by FDC and Citizens’ IPP Review Commission

THE FREEDOM from Debt Coalition (FDC) and the Citizens’ IPP Review Commission (CIRC) have learned that the tunnel which diverts water from the Casecnan and Denip rivers towards the Pantabangan Reservoir, has been built on a geologic fault. The tunnel belongs to the CE Casecnan Water and Energy Co., Inc., which has a Build-Operate-Transfer (BOT) contract with the National Irrigation Administration (NIA) for the delivery of water and the generation of electricity. CE Casecnan Water and Energy Company, Inc. is a subsidiary of California Energy, a US company that now calls itself Midamerican Energy Holdings Company. Last July 4, the Inter-Agency IPP Review Committee cited financial and legal infirmities that made the Casecnan contract defective.

The FDC and the CIRC have learned that in December 2000, in the course of building the diversion tunnel, the contractors of CE Casecnan encountered a geologic fault line. This resulted in the collapse of a partially completed vertical surge shaft. After months of deliberation, further delaying the project, the company decided to abandon the collapsed shaft, as repairing it would be impractical "for timing and economic reasons". Instead its contractors excavated a new 550-meter tunnel and built a new 140-meter vertical shaft.

The FDC is not aware if CE Casecnan Water and Energy Co., Inc. ever reported this incident to the Philippine government. There has been no public announcement by the company or the NIA in the Philippine press. However, CE Casecnan did file a report with the US Securities and Exchange Commission (US SEC) about the collapse of the shaft in February 2001, two months after the incident occurred.

The report submitted by CE Casecnan to the US SEC confirms what the FDC and the CIRC were told by a source who requested anonymity, that the company hit a fault line as it was starting to build the tunnel from the Pantabangan end. The source also said that this is an indication that CalEnergy/Midamerican did not undertake any geotechnical study of the area in which it was building the tunnel, prior to the start of construction.

The Casecnan Project is an onerous deal forged between the Ramos government and Midamerican Energy Holdings, formerly known as CalEnergy or California Energy. Although the project was found lacking in technical merits, it was nevertheless approved by the Investment Coordinating Committee, an interagency committee co-chaired by NEDA and the Department of Finance, in 1995, at the instruction—behest—of then President Ramos. A key officer of CE Casecnan at the time the project was being deliberated by the ICC was a retired US brigadier general, Donald M. O’Shei, Sr., who, like President Ramos, graduated from West Point.

The questions about the technical merits of the project become more serious in light of the failure of the company to conduct appropriate geotechnical studies of the project site before it began construction of the tunnel. This explains why the company’s contractors hit a fault line. It is in this light that a thorough assessment of the structural soundness of the tunnel must be conducted by independent engineers with no links to the company, especially in view of the heavy payments the government, Filipino taxpayers and electricity consumers must make towards this project.

For the next 20 years, the National Irrigation Administration must pay CE Casecnan over $100 million a year for water and for electricity, whether or not the company actually delivers the volume of water and electricity that NIA has agreed to buy. Moreover in the event of force majeure such as an earthquake, CE Casecnan may even compel the Philippine government to buy it out at a price over and above what it paid for the tunnel—which it built along a fault line.

Could the Casecnan diversion tunnel be structurally defective? What kind of structure does the government expect to receive from CE Casecnan 20 years from now, after paying over $2 billion in water delivery fees and take or pay fees for electricity? Are we taxpayers and electricity consumers paying for a tunnel that at this moment is extremely vulnerable to an earthquake? Should an earthquake destroy this tunnel, seeing as it’s built on a fault line, do we have to shell out even more money?

In light of this discovery, we of the Freedom from Debt Coalition and the Citizens’ IPP Review Commission strongly reiterate our call to the Arroyo government to rescind the contracts of the National Power Corporation and the National Irrigation Administration with the CE Casecnan Water and Energy Company, Inc.

To pay over $2 billion for a defective tunnel would be criminal.

Maitet Diokno-Pascual
President, Freedom from Debt Coalition
Member, Citizens’ IPP Review Commission