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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 6999-PH
STAFF APPRAISAL REPORT
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
May 31, 1988
Industry and Energy Operations DivisionCountry Department IIAsia
Regional Office
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CURRENCY EQUIVALENTS
Currency Unit - Philippine Pesos (I)US$1.00 # 20.51 1,000 -
US$48.78P 1 - 100 Centavos (Ctvs.)
WEIGHTS AND MEASURES
MMTOE - Million tons oil equivalentMMBOE - Million barrels oil
equivalentBOPD - Barrels of oil per dayHT - Million tonsMW -
Megawatt (1,000 kilowatts)TWh a Terrawatt-hours (billion
kilowatt-hours)kWh - Kilowatt-hours (1,000 watt-hours)kW - Kilowatt
(1,000 watts)kV . Kilovolt (1,000 volts).m . meter (3.2808 foot)km
- Kilometer (0.6214 mile)MWh - Megawatt hour (1,000
kilowatt-hours)MkWh - Million kilowatt-hours
ABBREVIATIONS AND ACRONYMS
ADB - Asian Development BankBED - Bureau of Energy
DevelopmentBEU - Bureau of Energy UtilizationCOA - Commission on
AuditsDBP a Development Bank of the PhilippinesEdF - Electricitb de
FranceEHV a Extra High VoltageERB - Energy Regulatory BoardGSIS a
Government Services Insurance SystemsICB - International
Competitive BiddingKfW 3 Kreditanstalt fur WiederaufrauKRTA -
Kingston, Reynolds, Thom and AllardyceLCB - Local Competitive
BiddingLIB m Limited International BiddingMERALCO - Manila Electric
CompanyMIS Management Information SystemMOE - Ministry of EnergyNEA
Natiohal Electrification AdministrationNEDA - National Economic
Development AuthorityNPC - National Power CorporationNPCC -
National Pollution Control CommissionNPV - Net Present ValueOKA
Office of Energy AffairsPGI a Philippine Geothermal Inc.PLC a Power
Line CarrierPNOC - Philippine National Oil CompanyPNOC-EDC a
PNOC-Energy Development CorporationPNOC-EDI - PNOC-Energy Drilling
Inc.
PNPP - Philiprine Nuclear Power PlantSCADA a Supervisory Control
and Data AcquisitionSER a Sequence-of-Event RecordingSGS -
Steam-Gathering SystemSOEs a Statements of Expenditures
FISCAL YEAR
January 1 to December 31
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FOR OMCUIL USR ONLY
PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
LOAN AND PROJEC SWMMARY
Borrowers: National Power Corporation (NPC)Philippine National
Oil Company (PNOC)
Guarantors Republic of the Philippines
Beneficiar-y PNOC Energy Development Corporation (PNOC-EDC)
Amounts Two loans amounting to an aggregate of US$100
million,consisting of a loan to NPC of US$59 million and a loanto
PNOC of US$41 million.
Lendinit Tomes Repayable over 20 years, including five years of
grace,at the standard variable interest rate.
RelendinE Terms PMOC would relend the proceeds of its loan to
PNOC-EDCunder the same terms and conditions as the Bank loan.
Pro4ect DescriptLons The project constitutes an integrated
approach toresource development, power generation and
transmLssion.the project's main objectives are to (a) develop
anexisting geothermal steam field and a new 110 MM powerplant at
Bacon Manitol (b) support the delineation andassessment of
geothermal sites for use in Lu:.;(c) support measures for upgrading
and expanding NPC'usystem facilities; and (d) support
Institution-buildingand financLal recovery efforts at NPC. The
projectprovides for ti) drilling of about 18 wells
fordelineationlappraisal of geothermal sites, drilling ofadditlonal
productian/injection wells at Bacon Manito Ifield, and construction
of a steam-gathering system;(II) construction of 2 x 55 MV power
plant Includingturbine generators, auxiliary equipment and 32 km
of230 kV transmission line; (Iii) construction of 142 kmof 115 kV
single and double circuit transmission lines,rehabilitation of
substations and extension ofconmunlcatLon links; and (iv)
consultancy servlces.
Rilskss The project entails no unusual twchnlcal rLsks.Extensive
scLentLflc LnvestLgatLons and independentresource assessment have
confirmed existence ofsufficient steam rese: ves. NPC and PNOC have
staffexperlenced in supervLsLon and executlon of workssimilar to
those required under this project. However,as a result of financLal
weaknase, NPC could havedLfficalty realizing counterpart funds and
keeping to
This document has a striced distbution and may be used by
reipients only in the performanceof their official duties. its
contents may not ohedwse be disclosed without Wodd Dank
authodratin.
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the project implementation schedule. Measures tominimize these
risks have been incorporated in theproject design.
Estimated Costss
Local Foreign Total--------US$ Million-------
PNOC-EDC
Development of Steam Field 4.9 19.3 24,2Delineation/Appraisal
30.1 17.2 47.3
Base Cost 35.0 36.5 71.5
NPC
Thermal Power Plant 12.6 46.6 59.2Transmission System 2.9 8.3
11.2Upgrading/ExpansioD 8.2 32.0 40.2Consultancy Services 0.8 3.0
3.8
Base Cost 24.5 89.9 114.4
Total Base Cost 59.5 126.4 185.9
Physical Contingencies 6.0 12.6 18.6Price Contingencies 3.3 8.5
11.8
Total Project Cost /a 68.8 147.5 216.3
Interest During Construction -- 10.7 10.7
Total Financing Requirements 68.8 158.2 227.0
Financing Plan:
Government of Italy 4.8 55.2 60.0IBRD 7.7 92.3 100.0PNOC-EDC
39.7 3.0 42.7NPC 16.6 7.7 24.3
Total 68.8 158.2 227.0
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Estimated Disbursementas
IBRD Fiscal Year 1989 1990 1991 1992 1993
1994-___________________ (US$ million) ------ ---- ^---
NPC 1.6 9.1 15.0 13.0 9.1 11.2PNOC 13.6 22.7 4.7Cumulative 15.2
47.0 66.7 79.7 88.8 100.0
Economic Rate of Returns About 19Z
/a This project is exempt from duties and taxes.
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PHILIPPINES
BACON MANITO GEOTHERMAL POWER PROJECT
STAFF APPRAISAL REPORT
Table of Contents
Page No.
I. THE ENERG.7 SECTOR .............* . ... ... *. .. .... *
*.............. 1
A. Overview ................ .. * ............... 1B. Domestic
Energy Resources ..... * .. * . * .. * . * * . * * * * ... * .... .
1C. Energy Sector Institutinne .....
................................ 2D- Energy Sector Objectives,
Issues and Strategy ............. 2E. The Power Sector ....... **
.... ......** ................... .. * 3P. The Geothermal Sector
....... ....... 5G. Bank Lending for the Sector ..... * .... *
.............................. , 7H. Sectoral issues
............... .... *.****...**.. ... 7I. Rationale for Bank
Involvement ......... *................... 9
II. THE PROJECT .............. ........... 10
A. Background ......* ** ******. . ............ *.. ......
...... 10B. Project Objectives
...........................*............ 10C. Project Description
.........*.. .* ......................... 10D. Project Costs
.............................................. 15E. Financing Plan
......... ................................... 17F. Project
Implementation and Schedule ...... ................. 173.
Procurement ...... ## ............................ 19H.
Disbursements ............ *.*........*.. ... *... ... .. ... .. .
22I. Monitoring and Reporting ................................. .
22J. Environment .............*...*............ 23
III. THF BORROWERS AND THE BENEFICIARY
............................. 24
A. NPC .#.##....... *oo.... #o.......
............................ 24
Organization, Management and Staff ......................
24Training
..........................................................
25Operations, Maintenance and Losses ......................
25Accounting System .................... 000* ..... 25Financial
Planning and Budgeting ........................ 25Commercial
Systems ... ............... ......... ...... 25Audit ........ *.#
..... 26Taxes ............................. *..*... 26Insurance
.................................... 26
This report is based on the findings of an appraisal mission to
thePhilippines in August 1987. Mission members included Anil K.
Malbotra(mission leader), Jamil Sopher, Darayes B. Mehta, Hossein
Razavi (World Bank),and P.T. Venugopal (consultant).
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Page No.
B. PNOC and PNOC-EDC ................................ .........
26
PNOC ............ *. ..... ............. 27
Organization and Management ...................... .......
27Budgeting .................................. 27Accounting and
Audit ...................................................
27Insurance ..*.*..........*.................................
............ 27
PNOC-EDC .... to.**.....*. *****. **. * . q..*... ...... 28
Organization, Management and Staff ......................
28Training and Technical Assistance .......................
28Collections
........................................................
29Accounting and Audit ....... ........ ........ ............ .
29
IV* FINANCE ....... .......... ............................
29
A. NPC .................... .................... ... *..........
29
Past and Present Financial Performance ..................
29Foreign Exchange Exposure ...............................
31Valuation of Assets ..... ....... .............................
31Tariff . ....................................................
32Financing Plan . ......................... ................
32Future Financial Performance ............................ 33
B. PNOC and PNOC-EDC .. .. ................... .. ...........
35
PNOC ***.*... .. *...*........... . .. ***............... 35
Capital Structure .....................................
35Financial Performance ................................. 36Asset
Valuation ... ...................... .............. 37Tariffs
.................. **........... ................. 37Future
Financial Performance ... ,....................... 37
PNOC-EDC * *** ** *** *** **......... ..... ......... ... 38
Capital Structure ........... ...... ............... .....
39Financial Performance . ...... ....... ... ...... 40Taxes
................ ,.#.....to.. 40Tariffs . ...................
........................... 40Future Financial Performance
.............. ............ 41Financial Analysis of the Geothermal
SteamComponent ..............................................
42
Sensitivity and Risk Analysis ......... ................ 43
V. PROJECT JUSTIFICATION AND RISKS ... ........................
44
A. Justification
........................................................ 44B.
Economic Rate of Return ....... *. **.*...................... 45C.
