Philippines - Fifth Power Project

RESTRICTED Report No. PU-79a Tiis report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibiity for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF FIFTH POWER PROJECT PHILIPPINES February 15, 1972 Public Utilities Projects Department  CURRENCY EQUIVALENTS Except where otherwise stated all figures are quoted in US dollars (US$). The project cost estimate is shown in both US$ and Pesos (f) Currency Unit - Philippine Peso US$1.00 = Peso (t) 6.50 fl.00 = US$0.154 tl Million = US$153,800 WeiRhts and Measures One Kilovolt (kV) = 1,000 volts One Megawatt (MW) = 1,000 kilowatts One Gigawatt (GW) = 1,000,000 kilowatts One Megavolt ampere (MVA) = 1,000 kilovolt amperes One Kilometer (km) = 0.62 miles One Square Kilometer (sq.km.) - 0.386 square miles Principal Abbreviations and Acronyms Used NPC - National Power Corporation MERALCO - Manila Electric Company NEA - National Electricity Authority PEPOA - Philippine Electric Plant Owners Assoc. PDC - Power Development Council PSC - Public Service Commission US AID - US Agency for International Development ADB - Asian Development Bank Fiscal Year July 1 - June 30  APPRAISAL OF FIFTH POWER PROJECT PHILIPPINES TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ........................ i - ii I. INTRODUCTION ................................... 1 II. THE ECONOfY .................................... 2 III. THE POW{ER SECTOR ............................... 3 Energy Resources .......................... 3 Power Supply .............................. 4 National Electrification Administration (NEA) .................................. 5 Public Service Commission .... ............. 6 Future Developments ....................... 6 National Planning and Coordination .... .... 7 IV. THE BORROWER ................................... 8 NPC's Revised Charter ..................... 8 Organization and Management .... ........... 9 Technical Operations - Engineering Consultants ............................ 10 Audit ..................................... 10 Staff ..................................... 10 V. THE PROJECT .................................... 10 Background .......... ...................... 10 Description of the Project ..... ........... 11 Generation ........ ..................... 11 Transmission ........ ................... 11 Advisory Services ...... ................ 11 Costs ................. 12 Amounts of Proposed Loan and Credit .... ... 13 Engineering . .............................. 13 Procurement . .............................. 13 Disbursement ............................... 13 Ecological Aspects ..................,. 13 This report is based on information obtained by Messrs. S.S. Scales and .Friedmann following dCi 1Ssio s with officials of the Plhilippines Government and NPC during a mission to the Philippines in May/June 1971.  Table of Contents (continued) Page No. VI. JUSTIFICATION OF THE PROJECT ..... .............. 14 Load Forecasts ................................... 14 Least Cost Solution - Economic and Social Benefits ........................ 15 Internal Financial Rate of Return .... ..... 15 VII. FINANCIAL ASPECTS .............................. 15 Past Record and Present Position . ......... 16 Financing Plan ........ .................... 18 Financial Forecasts ...... ................. 18 VIII. AGREEMENT REACHED AND RECOMMENDATIONS .... ...... 20  LIST OF ANNEXES AND GRAPHS ANNEX 1 NPC's Existing Plant 2A Growth of Load from Consumers on NPC's Grid on Luzon Island 2B Demand and Supply (at Generating Stations) 3 Surmmary of the Main Changes to NPC's Charter 4 List of Management Reports 5 Transmission Sub-Projects 6 Summary of Cost Estimates 7 Estimated Disbursement Schedule 8 Ecological Aspects 9 Internal Financial Rate of Return (IFRR) 10 Condensed Balance Sheets 11 Income Statements (Overall) 12 Income Statement - Luzon and Visayas 13 Income Statement - Mindanao 14 Statement of Sources and Applications of Funds (Overall) 15 Source and Application of Funds Statement - Luzon and Visayas 16 Source and Application of Funds - Mindanao 17 Statement of Long-Term Debt 18 Statement of Capital Expenditure GRAPHS 1 NPC's Luzon Provincial System Load Forecast A. Peak Load and Installed Peak Capacity B. Energy Demand and Availability 2 NPC's - Meralco Luzon System Forecast A. Peak Demand Installed Peak Capacity B. Energy Demand and Availability MAPS 1 A. NPC Luzon Grid Power Plant and Main Transmission Lines B. NPC Luzon Grid Transmission System  .  APPRAISAL OF FIFTH POWER PROJECT PHILIPPINES . SUMMARY AND CONCLUSIONS i. This report covers an appraisal of a Project consisting of a thermal-electric generating unit of 150 MW capacity to be installed at the National Power Corporation's (NPC's) power station at Bataan, extensive additions to NPC's transmission grid on the Island of Luzon, and managerial and technical studies by consultants. The estimated total cost of the Project is US$46.0 million equivalent. A Bank loan to NPC of US$22.0 million equivalent is proposed, plus an IDA credit of US$10 million equiv- alent which would be relent by the Government of the Philippines to NPC, a Government owned enterprise, on the same terms as the Bank loan. The foreign exchange cost of the Project and interest on the Bank loan during construc- tion of US$2 million (about two-thirds of the total cost) would be met by these amounts. ii. NPC has received four loans from the Bank aggregating US$67.3 mil- lion. The most recent Loan 491-PH for Bataan No. 1 Thermal unit will be com- pleted early 1972. The other projects are all in successful operation. iii. Demand for electricity in the Philippines is concentrated largely around Manila, where it is increasing rapidly. National plans for develop- ment however, place special emphasis on provincial electrification and give a high priority to connecting as many of the population as possible. At present only 20% of the population has a supply of electricity and even in Luzon there are substantial numbers of people without one. The Project, which is part of the FY 72-75 national plan, would make a substantial con- tribution towards this national aim. The five transmission sub-projects would expand transmission on Luzon by about 60%, and by 1976 connect about 80 towns and 20 large industrial consumers. The generating unit, the other main item in the Project, is essential to meet the growing demand and would increase NPC's installed capacity by about 30%. iv. There are two large power utilities operating on Luzon. The Manila Electric Company (Meralco), a privately owned enterprise, serves the greater Manila area, generating from thermal-electric plant and supplying power direct to consumers. NPC supplies the rest of the Island, mainly in bulk to local distributors, from hydroelectric sources. The grids of the two utilities are interconnected. Cooperation in planning and operating the two systems is desirable to achieve maximum economy in the sector, and a start is being made in this respect.  - ii - v. Total investment equivalent to about US$169 million is planned by NPC in FYs 1973-76. The proposed loan and credit would constitute about one-fifth of this total. Expenditure in Luzon and Visayas would be about US$98 million, and in Mindanao about US$71 million on two projects where the Asian Development Bank would lend about US$41 million. vi. NPC was expected to earn by FY 69 a minimum rate of 8% on net fixed assets in operation, but as tariff action was delayed it did not achieve that goal. The 42% tariff increase in Mlay 1971 was inadequate because the special presidential committee which heard the case was of the opinion that tariffs should not provide funds for future construction. The Government has since accepted that NPC's tariffs should be high enough to provide a reasonable proportion of the capital needed to finance development. The financing plan envisages tariff increases which will enable about one-fifth of the capital needed in FTs 1973-76 to be provided from internal cash generation, and to maintain a return of not less than 8% from FY 74. A first increase in tariff announced in January 1972 should provide a rate of return of about 6% in the interim FY73. vii. The performance of NPC in the past has been weak, especially its financial performance. However, recent developments have brought about im- portant improvements and further Bank assistance appears warranted. A re- vised charter for NPC was approved in September 1971 by the Congress of the Philippines. It contains provisions which increase NPC's institutional au- tonomy, strengthen the powers of its general manager, facilitate changes in tariffs, and introduces other measures, including exemption of NPC from taxes. Moreover, under the last loan the organization of NPC was studied by consult- ants and the recommendations, except those which had to await approval of the new charter, implemented. Assets have been revalued and a comprehensive fi- nancial reporting system introduced. Prospects for NPC becoming viable fi- nancially are much improved in view of the above, notwithstanding their pre- vious weaknesses in this respect. At this juncture, the proposed loan/credit should greatly help NMC in its efforts to establish itself as an autonomous, efficient and viable financial organization. viii. The internal financial rate of return on the Project is estimated to be 15%. ix. The Project is suitable for a Bank loan of US$22.0 million equiva- lent over 20 years, including four years of grace plus an IDA credit of US$10 million equivalent which is proposed in view of the country's heavy burden of short-term foreign debt.  APPRAISAL OF FIFTH POWER PROJECT PHILIPPINES I. INTRODUCTION 1.01 This report covers the appraisal of a Project consisting of a 150 MW unit (No. 2) at a thermal-electric power station on the Bataan peninsula near MIanila, development of the transmission system in five regions of Luzon, and the services of consultants. The Project would be completed by the end of FY 75. The Government of the Philippines has requested finance for the foreign exchange cost of the Project, including interest during construction on the Bank financed portion of the project. The Project's total cost is estimated to be US$46.0 million. A Bank loan of US$22.0 million and an IDA Credit of US$10 million are proposed. 1.02 The Borrower of the Bank loan would be the National Power Corpora- tion (NPC), a government corporation established in 1936. The Government of the Philippines wqould be the Borrower of the IDA Credit which it has agreed to relend to NPC on terms similar to those for the Bank loan. 1.03 The Bank has made four loans to NPC for power projects, totalling US$68.1 million net of cancellations (90% of NPC's foreign currency loans) as follows: Net Loan Amount Year Loan No. Project US$ Million 1957 183 PH Binga hydro-electric 18.4 1961 297 PH Angat hydro-electric 33.5 1962 325 PH Maria Cristina hydro-electric (No. 3 unit) 3.3 1967 491 PH Bataan thermal electric, No. 1 unit and Maria Cristina hydro-electric (No. 4 unit) 12.0 Total 67.3 Delays in construction have occurred in some loans, but finished projects have been operating successfully. The Maria Cristina hydro-electric ex- tension on Mindanao was completed in 1970 and is operating satisfactorilv, and the Bataan No. 1 thermal unit will be commissioned in early 1972. Bank Group lending to the Philippine power sector has also included a commitment by the International Finance Corporation (IFC) equivalent to USS12 million in FY 1967 to the Manila Electric Company (Meralco).  - 2 - 1.04 The institutional objectives of Loan 491 PH have been partly achieved. The management consultants have completed their task, and their recommendations, except those which had to await approval of NPC's new charter, have been implemented. But NPC has not earned the minimum rate of return of 8% stipulated in Loan 491 PH, owing to delayed consideration of its tariff proposals and the inadequate increase allowed. 1.05 However, as noted in section IV, the recent enactment of a revised NPG charter and other developments have provided NPC an adequate framework for improving its financial and overall performance. Actual achievements will depend on how this new framework is utilized by management and on gov- ernment support of a sound financial policy. The assistance provided by the proposed loan/credit will be important in helping to achieve these objectives. 1.06 This report is based on information obtained by Messrs. S. S. Scales and E. Friedmann and from discussions with officials of the Philippine Gov- ernment and NPC during a mission to the Philippines in June 1971. II. THE ECONOMY 2.01 The Republic of the Philippines has a population of about 38 mil- lion people; it consists of more than 7,000 islands with a land area of some 300,000 km2, spread over six times that area of the Pacific Ocean. The two major islands of Luzon and Mindanao have about 70% of both land area and population. Greater Manila and a few provincial cities are the main urban areas; some 35% of the population is urban. The population is growino, fast, by 3.1% a year. 2.02 During 1966-69 GNP increased satisfactorily at the rate of 6.2% a year, but it increased only 4.5% in 1970, due to the serious financial crisis of 1969. The four-year development plan (1971-74) established a target of about 5.5% for annual growth of GNP. Prices had been remarkably stable in the past but increased by 20% in 1970, mainly as a result of devaluation of the peso; figures for the first seven months of 1971 showed a further in- crease by 12.5%. 2.03 While the overall investment and saving rates in the Philippines do not compare unfavorably with many developing countries, the level of pub- lic investment is extremely low and serious deficiencies in public infra- structure act as a constraint on growth. When gross domestic capital forma- tion dropped in 1970, due to a financial/economic squeeze, very substantially below the peak year 1967, public investment suffered a serious setback. The Philippine Government in subsequent development plans has expressed its ob- jective to provide a more adequate infrastructure, with an imoortant role to be given to the power sector to which about 1'3% of the infrastructure outlay is allocated. Resource mobilization for the public sector is a matter of continuous concern. Total revenue of national and local governments is pres- ently around 13% of GNP and this level which is lower than in many developing  -3- countries leaves ample scope for increase. Improvement of the tax performance as well as other income sources, including income earned by government-owned corporations as the result of sound tariff policies is a vital issue which affects the ability of the Philippine Government to absorb foreign aid. 2.04 The economy has a heavy burden of relatively short-term foreign debt. Substitution of outstanding debts by longer-term debt on more favor- able terms, decreasing the present heavy dependence on private trade credits and increasing foreign loans for public investment would be desirable. With these considerations in mind it has been proposed that an IDA Credit of TJS$10 million be made to help finance the Project. III. THE POWER SECTOR 3.01 The power sector is complex, not as coordinated as it should be, and uneven in performance and institutional strength. Only one in five Filipinos enjoys the benefits of electricity. Reliable service exists only in Greater Manila and a few large towns. Most of the small towns have electricity only for six to eight hours a day for lighting needs. Rural electrification is at an early stage of development. 