
capacity has drawn private sector investors, as the
success of the privatization program shows.
3. Restructuring the market toward competition
WESM operations expanded to the Visayas WESM trial operations started in May 2009. But
by the end of 2007 commercial operations have not been launched
because of power generation shortages in the Visayas
grid.
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). All consumers with monthly average peak
demand above 1 MW are eligible for PSOP.
4. Promoting private sector participation in the power sector
Significant part of NPC’s eligible generation By the end of 2008, 2,172 MW of generation capacity
assets (at least 30%) sold by the end of 2008 had been privatized.
The rest of NPC’s eligible generation assets By 30 May 2010, 3,365 MW of generation capacity, or
sold by the end of 2010 91% of total eligible assets for privatization in Luzon
and the Visayas, had been privatized. Five IPP
administrators (for 2,146 MW, or 44% of the
contracted capacity of the IPP contracts for Luzon and
the Visayas) had been appointed.
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.
5. Improving consumer welfare and protection
Adequate social protection mechanism for ERC studied lifeline rates for poor consumers. Lifeline
the poor implemented by the end of 2007 rates have been approved for all distribution utilities.
To give more protection to vulnerable consumers,
ERC in December 2009 proposed changes in some
provisions of the Magna Carta for Residential
Electricity Consumers.
DSCR = debt service coverage ratio, ERC = Energy Regulatory Commission, IPP = independent power producer,
Meralco = Manila Electric Company, MW = megawatt, NPC = National Power Corporation, PSALM = Power Sector
Assets and Liabilities Management Corporation, TOU = Time-of-Use, TransCo = National Transmission Corporation,
WESM = wholesale electricity spot market

5. In summary, the output of the privatization program largely exceeded expectations, with
3,365 MW of capacity already awarded at the time of the program completion review (PCR)
mission, and the output related to the regulatory framework and market competition also
substantially achieved. A major concern is PSALM’s failure to achieve a debt service coverage
ratio (DSCR) of 1.0 in 2009 (though improved from 0.38 in 2008 to 0.76 in 2009) because of the
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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. ERC is holding public hearings on
PSALM’s application for universal charges, which was filed in June 2009.

C. Program Costs

6. The PSDP helped the government finance part of the adjustment costs of power sector
restructuring in support of the implementation of agreed policy actions. At the time of appraisal,
the government was expected to need about $9.2 billion in 2006–2010. In addition to ADB’s
program loan, the Japan Bank for International Cooperation provided cofinancing of $300 million
in February 2007. The privatization proceeds from 2006 to 2009 amounted to $3.71 billion, while
the remaining gap was covered mainly by PSALM’s commercial borrowings with government
guarantee. 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, 3 which was successfully privatized in 2008. The
prepayment helped reduce NPC’s aggregate debt from $7.01 billion at the end of 2007 to $5.8
billion at the end of 2008.

7. However, about $4.55 billion (in principal and interest) of PSALM’s debt was due to
mature in 2009–2011. As this amount was almost twice the expected privatization receipts
(about $2.56 billion) during the period, a shortfall of about $2.2 billion would result in 2009–
2011. PSALM established a liability management program to help it to meet the DSCR of 1.0
covenanted under the ADB loan. Without the program, PSALM’s DSCR would be 0.28 in 2010
(versus 1.2 with the program) and 0.14 in 2011 (versus 0.9) (Appendix 2).

D. Disbursements

8. The loan took effect on 19 December 2006 and was disbursed promptly on 20 December
2006 as provided in ADB’s simplified disbursement procedures.4 The government certified that
the expenditures were made for the purposes specified in the loan agreement.

E. Program Schedule

9. At appraisal, the PSDP was designed as a program cluster consisting of two


subprograms—one for 2007–2008 and another for 2009–2010 (tentatively). 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. 3). The loan was closed as scheduled on 30 June 2009.

F. Implementation Arrangements

10. The government created the Energy Executive Committee to implement the program
cluster. It had representatives from the Department of Energy (DOE), PSALM, the Philippine
Electricity Market Corporation (PEMC), NPC, the National Transmission Corporation (TransCo),
the National Electrification Administration, and the Philippine National Oil Company. The
program implementation arrangements were adequate for the delivery of the expected output.

