Philippines - Sixth Power Project

Report No. 421 a -PH FILE COPY Philippines Appraisal of the Sixth Power Project (National Power Corporation) June 13, 1974 East Asia and Pacific Projects Department Not for Public Use H Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  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 (V) 6.85 F 1.00 - US$0.146 V 1 million = US$145,985 UNITS AND MEASURES 1 Kilovolt (kV) - 1,000 volts (V) 1 Megawatt (MW) - 1,000 kilowatts (kW) 1 Gigawatt hour (GWh) - 1 million kilowatt hours (kWh) 1 Megavolt ampere (MVA) = 1,000 kilovolt amperes (kVA) 1 British thermal unit (Btu) - 0.252 kilo-calories (kcal) 1 Kilometer (km) = 0.62 miles (mi) 1 Square kilometer (ki2) - 0.386 square miles (sq. mi) ABBREVIATIONS AND ACRONYMS NPC - National Power Corporation MECO - Manila Electric Company NEA - National Electrification Administration NIA - National Irrigation Administration ADB - Asian Development Bank OECF - Overseas Economic Cooperation Fund IECO - International Engineering Company ECI - Engineering Consultant Inc. UPRP - Upper Pampanga River Project NPC'S FISCAL YEAR July 1 - June 30  PHILIPPINES NATIONAL POWER CORPORATION APPRAISAL OF THE SIXTH POWER PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ........... . .. ........... ...... i-ii I. INTRODUCTION .................................... . 1 II. THE ECONOMY ................................................... 2 III. THE POWER SECTOR ....... ................... .... ....... 3 Energy Resources .... ...... .................... 3 Power Supply . .......... .................. 4 Development Program .......... . ..... ............ 4 National Electrification Administration ......... . 6 Manila Electric Company ..... .................... . 6 IV. THE BORROWER . ......................... 7 Organization and Management ..................... 7 Amendment to the NPC Charter ..................... 7 Tariffs ......................................... . 8 Fuel Clause ..................................... . 9 Staff ......................................... ..... ... 9 Audit ...................................................... 10 V. THE PROJECT ................................. 0 10 Project Description .............................. 10 Cost Estimates ................................. 11 Amount of Proposed Loan ... ......................... 13 Engineering and Construction .................... 13 Procurement and Disbursement ..................... 14 Ecological Aspect ................................ 15 VI. JUSTIFICATION OF THE PROJECT ............... ........... 15 Power Market in Luzon ........... .. ..... 15 Economic Justification ............ ......... 16 Return on Investment .. ........ . ....... , ....... 16  -2- Page No. VII. FINANCIAL ASPECTS . .................................... 17 Earnings Record ......................... 17 Present Financial Position ....................... 17 Accounts Receivable .............................. 19 Proposed Financing Plan .......................... 20 Future Operating Results . .................... 23 VIII. AGREEMENTS REACHED AND RECOMMENDAX'ION ................. 24 ANNEXES 1. Presidential Decree No. 40 2. National Policy Objective for Total Electrification 3. Presidential Letter of Instruction No. 38 4. Luzon Grid Generating Facilities 5. Luzon Grid Transmission Facilities 6. Detailed Description of the Project 7. Transfer from Fifth Power Project 8. Cost Estimates 9. Estimated Schedule of Disbursements 10. Demand Supply Projection - Luzon Grid 11. Economic Evaluation of Pantabangan Investment 12. Condensed Balance Sheet at June 30, 1971 through 1979 13. Income Statements for FY 1971 - FY 1980 14. Income Statements for FY 1973 - FY 1980 (Luzon Region) 15. Income Statements for FY 1973 - FT 1980 (Visayas Region) 16. Income Statements for FY 1973 - FY 1980 (Mindanao Region) 17. Source and Application of Funds for FY 1974 - FY 1980 18. Source and Application of Funds for FY 1974 - FY 1980 (Luzon Region) 19. Source and Application of Funds for FY 1974 - FY 1980 (Visayas Region) 20. Source and Application of Funds for FY 1974 - FY 1980 (Mindanao Region) 21. Investment Program for FY 1974 - FY 1980 22. Loans Outstanding at June 30, 1973, and Subsequent Borrowing and Repayment of Principal through FY 1980 23. Assumptions for Financial Projections CHART: World Bank 8573: Organization Chart GRAPH: World Bank 8574: Demand-Supply Balance MAPS: IBRD-3562 RI: NPC Luzon Grid A Power Plants and 230 kV Transmission System IBRD-3563 RI: NPC Luzon Grid B 115 kV and 69 kV Transmission System  PHILIPPINES NATIONAL POWER CORPORATION APPRAISAL OF THE SIXTH POWER PROJECT SUMKARY AND CONCLUSIONS i. This report covers an appraisal of a project consisting of a hydroelectric generating installation of 10) MW at Pantabangan as an exten- sion to the Upper Pampanga River Irrigation scheme, additions to the National Power Corporation (NPC)'s transmission grid on Luzon, and technical studies by consultants. The estimated total cost of the Project is US$92 million. A Bank loan of US$61 million equivalent including interest on the Bank loan during construction of US$5 million is proposed to meet the foreign cost of the Project. ii. NPC has received five loans and one IDA credit from the Bank Group amounting to US$99.3 million equivalent. The project being financed by the most recent loan 809-PH and Credit 296-PH will be completed about April 1976. iii. The Government's policy of total electrification, declared by Presidential Decree No. 40 of November 1972, aims at forming island