Risks ..................................................... 46
VI. AGREEMENTS ......... . ***. *****************............. *
46
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ANNEXES
1.01 NPC's Gross Generation1.02 NPC's Installed Capacity by Grid
and by Plant-Type (1981-86)1.03 Load Forecast for the Luzon
Grid1.04 Load Forecast for the Mindanao Grid1.05 Load Forecast for
the Visayas Grid2.01 Transmission Line and Substation Projects of
NPC2.02 Detailed Project Cost - PNOC-EDC Component2.03 Detailed
Project Cost - NPC Component2.04 Project Implementation Committee -
Terms of Reference2.05 Organization Chart for PNOC-EDC2.06 Project
Organization for PNOC-EDC2.07 Project Organization for NPC2.08
Implementation Schedule - Critical Activities2.09 Implementation
Schedule for PNOC-EDC2.10 Implementation Schedule for NPC2.11 Major
Project Procurement Contracts2.12 Disbursements Schedule of the
Project2.13 Disbursement Schedule - PNOC-EDC2.14 Disbursement
Schedule - NPC2.15 Consultancy Services for NPC3.01 Organization
Chart for NPC3.02 NPC - Staffing Profile3.03 Organization Chart for
PNOC3.04 PNOC.-EDC - Staffing Profile4.01 NPC's Annual Financial
Statements (1984-95)4.02 KPC - Action Program to Reduce Accounts
Receivable and Accounts Payable4.03 NPC's Tariff4.04 PNOC and
Affiliatest Financial Highlights - 1987-19924.05 PNOC and
Affiliates: Income Statements, Balance Sheets, and Internal
Cash Generation (1984-1992)4.06 PNOC-EDC: Income Statements,
Balance Sheets, Cash Flows (1984-1995)4.07 PNOC and Affiliates and
PNOC-EDC: Assumptions on Financial Projections4.08 PNOC-EDC:
Financial Analysis of Investment in the Bacon Manito I
Geothermal Project5.01 Calculation of the Economic Rate of
Return (Versus Coal Alternative)5.02 Calculation of the Economic
Rate of Return5.03 Estimated Loss Reduction Benefits of the
TransmissionlDistribution
Components5.04 List of Documents in Project File
MAPS
IBRD 20275 - Grid Map of National Power CorporationIBRD 20278 -
Existing Geothermal Power Projects in Operation
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I. THE ENERGY SECTOR
A. Overview
1.1 The energy sector acquired pre-eminence in the Philippine
economy asa result of the oil crisis of the last decade. At the
time of the first majoroil price increase in 1973, imported oil
accounted for 952 of total energyconsumption. As a result of the
Government's implementation of an energydiversification/management
policy, the ratio of imported oil to total energyusage declined to
56X in 1986. Also, total consumption of energy, which hadgrown
rapidly prior to 1973 (at 9.62 p.a. during 1965-73), increased at
themodest level of 3.82 p.a. between 1973 to 1979. After the second
oil shock,consumption actually declined continuously from the peak
of 9.2 million tonsof oil equivalent (MfTOE) in 1979 to 8.5 MMTOE
in 1983 and 7.1 MMTOE in 1985.Several factors contributed to this
decline including the low GDP growth ofthe early 19808, the
decrease in GDP of the 1984-85 period, and the increaseduse of
non-conventional energy. Energy usage has started to increase with
therecent economic recovery; total energy consumptior. reached 7.5
MMTOE in 1986and 9.6 MHTOE in 1987, representing growth rate of 62
and 282 for 1986 and1987, respectively.
1.2 The shares of energy consumption by sector have remained
stable overthe years. The residential/commercial sector's accounts
for about 142 ofusage, industrial consumption 51X, and transport
31?. The share of electri-city as a proportion of energy
consumption has increased considerably; powergeneration accounted
for about 47X of primary energy consumptica in 1986,compared to
only 222 in 1973.
B. Domestic Energy Resources
1.3 Indigenous energy resources are relatively modest and proven
reservesof petroleum, coal and of natutai gas are small. The proven
reserves ofpetroleum are estimated at 4 million tons of oil
equivalent (MMTOE) whilepotential reserves are projected at a
possible 14 MKTOE. Domestic oil fieldsat Nido, Cadlao and Matinloc
produced 14,000 barrels of oil per day (BOPD) andcontributed 7.42
of total prinary energy consumption when commercial produc-tion
began in 1979; since then, production rates from these fields
havedecreased so that, by 1987, domestic oil's share of total
energy consumptionwas only 2.22. Natural gas deposits, found in
Northern Luzon, are consideredto be sub-commercial; and probable
uranium reserves are estimated at about 1.2MMTOE. Its total
potential coal resource is estimated at about 1,500 millionstonnes
but most of it is low grade and expensive to mine. The major
coalfields at Semirara (152.1 million metric tons (MT)), Cagayan
(65.8 millionMT), Surigao (36.8 million MT) and Zamboanga (18.6
million HT)--which accountfor an estimated 89.42 of total proven
coal reserves--contributed only 4.32 uftotal energy consumption in
1987. Philippine hydropower resources are quitesubstantial, with a
theoretical power potential in excess of 10,000 MW.However,
development of hydro resources is relatively costly due to
thedistance of the bettor sites from the main transmission grid.
Hydropowercontributed 10.22 of total energy consumption in 1985.
Geothermal reservesare not yet fully evaluated, but about 4.431 MW
of probable reserves, 1640 MV
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of which have been tested, but only 894 MW of capacity has been
installed. In1987, geothermal energy generated about 221 of the
nation's electricitysupply. biomass resources abound in the
Philippines, with an estimated annualpotential of 1.0 MMTOk from
agricultural wastes. This source's share of totalprimary energy
consumption was 16.8? in 1985.
C. Energa Sector Institutions
1.4 The basic organization of the energy sector was established
by aPresidential Decree in 1977. That decree created the Ministry
of Energy (MOE)as the central policy, planning and regulatory
agency for energy; in turn, MOEoperated through two major bureaus,
one for energy development (BED) and theother for energy
utilizatlon (BEU). The responsibilities of the PhilippineNational
Oil Company (PNOC), formed in 1973 to assure the adequacy of
thecountry's oil supply, were extended in 1976 to include
development ofindigenous energy resources; PNOC-Energy Development
Corporation (PNOC-EDC)became responsible for geothermal exploration
and development. The NationalPower Corporation (NPC) (responsible
for power generation and transmission),and the National
Elactrification Administration (NEA) (responsible for
ruralelectrification), were also strengthened by that Decree. PNOC
and NPC wereattached to MOE for program and policy coordination. A
committee to coordi-nate their activities was established within
the Ministry, and the Ministerheld the position of Chairman of the
Board cf both PNOC and NPC. NEA, inturn, was attached to the
Ministry of Human Settlements. Following the changeof Government in
1986, MOE was dissolved in June 1986, and all its units wereplaced
temporarily under the Office of the President. In June 1987,
ExecutiveOrder 193 formally placed the Office of Energy Affairs
(OEA) under the Officeof the President and gave it primary
responsibility for the formulation,planning, implementation and
coordination of policies and programs in thefield of energy. NPC
and PNOC were brought under the direct control of theOffice of the
President. The National Coal Authority was abolished and
itsregulatory functions transferred to the Energy Regulatory Board
(ERB). A partof BEU was transferred to ERB which was given
price-setting authority overprivate sector suppliers of petroleum
and electricity. The organizationstructure of the energy sector is
still somewhat fluid; working arrangementsunder this structure have
not yet been established. Coordination of thesector's entities
would still need to be strengthened and the Bank is expectedto
assist this process through the Public Resource Management Loan,
theproposed project and the ongoing energy sector study (para.
1.23).
D. Energy Sector Obiectives, Issues and Strategy
1.5 Prior to the first oil price hike of 1973, the Philippines
did nothave a comprehensive formulation of energy sector programs
and policies.Initial reactions to the 1973 oil crisis focused
mostly on securing a stableand adequate supply of crude petroleum.
To complement this, a longer termprogram of (a) indigenous energy
resource development and (b) energy demandmanagement was
implemented. The objective of indigenous energy resourcedevelopment
was met through heavy Government participation in developing oiland
non-oil resources. The search for domestic crude oil sources was
pursuedunder an innovative production sharing scheme. The policy of
diversifyingenergy sources focused on coal development as of 1976,
geothermal explorationand development as of 1978, and construction
of the 620 MW Philippine Nuclear
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Power Plant (PNPP) in 1979-85. Non-conventional energy
development was leftprimarily to private enterprise, with the
Government providing fiscal incen-tives for research, development
and utilization of these resources.
1.6 Energy demand management was initially focused on direct
Governmentiiterveation via fuel allocation and rationing schemes.
In 1975, the EnergyConservat-on Program was enacted; however, the
Government quickly recognizedthat pricing was more permanent and
effective than legislation as a policytool. Thereafter, the
Government pricing policy emphasized a rapid and fulladjustment of
domestic petroleum product prices to uorld market levels.
1.7 Despite the notable past success in the energy
diversification andmanagement policies, the sector is now facing a
number of issues with regardto its long term development strategy.
These issues are all the more argentbecause of the substantial
capital needed for energy development at a timewhen the country is
facing other urgent economic prioritiess
(a) Until 1986, the Government was planning to meet increases in
demandfor electricity in Luzon with generation from PNPP. The
Government'sdecision, made in the summer of 1986, to mothball PNPP
along with thedowngrading of generating capacity in Tiwi geothermal
power plant andthe relatively sharp increase in power demand in
1987, created asudden need to reexamine and optimize energy options
for meetingexpected increases in demand for electricity;
(b) The recent collapse in the international energy prices has
introducedconsiderable uncertainty regarding the economics of
domestic energyresources. In particular, the development of
domestic coal, geo-thermal steam and certain hydro resources may no
longer be viablealternatives to energy imports;
(c) The Government's decision to abolish MOE has led to a lack
of coordi-nation of energy sector activities and, in particular, a
lack ofclear direction for energy resource development;
(d) Finally, the Government's energy pricing policy needs to be
reexa-mined. In particular, further rationalization of power
tariffs andpricing policies for geothermal steam and coal are
needed in order toeltsure the economic efficiency of their
development and use.