3.02 The Government's policy of electrification, which aims at providing a supply of electricity to all the population, is guided by a sound strategy. Generation and transmission in the public sector are to be developed by NPC. Distribution in rural areas and small towns will be developed mainly through cooperative and municipal supplies. Private and municipal utilities will con- tinue to supply the urban areas, including Manila. As NPC's transmission grids are built or extended, cooperatives and municipal utilities will take power from them and electricity services will be extended to areas without any supply. Some of the larger utilities will continue to generate from their own plant as well. Thus. evolution towards an integrated sector is envisaged, in which the many small utilities will continue to play a part, perhaps after some consolidation, mainly as distributors. Given the geography of the Phil- ippines, the uneven nature of development of different areas, and the large investment required to provide a satisfactory power supply to most inhabitants, the sector development strategy is an appropriate one. However, the mechanics for its implementation needs considerable improvement as noted hereafter. Energy Resources 3.03 The country is not rich in energy resources. Known coal deposits are of little commercial value. The hydro-electric potential is estimated at 3,600 NW, and 16% of it, utilizing the best sites, has already been developed in Luzon and M.indanao. Explorations for oil and gas are in pro- gress in the Cebu and Palawan areas, but have not yet been successful. The main source of energy will continue to be imported oil. Its high cost and the uncertainties of future supply led the Government to consider nuclear power as an alternative. But it is not likely that this source of power  will be utilized before 1980 when the Luzon grid will have grown sufficiently to accommodate 500 MW units, the minimum size that presently makes nuclear power competitive with fossil-fueled power. Geothermal energy has also attracted Government interest recently, and a contract for initial explora- tion at Tiwi in Southern Luzon is being negotiated. Power SuppyY 3.04 Power is generated mainly by two utilities -- the Manila Electric Company (Meralco), a private company serving the Manila area, and the Na- tional Power Corporation (NPC), a government-aoned public utility. Between them, they generate about 90% of all the energy supplied. Meralco distrib- utes most of its energy directly in Greater Manila in a franchise area of 800 km2 with a population of about 4 million and a heavy concentration of business and industry. NPC operates on the basis of bulk sales to some 300 utilities and large industrial customers spread over many provinces in Luzon, in small areas of Mindanao, and in the Visayas Islands. The table below gives a general picture of the Philippine power industry in 1969. Installed Capacity Energy Generated MW % GWh % Total for the Philippines 1,670 100 6,670 100 By Region Luzon 1,450 87 5,790 86 Mindanao 150 9 520 8 Visayas 70 4 360 6 By Utility NPC 540 32 1,640 25 Meralco 970 58 4,400 66 Other utilities 160 10 630 9 By Energy Source Steam 970 58 4,470 66 Hydro 550 34 1,720 26 Diesel 150 8 480 8 3.05 Electricity is distributed to the consumers by some 456 private and municipal utility systems. They range in size from Meralco's large system, to six companies with capacities below 35 MW and several hundred small, family-owned and poorly operated systems with capacities below 50 klW. 3.06 Meralco is by far the largest utility in the sector and generates over 60' of the sector's output of energy, almnost entirely fron thermal plant. This privatelv-owned company is managed and operated very efficiently and is financially sound, although devaluation of the peso in 1970 seriously dis- located its cash flow projections and led to tariff increases. In the past,  - 5 - Meralco has been able to sell bonds abroad to finance its development, but this is now difficult with the foreign exchange problems facing the Philippine economy. 3.07 NPC, owned and controlled by the Government, is primarily engaged in developing the country's hydroelectric resources and in the bulk supply of power to other utilities and major industrial users. Its installations are listed in Annex 1. NPC operates two important power grids -- Luzon grid on Luzon Island and Agus grid on Mindanao Island -- plus seven small systems (three in Luzon, two in the Visayas and two in Mindanao). Load in NPC's Luzon grid has been growing by about 21% annually (Annex 2) over the past six years, compared with a national average of 13%, 7% for isolated utilities and 11% for Meralco. In Mindanao, the development of industry near Maria Cristina has been the main reason for growth in NPC's loads. 3.08 There are 121 municipal and 335 private utilities with an average capacitv of less than 500 KW. About half of them are isolated and, with few exceptions, they provide substandard and costly 6-8 hour per day service; the others distribute energy that they buy from NPC and Meralco. Of these 456 small utilities, 184 are associated in an organization called the Philippine Electric Plant Owners Association (PEPOA) that aims at representing their interests vis-a-vis the Government's or NPC's tariff increases. Until. now, PEPOA has done little to improve the technical standards of its members or to help them reduce costs. To assist in these matters, the Utilities Development and Finance Corporation was formed recently by PEPOA and three banks. 3.09 Tariffs charged by the small utilities range from YO.15 to tO.50 (US$0.023 to US$0.077) per kWh sold, the tariffs in the lower part of the range being charged by those utilities that receive their power from NPC or Meralco, and the higher tariffs by the small and isolated systems. NPC charges, on average, about VO.059 (US$0.009) per kWh on Luzon and rO.027 (US$0.004) on Mindanao, but these are wholesale rates; Meralco's charges, which are retail, are about rO.08 (US$0.012) per kWh on average. National Electrification Administration (NEA) 3.10 In 1969 the Government created The National Electrification Adminis- tration (NEA) to accelerate electrification of the entire country. Just as NPC is the agency in charge of bulk generation and transmission, NEA has the task of organizing and expanding distribution. It has given first priority to a nationwide program for creating rural cooperatives; each cooperative would provide services to areas with populations of about 70-150 thousand people. Two Dilot projects of this type have been started with the help of U.S. rural electrification experts. In the next five years NEA plans to establish at least one cooperative in each of the 66 provinces of the country, which would extend electric supply to about five million people. Many of these projects will be supplied by NPC's transmission systems, while others in more isolated regions will need their own generating plant, at least initially. US AID is expected to finance about one-half of the estimated cost of $100 million of this program.  -6- Public Service Commission 3.11 The Government exercises control over utilities in the power sector through the Public Service Commission (PSC), which regulates franchises and tariffs and has to approve plans for new installations. NPC is in a special position. as explained in paragraph 4.03. Future Developments 3.12 Total installed capacity in Luzon is expected to increase by 69% from 1,630 MW (83% of the national total) to 2,755 MW between mid-1971 and mid-1977 (see Graph 1). Expansion of generation plant is planned as follows: Capacitv Commissioning Plant 14 Owner Date 1. Bataan No. 1 75 NPC 1972 2. Snyder No. 2 300 Meralco 1972 3. Montelibano No. 1 300 Meralco 1974 4. Bataan No. 2 150 NPC 1975 5. Montelibano No. 2 300 Meralco 1976 NPC and Meralco operate independently and each utility is installing capacity sufficient to meet the demand on its own grid. However, the two grids are interconnected, and there is seasonal exchange of energy between the two systems (para. 6.02). There would be technical and economic advantages if expansion of the two systems could be planned with closer cooperation. Ul1timately, agreement for joint development, with shared investment, might be envisaged. The political situation in the Philippines however precludes very rapid progress along these lines. Another reason is that Meralco is reluctant to rely on NPC undertakings, given NPC's dependence on Government. In February 1971, a joint working committee was set up by the two utilities as an initial but important step to coordinate development. 