It was like a badly-written “telenovela” wherein the actors involved scramble for lines and plots in the lingering drama.

But before the plot thickens on this P470.865 billion stranded debts recovery which will eventually be passed on to all Filipino electricity consumers, let us go back to the most basic of issues.

Alright, the promise of industry competition bringing down electricity rates in the future is still something to look forward to – and the private sector, through market forces, can well take care of that. But while the sector is at this very critical transition, it is also prudent to look at cost components being passed on in the rates, including the universal charges (UC) from stranded debts recovery and stranded contract costs.

Stranded debts: EPIRA’s definition and intent

What exactly is stranded debt and why should this matter to electricity consumers? It’s because this will be the origin of the costs that will be reflected in the bills as universal charge.

The Electric Power Industry Reform Act (EPIRA), under Section 32, clearly defines stranded debts to “refer to any unpaid financial obligations of NPC (National Power Corporation) which have not been liquidated by the proceeds from the sales and privatization of NPC assets.”

In an interview, EPIRA principal author Rep. Arnulfo P. Fuentebella explained that “the definition of stranded debts when we framed it in the law would only the debts or loans of NPC that shall not be paid by proceeds raised from privatization.”

The lawmaker further noted that the “reckoning should be the level of debts before NPC privatization was mandated since 2001,” adding that the money fetched from the divestment of the assets have been intended only to retire the monstrous debts of the state-run power firm.

Pre-privatization (in 2001), the debt of NPC as reported to Congress was at US$9.35 billion. But the law also mandated absorption of P200 billion by the national government (enforced in 2004) to subsidize the P0.30 per kilowatt hour (kWh) mandated rate reduction which was packaged as ‘sweetener’ to gain public support on the policy. That then was able to pare down NPC debts by $4.0 billion, thus cutting the NPC’s debt level to $5.5 billion. Additionally, the estimated NPC obligations to independent power producer (IPP) contracts then were at $8.5 billion.

But then in May 2002, there was a Presidential decision to cap the rates of NPC at P0.40 per kWh, so the power firm resorted to new borrowings of $500 million to plug cost losses from the subsidized rates. This was until the Energy Regulatory Commission (ERC) approved adjustment in NPC’s basic rate in April 2005 for P1.0353 per kilowatt hour (kWh) to bring electricity rates closer to “true cost.”

In 2007, when the Power Sector Assets and Liabilities Management (PSALM) was called for a Senate inquiry on debt level and its reported P10 million bonus then, the company’s former chief executive Nieves L. Osorio reported that NPC’s debt level has risen to $7.1 billion because of the rate capping.

It is worth noting in that instance that the cited figure was prior to the time when privatization and sale of the NPC assets went full blast.

“The stranded debt recovery was intended for transparency – for the public to understand how much debts NPC had then and how much of it will be retired from the privatization proceeds, the computation we’re seeing had been straightforward because we would want the people to appreciate how rates have gone down when the debts are paid for,” Fuentebella explained further.

PSALM’s broadened definition

Yet when PSALM filed for its stranded debts recovery of P471 billion in June 2009, this is how company vice president Ms. Lourdes S. Alzona defined stranded debts in her testimony before the Energy Regulatory Commission, wherein she was under oath:

“Your Honor, the computation follows the cash flow statement which is also inclusive of the results of the operation of the plants. So, any cash flow that will be generated from the operation of the remaining unsold assets is part of that computation of the stranded debt.”

She further noted that: “Your Honor, I have to explain that the definition of stranded debt is really the unpaid financial obligations that were not covered in the privatization proceeds. That is premised that all assets have been sold out but there is still asset that remain unsold, operation of these plants should form part of the cash flow, following the sequence or the privatization on the use of the proceeds coming from the funds generated out of operations, revenue coming from the plants should be used first to cover its direct operating cost. And then any income derived from the operation of the plants will be used to cover financial obligations. And then if there are no more assets of any privatization proceeds will be used to cover financial obligations. So, for purposes of determining the stranded debt we have to consider first, if there an excess fund generated out of operations? So, that should be assumed first as funds to cover outstanding obligations and then after utilizing that, we will now use the privatization proceeds to reduce certain financial obligations. So this is still within the definition of the stranded debt under EPIRA.”

Indeed, if culled from that, the clear-cut definition of “privatization proceeds-to-debt payments offsetting” envisioned by the EPIRA’s framers had been lost in translation.

What PSALM employed as formula was to factor in all operating expenses, costs in operations of un-privatized plants, payable obligations and NPC loans – deduct to that the obligations paid for from operating income from NPC plants and privatization proceeds equals ‘unpaid financial obligations’ which became the stranded debts.