With the Bank's assistance, the Government is planning to: (a)
reexamine theeconomics of various sources of energy; (b) prepare a
consolidated plan fordevelopment and utilization of indigenous
energy; and (c) strengthen a coordi-nating body so that it can
resume many of MOE's former responsibilities.
E. The Power Sector
1.8 Overview. The electric power industry in the Philippines is
dividedinto two segments: (a) generation and transmission; and (b)
distribution.The industry has a number of participating
organizations, some of which arepublicly, and others privately,
owned. By far, the largest organization isNPC, which is responsible
for the generation of bulk power and its transmi;-sion through a
number of grids that serve virtually the entire country except
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for remote rural areas and smuJl outlying islands. Power is
distributed tomajor urban areas by a number of investor-owned
utilities. Of these, thelargest is the Manila Electric Company
(MERALCO), which serves Metro Manilaand accounts for about 70X of
NPC's sales in Luzon. The rural areas areserved by over 100
cooperatives, a few of which are either wholly or
partlyauto-generating. NEa was established to service the
cooperatives by mobiliz-ing funds, providing tichnical assistance,
and arranging procurement of commonmaterials.
1.9 At the end of 1986, the total installed capacity of the
Philippinepower subsector was about 6,600 MW, of which 5,788 MW
(88?) belonged to NPC(Annexes 1.01 and 1.02). The major part (41Z)
of NPC's capacity is oil-fired,while geothermal (152), hydro (372),
and coal-fired (7?) plants comprise therest. Currently, NPC
operates 19 oil-fired, 17 hydro, 4 geothermal and 1coal-fired power
plants. Total genexation from NPC facilities was 19.2 kWh in1986,
accounting for about 902 of the Philippines' total generation.
Theresidential sector accounted for 23X of electricity sales; the
commercialsector, 22?; industry sector, 502; and the Government,
street lighting andwater supply, 5Z. Losses exceeded 20? of gross
generation.
1.10 Currently, NPC's facilities are organized into separate
systems forLuzon, the Visayas and Mindanao. Among them, Luzon is
the largest. Totalenergy sales in 1986 were 17.6 billion kWh from
which the Luzon grid accountedfor 76?; Mindanao, 17?; and the
Visayas, 7?. The growth of electricityconsumption was well above
15? p.a. in the 1960s and the early 19709.Following the steep rise
in oil prices in 1973, the corresponding increases inpower tariffs
reduced the growth rate to 122 p.a. for 1973-79. The slow-downin
the economy further reduced the growth rate to 4.9? p.a. for
1980-86.Electricity sales in Luzon, which grew during 1980-83 at
4.6?, declined by4.8? in 1984 and by 0.8? in 1985. A modest rebound
of 2.5? and a sharpincrease of 10.5? were experienced in 1985 and
1986 respectively. Growthrates of 6? and 55? are projected for
1988-90 and 1990-95, respectively.
1.11 Power Sector Investment Program. The existing generating
capacityin Luzon is 4,100 MW, consisting of 1,925 MW of oil-fired,
1,226 MW of hydro-power, 660 MW of geothermal, and 300 MW of
coal-fired plants. The oil-basedpower plants have not been
maintained adequately in the past and have deterio-rated to
conditions of poor reliability and low thermal efficiency.
However,the Malaya power plant units No. 1 and 2 (300 MW and 350 MW
respectively) arebeing rehabilitated and are scheduled to be
recommissioned in 1988. Sucatunits No. 1 and 4 (150 MW and 300 MW
respectively) are scheduled for rehabili-tation in 1988-89.
Rehabilitation of other units at these plants, however,must be
delayed until some new generating capacity is added so that the
systemwill have sufficient capacity while the units to be
rehabilitated are takenoff line. Thus, the actual capability of the
oil-fired power plants is, andwill be, substantially lese than
their rated capacity, at least until early1990s. In addition, from
the 660 MW of geothermal power, 220 MW of Tiwi plantwill be retired
during 1989-90 due to technical problems related to the
steamsupply. Therefore, the total available capacity, after
rehabilitation of oil-fired plants, will be about 3,000 MW. In
contrast to installed capacity, theLuzon grid's current peak demand
of 2,500 MW is projected to reach 3,200 MW by1992. No new
generating plant is under contruction despite the (a)
projectedincrease in load, (b) decrease in installed capacity due
to the unexpected
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retirement of the geothermal units at Tiwi, and (c) mothballing
of the nuclearplant. As a result, system reliability is expected to
fall very sharply; theloss of load probability (LOLP) is expected
to increase from its present levelof 2 days/year to 7 days/year in
1989 and more than 30 days/year in 1991.
1.12 Rectification of this deteriorating situation will require
some heavyinvestment, precisely at a time when both NPC and the
Government are facingresource mobilization constraints. Short term
relief can only be providedthrough projects involving low lead time
for which substantial financing canbe obtained on attractive terms.
Longer term investment decisions need to beoptimized in order that
finite available resources can be stretched as far aspossible. In
this regard, NPC currently plans to: (a) address
peakingrequirements in 1989 and 1990 by installing two gas turbines
(150 MW and200 MW); (b) address base load requirements for 1991 and
beyond byconstructing the Bacon Manito geothermai power plant; and
(c) address longerterm requirements by optimizing the economic and
technical aspects of othercandidate plants and use sound financial
practices to develop the optimalcandidates. Although the relative
economic merits of geothermal versusimported coal are not clearly
established, the Bacon Manito geothermal plantis clearly the
least-cost option to supply the next increment of base
loadgenerating capacity because of the investment which has already
been incurredin developing the steam production wells; from the
total capital cost ofUS$73.3 million for geothermal development,
more than 702 has already beenexpended. The economic viability of
other geothermal candidate plants will,however, need to be
investigated in a least-cost framework. In conjunctionwith the
ongoing Energy Sector Study, the Bank and NPC are conducting a
jointreview of NPC's investment program through the year 2000. At
negotiations,NPC agreed that it would review its investment program
annually with the Bank.In conjunction with the Energy Sector Study,
the Bank ascertained that NPC wasdeveloping methodologies for
investment program formulation that weresatisfactory; therefore,
the annual reviews of NPC's investment program couldfocus as mtuch
on the methods used for investment optimization as on
theconstituents of the program.
F. The Geothermal Sector
1.13 The share of geothermal in total energy use has been
steadilyincreasing during the last five years. In 1979, consultants
visited 25 of themajor geothermal manifestations in the Philippines
and identified 11 aspriority areas for further investigation. In
addition to these 11, explora-tory drilling is planned or already
under way in a number of additional areas;also, where ongoing
geoscientific work is likely to lead to drilling prospectsin still
additional areas. Based on exploration to date, the total
geothermalresources of the Philippines are estimated at 8,000 MW.
Four fields, Tiwi andMakiling-Banahaw (MakBan) on Luzon and
Tongonan and Palinpinon in the Visayas,are currently operating and
drive a combined generating capacity of 894 MW,thus ma'ing the
Philippines the world's second largest producer of geothermalenergy
(after the USA). As of the end of 1986, more than 320 geothermal
wellshad been drilled in the Philippines, principally in the four
fields underdevelopment; in turn, geological, geophysical and
geochemical analyses havebeen completed at a number of other sites.
But during the period 1984-86,geothermal exploration and
development activity slowed considerably; PNOC-EDC's drilling
activity dropped from 26 wells in 1983 to six in 1984, four in
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1985 and one in 1986. Attempts are now being made to accelerate
theexploration and development program and PNOC has proposed a
program to drill171 wells providing an additional 1,290 MW
geothermal steam capacity for theperiod 1987-1994.
1.14 The first 2.5 kW geothermal power plant on Luzon was put
into opera-tion at Tiwi in 1969 and the first commercial geothermal
power station inLeyte, supplying 3 MW of electricity to Ormoc City,
was put into operation in1977 at Tongonan. Large-scale geothermal
power production began in 1979 inboth the Tiwi and MakBan areas,
when a 110 MW power station was commissionedin each area.
Currently, Tiwi and MakBan both have 330 MW installed capacity;both
fields are operated by Philippine Geothermal Inc. (PGI) under a
servicecontract with NPC. PNOC-EDC operates two geothermal fields,
both supplyirg112.5 MW plants, at Tongonan on Leyte and at
Palinpinon on Southern Negros.
1.15 Geothermal Exploration and Development. Geothermal
exploration anddevelopment is govez-nsd by Presidential Decree No.
1442 (The GeothermalExploration and Development Act, 1978). The
terms apply equally to foreignand local contractors and joint
ventures. Contracts were administered earlierby the Ministry of
Energ, through its BED. With %'he recent constitution,BED's
functions have been transferred to the Office for Energy
Operationswithin OEA.
1.16 From a resource development perspective, geothermal steam
has manyparallels with oil and gas; in the Philippines, they are
administered compar-ably. The basic features of the service
contracts previously entered into byBED for geothermal exploration,
drilling and production paralleled those ofpetroleum
production-sha,.ing segments. Although details may be negotiated
andvariations may occur, the contractor must in all cases take all
explorationand development risks, meeting all costs as incurred and
recovering thosecosts from a share of future production (the
contractor's take is a maximum of401 of net income). The
Government's intention was for NPC to purchase thesteam at the
"power plant fence" on a cost-related approach, with a firmcontract
price based on estimated costs plus a target rate of return.
Theservice contract is supplemented by two prior contracts for
geoscientificstudiess a geophysical survey contract, providing an
exclusive right to acontract area; and a geophysical permit,
providing a non-exclusive right to anarea. Foreign companies
considering operating in the Philippines generallyregard the
contractual arrangements as satisfactory and their relations
withthe Government, OEA and PNOC to be good. But world-wide, few
companies parti-cipate in geothermal development and even fewer
(less than 10) operate inter-nationally.