3
ADB. 1990. Report and Recommendation of the President to the Board of Directors: Proposed Loan for the
Sixteenth Power (Masinloc Thermal Power) Project in the Philippines. Manila.
4
ADB. 1998. Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila.
4

G. Conditions and Covenants

11. All 22 policy actions required for the effectiveness of subprogram 1 were fulfilled before
the Board consideration on 8 December 2006 (Appendix 3). Of the 12 policy actions to be
implemented under subprogram 1, 10 had been fulfilled at the time of the PCR. The two policy
actions that have not been fully accomplished involved (i) the expansion of the wholesale
electricity spot market (WESM) to the Visayas, and (ii) the establishment of effective safety nets
and consumer protection. As mentioned in the table under para. 4, WESM trial operations in the
Visayas started in May 2009. But power generation shortages in the Visayas grid have held
back commercial operations. 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. The expected
operation of the 246 MW coal-fired power plant in Toledo, Cebu, 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.

12. ERC studied lifeline rates for poor consumers under subprogram 1, and is looking into
ways of protecting the vulnerable. To strengthen the rights of consumers, ERC proposed
changes in some provisions of the Magna Carta for Residential Electricity Consumers. Among
the proposed amendments are provisions that identify options, set parameters, or clarify
concerns related to (i) applications for power connections, (ii) transfer and termination of
electricity service, (iii) liabilities of the house owner in case the applicant is a tenant of the
premises to be energized, (iv) billing and billing errors, and (v) filing of protests. The amended
Magna Carta is expected to be issued by September 2010.

13. Although subprogram 2 of the PSDP was not pursued, the government has made
substantial progress in implementing the policy actions envisaged before subprogram 2. Among
the seven policy actions, five have been completed: (i) ERC’s use of part of the fees collected,
(ii) start of the Customer Choice Program, (iii) issue of guidelines on open-access distribution to
allow retail competition to start, (iv) issue of notice of award for TransCo’s concession contract,
and (iv) issue of notice of award for the sale of a significant part of generating assets. Three of
the policy actions are yet to be fully achieved: (i) appointment of an independent market
operator (IMO) for WESM, (ii) start of the collection of universal charges for stranded debt and
costs, and (iii) appointment of independent power producer (IPP) administrators. Regarding the
appointment of an IMO, 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. DOE intends to appoint the IMO, on the basis of the study, in the first half of 2011. To
collect universal charges, PSALM applied to ERC in June 2009 for the introduction of such
charges. At the time of the PCR, ERC was still holding public hearings, as some consumer
groups opposed the charges. As for the appointment of IPP administrators, five plants with a
total capacity of 2,145 MW, or about 44% of the contracted capacity of the IPP contracts for
Luzon and the Visayas, have been successfully bidded out. PSALM plans to complete the
bidding by the end of 2010 to achieve 70% of the capacity, the last condition for open access at
the retail level.

H. Performance of the Borrower and the Executing Agency

14. The government submitted progress reports periodically to ADB and kept it informed
about the progress in implementing the program. The PSDP was closed on 30 June 2009 as
scheduled in the loan agreement. The Department of Finance (DOF), as the borrower and
5

executing agency, coordinated effectively with stakeholders and supervised the implementation
of the program. Overall, the performance of the DOF was satisfactory.

I. Performance of the Asian Development Bank

15. ADB supported the design and formulation of the PSDP and closely monitored the
implementation of the program. Instead of yearly review missions, monthly meetings were held
with the DOF and the DOE (the implementing agency). In fact, the proximity of ADB’s
headquarters to DOF allowed constant coordination on key policy issues during the processing
and implementation of the PSDP. ADB also worked closely with other development partners in
the power sector in the Philippines. The performance of ADB in the implementation of the
program was satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

16. The PSDP was highly relevant to the government’s goal of achieving a financially
sustainable, efficient, and secure power supply to stop the drain on the government’s finances,
free up resources for the social sectors, and minimize the risk of power shortages that would
impede economic growth. The PSDP was consistent with ADB’s CSP 2005–2007 for the
Philippines (footnote 2), which identified power sector reform as one of the main interventions
that would ease the most important development constraints, such as the fiscal imbalance and
the poor investment climate. As the lead financing agency in the sector, ADB has continued to
conduct policy dialogue, and to review and monitor power sector reform and privatization.

B. Effectiveness in Achieving Outcome

17. The power sector restructuring made substantial progress in wholesale competition and
privatization under the PSDP. But retail competition has not been fully implemented, and
electricity rates are still relatively high compared with those in other countries in the region.
Overall, the PSDP is considered partly effective in achieving outcome.

C. Efficiency in Achieving Outcome and Outputs

18. As summarized in the table under para. 4, the strengthening of the regulatory framework
induced substantial private sector investments in the power sector during the implementation of
subprogram 1. As a result, 91% of NPC’s generating assets were privatized, while the
appointment of IPP administrators for the Luzon and Visayas grids was at 44% at the time of the
PCR. Nevertheless, despite the high electricity rate, PSALM has not achieved a DSCR of 1.0
because of the historical debt burden and delayed approval of the universal charges by ERC.
Overall, the achievement of the PSDP’s outcome and output is considered partly efficient.