When Ms. Alzona was questioned on the nature of operating expenses, she responded: “these other operating expenses consists of the personnel cost, the salaries and wages, items refers (sic) what consists the operating expenses because here, this is just a breakdown of how much goes to the head office that is allocated for each grid.” She likewise qualified that after the transfer of the power assets under its charge, PSALM had become more of NPC’s, for it already shells out for the operating expenses of the company.

Bonuses, compensations: Are they in or out in the stranded debts computation?

In the whole controversy, the company in the eye of the storm defended itself by issuing this statement: “The Power Sector Assets and Liabilities Management (PSALM) Corporation belied allegations that bonuses, night differentials, and consultancy fees were tucked into the Universal Charge (UC) applications it filed, saying the claims in media reports were wrong, baseless and malicious.”

Nevertheless, beyond the give-away definition laid down by Ms. Alzona, there was also a specific question thrown by Mr. Siegfreido Veloso of the consumer group Federation of Village Association (FOVA) specifically on the P80.9 million bonuses of PSALM being examined in the proceedings, which went this way: “We are looking at the reasonableness of the charges being made here because we will end up paying for it;” to which the PSALM official directly answered with: “Because we have to consider, your Honor, this is not only for the plantilla positions, this includes all contractuals that we have.” In the scrutiny of PSALM income statement, the salaries of P80.5 million, P118 million consultancy fees as well as night differentials were also clearly stated; and sources from the ERC affirmed these were all part of the attachments and exhibits submitted by the company when it made the UC filing for the stranded debts recovery. There are also voluminous expenses and operating costs discussed in the petition, but I leave that to PSALM to explain.

If only unpaid NPC debts were factored into the cost recovery, it was noted that based on initial evaluation by relevant parties, the resulting universal charge would be a lot lower at P0.10 per kWh instead of the P0.3049 per kWh which PSALM batted for to pass on for 17 years.

And like all questions in the public mind, industry insiders offered their two-cents worth on the matter through this puzzling query: “Provided that PSALM has not included its bonuses and compensation in the universal charge application, where have they gotten their bonuses and compensations? Its only clear income source would be the privatization proceeds, so if they got their bonuses from that, it means that there are loans they were not able to pay. Where then will that be charged eventually? It’s still through the stranded debts, so isn’t that even more worth examining?”

Being the first to report on PSALM’s bonuses, I must qualify that my intent on writing the news was nothing malicious. Firstly, any reporter true to her duty in informing the public will write on a legitimate issue in the sector she’s assigned to cover, especially if there are legal documents presented as reference (that weighs a lot more than verbal assertion or press release); and secondly, I was hoping that by bringing attention on cost components integrated in the filing which may not fall under stranded debts definition, the regulator’s attention (read: ERC) might be called to examine all figures factored into the computations before approving the UC. I was hoping that by raising these concerns, the consumers will eventually pay less in their electric bills, for after all it is the media’s role to bring into the open issues which are worth the policymakers or regulators’ notice.

Bigger issues opened

All policymakers poring over PSALM’s finances agree that the bonuses or compensations are not the real issues, with Mr. Fuentebella noting “these are just the tip of the iceberg, it is more important for us to know why PSALM mismanaged the privatization money.”

The more critical issues to be investigated by the Joint Congressional Power Commission (JCPC), he stressed, would be “how PSALM computed the stranded debts and if the formula applied had been based on the definitions set out by EPIRA.”

The most important matter to be uncovered, he stressed, “was how the reported privatization proceeds of $10.625 billion were spent for; and why the debts went up instead of going down.”

Based on PSALM’s own data at its website, it noted that from the $7.01 billion debt it logged in 2007, this was pared down to $5.8-B due to loan prepayments of $1.3 billion until 2008. It is a matter to consider though, as culled from its own press statements, that the company borrowed $1.0 billion in  May 2009; followed by another $1.2 billion in November 2009; and the last one was P30 billion in April this year – for a whopping total of $2.8 billion. It said these were all intended to bankroll operating expenses and debt refinancing.

The figures submitted by PSALM to Energy Secretary Rene D. Almendras were also revealing because NPC’s debts swelled to as high as $16.5 billion to date – $9.5 billion of that account for obligations to the IPPs. The second item has to be matched though with cash flow remittances from IPP administrators.

With almost all NPC assets already privatized, where then will PSALM be getting the money to retire its remaining gargantuan debts – through the universal charge? Agree if you must, but as a consumer, I will ask for more prudent examination of what cost components are being tucked into my bill. Assured of that, only then will I rest my case.