1.17 Difficulties inhibiting further geothermal development have
alsoarisen because of the need to agree with NPC to a steam price
in advance ofcommencing exploration, a need arising from both lack
of major alternativeuses for steam in most locations and the
relatively low initial risk offailing to find a commercial
resource. Almost no international precedentsexist for steam
pricing! and further study and contract initiative are neededto
ease and accelerate the contractual process, and to provide for
uncertain-ties which may arise during geothermal field production.
In the past, Caltexand Total had proceeded with basic geothetmal
exploration in advance of asteam contract, and Union Oil has
continued on the basis set out in its
-
existing geothermal license (1970) (Union Oil's license for
geothermaldevelopment is different from current practice; it was
issued prior to thePresidential Decree and provides for development
to be on a cost-reimbursablebasis to be met from future earnings,
but without formal limitations on thecontractor's take); but other
interested companies have been extremelycautious and have not been
prepared to undertake even basic exploration inadvance of reaching
an agreed steam selling price. PNOC-EDC, as a subsidiaryof a state
company, has undertaken exploration in advance of any steamcontract
in the interests of national energy development objectives. A
numberof highly promising areas, not being explored by PNOC-EDC,
are still availableto the private sector; in any case, PNOC-EDC is
willing to consider seriouslysuitable joint venture proposals. The
Government has established within OEA aspecial inter-Governmental
committee charged with the responsibility toresolve the steam
pricing issue on the basis of the recommendations of arecent Steam
Pricing Study fostered by an existing Bank geothermal project.
G. Bank Lending for the Sector
1.18 Since 1957, the Bank has made nine lending operations
(eight loansand one credit) to the power sector, amounting to
US$290.2 million equivalent,and one for geothermal exploration
amounting to US$36 million equivalent.These lending operations
include sever to NPC, for a total amount of US$218.2million to
finance three hyd opower projects, two thermal power plants, andone
transmission project. Apart from considerable slippage in the
projectconstruction schedules and a consequential cost overrun on
the fifth and sixthprojects, all projects were completed without
major problems and the resultantfacilities are operating
satisfactorily. The seventh loan, which was theBank's last
operation with NPC (1460-PH, US$58 million, 1977) and whichfivanced
the expansion of the transmission system in Luzon and construction
ofa load dispatching center, was closed in 1985. Bank group lending
to thePhilippine power sector has also includeds (a) a loan to NEA
for US$60million in 1978, to help finance the 1979/80 portion of
the rural electrifica-tion program; and (b) a commitment by the
International Finance Corporation(IFC) of US$12 million equi. lent
to MERALCO in 1967. The role of geothermalenergy was considered in
some detail in the energy assessment undertaken by ajoint World
Bank/Asian Development Bank (ADB) mission in 1980 and a
project(Loan 2203-PH, US$36 million, 1982) comprising a 25-well
exploration programat the Bacon Manito and Palinpinon fields, is
scheduled for completion in end-1988. Two of the aforementioned
projects have been audited: the Fourth PowerProject (PPAR No.
P-0980, January 1976)--a thermal plant at Bataan; and theRural
Electrification Project (PPAR No. P-5372, June 1985). Both
auditreports identified major problems, such as implementation
delays and costoverruns, and their causes, such as project design
changes, cumbersomecontract award procedures and weak project
management.
H. Sectoral Issues
1.19 Because solutions to the power sector's problems are so
capitalintensive, the prevailing uncertainties in energy sector
development andcoordination can have a substantial cost to the
economy. The power sector isnow facing a number of issues in the
areas of resource allocation and utili-zation. In the area of
resource allocation, the sector needs to optimizeinvestment, but
currently lacks a clear direction regarding the economic
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advantages of various sources of supply. This problem became
particularlyurgent after the decision to mothball the nuclear
plant, which had beenplanned to meet all increments of electricity
demand in the Luzon grid through1994/95. Thus, the plant's capacity
of 620 MW needs to be replaced with moreconventional power
generation. New plants powered by domestic or importedcoal,
geothermal steam or hydro resources, as well as rehabilitated
existingoil-fired plants are all feasible fuel alternatives for
meetirg future growthin demand. However, except for the proposed
geothermal plant, which is econo-mically justified based on its
incremental cost., the other candidates cannotbe optimized because
a reliable basis for cost comparison is lacking. Toresolve this
issue, a thorough examination of the development cost of
coal,geothermal and hydro resources, together with a comprehensive
analysis oftheir economic positions within a consolidated
investment program, is needed.In addition, the option of
rehabilitating several existing oil-fired generat-ing facilities
should be weighed against each of the other alternative sourcesof
capacity expansion.
1.20 Pricina. Adjacent to the above issue are problems related
to steamand coal pricing. In brief, these resources need to be
priced in a way thatreflectt their relative economic merits.
Currently, pricing of both resourcesis being disputed by concerned
entities and has created a bottleneck in NPC'splanning for new, and
operation of existing, coal-fired and geothermal powerplants. For
NPC and PN0C, the price of geothermal steam must fall between
thecost of production and the 'avoided cost' of using alternative
fuels; however,the specific parameters to be used in the
computation of cost of productionand 'avoided cost' must still be
developed and agreed between the two partiesbefore a specific
pricing structure can be fixed. An ADB-financed study hasprovided
an important tool for resolving the issue. It includes a model
forgeotherna) steam pricing. The Government has appointed an
inter-Governmentalcommittee to establish a price to cover the steam
needed to power the proposedBacon Manito project, and to develop a
long term steam pricing policy based onthe study. The Bank is
expected to assist in (a) providing information on themost
important input into the model, namely the least-cost power
developmentprogram, and (b) addressing the financial and fiscal
implications of variouspricing policies.
1.21 In addition to optimizing investment programs, NPC and the
otherpower sector participants need to ensure that they are as
efficient aspossible at managing their businesses and producing
revenues. In particular,transmission losses need to be kept at
existing levels, distribution lossesneed to be reduced, tariff
structures need rationalization and the financialperformance of
NPC, MERALCO and NEA need substantial improvement.
1.22 Losses. System losses within Luzon have increased from 142
in 1978to 242 in 1986. NPC appears to have been effective at
controlling transmis-sion losses; however, distribution losses are
excessive and need to bereduced. MERALCO, which supplies 752 of the
total electricity used in Luzon,by itself recorded losses In excess
of 202 in 1986.
1.23 Tariffs. Rationalization of power tariffs has alreauy
receivedconsiderable attention. A tariff study was completed
recently; it concludedthat, although average revenue realizable
from aggregate electricity sales isconsistent with the average
aggregate production and delivery costs, the
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-9-
structure of the tariff, as well as the allocation of rates
between demand andenergy charges, needs to be altered substantially
in order for rates toreflect efficiently the cost of providing
service to each consumer. TheGovernment has adopted a policy of
revising present tariffs to reflect themarginal cost of power
supply and is currently developing guidelines forchanges to both
bulk rates and retail tariffs.
1.24 Financial Restructuring. A number of factors have had a
negativeimpact on the financial performance of NPC, MERALCO and
NEA. These organiza-tions all have had serious accounts receivable
problems; as a result, to meetsome of their working capital
requirements, all three have stretched theiraccounts payable beyond
reasonable limits. All are undercapitalized, with NPCnot being able
to raise peso denominated long term loans bearing
appropriatematurities and MERALCO having insufficient paid-in
equity capital. Thisproblem has constrained NPC's cash flows and
has affected some of MERALCO'sinvestment and resource maintenance
decisions. NPC, with Government support,has already implemented
measures which would relieve its cash constraints, atleast for the
next year or two. MERALCO's problems can only be resolvedthrough an
action program to attract fresh equity capital that will need
someyears to implement.
1.25 In discussions regarding the proposed project with the
NationalEconomic Development Authority (NEDA), NPC, PNOC, MERALCO
and OEA, all partiesnoted that the aforementioned issues needed to
be addre3sed within a compre-hensive and consolidated framework.
Accordingly, these organizationsindicated their interest that the
Banks (a) provide assistance through theproposed project to (i;
reduce distribution losses, (ii) facilitate the coor-dination among
the concerned entities, especially with regard to
geothermaldevelopment and steam pricing, (iii) relieve NPC's cash
constraints, and(iv) rationalize MERALCO's financial structure; and
(b) conduct a sector studyaimed at developing an action plan to
resolve medium and long term energyissues. The sector study,
initiated in early 1988, would: (a) assess thegeothermal reserves
and review the cost estimates of future exploration anddevelopment
activities; (b) carry out a technical and economic analysis
ofvarious coal de;elopment schemes; (c) develop a concensus
regarding NPC'sleast-cost investment program for the period through
2000; (d) proposeguidelines for the pricing of geothermal steam,
coal and petroleum products;(e) review the technical and economic
aspects of plant rehabilitation and lossreduction; and (f) analyze
the various instruments available for enhancing thecapitalization
of power sector organizations.
I. Rationale for Bank Involvement
1.26 The efficient development of the Philippine power sector
requiresclose cooperation and coordination among the principal
parties--NPC as thegenerator and wholesaler of power, PNOC as the
primary supplier of fuels toNPC, and the major private and public
distribution franchisees. Through itspast operational involvement,
the Bank has developed constructive relation-ships that enable it
to facilitate important interactions between NPC, PNOCand PNOC-EDC.
The Bank can play a significant role in resolution of issuessuch as
coal and steam pricing, and on the consequent analysis of
investmentstrategies. The sector's institutions all have
considerable scope forimprovement of operational performance,
financial stability and investment
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planning. The project would afford the Bank an opportunity to
assist NPC andMERALCO in implementing financial recovery measures.
Finally, by using Bankprocedures for procurement, the real cost of
investment in the project can beoptimized. The Government is keenly
interested in the Bank's continuedinvolvement in a sector which is
critical for the country's industrialization.