D. Preliminary Assessment of Sustainability

19. The restructuring of the power sector as envisioned in the PSDP is fundamentally sound,
and has had a significant positive impact on the sector and on the overall economy. With the
large-scale privatization and introduction of a competitive electricity market, the government has
had its role reduced to that of policy maker and planner. Further, except for the electrification of
unviable rural areas, its unsustainable subsidies to the power sector have been eliminated.
6

Thus, as a major fiscal crisis has been averted, more financial resources are being freed up for
social services and infrastructure. Restoring financial viability to the power sector is essential to
fiscal consolidation, and to new investments in the power sector. Therefore, the power sector
restructuring is considered sustainable in the long term.

20. The government is, however, facing some challenges in the short and medium term.
While the objective of the Electric Power Industry Reform Act (EPIRA) (2001) is to provide
sustainable and affordable power supply to all consumers, the electricity rate is the key
parameter that affects both consumer welfare and investment profitability. Electricity rates in the
Philippines are still among the highest in Asia. 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, at the same time, put in place a legal framework to protect the interests of
consumers.

E. Institutional Development

21. The power sector’s legal and institutional accountability framework is generally adequate.
Within the framework of the EPIRA and supported by various ADB assistance programs
including the PSDP, the following institutions have been created:
(i) TransCo, to take over NPC’s transmission assets and operations (its operations
have now been taken over by a private sector concessionaire);
(ii) PSALM, to (a) oversee and manage the privatization of NPC’s generation assets,
(b) award the concession for TransCo’s transmission operations, and (c) take
over the debt liabilities and non-transmission assets of NPC;
(iii) An independent ERC, to set rates for the captive market, and for transmission
and distribution, which are regulated parts of the electricity supply business;
(iv) PEMC, to supervise the establishment of the wholesale electricity spot market,
which started commercial operations in June 2006; and
(v) A reorganized DOE, to perform its expanded mandate of power sector planning
and supervision of power sector restructuring.

22. Among the above institutions, PEMC is still in a transition stage, as the appointment of
an IMO under EPIRA, a required policy action under the PSDP, is still to take place (para. 13).

F. Impact

23. Power sector restructuring has contributed to the fiscal consolidation of the country. With
the deficit declining from 2.7% of gross domestic product (GDP) in 2005 to 0.9% in 2008, 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. Sound debt management, particularly in the power
sector, led to a decline in national government debt as a ratio of GDP during the implementation
period of the PSDP, reduced dependence on commercial borrowing, increased access to official
development assistance, and eased debt servicing costs.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

24. In summary, the concept and design of the PSDP were consistent with ADB’s country
strategy and energy policy, and with the long-term vision of the government for power sector
7

development in the country. Under the PSDP, substantial progress was achieved in
strengthening power sector institutions and privatizing sector assets, but financial viability is still
a challenge for the short and medium term. Overall, the program is considered successful.

B. Lessons

25. The design of PSDP took into account the lessons learned from previous ADB
operations in the power sector.5 In particular, the preparation of the PSDP benefited from the
sector assistance program evaluation of ADB’s assistance to the Philippine power sector.6 On
this basis, the PSDP envisaged two subprograms with 2-year time horizons, covering 2007–
2008 and tentatively 2009–2010. Target dates were set only for subprogram 1 to allow flexibility
in the overall implementation schedule. The government chose not to pursue subprogram 2
mainly because of the better-than-expected progress of the privatization program, with private
sector investments being made without the assistance foreseen under subprogram 2. However,
without subprogram 2, 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. As a consequence, PSALM could not achieve a DSCR of 1.0 in 2009 as required
in the policy matrix.

C. Recommendations

26. Future monitoring. The financial situation of PSALM remains a key concern. The
implementation of its liability management program should be monitored closely, as this will
significantly affect the country’s fiscal situation.

27. Covenants. 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. A concrete action plan with clear milestones will be required from PSALM when a waiver
for its failure to achieve the required DSCR of 1.0 in 2009 is considered.

28. Further action or follow-up. A key milestone to follow up is the timing of the
introduction of universal charges for stranded debt and cost. At the same time, ERC should
strengthen the mechanism for protecting the welfare of consumers, particularly the very poor.

29. Additional assistance. 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, mainly through the
private sector lending window; (ii) strengthening of electricity distribution sector through public
sector operations; (iii) promotion of renewable energy and energy efficiency through public and
private sector partnership; and (iv) targeted support for the rural poor, particularly in Mindanao,
through technical assistance.