3.13 Expansion in Luzon for the period beyond 1977 will require further thermal installations for base load and hydro installation for peaking. Feasibility studies for the Upper Pamnpanga hydro-electric plant (100 14W) are already available. Studies for the Caliraya pumped storage scheme and the Chico River hydro-electric plants (450 NW4 approximately) are to be financed by the proposed loan and credit. NPC has agreed to appoint engineering consultants satisfactorv to the Bank, to carry out these studies. 3.14 NPC is planning to double its generating capacity on Mindanao from 150 MW at present by adding a 5th unit of 50 MW to Maria Cristina by 1974 and the 120 MW Agus II hydroelectric plant by 1976. It also plans construction of about 1,300 km of transmission lines to cover the island.  No plans have been made for expansion in other areas, but a feasibility study for power development in the Visayas is to be undertaken. The for- eign exchange cost of expansion in Mindanao is to be provided by loans from the Asian Development Bank. A first loan of US$23.4 million equiva- lent was made in October 1971. A second loan for about US$18 million is presently being considered. 3.15 In 1972-76 foreign loans for power development of over US$130 mil- lion are expected-US$50 million from the Bank and IDA for NPC's Luzon expan- sions, US$40 million from ADB for NPC's Mindanao expansions, and US$40 million from US AID for NEA's cooperatives-on reasonable terms and conditions. On the other hand, the private utilities, mainly Meralco, can only obtain fi- nancing at interest rates and maturities (10-12 years at 10% annual interest) which would add to the national burden of relatively short-term foreign debt. The Government is reluctant to approve such short-term foreign debt in view of the country's heavy foreign debt service burden. The small private utili- ties have had practically no access to foreign credits; the Utilities Develop- ment and Finance Corporation is trying to resolve this problem and has obtained a US$5 million credit line from the Export-Import Bank of the U.S. National Planning and Coordination 3.16 The coordinated growth of power supply in the Philippines is com- plicated geographically by the isolation of the many islands, and administra- tively by the difficulties of trying to integrate publicly-owned and privately- owned utilities. In the rural areas, conflicts are bound to arise between the private companies that serve small towns but not the adjacent rural com- munities, and the government-sponsored cooperatives that soon will be im- pinging on their franchise areas. 3.17 The lack of an effective national planning body which can guide coordination is a serious problem. It seems logical to rely on Meralco for the continued supply of its franchise area and to direct NPC to the urgent task of supplying power to the provinces. However, the growth of NPC and Meralco in Luzon calls for the integrated development and operation of hydro, thermal, pumped-storage and possibly nuclear plants in the not too distant future, and suitable coordination will be important. 3.18 In the past, most of NPC's energy has been delivered in and around Manila in Luzon, and in a very limited area of Mindanao. However, the Project includes extensive regional transmission. National planning for distribution is also required; many of the inefficient private and municipal utilities should be merged into larger ones which, according to circumstances, could be private, cooperative or municipal. 3.19 The need for systematic and coordinated development of the power sector was recognized by the Philippine Government when it formed the Power Development Council in 1970. This body which reports to the office of the President is intended to carry out research and to advise on these overall  matters, but has no power to enforce changes. Its organisation and staff- ing were determined only in 1971, and Congress has been asked to make an appropriation in the budget to finance it. The Government has agreed to consider means of achieving effective coordination of planning of power development and the implementation thereof among power suppliers and seek Bank comment thereon. IV. THE BORROWER 4.01 The National Power Corporation (NPC), the borrower, was created by Commonwealth Act No. 120 of 1936 to control all water rights in the Philippines and to develop and generate hydroelectric power. Later, NPC was authorized to generate power from other sources. Subsequent amend- ments to the Act converted NPC into a stock corporation whose shares are wholly government-owned. The authorized capital stock of W30O million (US$46 million) is fully issued. 4.02 NPC's corporate powers are vested in the National Power Board (the Board), which has seven members, including the General Manager, who is ex-officio Vice-Chairman. The Chairman and the other five members are appointed by the President of the Philippines, with the consent of the Commission on Appointments of the Congress. NPC's Revised Charter 4.03 NPC's new Charter was approved by the Government of the Philippines in September, 1971. This charter had become necessary for a number of reasons explained below, but most particularly because of the legal difficulties in- volved in the implementation of tariff increases. In effect, though NPC's tariff had been exempted from the control of the Public Service Commission (PSC) which exercises control over all other power utilities, the effect of this exemption had been paradoxically to make NPC tariff increases subject to lower courts decisions when they were appealed to the courts. The courts effectively delayed the implementation of the increases for years by issuing injunctions blocking collections pending hearing of the appeals. The new charter allows NPC to fix its own tariffs and gives the PSC and the Supreme Court sole jurisdiction in case of appeals. During the hearing of any appeals, NPC's tariff increases cannot be deferred. 4.04 The main new provisions of the revised charter are given in Annex 3. Its practical impact will be to give NPC sufficient autonomy to function efficiently. The following are the main changes: (a) The powers of the Board (i.e. to make policy and to advise) and of the general manager (i.e. to execute and administer) have been clarified, which should nov obviate conflict be- tween members of the Board and management. (b) NPC has been given full authority to award contracts for construction and repair work.  - 9 - (c) NPC is empowered to set tariffs provided a maximum rate of return of 10% is not exceeded. (d) PSC now has jurisdiction (in place of the lower court) to settle, within 90 days, appeals against new tariffs set by NPC. Implementation of the new tariff cannot be deferred. Final appeal is to the Supreme Court. (e) NPC is now exempted from all taxes, duties or fees. This exemption reduces the size of the tariff increase which would otherwise be necessary to yield a required minimum rate of return. (f) Each region is to be represented on the Board, and have its own manager and tariffs. These measures are evidence of the Government's strong wish to accelerate electrification by NPC in the less-developed areas of the country. Organization and Management 4.05 NPC's management was hampered in the past by administrative restrictions and lack of authority and information. Revision of the charter and overhaul of the accounting function (as described below) have now created a framework within which effective management can be practised. 