grids, integrating power generating facilities and consolidating the elec- tric distribution franchise system. NPC was made responsible for future development of generating plants and transmission systems. The National Electrification Administration (NEA) was made responsible for reorganizing and expanding the distribution sector. The Power Development Council will coordinate the planning and implementation of electrification projects. This provides a good basis for sector development. iv. The recent price of oil and uncertainties of its future supply have given priority to the development of indigenous hydroelectric and geothermal energy sources and nuclear power. The initial findings of geothermal explorations are encouraging and NPC has obtained a loan from Italy to finance construction of its first geothermal power plant by 1979. NPC has also initiated detailed site investigations and preliminary design for the first nuclear plant to be commissioned in 1984. v. Demand for electricity in the Philippines is concentrated in the island of Luzon, especially in the Greater Manila area where it is increasing steadily. The Pantabangan project will provide ideal peaking capacity by utilizing irrigation water releases during the dry season. It is the least cost solution for discount rates up to 35%. In the provincial area reliable supplies of electricity are available only in large cities and towns; the rest of the people either have supply on a limited and very costly basis or none at all. The proposed transmission project will extend power supply to rural areas by connecting about 130 towns and 60 large consumers including  - ii - pumped irrigation projects. Thus, the project would make a substantial con- tribution towards implementing the national policy of total electrification. vi. Total investment equivalent to about US$463 million is planned by NPC in FY 1975-78, to be financed from internally generated funds (15%), borrowings (84%) and by equity contribution (1%). NPC would require US$286 million in foreign currency. It has firm coumitments of US$96 million, with an additional US$61 million by the loan now proposed. A gap of US$129 mil- lion remains in respect of which the Government has applied to the Overseas Economic Corporation Fund (OECF) of Japan for US$16 million, t;ie Asian Devel- opment Bank (ADB) for $24 million, and anticipates assistance from the ADB, the World Bank Group, and others for the balance. NPC will raise its domestic capital through retained earnings, the sale of bonds, and from funds available through Commodity Loans. vii. NPC was expected to.earn a minimum rate of return of 8% on its net fixed assets in operation in FY 1974 but a return of 6.2% is now forecast due to slowness in increasing tariffs and to salary and wage increases and to continuing inflation during the year. NPC has now approved revised tariffs to be effective from July, 1974 which should ensure the required return of not less than 8% in F! 1975. viii. NPC's financial perforu)ance in the past was poor, but it has improved considerably since the revision of its charter in 1971, by con- tinued implementation of recoumendations made by management consultants employed as a result of Loan 491-PH, tariff increases, exemption from in- come taxes, realty taxes, duties and other charges, a rate base maintained at current values, and a much Improved financial reporting system. ix. The Project is suitable for a Bank loan of US$61 million equivalent, with a term of 25 years, including 4 years of grace on amortization.  PHILIPPINES NATIONAL POWER CORPORATION APPRAISAL OF THE SIXTH POWER PROJECT I. INTRODUCTION 1.01 This report covers the appraisal of a project consisting of a 100 MW hydroelectric plant at Pantabangan, further expansion of the trans- mission system in Luzon, and the services of engineering consultants to undertake engineering studies of the Chico hydroelectric development and a dispatching center. The Project would be completed by December 1977. The National Power Corporation (NPC) supported by the Government has requested a loan equivalent to the foreign c-ost of the Project, estimated at US$61 million equivalent. The Project'i total cost is estimated at US$92 million. The borrower would be the NPC, a government-owned corporation established in 1936. 1.02 The Bank Group has made five loans to NPC and one IDA credit to the Government for power projects, amounting to US$99.3 million, net of cancellations, as follows: Net Amount Year Loan/Credit No. Project US$ million 1957 183-PH Binga hydroelectric 18.4 1961 297-PH Angat hydroelectric 33.5 1962 325-PH Maria Cristina hydroelectric (No. 3 unit) 3.4 1967 491-PH Bataan thermal No. 1 unit and Maria Cristina hydro- electric No. 4 unit 12.0 1972 809-PH Bataau thermal No. 2 unit, transmission and services of consultants 22.0 1972 Cr 296-PH " 10.0 Total: $99.3 1.03 The projects undertaken through the first four loans have been completed and are in satisfactory operation. Following initial delay in project preparation for the Bataan No. 2 unit and transmission lines, im- plementation is now proceeding satisfactorily. Commissioning is presently expected in April 1976, about 10 months behind the original schedule. 