30. Timing of the program performance evaluation. 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.

5
ADB. 2004. Completion Report: Power Sector Restructuring Program in the Philippines. Manila.
6
ADB. 2005. Sector Assistance Program Evaluation: Assistance to the Philippine Power Sector. Manila.
8
PROGRAM DESIGN AND MONITORING FRAMEWORK
Design Performance Indicators Assumptions
Summary and Targets Monitoring Mechanisms and Risks Actual Achievement

Appendix 1
Impact
Financially sustainable, Government financial National Expenditure The power sector restructuring
efficient, and secure support for NPC, currently Program prepared by the contributed to the fiscal
power supply to stop exceeding $1 billion per Department of Budget and consolidation of the country, The
the drain on the year, reduced by 2010 to Management fiscal deficit declined from 2.7% of
government’s finances, subsidies required for PSALM’s and NPC’s annual GDP in 2005 to 0.9% in 2008.
and minimize the risk of power supply on small reports audited by COA
power shortages islands not connected to
the three main grids DUs’ annual reports; DOE’s
(SPUG) statistics as contained in the
Philippine Energy Plan No country-aide power shortage,
No power supply shortage except power shortages
experienced in some parts of
Visayas and Mindanao due to
drought situation in early 2010.
Outcome Assumptions
Consolidation of the Wholesale electricity Semiannual Macroeconomic and political Power sector restructuring made
power sector restructuring competition started, progress reports prepared by stability substantial progress with over 90%
substantial progress in DOE to JCPC on Strong fiscal stabilization of asset privatization and the
privatization, and retail the EPIRA implementation program wholesale competition started in
competition in line with Support of reforms by Luzon. The retail competition is
EPIRA by the end of 2010 stakeholders other than the expected to be implemented in the
government first half of 2011.

Risk
Weakening of the political will in
the executive and legislative
branches of the government to
proceed with the restructuring
Outputs Assumption
1. Financial viability of Debt service coverage PSALM’s annual reports ERC approval of needed tariff Debt service coverage
the power sector ratio of 1.0 achieved in audited by COA increases and universal ratio of 1.0 not achieved in 2009.
restored PSALM’s operations from charges, and successful debt PSALM is implementing liability
2009 onward management by the management program to achieve
government and PSALM debt service coverage of 1.0 from
2010.
Design Performance Indicators Assumptions
Summary and Targets Monitoring Mechanisms and Risks Actual Achievement
2. Regulatory framework ERC’s institutional Feedback from regulated Risk ERC’s institutional capacity has
and performance capacity and financial utilities and ERC annual Political and judicial interference been strengthened, and it has
improved autonomy strengthened report with ERC’s decision making issued necessary rules and
by the end of 2008 regulations for the wholesale
Rules and guidelines as Assumption competitive market, performance-
Regulatory framework for issued by ERC Continued support for ERC from based regulation for transmission
wholesale competition USAID and other development and distribution, and retail
completed by mid-2006 Partners competition. However, the ERC’s
budget still depends on the budget
allocation.

3. Market restructured WESM operations started PEMC’s audited annual Risk WESM operations started
toward competition in Luzon in July 2006, reports Technical problems with the in Luzon in July 2006,
accounting for at least start-up accounting for about 15% of total
10% of total sales sales in 2009.
Assumption
Technical and financial
readiness of WESM participants

WESM operations PEMC’s audited annual WESM trial operations in Visayas


expanded to the Visayas reports started in May 2009. Commercial
by the end of 2007 operations are expected to be
launched in the first half of 2011.

Consumer choice program Signed contracts between Assumption In January 2007, Meralco started the
for TOU rates started in suppliers and eligible Technical readiness of DUs Customer Choice Program. The
2007 for consumers with consumers scheme was extended to all
loads of 1 MW or more in franchises by ERC through the
Meralco’s franchise area issuance of rules for the Power
Supply Option Program (PSOP) in
January 2010. All customers with
monthly average peak demand
above 1 MW are eligible for PSOP.

Appendix 1
9
Design Performance Indicators Assumptions

10
Summary and Targets Monitoring Mechanisms and Risks Actual Achievement
4. Private participation Significant part of NPC’s Signed contracts between Risk By 30 May 2010, 3,365 MW of
in power generation eligible generation assets PSALM and private investors Lack of investor interest generation capacity, representing
and transmission (at least 30%) sold by the 91% of the total eligible assets for

Appendix 1
increased end of 2008 privatization in Luzon and the
Visayas, was privatized. Five
The remaining part of Signed contracts between independent power producer
NPC’s eligible generation PSALM and private investors administrators (for 2,146 MW, or
assets sold by the end of 44% of the contracted capacity of
2010 the IPP contracts for Luzon and the
Visayas) have been appointed.