4.06 In connection with Loan 491-PH Gilbert Associates Inc. (U.S.A.) were engaged as consultants to organize NPC's management on a sound basis. Their task involved the reorganization of managerial duties; the introduction of new systems and procedures and on-the-job training of personnel working with them; revaluation of NPC's fixed assets on a current-value basis; revaluation of accumulated depreciation and depreciation schedules. NPC has adopted the revaluation as explained in paragraph 7.02. 4.07 The information which management requires periodically has also been identified and financial statements are now available between the 10th and 15th of the next month. Annex 4 lists the various reports pre- pared regularly since July 1971. In view of NPC's improved financial reporting, it should be able to transmit copies of the audited balance sheets, income statements and other related financial statements to the Bank within three months of the end of the fiscal vear. NPC has agreed to this arrangement. 4.08 The management consultants' recommendations have been substantially implemented. A follow-up review by the consultants of the operations of the accounting systems and procedures, reporting procedures and staffing would now be highly desirable. NPC agreed to this review during negotiations.  - 10 - Technical Operations - Engineering Consultants 4.09 NPC's system planning, equipment maintenance and load dispatching need to be improved, especially in view of the large expansion and growing complexity of its operations. TPC has agreed to appoint engineering con- sultants acceptable to the Bank to study improvement of its technical opera- tions and to prepare long-term plans for NPC's Luzon system. Audit 4.10 The Auditor General of the Philippines is legally ex-officio auditor of NPC. He is empowered to appoint a representative known as Auditor of the Corporation who has normally audited NPC's accounts. This arrangement was acceptable to the Bank in past loans and remains so, provided that, if the Bank is not satisfied with the audit or is of the opinion that the Auditor of the Corporation is not sufficiently experienced and independent to perform the audit effectively, then NPC will agree to appoint an additional auditor to undertake the audit. NPC has agreed to do this upon request by the Bank. 4.11 Following the recommendations of the management consultants, NPC has recently created an internal audit staff directly responsible to the General Manager to assist management inter alia by reviewing the adequacy of accounting, financial and operational controls, to ensure compliance with policies and regulations, and ensure that proper accountability exists; the work of the internal audit unit will also be reviewed by the Auditor of the Corporation. Staff 4.12 The number of staff on May 31, 1971 was about 2,300, about 300 more than NPC required as determined by a detailed analvsis made by the Consultants. The surplus is to be reduced by attrition. Over 100 posts have already been cancelled since a preliminary evaluation of staff was made in 1968. The management consultants have worked out for NPC a procedure for evaluating staff and jobs, to help in assigning staff to posts for which they are properly qualified and trained. V. THE PROJECT Background 5.01 At present, practically all NPC's generating plant on the Island of Luzon is hydro-electric. As the system grows, it will become necessary to firm up the energy supply with thermal-electric plant, relying on thermal plant as well for subsequent expansion, perhaps with some help from further  - 1 1 - hydro-electric development in meeting peak loads. The 75 MW unit to be com- missioned December '71 and financed by Loan 491 PH will be NPC's first ther- mal unit. The 150 MW unit proposed for financing would be the second. 5.02 While provincial electrification in Luzon has been characterized in the past by many delays, its further development is given Government pri- ority. The Project will increase NPC's generating capacity on Luzon by about 30%, but transmission including low voltage lines for rural electri- fication will be increased by about 60%. Description of the Project 5.03 The Project would consist of: Generation 1. Bataan No. 2 unit (150 MW) including a boiler; turbine: and a hydrogen-cooled generator and extension of the Power House. The boiler would burn low-cost high-viscosity fuel oil, piped from a refinery two kilometers away. 2. Three 75 MVA transformers and extension of the switchyard. The control room, cooling water system, workshops and travelling crane built at the power station to serve No. 1 unit would also serve No. 2 unit. A 230 kV transmission line connecting the power station with the grid has also been built. Transmission The works proposed would consist of five regional sub-projects: Central Luzon, Laguna-Batangas, Ilocos, Zambales and Southern Luzon, involving construction of 24 substations with an aggregate of 340 MVA, and over 1400 km of transmission lines are shown in Annex 5 and maps. Advisorv Services 1. A follow-up review by the management consultants of account- ing systems and procedures, reporting systems and staffing (para. 4.08) and a review of the current value of fixed assets (para. 7.02). 2. Engineering consultants to improve technical operations and to prepare long-term plans for Luzon (para. 4.09). 3. Feasibility studies of possible hydroelectric schemes on the Chico River in Northern Luzon of about 450 MW capacity and 1,600 GWh output, for peaking duty, and of the pumped storage scheme at Caliraya (300 MW initial canacitv) (para. 3.13).  - 12 - Costs 5.04 Details of the estimated costs of the Project are in Annex 6. The estimates are summarized below: I Millions US$ Millions Local Foreign Total Local Foreign Total Generation Civil Works 10.7 2.2 12.9 1.7 0.3 2.0 Plant and Equipment 13.7 100.0 113.7 2.0 15.4 17.4 Switchyard and Transformer 0.3 6.0 6.3 0.1 1.0 1.1 Engineering 2.8 4.8 7.6 0.5 0.7 1.2 Contingencies - Physical 0.3 1.8 2.1 - 0.3 0.3 Contingencies - Price 2.3 7.8 10.1 0.4 1.2 1.6 Sub-Total 30.1 122.6 152.7 4.7 18.9 23.6 Transmission Transmission lines and sub-station equipment 60.0 60.7 120.7 9.1 9.3 18.4 Engineering 3.0 1.3 4.3 0.5 0.2 0.7 Contingencies - Physical 3.2 1.3 4.5 0.5 0.2 0.7 Contingencies - Price 6.5 3.9 10.4 1.0 0.6 1.6 Sub-Total 72.7 67.2 139.9 11.1 10.3 21.4 Advisory Services 1.3 5.2 6.5 0.2 0.8 1.0 Total Cost of Project 104.1 195.0 299.1 16.0 30.0 46.0 Interest on Bank Loan During Construction - 13.0 - - 2.0 - Foreign Exchange to be financed by IBRD and IDA - 208.0 - - 32.0 5.05 The estimates for the generating plant were made by Electroconsult of Milan who have been retained by NPC as consulting engineers for both the Nos. 1 and 2 units. The estimates were based on recent international bidding for similar plant, and on the local costs for No. 1 unit. Estimates for the transmission sub-projects were made by NPC's staff on the basis of experience with similar work. They have been adjusted for current exchange rates. There are no physical uncertainties in the Project, so physical contingencies are small (3% and 2% respectively for local and foreign costs). Construction will be completed in three years (by June 1975), so price contingencies of 11% for local and 7% for foreign costs should prove adequate.  - 13 - Amounts of Proposed Loan and Credit 5.06 The loan and credit would cover the full foreign exchange cost of US$30.0 million and the interest on the Bank Loan during construction, of US$2.0 million. The total amount required is US$32.0 million, for which a Bank loan of US$22.0 million and an IDA credit of US$10 million are proposed. Engineering 5.07 Electroconsult, the consulting engineer for the Bataan No. 2 unit (para. 5.05) is satisfactory to the Bank. It has been agreed with NPC that a consultant is required to review the preliminary design of the transmission sub-projects, and help NPC's staff in the preparation of specifications, bid documents, bid analysis, final design, and supervision of erection. NPC has agreed that consulting engineers, satisfactory to the Bank will continue to be retained for the design and supervision of the Project. Procurement 5.08 All contracts for civil engineering and plant and equipment will be awarded after international competitive bidding according to the Bank's guidelines. NPC has agreed, in principle, to contract most of the transmis- sion sub-projects on a "'supply and erect" basis, to ensure coordinated scheduling of completions and expenditure. Disbursement 5.09 Disbursements will be made against the full foreign exchange costs of the equipment and services provided. No disbursements would be made for goods bought prior to approval of the loan, but expenditure for consultants' services may need to be covered retroactively to January 1. 1972, in- volving a sum of up toA$t00,000. Estimated disbursements, by quarters, are given in Annex 7. As indicated, the IDA funds will be disbursed first. Any surplus remaining on completion of Project would be cancelled, unless there are good reasons for applying savings to related works such as addi- tional transmission sub-projects. Ecological Aspects 5.10 No ecological problems are expected to arise from the No. 2 gener- ating unit at Bataan. Cooling water is discharged 600 meters offshore at the far end of Manila Bay, 50 km from Manila. The height of the chimney will ensure adequate dispersal of the flue gases and wil' meet the require- ments of the Water and Air Pollution Control Commission of the Philippine Government. These problems have been thoroughly examined by the consul- tants and a summary of their appreciation is given in Annex 8.  - 14 - VI. JUSTIFICATION OF THE PROJECT 6.01 The Project forms part of the Government's four-year development plan for Luzon. The plan gives the power sector the second highest priority (after transport), because of the social, political and economic importance attached by the Government to bringing electricity to as many inhabitants as possible, a process assisted by connecting as many of the provincial popula- tion to the national system of electricitv supply as soon as feasible. NPC's current objective is to extend systematically its transmission system to load centers presently served by isolated diesel plants in order to provide cheaper and better quality service to all of Luzon, an area, exclusive of Greater Manila, of about 100,000 sq. km. with a population of about 13 million. NPC's load has been growing steadily by about 21% annually in the last five-six years as a result of pursuing this policy. Load Forecasts 6.02 The attached graphs 1A and 1B show peak-loads and energy demands from 1971 forecasts through 1978 and the corresponding installed capacity and half-yearly generation of energy (i.e., in wet and dry seasons respec- tively) for the whole of Luzon's interconnected system, that is the grid served by both NPC and Meralco which is operated with seasonal interchanges of energy between the two utilities. The forecast has been made on the basis of the comprehensive market studies carried out in 1964-65 by Gilbert Associates Inc. and by the Power Industry Survey Team; 1/ these studies have been continuously updated by NPC and Meralco. The forecasts have proved to be accurate. The program of new generating plant provides about 15% re- serve capacity, which is reasonable. 6.03 NPC's forecast for its own grid (i.e., the provincial grid on Luzon) is based on detailed consideration of present loads and of the new ones that are expected to be connected to the system, as well as on the realistic esti- mates of economic and industrial growth assumed in the Government's develop- ment plan. The forecast assumes that growth of NPC's load will decrease to an average of 14.5% annually during FY71-78. 14PC's peak loads and installed capacities, half-yearly energy demands and energy available, projected through 1971-77 are shown in Annexes 2A and 2B and Graphs 2A and 2B. By FY 1974 there would be a small energy deficit. The completion of the No. 2 unit at Bataan by FY 1975 is therefore essential. 1/ A team, chaired by Mr. J. B. Thomas (Texas Electric Service Co.) and composed of 13 U.S. specialists on all aspects of Public Utility Power Industry who prepared a report under contract to USAID.  - 15 - Least Cost Solution - Economic and Social Benefits 6.04 An additional thermal unit at Bataan is NPC's most economic method of meeting the increased load expected on its system. There is no hydro- electric alternative of suitable size. The 150 M unit size adopted is acceptable in relation to the combined capacity of the NPC-Meralco system. 6.05 The transmission sub-projects in Southern Luzon are based on stu- dies made by Electricite de France in 1965, which have been brought up-to- date by NPC. They are the most economic proposals on the basis of present- value comparisons of the various transmission voltages which were consider- ed as possible alternatives. 6.06 The Project will allow NPC to supply the load until FY 78. New connections made possible by the Project would include 80 towns and 20 large industrial consumers (compared with 250 towns and 27 large consumers now served). The economic value of these new connections includes other factors as well as the difference in cost (usually a reduction of 25% to 35% to the consumers) between NPC's energy and that of the present diesel plants. A reliable supply for 24 hours a day instead of the usual 6-8 hours supply for lighting only would encourage the use of electricity for many purposes such as drinking water distribution, pumped irrigation and power for workshops, cottage industries and other small businesses. Unfortunately no reliable data or methodology is yet available to measure these benefits which are nevertheless quite important and evident. Internal Financial Rate of Return 6.07 A calculation of the internal financial rate of return on the Project was carried out considering streams of cost and benefits for a pe- riod of 30 years (Annex 9). The Project is considered to be a well ba- lanced expansion of both generation and transmission capacity. Therefore, benefits have been measured by the income from the additional energy ge- nerated by the Bataan Unit No. 2 when sold at customers' substations. Costs cover total investment, fuel, operation and maintenance, but exclude depreciation, taxes and customs duties. The internal financial rate of re- turn with the proposed increases in tariffs discussed in Chapter 7, would be about 15%. Sensitivity analysis shows that an increase in costs of con- struction of 15% and a delay of 25% in completion of the Project would re- duce the rate of return to about 12%. VII. FINANCIAL ASPECTS 7.01 As noted in para- 1.04 and 1.05, NPC has been hampered for several years by poor earnings, inadequate capital, poor financial and operating in- formation, and inadequate authority. Earnings improved following a 42% tariff  - 16 - increase in May 1971 but are still inadequate. The provisions of the revised NPC chapter enacted in September 1971 (para. 4.04) should enable NPC to put its financial operations on a sound utility basis. The rate and other cove- nants agreed to during loan negotiations as described hereafter should helD to ensure achievement of this objective. Past Record and Present Position 7.02 NPC's assets were revalued as at December 31, 1967 but the new values were not entered into NPC's books until FY 70. The management con- sultants, Gilbert Associates, Inc., who appraised the assets recommended an interim updating procedure by trending based upon a combination of the whole- sale price index of imported manufactured goods in Manila (as prepared by the Central Bank of the Philippines), and a construction labor cost index devel- oped by the consultants. This interim procedure was recommended only for rate making purposes. It was further recommended that a periodic review of the current value of fixed assets be made every two or three years by an in- dependent consultant. As the peso was devalued in February 1970 from 14 to the U.S. dollar to a floating rate, presently about P6.50 to the dollar, a further revaluation of assets became necessary. An appropriate increase in value has therefore been estimated by NPC and incorporated into the net plant in service as at June 30, 1971 for rate making purposes, shown in Annex 10. NPC has agreed to appoint independent consultants to revalue the net fixed assets as at June 30, 1972 and thereafter every four years or more freauently if required. 