1.04 The institutional objectives of Loan 809-PH and Credit 296-PH are being achieved. The consultants' feasibility studies of possible hydro- electric schemes and of the pumped storage scheme at Kalayaan have been  - 2 - completed; fixed assets have been revalued; a national policy has been in- troduced for coordinating the development of the power sector and the NPC Charter has been further revised. NPC now has the necessary structure and powers for sound and efficient public utility operation. It achieved the 6% rate of return stipulated in Loan 809-PH for FY 1973, with a forecast 6.2% return in FY 1974 compared to 8% required by the Agreement. 1.05 This report was prepared by Messrs. R. Maeda and S. S. Scales who visited the Philippines in November/December 1973 to appraise the project. II. THE ECONOMY 2.01 The Republic of the Philippines c9nsists of over 7100 islands, all of which lie within the tropics in the Western Pacific. Only 154 of the islands have a land area in excess of 13 square kilometers. The largest eleven account for 95% of the total land area of 184,000 square kilometers. The Philippine archipelago is divided into three regions as are NPC's opera- tions, Luzon in the north, the central islands known as the Visayas, and Mindanao (including Sulu islands) in the south. All the regions lie within the typhoon belt. 2.02 The population is approximately 40 million, over one half of which live on Luzon, over 4 million being concentrated in the Greater Manila area. About 25% of the population live in the Visayas, and the remainder in the Mindanao region. The population is growing at the rate of 3.1% a year. 2.03 In the three years 1970-1972 the performance of the economy was disappointing with a growth of only 5% a year in GNP. The Government's policy of monetary and fiscal restraint had improved the maturity autructure of external public debt, but the country had suffered considerable disruption of its agricultural output which had retarded food production, a deteriora- tion in external trade, and rapid inflation. The real gross national income per capita in 1971 and 1972 remained at about US$240. 2.04 The situation changed favorably in 1973. The recently increased world prices of commodities exported by the Philippines such as sugar, lumber, copper and gold contributed to the higher economic growth and in- creased foreign exchange reserves. 2.05 The recent economic mission is assessing the impact of higher oil prices on the Philippine economy. Preliminary analysis indicates the continuing favorable situation in 1974 with an expected surplus of US$250 million in overall balance of payment, which would increase international reserves to about US$1.1 billion, the equivalent of about three and half months' imports. In 1975, sustaining high prices of exports will likely offset the increased cost of fuel imports, resulting in only a small deficit in overall balance of payment.  - 3 - III. IrE POWER SECTOR 3.01 Prior to measures introduced in November 1972 to improve the opera- tion of the power sector, as discussed in the following paragraph, sector development lacked a cohesive plaa and was poorly coordinated, even between NPC and Manila Electric Company (AECO), the largest entities. Loan 809-PH in early 1972, focused on the need for more effective coordination of planning of power development and implementation among power suppliers, and the Govern- ment had undertaken to prepare proposals for improving the situation by December 31, 1972. 3.02 On November 7,' 1972, Presidential Decree No. 40 (Annex 1) directed that attainment of a national policy objective of total electrification (Annex 2) involving industrial development, dispersal of industry, and rural electrification should be achieved by establishing island grids, integrating power generating systems, and consolidating electric distribution franchise systems. This was a major change in sector policy. NPC was made responsible for the construction of national grids and the development of all future generation supplying the grids and ultimately for owning and operating all generating facilities. This implies that existing generating facilities of MECO, representing two-thirds of the total capacity in the country, will be transferred to NPC. However, the terms and timing of the transfer remain to be decided. The distribution of electric power will be undertaken by electric cooperatives, and municipal and private electric utilities. The National Electrification Administration (NEL.) was made responsible (Annex 3) for reorganizing the distribution sector and implementing rural electrification. The Power Development Council 1/ was made responsible for the preparation of an effective integrated plan of electrification and power development and to coordinate all activities and operations in its implementation. The Decree is more comprehensive and far reaching than had been contemplated by the covenant in the 809-PH Guarantee Agreement. Energy Resources 3.03 The country is not rich in energy resources. Coal deposits are limited in amount and belong to a geologically young variety with low heating values. The hydroelectric potential is estimated at 3,600 MW, two- thirds in Luzon and one-third in Mindanao; 16% of it has already been dev- eloped. Oil and gas explorations are in progress in Cebu and off-shore in Palawan. Some gas reserves have been found, but these are insignificant for the electric power sector. More than 90% of total energy consumption and about 80% of the electric generation are presently dependent on imported oil. Its price and the uncertainties of future supply have accelerated NPC's and Government's plans for development of indigenous geothermal energy and 1/ A Government agency formed in 1970 to carry out research and coordinate the development of the power sector, and which reports to the Office of the President.  