TransCo concession Signed contract between TransCo concession


awarded by the end of PSALM and the awarded in December
2008 Concessionaire 2007
5. Consumers informed Rights and obligations of Magna Carta and remedial Magna Carta and remedial
and protected consumers promulgated procedures for consumers as procedures for consumers
by the end of 2005 issued by ERC issued by ERC; amendments
proposed in December 2009

Adequate social protection ERC-approved retail tariff ERC conducted a study on lifeline
mechanism for the poor schedule rates for poor consumers. Lifeline
implemented by the end of rates have been approved for all
2007 distribution utilities.

Activities
1. Financial viability of
the power sector

a. Ensuring financial Generation tariffs ERC-approved generation Risk Generation tariffs have been
recovery of NPC increased and operating tariffs Tariff increases contested in regularly adjusted to reflect the fuel
costs reduced to levels NPC’s annual reports audited courts by consumer groups price and currency fluctuations.
required to eliminate by COA
NPC’s losses

b. Establishing Action plan adopted to Action plan approved by DOF approved PSALM’s liability
creditworthiness of increase PSALM’s debt the government management program in May 2009.
PSALM service coverage ratio to
at least 1.0 by 2009
Design Performance Indicators Assumptions
Summary and Targets Monitoring Mechanisms and Risks Actual Achievement
P200 billion of NPC’s debt Legal instrument to effect the Assumption P200 billion of NPC’s debt
liabilities absorbed by the transfer Effective fiscal management by liabilities absorbed by the
government selected and the government government selected and
transferred by the end of transferred in December 2005
2005

Universal charge ERC-approved wholesale and Risk PSALM filed application of universal
introduced by retail tariffs Universal charge contested in charge for stranded costs and debt
January 2008 to cover courts by consumer groups in June 2009. Public hearings are in
NPC’s stranded costs and progress.
debt

2. Regulatory
framework and
performance

a. Enhancing ERC’s Rolling strategic plan for Strategic plan adopted by ERC has adopted a Medium-Term
independence, ERC adopted by ERC Strategic Plan for 2008–2011.
efficiency, and October 2006
technical
competence

ERC allowed to use fees Approved ERC budget Delays in Congress ERC’s budget has been approved
levied on regulated on a timely basis, without resorting
entities for funding fees levied.
prescribed regulatory
activities

b. Completing the Guidelines on pricing Guidelines issued by ERC Price determination methodology
regulatory framework methodology for WESM, issued in June 2006, with bid cap of
for wholesale and system loss cap for DUs, P64 per kWh
retail competition transmission capacity
development, and open
access for distribution,
issued by mid-2006

Appendix 1
Performance-based Guidelines issued by ERC, Performance-based
regulation implemented by and applications of TransCo regulation issued by ERC, and
the end of 2006 for and DUs approved implemented by TransCo and
TransCo and DUs eligible DUs

11
Design Performance Indicators Assumptions

12
Summary and Targets Monitoring Mechanisms and Risks Actual Achievement
Regulation for ECs Guidelines issued by ERC Risk A simplified benchmarking system
simplified and an Political resistance at local level for setting ECs’ wheeling rate was
approach developed for to EC consolidation adopted in September 2009.

Appendix 1
reducing their number by
the end of 2008
3. Market restructuring
toward
competition

a. Preparing the start of Negotiation of transition ERC-approved signed Risk All transition supply contracts were
wholesale supply contracts contracts between NPC and Inability of the parties involved concluded in 2007.
competition completed by the end of DUs to arrive at mutually acceptable
2006 solutions

Independent operator for Signed contract between ADB-funded consultant is assisting


WESM appointed by the PEMC and the WESM DOE in appointing IMO by the first
end of 2008 operator half of 2011.

Mechanisms established Consultant report and DOE’s Assumption National Electrification


by end-2006 to mitigate and PEMC’s decision on its Implementation of DOE action Administration set up a mechanism
offtake risks, allow recommendations plan with the support of a to encourage participation of ECs in
participation of smaller World Bank loan and TA to WESM. NPC was appointed the
DUs, and ensure power manage creditworthiness risk of supplier of last resort for ECs.
supply in case of DU DUs, particularly ECs
suspension from WESM

4. Private participation
in power generation
and transmission

a. Ensuring reliable NPC’s and TransCo’s Government-approved Government approved NPC and
power supply during investments prioritized by revised investment plan of TransCo’s investment plans before
the transition period mid-2006 NPC and TransCo their privatization.