7.03 Summarized income statements for FY 67 through FY 71 are shown in Annex 11. (Annexes 12 & 13 show Luzon and Mindanao separatelv). The rates of return during the three years to FY 69 are overstated because the histor- ical value of assets was used (a) for the calculation of annual depreciation (which increased the numerator) and (b) as the rate base (which understated the denominator). The low FY 69 return of 4.8% reflects the commissioning of the Maria Cristina No. 3 Unit (50 MW) Loan 325 PH and the Angat 100 MW Project (Loan 297 PH) in FY 68 and the drought during FY 69. 7.04 The rate of return for FY 70 was 3.0% and an earnings deficit resulted after charging interest. Poor earnings continued throughout FY 71, until the 42% increase in tariffs became effective during the last two months of the fiscal year. A return of only 2.6% was earned for the year and the Government had to advance funds under the terms of the Guarantee Agreement (Loan 491-PH) to enable NPC to pay the interest and repayments of principal on the Bank loans. 7.05 Condensed balance sheets for FYs 67-71 are showqn in Annex 10. NPC's capitalization at June 30, 1971 is summarized below. Long-term debt on that date was t368 million if foreign exchange loans are calculated at the ex- change rates in force at the times they were withdrawn. Using the devalued rate of F6.5 to the dollar, long-term debt becomes f565.6 million. Annex 10 includes an adjusted balance sheet for 1971.  - 17 - % off Peso (Million) Total Equity Capital stock 300.0 26 Earned surplus 77.6 7 Surplus on Revaluation of Plant and Debt 208.4 18 Total equity 586.0 51 Foreign Currency Debt IBRD loans 345.1 30 Eximbank 26.3 2 Morgan Guaranty Trust 25.3 2 Foreign currency loans 396.7 34 Local Currency Debt NPC bonds - 30 years 157.9 14 War Reparations loans 5.3 - Philippine Government - All loans 5.7 1 Local currency loans 168.9 15 Total Debt (Annex 17) 565.6 49 Total - Capitalization 1151.6 100% 7.06 About half of the equity is capital stock of f300 million, made up of p85 million subscribed by Government, r175 million converted from bonded debt, and P40 million from earned surplus. The ?175 million converted from NPC bonds is the gross value without adjustment for the sinking funds of about ?20 million which NPC had accumulated for their repayment. When the capital structure was changed the net debt, and not the gross debt, should have been transferred. The Government has agreed to repay F20 millions from the sinking funds to NPC or make such other adjustment satisfactory to the Bank. 7.07 The local-currency debt is mainly from Government financial insti- tutions. The NPC bonds are repayable over 30 years and carry annual interest at rates varying between 4% and 7%. Sinking funds administered by the Cen- tral Bank have been created to repay them. The revised charter provides for a maturity of ten years or more for future bond issues. 7.08 Customers' accounts outstanding at the end of FY 71 amounted to nearly t39 million, or about eight months' billings on the increased tariffs. NPC has already introduced revised billing and collection procedures and, at the time tariffs were increased in May 1971, also introduced new conditions of supply which involve a discount for prompt payment, disconnection of supply for non-payment of bills, a charge for interest at 1% per month on amounts unpaid, and a reconnection fee after disconnection for non-payment. NPC has agreed to take all necessary steps to reduce the balance of the unpaid accounts as of June 30, 1973 and thereafter to an amount not more  - 18 - than three months' billings. Financing Plan 7.09 Annex 4 presents sources and applications of funds for FY 72 through FY 77. Annexes 15 and 16 show separately information relating to rnPC's operations in Luzon and Mindanao. These Annexes are based on sales forecasts and on the income statements for FY 71-77. Tariff increases amounting to 28% have been assumed to meet the minimum overall return of 8% in FY 74. The forecasts produce the following financing plan: Four-Year Financing Plan (FY 73-FY 76) 1 Million US$ Million _ Internal Cash Generation 557.0 85.7 Less Debt Service /1 317.0 48.8 Net Cash Generation 240.0 36.9 22 Decrease in Working Capital 6.3 1.0 Sale of Plant 4.3 0.6 Borrowing IBRD and IDA 208.0 32.0 19 ADB 267.0 41.1 25 Future Foreign Loans 145.1 22.3 13 Local Currency Loans 226.8 34.9 21 Total Capital Expenditure /2 1097.5 168.8 100 /1 Excludes interest capitalized. /2 Includes interest capitalized. 7.10 NPC's Capital expenditure during the four years FY 73-76, would amount to US$169 million, of which about 60% would be spent in Luzon and about 40% in Mindanao. Internal funds would finance 22%, and 78% would be borrowed (57% foreign and 21% local capital). NPC has previously raised local capital by the sale of bonds for relatively small amounts and these efforts would not have been successful without G^overnment help in marketing (i.e., purchase of bonds by Government agencies). The much larger domestic financing now needed over the four-year period (USS35 million eouivalent) would not be obtained unless Government provides most of it. The Government has agreed to ensure that these funds shall be made available to NPC on terms satisfactory to the Bank. On this basis, the financing plan is acceptable. Financial Forecasts 7.11 Loan 491-PH requires that NPC's tariffs should earn a minimum annual rate of return of 8% of its average net revalued fixed assets in oneration. While 8% was not expected until FY 69, it was not earned even  - 19 - then because NPC's tariff applications were delayed several years bv court injunction pending the hearing of appeals against the rate increase. Finally, a 42% rate increase was implemented in May 71 following intensive efforts of NPC and Government officials in this connection. However, this increase is inadequate to earn 8% in the future. An 80% rate increase had been called for but the application was heard in public by a presidential ad hoc commit- tee, whose view was that tariffs should not provide funds to finance future construction, but should only be sufficient to meet annual operating expenses and debt service. It therefore agreed only to the 42% increase. Nevertheless subsequent to this increase, the Government has agreed that tariffs should provide funds to finance future construction, and that NPC's tariffs should be raised over the next two years to achieve the rate of return required. 7.12 The first of these, an increase of f0.005 kWh (about 8%) on Luzon consumers was promulgated in January 1972 and will become effective on the expiry of the notice periods which vary from one to six months. This tariff increase should raise NPC's overall rate of return for FY 73 to not less than 6% on its average net fixed assets in service. The Government and NPC have agreed to further adjust tariffs to provide revenues sufficient to produce and maintain an annual rate of return of not less than 8% in FY 74 and there- after. The financial forecasts (Annexes 10-17) were prepared on this basis. 7.13 NPC's tariffs are based on bulk supply at wholesale rates. The tariff increases envisaged (para. 7.12) would be recovered by the small utilities bv an increase of less than 10% at the retail tariff level. 