nuclear power. The initial findings of geothermal explorations at Tiwi, Southern Luzon, are encouraging. High pressure steam sufficient to produce 20 MW of electric power has been found and the capacity of the field is estimated at several hundred megawatts. NPC has entered into a contract with Philippine Geothermal, Inc., subsidiary of Union Oil of California for the supply of steam uip to 250 MW. Exploration of another geothermal field started on the island of Leyte recently. A feasibility study for nuclear power has been completed by Electrowatt of Zurich for the International Atomdc Energy Agency, and NPC has engaged consultants for the detailed site investi- gations and preliminary design. The first 600 MW unit is likely to be in operation by 1984. Power Supply 3.04 Electricity supply is provided by more than 400 utilities. One quarter are public, the largest by far being NPC. The rest are privately owned, dominated by MECO. NPC accounts for about 26% of total generation and MECO for 66%; the remaining 8% being provided by the self-generating small utilities. NPC's generation is primarily from hydroelectric resources; MECO depends almost entirely on oil-fired thermal generation. In addition, some industries have captive plants, totalling about 18% of utility capacity. 3.05 MECO serves the greater Manila area, the center of the country's industrial and commercial activities. Industrial and commercial load re- present 41% and 24% of MEC0's total sales, respectively. MECO's fixed serv- ice area which has been well served for years, and the industrial dispersal policy of the Government combined to stabilize load growth to a moderate 8% annually during the 5 years 1967-72. As this growth rate is not likely to change significantly (para 6.01), the extent of MECO's participation in the sector will gradually decline. NPC, as a bulk supplier of electricity to small utilities, serves 177 electric utilities and 104 non-utility customers spread over about half of Luzon, in small areas of Mindanao and in the Visayas islands. NPC's provincial demands in Luzon have been growing at an average annual rate of 15% during the past 5 years, reflecting the Govern- ment's policy of total electrification. 3.06 However, total electrification has a long way to go. Although about 30% of the total population enjoy the benefits of electricity, most of them live in urban areas. In rural areas small private and municipal utilities provide limited service but reliable supplies are available only in large cities and towns where utilities are connected with the main grids. The rest of the utilities generate power on a 6-10 hour daily basis from small diesel units averaging in capacity less than 500 kW; services are substandard. Even in Luzon, the most developed region, 242 towns and villages out of a total of 636 have no power supply at all. NEA has already initiated plans for their electrification (para 3.11). Development Program 3.07 NPC has prepared a long-range generation expansion program for the combined NPC-MECO Luzon grid based on recommendations by its consultants,  -5- International Engineering Co. (IECO) of San Francisco. Projects included in the program for early commissioning are listed below: Capacity Commissioning Project MW Type Owner Year 1. Malaya 1 310 thermal MECO 1975 2. Bataan 2 150 thetrmal NPC 1976 3. Pantabangan 100 hycro NPC 1977 4. Malaya 2 330 thermal MECO 1978 5. Tiwi 1 50 geothermal NPC 1979 6. Kalayaan 1,2 300 pumped storage NPC 1979 7. Tiwi 2 50 geothermal NPC 1980 8. Chico II 1-4 240 hydro NPC 1981 Total installed capacity in the Luzon grid will increase by 70% from 1,896 MW in 1973 to 3,186 MW in 1980. Existing facilities of the Luzon grid are shown in Annexes 4-5. The program has three distinctive aspects: (a) NPC will be responsible for all the future generation expansion after Malaya 2 as stipulated by Presidential Decree No. 40 (para 3.02); (b) indigenous resources of hydro and geothermal energy will be utilized instead of conventional oil-fired steam plants (para 3.03); and (c) emphasis is placed on the development of peaking capacity required in late 1970's when about 84% of total capacity will consist of base-load thermal plants. The future generation development policy is to provide the base load energy from geothermal and nuclear sources, and peaking capacity from pondage hydro and pumped storage schemes. However, oil-fired generation might have to replace Tiwi geothermal should sufficient steam not be available. 3.08 In response to the energy crisis, the Government and NPC recently revised the above investment program in order to further accelerate hydro, geothermal and nuclear power development and reduce dependence on oil-fired thermal plant. This revised program is now being reconsidered by NPC and the Government since it appears too ambitious both in terms of executing a large number of additional projects and in terms of finding foreign and domestic financing for them.  - 6 - 3.09 NPC and MECO have been operating essentially independently with only seasonal and emergency exchange of energy between the two systems. Joint operation would not only yield technical and economic advantages but will become inescapable in the future when MECO becomes dependent on NPC for its power supply. A task force consisting of NPC and MECO personnel and a professor from the University of the Philippines has been studying the technical and economic aspects of 'combined operation' of the two systems. The results of the study are to be reviewed by consultants proposed to be retained for the preparation of a feasibility study for a load dispatching center (para 5.05). 