Contingency plan put in Contingency plan The government adopted a


place by the end of 2006 prepared by DOE contingency plan for dealing with the
power crisis. The plan was partly
applied during the drought of March
2010.
Design Performance Indicators Assumptions
Summary and Targets Monitoring Mechanisms and Risks Actual Achievement
b. Paving the way Relevant plans regularly Philippine Energy Plan, DOE issued Philippine Energy Plan,
for asset sale updated and made Power Development Plan, Power Development Plan every
consistent and Transmission year; TransCo issued Transmission
Development Plan issued Development Plan.
or approved by DOE

Award of TransCo Semiannual TransCo’s concession awarded in


concession by the end of progress reports prepared by December 2007
2008 DOE to JCPC on
the EPIRA implementation

Bids called in a phased Invitations to bid and bid Invitations to bid for privatization of
manner for NPC’s power documents issued by all of NPC’s eligible generation
plants PSALM assets were issued.

5. Consumer
information and
protection

a. Conducting public Public understanding of Surveys of the general public Regular public information
information the matter improved by DOE campaigns were conducted in June
campaigns on the every year on the anniversary of
rationale for power EPIRA. DOE prepared the EPIRA
sector restructuring status report every 6 months to
inform the public about the progress
of power sector reform.
b. Assessing the social Existing social protection ERC’s review report and ERC conducted a study on lifeline
impact of the power mechanism for lifeline ERC’s decision rates for poor consumers. Lifeline
sector restructuring tariffs reviewed and, if rates have been approved for all
necessary, modified by distribution utilities.
mid-2008 to better target
the poor
Inputs The loan was disbursed on
ADB loan: $450 million 20 December 2006.
PCG, PRG amounts to be
determined

Appendix 1
ADB = Asian Development Bank, COA = Commission on Audit, DOE = Department of Energy, DOF = Department of Finance, DU = Distribution Utilities, EC =
Electric Cooperatives, EPIRA = Electric Power Industry Reform Act, ERC = Energy Regulatory Commission, GDP = gross domestic product, JCPC = Joint
Congressional Power Commission, Meralco = Manila Electric Company, MW = megawatt, NPC = National Power Corporation, PCG = partial credit guarantee,
PEMC = Philippine Electricity Market Corporation, PRG = political risk guarantee, PSALM = Power Sector Assets and Liabilities Management Corporation, SPUG
=Small Power Utilities Group, TA = technical assistance, TOU = Time-of-Use, TransCo = National Transmission Corporation, US= United States Agency for
International Development, WESM = wholesale electricity spot market

13
14 Appendix 2

PSALM’s LIABILITY MANAGEMENT PROGRAM


Projected DSCR Calculations
(P million)

Without Liability Management Program 2009 2010 2011

Internal Cash Generation a (7,142) 7,851 (15,380)


Privatization Proceeds 93,544 25,887 28,935
Funds Available for Debt Service 86,401 33,738 13,556

Debt Service 65,111 83,012 58,123


Lease Obligations 48,756 36,232 37,575
Debt Service Requirement 113,868 119,244 95,698

DSCR 0.76 0.3 0.1

With Liability Management Program 2010 2011

Internal Cash Generation a 7,851 (15,380)


Privatization Proceeds 25,887 28,935
Cash Flows from LMP
Securitization Proceeds 23,698 96,768
Less: TransCo Concession Fee Receivables (14,257) (17,922)
Bond Exchange Proceeds
Peso Bond Issuance 19,800
US Dollar Bond Issuance 47,000
Funds Available for Debt Service 109,980 92,402

Debt Service
Existing Debt 83,012 58,123
Less: Bonds Exchanged (28,800)
Interest on New Bonds of Bond Exchange 1,560 3,185
Interest on Peso Bonds 2,813 4,688
Interest on Dollar Bonds 3,920
Lease Obligations 36,232 37,575
Debt Service Requirement 94,816 107,491

DSCR 1.2 0.9


DSCR = debt service coverage ratio, LMP = Liability Management Program, PSALM = Power Sector Assets and
Liabilities Management Corporation, TransCo = National Transmission Company.
a
Excludes universal charge that PSALM is seeking approval for from the Energy Regulatory Commission. Its
application will improve PSALM’s DSCR.
Source: Power Sector Assets and Liabilities Management (PSALM)
DEVELOPMENT POLICY LETTER AND POLICY MATRIX FOR THE PROGRAM CLUSTER
(Implementation Status as of 31 December 2009)

