Last week, a team from Meritec Ltd., a New Zealand-based firm specializing in power plant designs, reported to the Department of Energy (DoE) that IMPSA was overcharging Napocor for rehabilitating the Caliraya-Botocan-Kalayaan (CBK) power plant complex in Laguna. Napocor had paid IMPSA more than $50 million for the first 18 months of its operation, even if the Argentine company had so far invested only $9 million to rehabilitate the plant.

Meritec, which was hired by the DoE to do an independent audit of CBK, also confirmed what IMPSA critics and Napocor engineers had been saying all along: IMPSA's contract to rebuild and operate the Kalayaan Pumped Storage Plant within the CBK complex was unnecessary as the power facility was not in urgent need of repair.

Two years ago, IMPSA had claimed that the transformer of CBK's Kalayaan Unit 1 was in precarious condition, a claim that Meritec found invalid. But Napocor officials took IMPSA's word, despite the objections of the state power firm's engineers. IMPSA did some repairs and later charged exorbitant fees for its work, even if it had initially offered to do the repairs for free.

Under the pretext of doing free repairs, IMPSA was able to enter CBK complex in 2000, even if its contract with Napocor took effect only in 2001. Napocor also paid IMPSA tens of millions of dollars in extra fees not provided for in the original contract.

The DoE has so far not made public all of Meritec's findings on CBK. Instead, energy officials said publicly that IMPSA payments were justified. Earlier, the IPP review committee report had also singled out the CBK contract, when it considered the possibility of taking administrative, civil and criminal action against IMPSA. The report, however, has not been released to the public.

"The propriety and legality of the amended terms of the contract calls for further investigation," the IPP committee report, a copy of which was obtained by PCIJ, said. "If entered into without legal authority, the appropriate administrative, civil or criminal action will be determined." The committee recommended termination, review or renegotiation of other questionable contracts but mentioned the possibility of legal recourse only for IMPSA and CBK.

The secrecy that surrounds the Argentine firm's operations indicates the special treatment IMPSA has received from successive governments since it began negotiating the CBK contract during the Ramos presidency. In a 1993 state visit to Argentina, President Fidel V. Ramos promised the CBK deal to IMPSA, but negotiations over the contract were stalled.

Just before Ramos left office in 1998, he scribbled in an aide memoir addressed to Napocor and DoE officials that the IMPSA deal was to be favorably endorsed to his successor Joseph Estrada, who eventually witnessed the signing of the agreement, thus becoming an "unwitting godfather" to the controversial deal.

The National Economic Development Authority, the Department of Justice (DOJ) and the Department of Finance (DOF), however, refused to endorse the contract, and these agencies' objections remained unresolved by the time Estrada was ousted.

But four days after the government of Gloria Macapagal Arroyo assumed power and just two days after his appointment as justice secretary, Hernando Perez issued a DOJ ruling that removed the obstacles to the contract's implementation.

Perez's ruling also gave the green light to Napocor to start payments to IMPSA. From April to December 2001 alone, the heavily indebted state-owned utility coughed up some P1 billion, representing "capital recovery fees" that Napocor supposedly owed IMPSA for the rehabilitation of the Kalayaan plant.

Several engineers at Napocor, however, objected to the payments. They said the fees were too excessive for the minimal and unnecessary work that IMPSA had done. Moreover, Napocor had no money to pay the Argentine firm, forcing the state firm to divert funds intended for the Casecnan Multipurpose Project to CBK.

Under the terms of the original contract, Napocor was supposed to pay IMPSA only after the third year of the project, which is 2004. By bringing forward the rehabilitation payments, Napocor will in effect pay the Argentine firm an extra 42 months' worth of fees that were not part of the agreement. This means higher costs of electricity which Napocor passes on to consumers.

"The 'levelized cost' has increased from P0.65 to P0.81 per kilowatt hour," said retired Napocor engineer Roger Lomague, former group manager of the CBK Project. "The government has ended up paying more." The levelized cost is the price Napocor pays for every kilowatt hour of electricity that is generated by IPPs like IMPSA.

IMPSA's contract stipulates that it will charge Napocor a levelized cost of P0.65 per kilowatt hour. Because of the advance payments, this cost rose to P0.81, in effect amending the contract, even if there was no formal revision of the agreement.

IMPSA's rehabilitation of the Kalayaan plant also affected the workings of the Luzon grid. Before IMPSA operated CBK, explains Napocor vice president for systems operations Rolando Bacani, Napocor engineers could easily control the Kalayaan plant, which was the grid's regulator, from their head office in Quezon City.

Kalayaan's function was to maintain the balance throughout the grid. "In the past, Kalayaan automatically reacted to changes in frequency. After the rehab, it could not perform that function as well because IMPSA changed the governing system," Bacani said.