7.14 NPC's tariff structure includes both a monthly demand charge and an energy charge. NPC has engaged a consultant to advise on modification of the present tariff structure and interchange pricing with Meralco. 7.15 NPC has recently introduced a fuel cost adjustment clause as a condition of supply, which enables it to pass on to its consumers any increase in fuel cost above a base price of f1.10 per million BTUs. The fuel cost included in the projected operating expenses in Annexes 11 and 12 is the base price, so revenue projections do not require any upward adjust- ment of tariff to reflect any variation of fuel cost. Present price of fuel has already risen to $2.60 per million BTU, therefore when Bataan No. 1 Unit begins operation the tariffs for Luzon will be increased initially by f0.004 per kWh (approx. 6%). 7.16 NPC's charter does not permit payment of any dividends. All funds generated after meeting operating expenses will therefore be applied towards meeting debt service, maintaining adequate working capital and financing canital expenditure. 7.17 Condensed balance sheets as of June 30, 1971 through 1977 in Annex 10 show that NPC's gross plant would increase over that period by p1.4 billion, or by 86%, to a total of p2.3 billion (US$354 million equiv- alent). Plant in Luzon would increase by f650 million, or by 56%, and that in Mindanao would increase by f450 million, or nearly fourfold.  - 20 - 7.18 The ratio of current assets to current liabilities falls from 2.8 times in FY 70 to 1.8 times in FY 71, because of a reduction which NPC has achieved in its working capital, mainly by reducing materials and supplies by nearly t11 million (US$1.7 million equivalent). A further reduction is expected as the collection of customers accounts improves (para. 7.08). 7.19 The debt equity ratio was 49/51 in FY 71. It would increase to 59/41 by FY 75 reflecting the increased borrowing to meet the construction program. (Annex 10). 7.20 Interest chargeable to revenue would be covered 1.4 times by net operating income in 1972, and 2.5 times after the Project has been commis- sioned. Debt service would be covered 1.3 times by cash generation in 1972 and by 1.5 times or more each year through FY 77. 7.21 With the tariff adjustments described, (para. 7.12), internal cash generation would increase from p78 million in FY 72 to f198 million in FY 77. Net of debt service, internally generated funds would finance 22% of the capital expenditure during FY 73-76. These ratios and percentages are acceptable. 7.22 NPC has agreed that the existing debt limitation covenant that revenues should cover 1.3 times the maximum debt service requirement of any succeeding fiscal year on all debt including anv debt to be incurred, should be repeated for the proposed loan. The purpose of this limitation is to maintain some control over incurrence of debt by NPC without being undulv restrictive. When further tariff increases (para. 7.12) have been made, to produce the minimum 8% rate of return required, NPC should be able to meet this requirement. VIII. AGREEMENTS REACHED AND RECOMENDATIONS 8.01 During negotiations in January 1972 agreement was reached on the following principal points: (a) engineering and management consultants will be employed upon terms and conditions satisfactory to the Bank (paras. 3.13, 4.08, 4.09 and 5.07) (b) the Government will prepare proposals regarding the effective coordination of power development among all the power suppliers (para. 3.19) (c) a revaluation of the borrower's net fixed assets in service will he made as at June 30, 1972 and thereafter every four years or more frequently, if required (para. 7.02)  - 21 - (d) a sum of f20 million in respect of the sinking funds accumulated on the borrowers' bonded indebtedness converted into capital stock will be paid by the Government to the Borrower, or other adjustments made satisfactory to the Bank (para. 7.06) (e) the Government shall take all necessary steps to ensure that funds required by the Borrower to finance local currencv costs during fiscal years '73 to '76 shall be made available on terms satisfactory to the Bank (para. 7.10) (f) tariffs will be set to achieve a rate of return on average net assets in service of not less than 8% in FY 74 and thereafter (para. 7.12)~ (g) debt will not be incurred without prior Bank approval unless the borrowers' net revenues cover by 1.3 times the debt service, including the debt to be incurred, in the future year of maximum debt service (para. 7.22) 8.02 The proposed Project constitutes a suitable basis for a Bank loan of US$22.0 million for a term of 20 years, including a grace period of four years, and an IDA Credit of US$10 million. February 15, 1972   ANNEX 1 PHILIPPINES NATIONAL POWER CORPORATION EXISTING PLANT GENERATION Name of Type Power Station Installed Capacity Commissioning Date Units Total MW Luzon No. Capacity Hydro Caliraya 4 8.0 32.0 1945-1950 "1 Ambuklao 3 25.0 75.0 1956-1957 it Ambarayan 1 0.2 0.2 1953 it Penaranda 1 0.3 0.3 1956 Buhi-Barrit 1 1.8 1957 Binga 4 25.0 100.0 1960 Cauayan 1 0.4 0.4 1959 "i Angat 2 6.o 212.0 1967 4 50.0 1967-1968 Steam Bataan No. 1 1 75.0 75.0 1971 Diesel Bantag 1 0.9 1.15 1957 1 0.25 1967 Laoag 1 0.65 1.65 1958 4 0.25 1967 Mindanao Hydro Talomo 1 0.6 2.9 1950 1 0.4 1953 1 0.3 1954 1 1.6 1959 it Maria Cristina 2 25.0 150.0 1953-1956 2 50.0 1969-1971 it Digos 1 0.2 0.2 1956 it Aguran 2 0.8 1.6 1957 Diesel Digos 2 0.25 0.5 Small Islands Diesel Loboi 3 0.4 1.2 1957-1968 Amlau 2 0.4 0.8 1962 SUMMARY OF GENERATING PLANT Hydro Steam Diesel Total Luzon 419.9 75.0 2.8 497.7 Mindanao 154.7 0 0.5 155.2 Small Islands 0 0 2.0 2.0 574.6 75.0 5.3 654.9 TRANSMISSION: NPC's existing, transinission svsteri- in Luzon extends a T anl1r, and, in some g.ari:s <WF the n rthwest of the island, Tt consists of 4\Ij of 5 !( 7 1line, 200 ko'n of 69k\7 and 13.8 kV lines (See Maps). oi) .mincdanTo tLc, -ci,5 mission grid only in the vicinity of the Mari.a Cristina Dower sta ino; -. sF 17( lWnr. of 69 kV anci 13.8 kV lines. Novemiber, 1971   Philippl-es - Natio.nal Powe,r Coro-aulo- rowth of _oai From CDao,aers on NPC's Grid or I-on Island AQt-al Estimate Fore-ast Average rth F.Y. 1964 1965 1966 19(7 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 19 64196 1970-19Fr 8 Utilil.ies Eisti MW 101 113 126 14? 159 179 199 223 G9 GW 495 523 593 668 780 855 '965 109D Nl- M 1. 7 8 16 19 31 36 4D . w W 26 29 6i 96 109 125 134 Total KI 33.9 38.9 48.2 57.2 70.7 79.4 69.9 105 120 134 158 178 209 235 263 18.5 14.3 G6h 149.2 175.T 212.9 249.7 30S.1 355.3 412,1 498 549 622 729 876 964 1090 1224 19.5 14.7 Non-TJtilities FlaMtiag 110 It? 122 126 188 141 149 i15 `(h 546 573 621 631 654 697 731 772 oss. '3 40 78 102 111 124 136 15-1 @(Vh 36 248 427 570 580 739 609 936 Total mw 25.5 30.1 57.6 60.7 69.1 81.6 105.4 135 156 220 229 246 765 >82 307 26.o 14.4 0W9, 151.8 194.2 217.3 248.6 281.9 426.1 920.6 642 827] 1028 1201 1234 1456s 1540 7o 7'3.- 16.0 Total MW 89.3 69 105.6 11'7.9 139.8 161.0 195.3 238 276 334 387 424 174 500 570 'i.8 14.2 W9I 301 359.7 430.2 498.5 sly.o 731.4 932,7 1140 1370 1650 1S30 2110 4oo 0630 2930 21.0 15.5 Naveroher, lYrl  NPC - Luzon Demand and Supply (at Generating Stations) Output in Power - YIJ Energy - GWh FY Plant Installed Peak Normal Year Total peak Peak Surplus Surplus Additions Capacity Capacity G,h Capacity Loa r (Deficiency) Availabl Required(Deficiency) 1971 (a) Existing 427 427 993 427 187 2h0 993 670 323 (b) )i27 302 655 302 205 97 655 680 (25) (c) 16348 16h8 1350 298 1972 (a) Bataan No. 1 75 75 282 502 230 272 1275 800 h75 (b) 75 75 282 377 2hh 133 937 820 1]17 (c) 564 2212 1.520 592 1973 (a) 502 273 229 1275 960 315 (b) 377 290 87 937 990 (53) (c) 2212 1950 262 1974 (a) 502 325 177 1275 1120 155 (b) 377 336 41 937 1150 (223) (c) 2212 2280 (68) 1975 (a) 502 368 13L 1275 12L0 35 (b) 377 376 1 937 12zC (3L3) (c) 2212