II. THE PROJECT
A. Background
2.1 Several Bank missions during 1984-86 reviewed with NPC, PNOC
andPNOC-EDC the development of the power and geothermal sectors in
Philippines.An examination of NPC's least cost power development
program indicates thatdevelopment of a 110 MW power plant at Bacon
Manito in southern Luzon shouldbe NPC's next development priority.
PNOC has already invested US$51.5 millionin developing the Bacon
Manito geothermal steam field to sustain a productionlevel of 70 MW
and needs an incremental investment of about US$24 million
toupgrade the field to 110 MW. To optimize the efficiency of
investments ingeneration, there is a need to upgrade and expand the
facilities of NPC'ssystem.
B. Proiect Objectives
2.2 The main objectives of the project are to:
(a) support the delineation and assessment of geothermal
resources foruse in Luzon, and thereby reduce the need to rely on
imported fuelfor power generation;
(b) develop an existing geothermal steam field at Bacon Manito I
and anassociated 110 MW base load power plant that would provide a
newsource to meet demand growth in the Luzon grid;
(c) support measures for upgrading and expanding NPC's system
facilities;and
(d) support institution-building and financial recovery efforts
at NPCduring this critical stage of the economic recovery
period.
C. Proiect Description
2.3 The project includes the following components:
(a) Geothermal Steam Exploitation and Distribution
(i) development of the Bacon Manito I geothermal field
includingdrilling of additional production and injection wells,
andengineering, procurement, installation and commissioning of
thesteam-gathering system;
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- 11 -
(ii) delineation/appraisal of geothermal sites for power supply
tothe Luzon grid. This includes drilling of about 18 wells to
anaverage depth of 2,800 meters, and studies for assessing
theextent of geothermal resources and the feasibility of
theirdevelopment.
(b) Power Plant and Associated Transmission System
(i) construction of the 2 x 55 MW Bacon Manito geothermal
powerplant including turbine generators, auxiliary equipment,
steamcondensing and gas extraction systems, cooling towers and
the230 kV switching system;
(ii) construction of about 32 km of double circuit 230 kV
transmis-sion line for evacuating power from the generating
station.
(c) Upgrading and Expansion of NPC's System Facilities
(i) expansions of Bantay, Balintawak, San Jose, San Esteban,
Laoag,Olongapo, Dasmarinas and Binan substations, construction of21
km of 230 kV double circuit Balintawak-San Jose and 121 km of115 kV
single circuit San Esteban-Laoag transmission lines
andrehabilitation of substation transformers and switchgear in
theLuzon grid; expansions at Lugait, General Santos and
Davaosubstations in the Mindanao grid; and expansions at Tunga,
SantaBarbara, Panitan, Medelin and Bacolod substations in the
Visayasgrid (Annex 2.01);
(ii) extension of the communication link to Mindanao and Visayas
andexpanding telecommunication facilities of the Luzon grid
loaddispatch system; installation of computer hardware and
softwarefor enhancing NPC's Management Information System (MIS);
andprocurement of mobile environmental monitoring units for
NPC'senvironmental division; and
(iii) rehabilitation of instrumentation and controls for the 50
MWcoal/oil-fired unit at the Naga thermal power station.
(d) Consultancy Studies for
(a) establishing the feasibility of transmitting power from
Leyte toLuzon;
(b) Tongonan Geothermal Power Plant Siting and Development;
(c) establishing the feasibility of transmission
interconnections tothe islands of Masbate, Mindoro, Marinduque,
Romblon,Batanduanes and Basilan;
(d) developing cost estimating techniques for power
systemcomponents, and a computerized data base;
(e) developing norms for cost of power supply outages; and
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(f) establishing feasibility of the latest techniques in
theconstruction of hydro-electric dams.
2.4 Development of Bacon Manito Geothermal Field. The first
reconnais-sance survey of the Bacon Manito geothermal field,
located about 600 km southof Manila in southern Luzon, was started
in May 1977 by PNOC and GeothermalEnergy of New Zealand, Ltd.
During 1977-85, PNOC carried out detailedgeophysical, geological
and geochemical studies and delineated a geothermalfield, about 10
sq. km. In Bacon Manito, a total of 24 wells have alreadybeen
drilled and only three additional wells are needed to complete
theproduction and reinjection requirements of the 110 MW plant. Of
the totalwells drilled, only 16 are presently hookable to the
steam-gathering system,while four wells could be used in the future
for power on a modular concept.The current production capacity is
102.5 MW, and the additional wells willenable attainment of the
plant rated capacity of 110 MW, plus an additional 10MW reserve
capacity. An independent resource assessment completed in
1985concluded that the site has reserves sufficient to supply a 110
MW power plantfor 25 years. This conclusion has been confirmed by
an independent expert,who assisted the Bank in 1987. The project
component includes the drilling ofadditional three wells so as to
develop the first section of the Bacon Manitogeothermal field, and
construction of the required steam-gathering system.The
steam-gathering system (SGS) is comprised of a piping network,
threeseparator stations, cross-country steamlines and reinjection
lines. The SGS,designed to drive as a base load station, although
provisions for load peakingwill be included, will have a fully
automatic control system with a secondaryprovision for full
blow-off capacity to take care of major plant operatingupsets.
2.5 Delineation and Appraisal of Geothermal Sites for the Supply
of Powerto the Luzon Grid. Geoscientific studies, including
geological, geophysicaland geochemical studies, will be conducted
to identify appropriate locationsand targets for drilling
operations. The project includes the drilling of 19confirmatory
wells on the basis of the above geoscientific studies and/orbased
on results of drilling already undertaken earlier. Three wells will
bedrilled to an average depth of 2,800 - 3,000 meters to complete
the eightwells that are necessary to define an area for a 110 MW
development at BaconManito II, including both the production and
reinjection wells; five wellswith an average depth of 2,800 - 3,000
meters which will be drilled inPinatubo are necessary to complete
the ten wells required to delineate aresource area capable of
sustaining a 110 MW development; and approximatelyten wells will be
drilled to an average depth of 2,800 - 3,000 meters in oneor more
of the following areass Del Gallego, Mariveles Natib, and
GreaterLeyte area to confirm the resource potential of the chosen
area. Oncompletion of geoscientific surveys and drilling, studies
of geothermalresource and feasibility of development will be
carried out. An independentresource assessment and feasibility
study by an internationally reputedorganization will confirm and
establishs (a) the existence of an exploitablegeothermal resource
sufficient to support a first stage development of up to110 MW on
two sites; and (b) the future drilling and development plans.
2.6 Bacon Manito Geothermal Power Plant. A feasibility report
detailingthe parameters of the Bacon Manito geothermal power plant
has been prepared by
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NPC, and a site for the power plant has already been selected.
The projectconstruction includes a power house installed with two
55 MW generating units,auxiliary equipment and controls, steam
condensing and gas extraction systemsand the cooling water system
including cooling towers. Power from the genera-tors would be
sterped up to 230 kV by transformers leading to an adjacent
gasinsulated metalclad 230 kV switching station. A 10 km long 230
kV doublecircuit transmission line will convey power to the nearest
230 kV switchingstation at Daraga and thence to Manila by the 500
kV EHV system currentlyunder construction. The project would
provide the Luzon grid with a source ofadditional firm energy of
about 800 GWh annually from 1991/92.
2.7 Upgrading and Expansion of NPC's System Facilities. To meet
theprojected increases in power demands in its Luzon, Mindanao and
Visayas grids,NPC has formulated a sizeable investment program
(US$6,337 million equivalentover the period 1989-1995) to
strengthen its system facilities. This programenvisages
construction of new transmission lines and substations,
augmentationof transforming and reactive control capacity at
existing substations andrehabilitation of transmission lines and
substation equipment. For moreefficient system operation, NPC plans
to extend its communication facilitiesand enhance its management
information system. A portion of NPC's investmentprogram for the
1989-91 period is expected to be financed by an ADB's powersector
loan currently under appraisal. The proposed project includes
compo-nents (para. 2.4(c)) which would complement the ADB
project.
2.8 Extension of NPC's Communication System. The
Luzon-Visayas-Mindanaomicrowave link, which will establish an
integrated communication network forNPC, will provide communication
channels needed among the NPC offices inLuzon, the Visayas, and
Mindanao. The channels will be used to transmit data(computer,
telex, facsimile) and voice information between the regionaloffices
and the head office. This will also allow communication between
thedifferent plants, substations and offices of NPC and will
contribute to anefficient and effective operation and management of
the corporation. Theexisting microwave system will be extended to
the south from Kalayaan to Tiwiand to the north from La Trinidad to
San Esteban. Power Line Carrier (PLC)equipment will be used to
replace equipment which was installed and commis-sioned a decade
ago and provide for expansion of PLC channels to
plants/sub-stations that cannot be reached via microwave. The
upgrading of the microwavesystem in Luzon will provide the
communication channels needed for improvedhigh voltage transmission
line protection, supervisory control and data acqui-sition (SCADA)
computer terminals of plants/substations, centralized
sequence-of-event recording (SER), telephone, telex, facsimile and
other communicationfacilities required in plants, substations and
offices. Microwave and PLCequipment will be used to establish a
communication network among the islandsof Visayas. The
communication channels will be used for telephone, telex
andfacsimile, transmission line protections, SCADA, centralized SER
and computerterminals.
2.9 Enhancement of NPC's MIS. With the rapid power expansion
program ofthe 70s, information systems did not evolve to match
NPC's growth. In 1982,NPC engaged Computer Information Systems (a
subsidiary of MERALCO) to formu-late its MIS plan. This plan
envisaged development of 43 MIS software modulesand installation of
a total of 27 computers for major offices and plants.Currently, NPC
has three Burroughs mainframes for commercial work and a VAX
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computer for engineering applications. While NPC has made
substantialprogress in the implementation of the Materials
Management and ProjectManagement Information systems, considerable
work still needs to be done forthe Financial Management,
Maintenance Management and AdministrativeInformation Systems. In
order to complete the MIS System Plan, NPC needs topurch4se
additional hardware and software including four mainframe
computersand eight minicomputers, software, and consulting
assistance for theMaintenance Management and Project Management
systems. The four mainframeswill serve as regional computers
whereas the eight minicomputers will handleMaintenance and
Materials Management systems at eight major power plants.
