The International Finance Corp. (IFC), the private sector investment arm of the World Bank group, is urging the government not to wane on its efforts to privatize state-owned power plants as the deadlock continues between the government and a foreign investor over successfully bidded coal plant.

In an interview with reporters, IFC country head Jesse Ang emphasized that the sale of power plants currently owned by the National Power Corporation (Napocor) will provide set the true price of electricity, thus attracting more foreign investors in this capital-intensive sector.

"We need to finish the privatization process particularly the IPPAs (independent power producer administrators)," Ang said.

"As long as the government is majority (owner of power plants), you can't avoid the perception that the government may be affecting the (electricity) prices," Ang added.

The IFC official was reacting to news that the sale of the 600-megawatt coal-fired power plant in Calaca, Batangas may not proceed. The power plant's winning bidder, French-Belgium firm Suez Energy, has refused to settle the the upfront payment, which represents 40 percent of its winning $787 million bid in October 2007.

Suez Energy has already paid a performance bond, but it has been waiting for the Energy Regulatory Commission (ERC) to decide on Napocor's rate hike petition before it finalizes the acquisition of the facility.

Suez has already received financing from the IFC and the Asian Development Bank for its Calaca plant acquisition. However, Suez is caught in a chicken-and-egg situation.

Suez is dealing with the Power Sector Assets and Liabilities Management Corp. (PSALM), the entity created to handle the privatization of Napocor assets, but the rate hike decision is independently handled by ERC, a quasi-judicial body.

The ERC, in turn, has been asking PSALM to once and for all set a timeline for the financial close of the Calaca deal as this is part of the conditions before the proposed interim open access kicks in.

The open access regime is the ultimate aim of the reforms in the power sector. Open access will allow end-users of the electricity generated by power plants to choose where to source their power requirements. Potential power plant investors, therefore, need to know current generation rates to compute if their bid would allow them a reasonable return.

The Calaca plant was bid out on Oct. 16, 2007, with the consortium of Calaca Holdco Inc. (CHI) of Suez group emerging as the highest bidder. Under PSALM bidding rules, the winning bidder should come up with n upfront payment 270 days after the contract of effectivity is served to the buyer. PSALM has set November as an internal target to get the upfront payment from Suez Energy.

Rate-setting

ERC executive director Francis Saturnino Juan defended their efforts to still study the rate hike petition of Napocor. "In the setting of electricity rates, the ERC has always adhered to the 'just and reasonable' standard under the law. The same can be expected in its resolution of the Napocor rate petition," he said.

On the urgency for ERC to release decision on Napocor rate hike as a condition to Calaca closing, Juan said that "the ERC decides based on evidence, not on impositions by interested stakeholders."

IFC's Ang, however, commented, "You need to update the tariffs to where they should be, then set an automatic adjustment mechanism thereafter. So that you're not always playing catch up and that you're not always dependent on somebody's timing of an application."

He also noted that Napocor rates "are still determinant for the transition supply contracts (TSC). For many of these private generators the TSCs are a big part of their source of revenues. So the ERC needs to get that thing going."

Ang stressed that as a young market, the Philippine power sector maybe going through these as "part of its birth pains."

Nonetheless, Ang said investors would put their money in a project if there is "fair pricing," referring to the rates that power plants would eventually be able to collect from clients.

"The ERC plays an important role to make sure that fair pricing is set, so that when generators come in, they can be able to make a fair return on their investments," he explained.

"We at the IFC continue to urge the government to make sure EPIRA (Electric Power Industry Reform Act) works and that means making the relevant agencies function properly as envisioned by the EPIRA," he added.