Meritec engineers agreed, saying that IMPSA's operation made the frequency regulating and generating capacity of both Kalayaan Units 1 and 2 unreliable.

Bacani, however, is quick to point out that IMPSA has since remedied the situation by going back to the old governing system, and that the plant is now back to its usual operation.

The IPP review committee also questioned what the project's critics have raised through the years: government's approval of a performance undertaking or a government guarantee for IMPSA.

Under the Build-Operate-Transfer (BOT) Law, unsolicited proposals like IMPSA's or those proposals initiated by the private sector and not necessarily prioritized by government, should not be given any special concessions—whether these are direct or indirect subsidies, equities or guarantees. For this reason, previous DOF and NEDA officials had opposed giving a guarantee to IMPSA.

For example, a November 1997 meeting of the Napocor board decided, among others, that a "government performance undertaking shall not be provided." The board also agreed to pay fees for only two units of the Caliraya hydroelectric power plant. Kalayaan was then not included in the contract as part of the rehabilitation work, although IMPSA later charged the government for such work.

Through the years, the contract to rehabilitate CBK had mutated. The original framework should have been a Terms of Reference drafted by Napocor and IMPSA, but this document has since been reworked and the agreement amended through various legal documents that were attached to the original contract.

A former member of the Napocor board said that Perez's ruling was interpreted as tantamount to a blanket approval of all the documents drawn up and signed in connection with IMPSA's CBK contract, even if they contained legal infirmities.

The ruling also opened the door wide open for IMPSA's entry into the CBK complex. On February 7, 2001, two weeks after the ruling, Napocor formally turned over CBK, a network of seven power plants that together constitute the heart of the Luzon grid.

Using hydro energy from the Laguna de Bay and Lakes Caliraya and Lumot as well as the Botocan river, the CBK complex not only produces electricity but also regulates and stabilizes the grid. Napocor insiders have lamented the privatization of CBK, the most strategic power facility in the Luzon grid, saying it was an income-generating plant run on a cheap and environmentally safe source of energy.

For years, IMPSA has maneuvered to get the CBK contract. Sometime in 1999, the firm offered to rehabilitate Units 1 and 2 of Kalayaan 1 "at no cost to the Napocor." IMPSA justified its offer by saying that the two units were in precarious condition and needed immediate and extensive rehabilitation. Using this pretext, the company was later able to take over the entire CBK.

Lomague, then CBK group manager, wrote his superiors at the Napocor, urging them to decline IMPSA's offer because the two Kalayaan units were still in good condition, having been rehabilitated in 1992 and 1997. As a result, he said, IMPSA found only minor defects.

Lomague also noted, there was no "legal basis to anchor to, considering that the CBK contract was not yet effective." At that time, the IMPSA contract, although already signed, could not take effect because IMPSA had not yet posted the required $70 million security deposit.

From the field, a manifesto written by a group that called itself Concerned Napocor CBK Employees said, "If Napocor allows such a (supplemental) agreement to be executed, IMPSA will already have one foot inside the CBK complex," even before the main contract becomes effective.

Despite these objections, IMPSA convinced Napocor to draft a Supplemental Agreement signed on September 14, 1999 that, among others, allowed the company to rehabilitate the two Kalayaan units.

Even then, some Napocor engineers tried to prevent IMPSA's entry. In a memo on January 13, 2000, Napocor's then acting vice president for system operations Rolando Bacani supported the engineers, stating that "the conditions set out in the Supplemental Agreement that the transformer of the unit is in critical condition or requires immediate shutdown/rehabilitation is no longer valid or true at this time."

In March 2002, IMPSA sought a certification from Napocor that it had completed rehabilitation of Kalayaan Unit 1. A furor erupted because engineers in charge of the project refused to endorse a certificate of completion. They said a certificate should not be issued because IMPSA had not actually passed the acceptance test as a result of work still unfinished on the Kalayaan plant.

On March 22, 2002, a certification was issued while the engineers' objections remained unresolved.

Meanwhile, IMPSA was breathing down Napocor's neck, demanding immediate payments. The perception within the energy sector was that the firm did not have funds of its own to continue the project and needed the cash badly, especially in the wake of the financial debacle in Argentina that had pushed its mother company IMPSA-Argentina to default on the debts it owed creditors for other projects.

To resolve matters once and for all, Energy Secretary Perez ordered an independent audit of CBK, and hired Meritec to do it. Whether the government will act on Meritec's findings remains to be seen.



Copyright © 2002 All rights reserved.
PHILIPPINE CENTER FOR INVESTIGATIVE JOURNALISM