2.10 Consultancy Studies. Draft terms of reference for all the
studies,including cost estimates, are presented in Annex 2.15.
These drafts werediscussed and confirmed at negotiations.
(a) Establishing the feasibility of transmitting power from
Leyte toLuzon. This study will determine the feasibility of
transmittinelarge blocks of power (500-1200 MW) from the Tongonan
GeothermalProject in Leyte to the Luzon grid over a distance of 460
km (23 kmsubmarine). The study will consider a.c. versus d.c.
transmissionand establish the least cost technically feasible
transmissionoption. The feasibility study carried out in Phase 1
will befollowed by engineering studies and preparation of
procurementdocuments in Phase 2. This study is estimated to require
70 man-months of consultancy services.
(b) Tongonan Geothermal Power Plant Siting and Development. This
studywill determine the least cost technically feasible alternative
forsiting, sizing and interconnection of power plants in the
vastgeothermal steam complex at Tongonan. This study is estimated
torequire 30 man-months of consultancy services.
(c) Establishing the feasibility of transmission
interconnections to theIslands of Masbate, Mindoro, Marinduquie,
Romblon, Catanduanes andBasilan. This study will determine the
feasibility of transmittingelectricity from the mainland grids to
the nearby islands mentionedabove, thus mitigating the need for
expensive local diesel powergeneration on the islands. The
feasibility study carried out underPhase 1 will be followed by
engineering studies and preparation ofprocurement documents under
Phase 2. This study is expected torequire 70 man-months of
consultancy services.
(d) Developing cost estimating techniques for power system
components anda computerized data base. This study will establish
techniques forestimating the cost of major power system components
such as thermalpower plants, hydroelectric power plants,
transmission lines,substations and civil works. The study which
will be followed bypreparation of a computerized data base and a
cost estimated manualwill assist NPC in major planning exercises
for power systemdevelopment. This study is expected to require 25
man-months ofconsultancy services.
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(e) Developing norms for the cost of power supply outages. This
studywill establish norms for the determination of cost of power
supplyoutages in the various grids of PNC, which would assist NPC
indeveloping its future generation expansion plans. This study
isexpected to require 25 man-months of consultancy services.
(f) Establishing feasibility of the latest techniques in the
constructionof hydroelectric dams. This study will determine the
applicabilityof latest techniques in dam construction in the
Philippines withparticular reference to the application of Roller
Compacted Concrete.The study will review in detail the design of
seven prospectivehydroelectric dams and recommend the most
cost-effective constructiontechniques. This study is expected to
require 25 man-months ofconsultancy services.
D. Project Costs
2.11 The total project cost is estimated at US$216.3 million
excludinginterest during construction, of which about US$147.5
million is expected tobe in foreign exchange. A summary of project
cost is shown below in Table 2.1for the two agencies executing the
project.
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- 16 -
Table 2.1s PROJECT COST ESTIMATE
Foreign CostPescs Miltlon US$UMillton as X of
Local Foreign Total Local Foreign Total Total
PNOC-EDCDevelopment of Bacon Manito I Steam Field 100 898 496
4.9 19.8 24.2 79.8Delneaotlon-Cum-Appraseal 617 a85 970 B0.1 17.2
47.2 36.6
Total Boso CoOt 717 749 1.466 36.0 86.6 71.6 F1.O
Physteal Contingoncy 72 75 147 3.5 8.7 7.2 51.4Price Contingoney
180 64 220 1.2 0.8 2.1 40.0
Total Prolect Cost (PNOC-EOC) 925 908 8a3 89.7 41.0 80.7
60.8
NECBacon Manito Thermal Power Plant 258 955 1,213 12.6 46.6 59.2
78.7Transmission System for Bacon Manito s0 170 230 2.9 8.8 11.2
74.1Upgrading and Expansion of NPC'o System
Facilities 168 656 824 8.2 82.0 40.2 79.8Consultancy Services 18
82 78 0.8 8.0 8.8 78.9
Total Base Cost $02 1.843 2.845 24.5 09.9 114.4 78.9
Physical Contingencets (lOx) s0 184 284 2.6 6.9 11.4 78.6PrieĀ¢
Contingencles 157 586 723 2.1 7.7 9.0 78.6
Total Prolect Cost (NPC) 709 2.89B 8.802 29.1 108.5 165.6
78.6
TOTAL PROJECT COST /p 548 8,601 5,186 68.8 147.5 218.3
88.2INTEREST DURINO CONSTRUCTION - 219 219 - 10.7 10.7
TOTAL FINANCING REIJIRED 1.684 8.720 5.B54 80.8 158.2 227.0
/n This project Is exempt from duties and taxes.
NOTES: (1) December 1967 price levels.(2) Exchange Rates US$1 u
P 20.6.
2.12 Annexes 2.02 and 2.03 give detailed cost estimates for the
projectcomponents for PNOC-EDC and NPC, respectively. All costs are
based onDecember 1987 prices; physical contingencies are at 10X.
Cost estimates forthe Bacon Manito geothermal power plant are
estimated based on budgetaryestimates obtained by NPC in mid-1987.
Price escalation for costs expressedin terms of foreign exchange
(US dollars) is calculated according toanticipated international
price movements of 1.0Z for 1988-90, and 3.5? for1991 and
thereafter. Price escalation for costs expressed in local
currency
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- 17 -
is calcul..ted according to projected local inflation :at.es of
6.5Z for 1988-90and 8.02 for 1991 and thereafter. The cost
estimates assume that exchangerate adjustments would, on average,
maintain "purchasing power parity' duringthe project implementation
period.
E. Financina Plan
2.13 The financing plan for the project is presented in Table
2.2 below:
Table 2.2s FINANCING PLAN FOR THE PROJECT
Local Foreign Total Percent
Govt. of Italy 4.8 55.2 60.0 26IBRD 7.7 92.3 100.0 44PNOC-EDC
39.7 3.0 42.7 19NPC 16.6 7.7 24.3 11
Total 68.8 158.2 227.0 100
A protocol soft loan being offered by the Government of Italy
will finance theforeign cost and a portion of local cost for the
Bacon Manito power station.At negotiations the Government of Italy
indicated the expectation that thisprotocol loan would become
effective not later than December 31, 1988. TwoBank loans will
cover the proposed project's remaining foreign
exchangerequirements, including interest during construction. The
remaining expendi-tures will be financed by PNOC-EDC and NPC using
internal cash generation.US$41 million would be lent to PNOC (PNOC
Loan) for 20 years, including fiveyears of grace on repayment of
principal, at the standard variable interestrate. PNOC would relend
the proceeds of that loan to PNOC-EDC on the sameterms and
conditions as the PNOC Loan, and PNOC-EDC would bear the
foreignexchange risk. Execution of a Subsidiary Loan Agreement,
satisfactory to theBank, between PNOC and PNOC-EDC would be a
condition of loan effectiveness.US$59 million would be lent to NPC
(NPC Loan) at the standard variableinterest rate for 20 years,
including five years of grace on repayment ofprincipal.
2.14 The aggregate amount of the proposed Bank loans is US$100
millionequivalent. The Republic of the Philippines will guarantee
the two Bankloans.
F. Proiect Imnlementation and Schedule
2.15 In order that the two separate organizations involved in
projectimplementation coordinate their activities in the most
effective manner, NPCand PNOC-EDC have formed a Project
Implementation Committee, consisting of therelevant managers of
each of the two implementing organizations. Thiscommittee has
functions and powers agreed by all parties; a draft of thoseterms
of refereace is given in Annex 2.04. At negotiations, NPC and
PNOC-EDC
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indicated that each will comply with such functions and powers
for the ProjectImplementation Committee as are satisfactory to
these two organizations and tothe Bank.
2.16 DNOC-EDC will have overall responsibility for implementing
the geo-thermal component of the project. It is organized in four
technical operaLinggroups (Annex 2.05) composed of highly capable
technical and professionalstaff whio have gained extensive
experience in geothermal technology from thePhilippines experience,
as well as training extended through various bilateralagreements
with New Zealand, Iceland, Italy, Japan and USA. PNOC-EDC
willcontinue to retain Kingston, Reynolds, Thom and Allardyce
(KRTA), New Zealand,to provide experienced staff to assist them in
the specialized areas of geo-sciences, drilling, production and
system engineering through the projectduration for an estimated 28
man-months. For the development of the BaconManito I
steam-gathering system, PNOC-EDC agreed at negotiations to appoint
aconsultant to provide support for project execution services. In
addition,PNOC-EDC agreed that, after completion of appraisal ard
delineation drillingat prospective geothermal sites, it will retain
an independent consultant forstudy of resource assessment and
techno-economics of field development. Theterms of reference for
these studies shall be drawn up in consultation withthe Bank on
completion of the drilling program at each site. The project
isbased on a detailed feasibility study prepared by PNOC-EDC, in
consultationwith KRTA, and verified independently by NPC. The
overall engineering designhas been developed by PNOC-EDC after
optimization studies have been carriedout in consultation with NPC.
The detailed engineering will also be revie-qedby KRTA before the
end of 1987. The corporate structure for undertakirgdrilling, as
well as development activities, already exists with PNOC-EDC,
whohave carried out similar works successfully in the past at
Palinpinon andTongonan. The project will be executed through a
project team constituted forthis purpose (Annex 2.06). The 21 wells
under the proposed project would bedrilled by PNOC-EDC. PNOC Energy
Drilling Inc. (PNOC-EDI), the drillingsubsidiary of PNOC, which has
drilled over 100 geothermal wells and 10 oil andgas wells in a
technically efficient and cost effective manner, has recentlybeen
made a part of PNOC-EDC. The PNOC-EDC drilling crews will use their
ownrigs and staff, while all other drilling equipment, materials
and serviceswill be obtained from the international market as
needed. Implementation ofthe steam-gathering system will be
procured through seven contracts for thepurchase of materials and
services and a single installation-cum-erectioncontract.