3.10 In Mindanao, NPC relies entirely on the hydroelectric development of the Agus river. The installed capacity is presently 150 MW at the Agus VI plant. NPC is planning to triple its generating capacity by 1978 to meet growing industrial demands by adding a 5th unit of 50 MW to Agus VI and by developing Agus II (180 MW) and Agus VII (60 MW). The Agus river can be further developed to a maximum capacity of about 900 MW, which would be sufficient to cover demands expected by the early 1980's. In the Visayas region NPC has only two small hydropower plants (2 MW) and demand is sup- pressed. A power development study has been carried out and NPC plans to install 5 x 10 MW diesel units by 1977 and a 50 MW coal-fired steam plant in 1978 on the island of Cebu. National Electrification Administration 3.11 NEA was empowered by Letter of Instruction No. 38 (Annex 3) to implement Presidential Decree No. 40, and was given certain powers, duties, and functions to attain total electrification; to set up cooperatives for the distribution of power; and to determine which privately-owned public utilities should be permitted to remain in operation. NEA's organization was strengthened and made more flexible by Presidential Decree No. 269 dated August 6, 1973 (called the NEA Decree) which converted it into a corporation, wholly owned and controlled by the Government, having borrowing authority and corporate powers. By February, 1974, 47 cooperatives had already been registered and 18 of them had taken ovet franchises and are supplying electricity to consumers in approximately 80 towns and villages. Manila Electric Company 3.12 Although NPC has been given responsibility for the construction of all new plant additions to meet the increase in power demand, MECO will continue for the present to complete Malaya 1 (310 MW) to be commissioned in January 1975, and Malaya 2 (330 MW) to be completed by January 1978. 3.13 MECO was purchased in 1962 by the Filipino owned Meralco Securities Corporation from the General Public Utilities Corporation of New York and now generates about 66% of all electric energy in the country, almost en- tirely from oil-fired plant. It was and is well-managed and until about 1970 profitably operated. Foreign capital was raised by the sale of bonds abroad, but devaluation of the peso in 1970 combined with inability to se- cure approval for tariff actions to maintain what had been the allowable return of 12% on net fixed assets seriously upset its cash flow. A severe liquidity problem ensued.  - 7 - 3.14 The Meralco Securities Corporation has recently been divested of MECO in connection with Government's agreement to guarantee repayment of MECO's debt. It is also the Government's objective that MECO should regain its financial viability and it has recently approved substantial tariff increases toward this end. IV. THE BORROWER 4.01 Created originally as a nonstock public corporation in 1936, NPC was converted into a stock corporation in 1960. Presidential Decree No. 380 of January 22, 1974 raised the authorized stock from 1 300 million, fully subscribed by the Government, to f 2,000 million. The life of the corpora- tion, due to expire on January 4, 1976, was extended by 50 years. Organization and Management 4.02 NPC's past management suffered from poor financial and operating information and inadequate authority. The reorganization by consultants of managerial duties, the overhaul of accounting and financial functions, on- the-spot training of personnel implementing the revised systems and proce- dures, and the revision of its charter have provided NPC the necessary base for sound and efficient public utility operation. Although more time is re- quired to demonstrate fully the effect of the reorganization, considerable improvement is already evident. 4.03 NPC's corporate powers are vested in a Board of seven members including the General Manager who is ex-officio Vice Chairman. The Chairman and the five directors are appointed by the President of the Philippines with the consent of the Commission on Appointments. The five directors re- present Luzon, Mindanao, Visayas, labor, and the business sector, respectively, and each is required to possess one or more of the following qualifications: a licensed professional of recognized competence in engineering, in business management and finance, or in law, or to be a recognized labor leader. Re- gional representatives must be residents of the regions they represent. Amendment to the NPC Charter (Republic Act No. 6395) 4.04 Amendments to the NPC Charter in September, 1971 improve rate- making procedures by exempting NPC rate increases from lower court injunc- tions which had in the past been the major cause of delay in implementing such increases. The amendments also grant NPC exemption from all taxes, including income and other taxes, reflecting the Government's determination to help it overcome its financial difficulties. 4.05 NPC's Charter was again amended by Presidential Decree No. 380 in January 1974. The following are the main changes: (a) NPC was placed under the direct supervision of the Office of the President, with the Solicitor General having supervision of the Corporation's court cases.  - 8 - (b) All industrial disputes of the Corporation will be settled by compulsory arbitration. (c) NPC was authorized to p,rescribe a standard form of contract for the supply of power and appropriate rules and regulations for uniform application. Service agreements in torce at the date of the Decree, which required differing periods of notice before tariff changes could be implemented, were considered revised with immediate effect. (d) The authorized capital stock of the Corporation was raised to 1 2,000 million to be subscribed by the Government. (e) The ceiling on NPC's total peso indebtedness was raised from 1 500 million to t 3,000 million, and that on NPC's foreign debt from US$200 million to US$1,000 million or equivalent in other currencies. (f) NPC was permitted to sell bulk supplies of power to enterprises in franchised areas without restriction when the cost of power to the enterprises would exceed 10% of the total production cost of the goods or commodities produced. (g) The assessment of compensation was simplified in respect of easements or rights of way, land purchase, or damage to property or crops by basing it on the value of the property claimed by an owner' s current tax declaration. Tariffs 4.06 NPC's tariffs are appropriate for bulk supply. They include demand (kW) and energy (kWh) charges and, effective from July 1973, the rate sched- ule in Luzon includes a fuel clause (paras 4.08-4.10). 4.07 To assist NPC in neeting the rate of return agreed in connection with Loan 809-PH with minimum tariff increases, the Government has not only exempted NPC from income tax but from other expense such as all franchise and realty taxes; all import duties, taxes, wharfage fees on the import of foreign goods required for its operations; taxes, duties, fees, imposts and other charges imposed directly or indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies, on all petroleum products used by NPC on generation, transmission, distribution and sales of electric power. Although these exemptions increase the numerator in the rate of return calculation, a return of only 6.2% is forecast for FY 1974 rather than the minimum 8% required. However, NPC has approved revised tariffs for implementation from July 1, 1974,  - 9 - which should produce revenue adequate to achieve a rate of return of not less than 82 in FY1975. Fuel Clause 4.08 The fuel clause referred to in paragraph 4.06 was first proposed by NPC during FY 1971 to enable it to pass on to the consumers any variation in the average cost of fossil fuel above a stipulated base price. This applies only to Luzon where the cost of fuel oil is apportioned over total sales in calculating the surcharge per kWh payable by customers. The following table shows the cost of fuel oil at NPC's Bataan thermal plant and the amount of the surcharge per kWh payable by customers prior to com- missioning of Bataan unit No. 2. Cost of Fuel Oil Only Average Revenue per kWh Sold Average Price per kWh Per per kWh Per Barrel Generated Tariff Fuel Oil Payable by at Bataan Schedule Surcharge Customers (US$) (US cents) (US cents) (US cents) (US cents) 4.40 0.74 0.89 0.16 1.05 8.80 1.48 0.89 0.35 1.24 4.09 The November 1973 fuel oil price at the Bataan plant was US$4.40 per barrel which was included in the average price of US 1.05 cents per kWh sold by NPC to its Luzon customers. A doubled fuel oil price would raise the price to customers by US 0.19 cents per kWh (equivalent to an additional 18% tariff increase). This comparos with a US 1.00 cent per kWh increase in the cost of generation by MECO which in addition to paying taxes and duties from which NPC is exempt (para 4.07), depends upon wholly oil-fired generating plant. 4.10 NPC has a service contract with Philippine Geothermal, Inc., sub- sidiary of Union Oil of California for drilling operations. Payment for geothermal steam will be at a rate which is subject to escalation according to mutually acceptable cost indices still to be arranged, but subject to geothermal power remaining competitive with other alternative generation sources. NPC's fuel clause formula will require amendment, prior to the commissioning of geothermal generation plant in 1979 at Tiwi, to cover changes in the cost of steam. Staff 4.11 The following table shows the number of NPC employees at the end of FY 1969 through FY 1973:  - 10 - Permanent Temporary/Casual Employee Employee Total June 30, 1969 1,261 625 1,886 1970 1,219 692 1,911 1971 1,107 1,039 2,146 1972 1,135 1,336 2,471 1973 1,057 1,906 2,963 4.12 A preliminary evaluation of permanent employees made by consult- ants in 1968 indicated substantiel surplus staff. These have been reduced by attrition by 16% to 1057 as of June 30, 1973. However, NPC now faces a shortage of permanent staff in the skilled and supervisory categories, partly due to the establishment of regional offices, but largely due to Presidential Decree No. 40 which accelerates the investment program. Tempo- rary and casual employees are hired for specific work orders of limited duration in plant, substations, surveys and investigation work, and con- struction projects. The increase of temporary employees in FY 1973 re- flects the increased work, particularly on hydrologic surveys and in respect of the accelerated development program. Audit 4.13 The Commissioner on Audit, which replaced the Auditor General of the Philippines in January, 1973, is ex-officio'auditor of NPC. He is empowered to appoint his representative, known as the "Auditor of the Corporation". He also appoints staff to assist his representative and fixes their salaries. The existing loan agreement required NPC's accounts to be audited by an in- dependent auditor acceptable to the Bank, and the Bank has accepted the Auditor of the Corporation. V. THE PROJECT Project Description 5.01 The proposed project comprises: (a) the 100 MW Pantabangan hydropower plant (para 5.02 and Annex 6); (b) the transmission system expansion programs in Luzon (para 5.03 and Annex 6); and (c) the feasibility studies of the Chico river hydropower development and a dispatching center (paras 5.04, 5.05). 