Action Required for Completion by


During Before During
Before Board Subprogram Subprogram Subprogram
Area Action Agencies consideration 1 2 2 Actual Status
A. Financial viability of the 1. Start charging the generation NPC X Continuing
power sector tariff adjustment authorized compliance
by ERC.
2. Timely adjustment of ERC and X X Continuing
regulated generation prices NPC compliance
through application of a
formulaic approach for
incremental fuel and power
purchase costs.
3. Continue to implement PSALM, X X Continuing
measures to lower NPC and NPC, and compliance
TransCo’s operating costs; TransCo
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.
4. DOF to coordinate with DOF, X Completed in
(a)DOE for the issuance of a DOE, Nov. 2006
detailed action plan on the NPC,
following: (i) by PSALM PSALM,
and NPC, the use of and DBM

Appendix 3
privatization proceeds to
reduce borrowings; (ii) by
PSALM and NPC,
application for universal
charges for stranded costs
and debt; (iii) by PSALM DSCR of 1.0
and NPC liability not achieved in

15
management and iv) by 2009
PSALM and NPC
reimbursement of non-
Action Required for Completion by

16
During Before During
Before Board Subprogram Subprogram Subprogram
Area Action Agencies consideration 1 2 2 Actual Status

Appendix 3
power costs for multi-
purpose projects.
(b)DBM in providing the
assistance to PSALM,
when necessary and in
accordance with budgetary
process, to (i) help PSALM
b
achieve DSCR of at least
1.0 starting in 2009.
5. Complete the transfer of DOF, X Completed in
about P200 billion of NPC PSALM, April 2005
debts to the government. and
NPC
6. Issue guidelines for universal ERC X Completed in
charge (UC) for stranded Feb. 2007
contract cost and stranded
debt, respectively.
(a) Filing the universal charges PSALM X Completed in
for stranded debt and and NPC June 2009
costs. X Not yet done
(b) Start charging the universal PSALM
charges authorized by ERC. and NPC
7. Issue guidelines for ERC X Completed in
introduction of TOU tariffs at June 2005
the wholesale level.

8. Approval to remove inter-grid ERC X Completed in


and intra-grid cross- Oct. 2006
subsidies and inter-class
cross-subsidies in electricity
tariffs.
9. Issue guidelines, for all ERC X Completed in
regulated market Sept. 2009
participants, a uniform
system of accounts that is
internationally accepted for
private DUs, and enforce the
use thereof.
10.DOE to coordinate and issue DOE, X Ongoing
a detailed action plan to NEA, and implementation
Action Required for Completion by
During Before During
Before Board Subprogram Subprogram Subprogram
Area Action Agencies consideration 1 2 2 Actual Status
implement clear restructuring PSALM of the action
steps where ECs are not plan adopted in
financially viable, including Dec. 2006
such actions as mandatory
NEA or NPC transitional
management / participation
in Board of ECs, as
appropriate, and investment
management contracts
(IMCs), for ECs that have to
rely on wholesale supplier of
last resort and fail to cure the
problems within a specified
period.

B. Regulatory framework and 1. Adopt and implement a ERC X ERC Medium-


performance rolling strategic plan for Term Strategic
ERC with respect to Plan 2008–
institutional and capacity 2011
improvement, efficiency and
technical competencies,
regulatory achievements
and indicators for public
confidence levels.
2. Issue Rules of Practice and ERC X completed in
Procedure to ensure June 2006
efficient hearing and
investigative procedures
that have clear time
periods.
3. For ERC’s budget ERC and

Appendix 3
(a) Timely provision and release DBM X Completed on
of regular budget based on time
applicable law in line with
budgetary process and
regulations. No progress
(b) ERC to use fees collected in reported
excess of their revenue X

17
target for the year in
accordance with budgetary
Action Required for Completion by

18
During Before During
Before Board Subprogram Subprogram Subprogram
Area Action Agencies consideration 1 2 2 Actual Status