2.17 NPC will have overall responsibility for implementing the
powergeneration and transmission lines component of the project.
NPC has carriedout an indepth feasibility study of the Bacon Manito
geothermal power plant,and has prepared the specifications,
drawings and bid documents for procuringthe entire power plant
including civil works on a single responsibility basis.NPC has also
prepared the bid documents for the transmission lines and
substa-tions. Having been associated with the design, construction
and operation ofthe Tiwi and MakBan geothermal plants, which have
six 110 MW units, the staffof NPC has the experience and capability
to undertake the pToposed projectwithout outside assistance.
Detailed designs and drawings for the power plantwhich will be
produced by the contractor, will be reviewed by NPC's engineersto
ensure compliance with the specifications. NPC's field staff will
providenecessary supervision and exercise quality control over the
contractor's
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activities during construction, testing and commissioning. The
proposed NPC'sorganization which will function exclusively for
implementation of the BaconManito geothermal plant is shown in
Annex 2.07 and is considered to beadequate. The project manager and
other key staff have already beenappointed. NPC also has in-house
capability for designing, engineering andimplementing the other
project components including the transmission lines andsubstations,
communication, instrumentation ar4 control systems, with
engage-ment of local civil works and erection contractors as
necessary to supplementNPC's own forces. Limited consultancy
assistance will be needed for themaintenance management system of
the MIS; the overall design of the latter hasalready been
formulated.
2.18 Implementation Schedule. Annex 2.08 gives the critical
activities inthe implementation schedule of the Bacon Manito
geothermal power plant.Annex 2.09 gives the implementation schedule
for installation and erection ofthe steam-gathering system for
Bacon Manito I, and for the drilling programfor the
delineation-cum-appraisal component of the project. The
commissioningof the steam-gathering system is scheduled to be
completed by the middle of1991. The 21 wells to be drilled under
the project are scheduled to becompleted by the first quarter of
1990. Annex 2.10 gives the implementationschedule for the NPC
component of the project. The first 55 MW unit isscheduled to be
commissioned by April 1991 and the second unit by July 1991.The
associated transmission system will be available on time for
evacuation ofpower from the first unit. The system upgrading and
expansion components areprojected to be completed by 1991. The
entire project is scheduled forcompletion by end 1991.
G. Procurement
2.19 The procurement arrangements fcr the project are summarized
inTable 2.3 below.
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Table 2.3s SUMMARY OF PROCUREMENT ARRANGEMENTS(US$ million)
Procurement MethodProject Component ICB LCB Other/a N/A/b Total
Cost
PNOC-EDCSGS Installation/Erection 8.6 0.3 0.0 0.0 8.9
(8.6) (O.0) (0.0) (0.0) (8.6)Mechanical Equips. & Materials
for SGS 8.9 0.0 0.0 0.0 8.9
(8.9) (0.0) (0.0) (0.0) (8.9)Non-Destructive Testing Services
0.2 0.0 0.0 0.0 0.2
(0.2) (0.0) (0.0) (0.0) (0.2)Consultancy Services & Studies
0.0 0.0 2.7 0.0 2.7
(0.0) (0.0) (2.3) (0.0) (2.3)Drilling Consumables 17.9 0.0 0.0
0.0 17.9
(17.9) (0.0) (0.0) (0.0) (17.9)Drilling Services 0.0 00: 2.80c
0.0 2.0
(O.0) (0.0) (2.0)- (O.0) (2.0)Rig Charges 0.0 0.0 16.0/d 0.0
16.0
(0.0) (0.0) (0.0)- (0.0) (0.0)Training 0.0 0.0 0.3 0.0 0.3
(0.0) (0.0) (0.2) (0.0) (0.2)Fuel 0.0 1.8 0.0 0.0 1.8
(0.0) (0.9) (0.0) (0.0) (0.9)Engineering & Administrative
Overheads 0.0 0.0 0.0 22.0 22.0
(0.0) (0.0) (0.0) (0.0) (0.0)
Total PNOC-EDC 35.6 2.1 21.0 22.0 80.7(337) (UT) T47) TOT)
(7iT7)
NPCZacon Manito Thermal Power Plant - 3.5 65.2/e 1.5 70.2
(0.0) (3.5) (0.0)_ (0.0) (3.5)Transmission System for Bacon
Manito 9.8 3.2 0.0 0.3 3.3
Uprading & Exansion of NPC's (9.8) (1.6) (0.0) (0.0)
(11.4)yetem FacilitiesTransmission System 20.0 6.3 0.0 0.5 26.8
(20.0) (3.2) (0.0) (0.0) (23.2)Communication System 10.7 1.9 0.0
0.1 12.7
(10. 7) ( 0) (0 0) (0.0) (10 7)MIS 5.7 0.4 0.0 0.1 6.2
(5.7) (0.0) (0.0) (0.0) (5.7)Instrumentation & Controls 1.1
0.3 0.0 0.1 1.5
(1.1) (0.0) (0.0) (0.0) (1.1)Environmental Monitoring Equip. 0.4
0.0 0.0 0.1 0.5
(0.4) (0.0) (0.0) (0.0) (0.4)Consultancy Services - - 4.5 -
4.5
- - (3.0) - (3.0)
Total NPC 47.7 15.6 69.7 2.7 135.7(r "7) T"7 ) TYTM) (". )
(59.0
NOTEs Figures in parentheses indicate financing from the two
Bank loans.
/a Includes limited international bidding, direct contracting,
force accountand bilateral funding.
/b Refers to expenditures on engineering and administrative
overheadsIc Technical assistance from XRTA on contract exiansion./d
Rigs are owned by PNOC-EDC./e Financed by the Government of Italy
to the extent of US$60 million.
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2.20 Equipment and services financed under the proposed Bank
loans wouldbe procured by International Competitive Bidding (ICB)
in accordance with theBank's Procurement Guidelines except as noted
in paras. 2.21, 2.22 and 2.23below. The power plant will be
procured on a single responsibility turnkeybasis from an Italian
firm. For all ICB procurement, local manufacturers willbe permitted
to participate where appropriate and, at PNOC-EDC's and
NPC'soption, will be eligible for a preference of 15Z of the CIP
cost of theimported goods or the prevailing customs duties and
other import taxes,whichever is lower, in the evaluation of bids.
All essential procurementdocumentation for goods and services
financed by the Bank and estimated tocost over US$1 million
equivalent will be subject to the Bank's prior review.Procurement
packages valued at approximately 80Z of the loan amount are
likelyto be reviewed.
2.21 All major packages of materials, equipment and services for
PNOC-EDCshall be procured via ICB, except for the followings
(a) Contracts for services and equipment needed for well-related
opera-tions, e.g., cementing, directional drilling, pipe inspection
andother highly specialized operations available only from a
limitednumber of suppliers which do not exceed in the aggregate the
equi-valent of US$4,000,000, may be awarded in accordance with
LimitedInternational Biddings (LIB) procedures. All qualified
bidders willbe invited to bid on these packages.
(b) Contracts for equipment and materials that are proprietary
or toensure standardization and compatibility with existing
equipment andfacilities which do not exceo.d, in the aggregate, the
equivalent ofUS$1,000,000 may be procured by direct contracting
under terms andconditions acceptable to the Bank.
(c) Approximately US$16.8 million for drilling of wells on force
accountbasis using PNOC-EDC's own drilling rigs and crews; these
items willnot be financed by the Bank loan.
2.22 Minor packages for equipment, spare parts, materials,
consumables andservices (not exceeding US$200,000 per contract up
to an aggregate amount ofUS$3 million for NPC and US$2 million for
PNOC), may be procured in accordancewith local competitive bidding
procedures which have been reviewed by theBank, and are considered
acceptable to the Bank, or international shoppingprocedures based
on comparing price quotations from at least three
qualifiedsuppliers.
2.23 Conductors for NPC's transmission lines will be fabricated
locallyfollowing LCB procedures from ingots procured through ICB.
The local condu%.-tor manufacturing industry is efficient and this
mode of procurement is notexpected to affect satisfactory
implementation of the project in terms ofcost, efficiency and
completion time. Local fabrication of conductors willnot be
financed from the Bank loan. Poles for transmission lines and
civilworks for substations and transmission lines will be procured
locally throughLCB procedures. These procedures are acceptable to
the Bank.
2.24 The major packages for procurement on the project are shown
inAnnex 2.11.
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2.25 Consulting services financed under the Bank loan would be
engaged inaccordance with the Bank Guidelines for the use of
consultants.
2.26 Retroactive financing would be permitted to the extent of
US$2 mil-lion equivalent for payments made after March 31, 1988 by
NPC, and US$1million for payments made after March 31, 1988 by
PNOC-EDC to cover advancedcontracting for materials and
services.
H. Disbursements
2.27 The Bank loan would be disbursed against (a) 1002 of the
foreignexpenditures of directly imported equipment and materials;
(b) 100? of localexpenditures ex-factory of locally manufactured
items procured through ICB;(c) 502 of local expenditure for
materials and works procured locally;(d) 100? of total expenditures
for consulting services; and (e) for fuel,disbursement would be
made against 502 of cost (the estimated foreign exchangecomponent)
and, for imported goods procured locally (e.g., chemicals), 80?
ofthe cost.
2.28 Reimbursements of expenditures relating to contracts valued
at lessthan US$200,000 equivalent would be made on the basis of
statements of expen-ditures (SOEs). Documentation supporting the
SOEs need not be submitted tothe Bank but should be retained by
PNOC-EDC and NPC and made available forreview by the Bank
supervision missions. To facilitate project disbursements,a Special
Account in a fully convertible currency will be established in
abank on terms and conditions satisfactory to the Bank for each
agency. Theauthorized allocation to the Special Account will be
US$4 million for NPC andUS$2 million for PNOC-EDC, representing
four months, average projectexpenditure. Replenishments to the
Special Account would be made quarterly orwhenever the account is
drawn down by about 50? of the initial deposit. Thestandard
procedure for auditing SOEs will apply.