5.02 The Pantabangan hydropower plant is an addition of power gener- ating facilities to the Upper Pampanga River Project (UPRP) presently in the final stage of construction by the National Irrigation Administration (NIA) with the assistance of Bank Loan 637-PH. Two units of 50 MW each will be installed in a surface power house at the foot of the irrigation dam.  - 11 - A re-regulation dam will be built downstream of the plant to regulate river flow for irrigation purposes. The plant would have a firm capacity of 70 MS, with an annual energy output of 293 GWh, and would supply the Luzon grid by a 23 km 230 kV double circuit transmission line which is also included in the Project. Commissioning is planned for April 1977. 5.03 The transmission system eIxpansion program will continue work fi- nanced in part by the 5th Power Prcject. The Luzon grid will be extended by constructing 210 km of 230 kV and 535 km of 69 kV transmission lines and 33 substations with a total capacity of 1,375 MVA. Of this, 250 km of 69 kV lines and 13 substations (75 MVA) originally included in the 5th Power Loan, but for which bids have not been received, have been transferred to the pro- posed project because funds remaining in the 5th Power Loan are inadequate to cover the originally envisaged program due to sharp cost increases in the supply and erection of transmission facilities since its appraisal in 1971 (Annex 7). The transmission expansion program would be completed by December 1977. 5.04 A pre-feasibility study financed umder the 5th Power Project iden- tified the Chico river as one of the better potential hydropower resources in Luzon with a. total available capacity of 1,000 MW and 2,200 GWh. The study included in the proposed project would advance the preliminary investi- gations to feasibility grade level and prepare the definite design for the Chico II site, which was given the highest priority among the four proposed development sites in the pre-feasibility report. Pre-feasibility studies of two tributaries of the Chico river are also included in the study. 5.05 NPC has no dispatching center and its daily operations are based on pre-determined loading curves for each hydro plant. With the commissioning of the second Bataan thermal unit and the need for pooled operation of the NPC-MECO system for maximum fuel economy, it is essential for NPC to have reliable dispatching facilities. The proposed loan would finance a study to determine precise requirements and the design of the facilities. Cost Estimate 5.06 The detailed cost estimate of the Project is given in Annex 8 and summarized below:  - 12 - Millions of Pesos Millions of US$ Local Foreign Total Local Foreign Total Pantabangan Hydro Plant Civil Works including Re-regulation Dam 59.85 - 59.85 8.74 - 8.74 Supply of Materials for Civil Works - 18.91 18.91 - 2.76 2.76 Power Plant and Equipment 4.04 44.80 48.84 0.59 6.54 7.13 Transformers and Switchyard 0.32 9.04 9.36 0.05 1.32 1.37 Transmission Line 2.90 5.69 8.59 0.42 0.83 1.25 Engineering 4.90 5.48 10.38 0.71 0.80 1.51 Contingencies - Physical 3.36 3.90 7.26 0.49 0.57 1.06 - Price 23.96 24.52 48.48 3.50 3.58 7.08 Sub-Total 99.33 112.34 211.67 14.50 16.40 30.90 Transmission Expansions Transmission Lines and Substations 50.35 154.47 204.82 7.35 22.55 29.90 Items formerly included in 5th Power 14.11 54.80 68.91 2.06 8.00 10.06 Contingencies - Physical 2.53 8.01 10.54 0.37 1.17 1.54 - Price 26.85 43.02 69.87 3.92 6.28 10.20 Sub-Total 93.84 260.30 354.14 13.70 38.00 51.70 Consultirm Services 2.33 10.96 13.29 0.34 1.60 1.94 Total Cost of Project 195.50 383.60 579.10 28.54 56.00 84.54 Interest during Construction 16.60 34.25 50.85 2.42 5.00 7.42 Grand Total 212.10 417.85 629.95 30.96 61.00 91.96 5.07 The cost estimate for the Pantabangan project was prepared by Engineering Consultant Inc. of Denver (ECI), the consultant for UPRP. It is based on world market prices which prevailed in late 1973. The esti- mate for the transmission system expansions was made by NPC on the basis of the latest tenders received for similar work in the 5th Power Project. Both estimates are considered reliable. As the project is well prepared, physical  - 13 - contingencies of 5% should prove adequate. Various percentages of price es- calation ranging between 7.5-18% per year haive been applied to various items in each year during the construction period. Overall price contingency amounts to 21% of the project cost. Considering recent trends of world-wide inflation, the provision is reasonable. Amount of Proposed Loan 5.08 The Project's foreign exchange component of US$56.0 million equiv- alent represents about 66% of the total cost of US$84.5 million equivalent before interest. This percentage is high because the Project contains very little civil works. The proposed loan would cover the full foreign exchange cost and the interest on the Bank loan during construction amounting to US$5.0 million. The total amount is thus US$61.0 million. Engineering and Construction 5.09 ECI has prepared the specification for the power phase and will continue as the consultants during its implementation. This has been agreed by the Bank. During negotiations NPC confirmed that ECI would be retained as consultants for the power phase. NPC and NIA have agreed in connection with the implementation of the power phase that: (a) NPC shall be the Borrower and shall be responsible to the Bank for the satisfactory completion of the project, including procurement; (b) NIA shall be the implementing agency on behalf of NPC to avoid duplication of facilities and field organization; (c) NPC shall bear only the incremental costs of the power phase; and (d) NPC shall own the facilities associated with the power phase and operate them in accordance with guidelines set out by NIA. The terms of the agreement are satisfactory. 