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Private Participation inrural electrification

- Philippines

Washington

1 March 2004

Copyright Castalia. All rights reserved. Castalia is not liable for any loss caused by reliance on this document. Castalia refers to members of theworldwide Castalia Advisory Group and its staff

1

Outline

¾ Background

­ History

­ Coverage

­ Problems

¾ New Solutions – on grid

­ Private Participation in Rural ElectricCooperatives (ECs)

­ Regulatory improvement

¾ New Solutions – off grid

­ Energy Services Contracts for new‘Qualified Third Parties (QTP)

­ OBA subsidy

2

Historical perspective

1970

1980

1990

2000

2004

Rural electrification Sector issues

Municipal and small private systems

Rural Electricity Co-operative programlaunched, based on US model

119 ECs (plus 20IOUs) cover wholePhilippines, withexclusivefranchises

100% Municipal Energization

89% BarangayElectrification

80% HouseholdElectrification

Bataan Nuclearplant cancelled Power crisis

IPP programAsian crisis (’97)

EPIRA 2001 – Classic Market Reform

Power glut

Sector Structure: National PowerCorporation – Generation andTransmission, selling to RegionalDistributors

Vertical disaggregation, retailcompetition, wholesale market

100% Barangay Energization (’06)

100% Household Energization (’17)

3

Structure of Electric Cooperatives

ElectricCooperative

Customers

RevenuePower

Board

Elects

National PowerCorporation Wholesale

Power

NationalElectrificationAdministration

FinanceSupervision Energy Regulatory

Commission

Regulatestariffs & services

Inefficient.Tariffs below

costs

Doesn’t payfor power

Doesn’t repayloans

Service andcoverage

suffer

What goes wrong?

4

Barangay electrification by EC

0

10

20

30

40

50

60

70

80

90

100

%o

f b

aran

gay

s in

fra

nch

ise

elec

trif

ied

%o

f baran

gays in

franch

ise electrified

Each bar is one Electric Cooperative

5

Household electrification by EC

%o

f ho

useh

old

s in fran

chise electrified

Each bar is one Electric Cooperative

6

Financial performance by Electric Cooperatives

Average tariff 2002 US c/kWh

5

10

15

Operating profit (US$m)

Total profit (US$m)

1

2

-1

1

Meralco rate

Tariffs below costs for many

Modest operating profits

Nearly half making losses afterinterest payments (2002)

7

Efficiency of ECs – not related to scale …

Operating cost per customer vs. number of customer

R2 = 0.0002

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000

Number of connections

O&

M c

ost

per

cu

sto

mer

8

… or density

R2 = 0.0021

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0 10 20 30 40 50 60 70 80

Cusomers per km

Op

erat

ing

co

st p

er c

ust

om

er

Operating cost per customer vs. Customers per km

Customers per km

9

Improvement options for Electric Cooperatives

9Third Party Provision in UnservedAreas

9Investment Management Contracts

9Demutualisation

9Governance Reforms

Off-gridOn-gridOption

10

Investment Management Contract - Dynamics

Starting Point Turn-around Phase Steady Growth Contract Termination

Revenues

Costs

Service

No Investment Risk Capital fromContractor

Borrowing on ECBalance Sheet

Satisfactory level

11

Structure of IMC

ElectricCooperative

Customers

RevenuePower

Board

Elects

Energy RegulatoryCommission

Regulatestariffs & services

Investment-ManagementContractor

Risk Capital andManagement

Share of profit

Delegation ofManagement

Cost Plus

Profit at risk

Needs to offerprice-capregulation

12

Third Party Participation in Off-grid electrification

DU waivesareas

DOE publisheslist of waived

areas

Firmsapply to be

QTPs

Screenedagainst

QualificationCriteria

DOE definesand publicizesService Areas

Given statusas QTP

CompetitiveTender

EnergyServicesContract

concluded

QTP expressinterest in

waived areas

Coverage targetsand servicestandards

Indicative“Socially

Acceptable Tariff”

Cost of Service < SAT Ö Bid TariffCost of Service > SAT Ö Bid SubsidySubsidy structured as OBA – cost per connectionSubsidy and tariff approved by ERC

Service Regulation Tariff Regulation and Subsidies