2.29 Annexes 2.12, 2.13 and 2.14 give the disbursement schedules
for theproposed Bank loan for the project, PNOC-EDC and NPC,
respectively. There isno information available on typical
disbursement profiles for similar powerprojects in Philippines, no
meaningful comparison can be made in that respect.However, the
disbursement schedules up to the year 1993 for the NPC
componentsare in line with the Bank's profile of disbursements for
power projects in theEast Asian region and the PNOC-EDC component
is expected to be fully disbursedby 1991. The closing date would be
Deoember 31, 1993.
I. Monitoring and Reporting
2.30 Satisfactory procedures for monitoring the progress of the
project interms of physical execution and financial reports have
been agreed. PNOC-EDCand NPC will furnish quarterly progress
reports. At negotiations, PNOC-EDCagreed to furnish annually to the
Bank its exploration program for the nextyear for areas covered by
the project.
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J. Environment
2.31 The potential environmental problems of steam field
development andoperation are taken very seriously by PNOC and NPC,
who wish to avoid environ-mental damage. At Bacon Manito and other
sites, maximum use would be made ofdirectional drilling, which
would minimize the amount of land to be levelled.Flow testing
operations are planned so as to restrict the temporary dischargeof
geothermal fluid to the amount capable of being carried by local
streamswithout permanent harm, and testing would be deferred rather
than permittingfluid to exceed that level. Operational effluent
would be reinjected. Safetyprocedures have been designed for each
well, and appropriate industrypractices are followed regarding
disposal of fluids recovered in tests,borehole cuttings, and other
waste materials normal to drilling operations.
2.32 There are very few inhabitants in the immediate area of the
proposedpower plant, the vegetation is sparse and there is little
wildlife. Specialattention has been given to the problem of
hydrogen sulphide in the design ofthe system so as to eliminate
unventilated areas, and deep pits or trencheswhere the gas may
accumulate. Disposal of gases would normally be through a24 m high
stack which has been designed to provide adequate dispersion
anddilution so as to conform with recommended allowable ground
level concentra-tion. The ground level concentration of H2S will be
kept below 20 parts perbillion (Philippine National Standard) in
the plant areas. Further, a sensi-tive HBS monitoring system will
be installed to give alarm and shut down theplant in the event H2S
concentrations exceed specified levels. Periodically,it would be
necessary to blow off steam for pressure stabilization and
wellmaintenance, but with suitable protection the noise would be
within acceptablelimits for the operators, who would normally be
stationed in an air-conditioned control room. Housing of the
operating staff would be locatedsome distance away so that
objectionable gases would be diffused and seldomreach the area, and
the noise level much reduced. Waste water containinglarge
quantities of salts would be reinjected to the reinjection wells
wherethe water would seep deep into the ground.
2.33 Transmission lines will be designed to international
practices andwill have no adverse impact on the environment. Within
the urban areas, highvoltage lines will be run on poles meeting
necessary safety codes. Substa-tions in built-up areas will be
indoors depending on availability of space.
2.34 The Environmental Management Bureau has granted an
EnvironmentalCompliance Certificate for the proposed Bacon Manito
Geothermal Power Projectbased on compliance with the Environmental
Impact Assessment. The Certificateis issued subject to the project
authorities ensuring (a) that Boron andArsenic discharge do not
exceed the levels set by the National PollutionControl Commission
(NPCC), and that this is adequately monitored; (b) H2Semissions are
kept within acceptable limits and H2S control facilities
areinstalled according to the specifications set forth in the
EnvironmentalImpact Statement, and that continuous monitoring of
H2S is effected; (c) noiselevels are kept within NPCC set levels
and (d) monitoring of water quality inaffected river systems is
institutionalized. NPC and PNOC-EDC have furnishedto the Bank
updated environmental reports showing that they have
incorporatedthe design parameters needed to enable compliance with
the regulations of theEnvironmental Management Board and with
environmental standards satisfactoryto the Bank.
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III. THE BORROWERS AND THE BENEFICIARY
3.1 The Borrowers of the two separate Bank loans will be the
NationalPower Corporation (NPC) and the Philippine National Oil
Company (PNOC). Inturn, PNOC's subsidiary, the Energy Development
Corporation (PNOC-EDCI will bethe Beneficiary of the loan to PNOC.
These entities are large corporationswith occasionally contiguous,
though dissimilar operations. This chapter willpresent separate
institutional analyses for each of the two Borrowers and
theBeneficiary.
A. NPC
3.2 NPC was established in 1936 as a non-stock public
corporation with amandate to develop hydroelectric power generating
facilities. In 1960, NPCwas converted into a stock corporation with
all shares subscrlbed by theGovernment. NPC's charter, which was
issued in 1971 and was amended there-after by several Presidential
Decrees, expanded its mandate into the develop-ment, construction
and operation of all electric power generation and trans-mission
facilities throughout the country. Since 1979, the
NationalElectrification Administration (NEA) is empowered to
authorize electric powercooperatives to construct and operate
generating plants of less than 5 MW. InJuly 1987, the Government
issued an amendment to Presidential Decree No. 40,allowing the
private sector to construct and operate electric generatingplants
and sell their production to grids where they exist and to end
userswhere grids do not exist.
3.3 Organization, Management and Staff. NPC's corporate powers
areexercised by its seven-member Board of Directors. The present
NPC Board,which consists mostly of businessmen, was appointed by
the Presidelit of theRepublic in July 1986. Appointments are
normally for five years, and containthe possibility of
reappointment. NPC's management is vested in its Presidentwho is
Chief Executive of the Corporation; the incumbent is normally
appointedby the President of the Republic.
3.4 NPC's organization chart is presented in Annex 3.01. In
1985, theCorporation underwent a major reorganization that had the
objectives of (a)consolidating operations and construction, (b)
decentralizing those functions,and (c) placing responsibility for
them in the regional centers under thesupervision of regional Vice
Presidents. In view of the large and geographi-cally fragmented
nature of NPC's system and the often difficult
communicationsbetween headquarters and the field, NPC operates as
three separate businesses;therefore, the decentralized structure is
appropriate for NPC.
3.5 A profile of NPC's staff, allocated according to function is
presen-ted in Annex 3.02. In conjunction with its reorganization,
after redeployingpersonnel with fungible skills from units that
were streamlined, NPC reducedits staff from about 11,500 to about
10,600 in early-1986. Most of the cut-backs were effected in the
construction department, which was reduced by about652 because of a
retrenchment in the scope of NPC's in-house constructionactivities.
As of mid-1987, NPC had 11,300 approved positions, of which
about10,200 were filled by permanent staff and the remainder with
temporaries.
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3.6 Training. NPC has an ample in-house training program. In the
past,this program has focused on orientation for new employees and
skills develop-ment for technicians, equipment operators, and other
specialized workers. Inrelation to the reorganization, NPC promoted
to newly created management posi-tions many employees lacking
previous managerial experience; to developquickly the effectiveness
of these new managers, NPC devised a separate in-house training
curriculum emphasizing basic managerial techniques, systems
andprocedures. NPC also arranges with other centers in the
Philippines fordeserving staff to acquire training in relevant
topics not covered in its in-house program. These training
arrangements are appropriate.
3.7 Operations. Maintenance and Losses. Although NPC appears to
havelarge capacity margins, especially in Luzon, much of its aging
plant andequipment cannot be operated at rated capacity. NPC has
operated andmaintained its assets satisfactorily, especially in
view of the age and mix ofits plant, the geographic dispersion of
its systems, and the resourceconstraints of recent years. Many of
the NPC system improvement measuresincluded in the proposed project
are expected to enable better fut're stan-dards of operation and
maintenance. In recent years, NPC's combined linelosses and station
use have averaged between 7-8X of energy sold, a levelappropriate
to NPC's current circumstances.
3.8 Accounting System. NPC's accouating system is based on
acceptedpower utility principles and procedures. It was modeled
after the UniformSystem of Accounts prescribed for public utilities
by the Federal EnergyRegulatory Commission of the United States of
America, and adapted to suitlocal conditions and requirements.
3.9 Financial Planning and Budgeting. NPC has well staffed units
forfinancial planning and budgeting. The financial planning unit
has developedseveral computerized financial models, which are used
primarily for reportingto the Government. These financial plans are
also used for evaluating invest-ment alternatives and providing
necessary information to financiers. NPCprepares budgets annually
according to Government practice. The budget isrevised periodically
during the year and comparisons of actual performanceagainst budget
is a regular managerial exercise.
3.10 Commercial Systems. As of July 31, 1987, NPC had 245
powercustomers. MERALCO, which accounts for more than 502 of both
sales andconsumption, is by far the largest. Other customers
include a handful ofsmall investor-owned utilities, about 115
electrical cooperatives, a fewpublic sector consumers (armed forces
installations and municipal utilities),and industrial operations
with loads greater than 69 kV. None among theseother customers
predominates the rest.
3.11 In the past, NPC has had severe problems collecting from
MERALCO, thecooperatives, and Government sector consumers (para.
4.6). Many of thesecustomers were experiencing difficulty in
realizing collections from their ownGovernment sector customers and
were stretching their payables to theirlargest Government sector
creditors. To assist NPC inter alia, the Governmentdecided to use a
clearing-house approach for settling some transactionsbetween
public sector organizations. This enabled power retailers to
turn
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verifiable receivables from national Government consume s over
to NPC; inturn, NPC could collect the amounts due directly from the
Treasury. In addi-tion, the Government has authorized NPC to
toughen its disconnection of coope-ratives. NPC has recently
disconnected several cooperatives; as a result,many cooperatives
have sought to reschedule their arrears while paying theircurrent
obligations on time (or making strictly enforced prior
arrangementsfor late payments). As of post-appraisal, NPC had
concluded negotiations withMERALCO for a rescheduling of arrears;
this agreement includes severe penal-ties for late payment of
current bills as well as amortization of