Appendix 3
process and regulations.
4. Request and obtain a ERC X Completed in
general deputization consent Dec. 2006
for ERC to represent itself at
all levels of judicial
proceedings.
C. Market restructuring toward 1. Design mechanisms that DOE and X Only 18 ECs
competition facilitate and provide PEMC out of 119
incentives to demand-side registered for
participation in WESM and WESM
provide technical support
2. Put in place a contingency DOE X X Plan in place
plan to ensure reliable
power supply in line with
Sec. 71 of EPIRA without
disrupting the development
of a competitive energy
market.
3. Issue guidelines on ERC X Completed in
performance-based March 2006
regulation for TransCo and
selected DUs
4. Issue guidelines on ERC X Completed in
recoverable system loss Sept. 2006
methodology for DUs to
improve energy efficiency.
5. Issue guidelines on price ERC X Completed in
determination methodology June 2006
for WESM
6. Issue competition rules and ERC X Completed in
complaint procedure June 2006
7. Issue guidelines to enable ERC X Completed in
small and/or weak suppliers Sept. 2006
to purchase energy through
wholesale aggregators.
8. Start WESM commercial PEMC X Completed in
operations in Luzon. June 2006
Action Required for Completion by
During Before During
Before Board Subprogram Subprogram Subprogram
Area Action Agencies consideration 1 2 2 Actual Status
9. Start customer choice NPC and X Ongoing
program with time-of-use ERC
tariff for consumers with
average peak demands of
1MW or more in ERC
approved franchise area.
10. Issues guidelines on a DOE, X Issued in Nov.
streamlined approach to PEMC, 2009
regulation of ECs to reduce and ERC
the number of individual
price reviews required
11. Expand WESM operations DOE and X Expected 1Q
in Visayas, if warranted by PEMC 2011
the initial experience in
Luzon and the power supply
situation.
12. Expand WESM operations DOE and X Not considered
in Mindanao, if warranted PEMC
by the initial experience in
Luzon and the power supply
situation.
13. Appoint an independent DOE and X Expected 2Q
operator for WESM. PEMC 2011
14. Issue guidelines on open ERC X Issued in Sept.
access for distribution to 2009
allow retail competition to
start.
D. Private participation 1. Timely updating of power DOE X X Regularly
sector development plan to updated

Appendix 3
ensure consistency and
adequacy of information
needed for investment
decisions
2. Engagement of consultant PSALM X Study
to study on the option of and NPC completed in

19
having a trading advisor to June 2007
advise on trading strategies
Action Required for Completion by

20
During Before During
Before Board Subprogram Subprogram Subprogram
Area Action Agencies consideration 1 2 2 Actual Status

Appendix 3
as a transition to
establishment of the IPP
administrator
3. Appoint IPP administrators. PSALM X 41% of capacity
and NPC awarded
4. Call for bids for the TransCo PSALM X Completed in
concession. Sept. 2008
5. Issue notice of award for PSALM X Completed in
the TransCo concession Dec. 2008
contract.
6. Complete the process of PSALM X Completed in
negotiation and conclusion and NPC Dec. 2007
of transition supply
contracts between NPC and
the DUs
7. Issue resolution to require ERC X Completed in
DUs to negotiate bilateral Sept. 2006
supply contracts with power
generators.
8. Issue resolution to impose a ERC X Completed in
premium on sale prices for Sept. 2006
those DUs without transition
supply contract and relying
on the default wholesale
supplier arrangements
9. Call for bids for the sale of PSALM X Completed in
eligible NPC’s generation 2006–2009
capacity.
10. Issue notice of award for PSALM X 91% awarded
the sale of a significant part
of generating assets.
E. Consumer welfare and 1. Conduct public information DOE and X X Ongoing
protection campaign on the rationale ERC
for power sector
restructuring, privatization
and regulatory framework.
2. Promulgate a bill of rights of ERC X Completed in
Action Required for Completion by
During Before During
Before Board Subprogram Subprogram Subprogram
Area Action Agencies consideration 1 2 2 Actual Status
residential electricity June 2004
consumers.
3. Issue guidelines on supplier ERC X Completed in
of last resort in case of retail June 2006
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.
4. Publish complaint ERC and X Completed in
procedure, establish DUs June 2006
consumer complaint desk at
ERC and consumer welfare
desks at all electric utilities;
and conduct training to all
consumer welfare desk
officers.
5. Establish periodic review DOE and X 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.
ADB = Asian Development Bank, DBM = Department of Budget and Management, DOE = Department of Energy, DOF = Department of Finance, DSCR = debt service

Appendix 3
coverage ratio, DU = distribution utility, ERC = Energy Regulatory Commission, EPIRA = Electric Power Industry Reform Act, IPP = independent power producer, NEA =
National Electrification Administration, NPC = National Power Corporation, TransCo = National Transmission Corporation, PEMC = Philippine Electric Market Corporation,
PSALM = Power Sector Assets and Liabilities Management Corporation, TOU = time of use, WESM = wholesale electricity spot market
a
These conditions are indicative of the general direction subprogram 2 might take. They need to be reviewed and, if necessary, modified or deleted on the basis of the
results of subprogram 1.
b
DSCR is defined as internally generated cash (including privatization proceeds and universal charges) divided by debt service.
Sources: Department of Finance, Department of Energy, and Asian Development Bank

21