5.10 NIA has been implementing UPRP satisfactorily. Its project organization at the site with experienced personnel, equipment and other facilities permit it to complete the power part of the project, with some NPC staff seconded, more expeditiously than NPC could itself. 5.11 In the interest of expediting the implementation of the Pantabangan project, NPC has requested and the Bank has agreed that the civil works con- tractor for UPRP undertake the 'Pantabangan civil works under the terms of a negotiated contract. This contractor has been performing satisfactorily for UPRP and also has experience in the construction of hydropower plants in the country. The contract would cover the civil works for the power- house, switchyard and the re-regulation dam. This contract would not be  - 14 - financed by the proposed loan. However, im;orted materials and equipment necessary for the civil works would be provided by NPC and financed by the loan (para 5.15). 5.12 NPC has gained sufficient experience in the execution of transmis- sion projects through the on-going 5th Power Project and plans to carry out the engineering and the construction supervi sion of the transmission project using its own staff. This arrangement would be satisfactory. 5.13 The transmission project includes the expansion of the Dolores substation, the interconnecting point between NPC and MECO, but the extent to which NPC and MECO would be responsible for the construction and operation of the substation is not clear. The project cost estimate assumes that NPC would be responsible for the high voltage side of the substation. A satis- factory agreement between NPC and MECO on this matter would be the condition of disbursement against this specific item. 5.14 For the purpose of the Chico II project feasibLlity study, NPC has retained Lahmeyer International of Germany who carried out the pre-feasibi- lity study of the Chico river development. The consultants are acceptable to the Bank. The proposed loan would finance the detailed field i3vestiga- tion and the definite design of the project and pre-feasibility studies of hydropower development on the Pasil and Tanudan river, tributaries of the Chico river. The study for the dispatching center will be carried out separately by engineering consultants yet to be selected. NPC has agreed to retain consultants satisfactory to the Bank for this purpose. Procurement and Disbursement 5.15 The goods and services financed by the proposed loan, including basic materials and equipment for civil works construction to be provided by NPC, will be procured through international competitive bidding in accord- ance with the Bank's Guidelines. Since some of the project items could be manufactured locally, the Loan Documents include the usual margin of pre- ference for local manufacturers. 5.16 The preparation of bidding documents is underway for the Pantabangan project and the items transferred from the 5th Power Project. To avoid undue delay in the implementation of the Project, the Bank has agreed to the issu- ance of bid invitations for these items providing no contract commitment is made in advance of loan approval. On the basis of the present procurement schedule it is unlikely that contracts would be ready for placing before the loan is signed. 5.17 Disbursements would be made against the full foreign exchange costs of equipment and services. No disbursements would be made for goods bought prior to approval of the loan, but foreign costs of the consultants' services incurred between December 1, 1973 and loan signing, amounting to about US$100,000 would be financed retroactively. The estimated schedule of dis- bursements is shown in Annex 9. Any surplus funds remaining after completion of the Project would be cancelled, unless there were good reasons for applying savings to related works.  - 15 - Ecological Aspect 5.18 No ecological problem is expected to arise from the Project. The re-regulation daim will eliminate any effect on the downstream river flow and the siting of it will not introduce relocation problems. Transmission lines will mainly pass through rural and mountainous areas. VI. JUSTIFICATION OF THE PROJECT Power Market in Luzon 6.01 Electricity consumption for the combined NPC-MECO interconnected system has increased at the average rate of about 10% per year since FY 1967. NPC's provincial market has grown by 15% annually, a much higher rate than MECO's 8%, reflecting the Government's policy of bringing electricity to rural areas. This tendency is expected to continue, although at slower rates. Annex 10 and the attached graph (No. 8574) show the peak-demand and energy requirements up to FY 1980 and the corresponding supply capability. The forecist is summarized below: Peak Demand Energy Requirement FY 1972 FY 1980 Growth Rate FY 1972 FY 1980 Growth Rate