Philippines - Rural Electrification Project

Document of The World Bank FOR OFFICIAL USE ONLY F $ V Report No. 1848-PH PHILIPPINES STAFF APPRAISAL REPORT RURAL ELECTRIFICATION PROJECT March 13, 1978 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performane2 of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1.00 = Philippine Peso (P) 7.40 1 1.00 = 100 centavos P 1.00 = US$0.135 P 1 million = US$135,335 UNITS AND MEASURES 1 kilovolt (kV) = 1,000 volts (V) 1 megawatt (MW) = 1,000 kilowatts (kW) 1 megavolt ampere (MVA) = 1,000 kilovolt amperes (kVA) 1 gigawatt hour (GWh) = 1 million kilowatt hours (kWh) 1 kilometer (km) = 1,000 meters (m) 1 meter (m) = 100 centimeters (cm) 1 hectare (ha) = 10,000 square meters (sq. m) ABBREVIATIONS AND ACRONYMS Coop - Cooperative DOE - Department of Energy EDB - Energy Development Board GNP - Gross National Product IER - Internal Economic Return MECO - Manila Electric Company MM - Man-Month NEA - National Electrification Administration NPC - National Power Corporation NRECA - National Rural Electric Cooperative Association PDC - Power Development Council NEA's FISCAL YEAR Until 1976: July 1 - June 30 1976 onward: January 1 - December 31  FOR OFFICIAL USE ONLY PHILIPPINES NATIONAL ELECTRIFICATION ADMINISTRATION APPRAISAL OF THE RURAL ELECTRIFICATION PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. 1. THE POWER SECTOR . . . 1 . . . . . . . . . . . . . . . . . . 1 General . . . . . . . . . . . . . . . . . . . . . . . . . I The Bank's Role in the Sector . . . . . . . . . . . . . . 2 Main Characteristics of the Sector . . . . . . . . . . . . 2 Development Program . . . . . . . . . . . . . . . . . . . 4 2. THE BORROWER . . . . . . . . . . . . . . . . . . . . . . . . 5 Organization and Management . . . . . . . . . . . . . . . 5 Audit and Accounts . . . . . . . . . . . . . . . . . . . . 6 Consolidation and Coordination of Information . . . . . . 6 Cooperatives . . . . . . . . . . . . . . . . . . . . . . . 7 Organization and Management. . . . . . . . . . . . . . 7 Consultants . . . . . . . . . . . . . . . . . . . . . . 7 Reports and Progress Certificates . . . . . . . . . . . 7 Audit and Accounts . . . . . . . . . . . . . . . . . . . 7 Manpower and Training . . . . . . . . . . . . . . . . . 7 Insurance . . . . . . . . . . . . . . . . . . . . . . . 8 Tariff Policy . . . . . . . . . . . . . . . . . . . . . 8 Load Promotion Programs . . . . . . . . . . . . . . . . 9 3. THE POWER MARKET . . . . . . . . . . . . . . . . . . . . . 9 Historic Background . . . . . . . . . . . . . . . . . . . 9 The Forecast . . . . . . . . . . . . . . . . . . . . . . . 11 The Rural Electric Cooperatives . . . . . . . . . . . . . 12 4. PROGRAM AND PROJECT . . . . . . . . . . . . . . 13 General . . . . . . . . . . . . . . . . . . . . . . . . . 13 Generation and Transmission Facilities . . . . . . . . . 13 Program Costs . . . . . . . . . . . . . . . . . . . . . . 14 The Project . . . . . . . . . . . . . . . . . . . . . . . 14 Scope . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Objectives . . . . . . . . . . . . . . . . . . . . . . . . 14 This document has a restricted distnbution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed withoul World Bank authorization.  -2- Page No. Descri,-Lon 3o o ProJect . . . . . . . . . . . . . . Location. . . . . . . . . . . . . . . . . . . . . . . .5 Project Cost. . . . . . . . . . . . . . . . . . . . . . . - Financing . . . . . . . . . . . . . . . . . . . . 16 Engineering and Construction. . . . . . . . . . . . . . . 17 Procurement . . . . . . . . . . . . . . . . . . . . . . . 18 Disbursements . . . . . . . . . . . . . . . . . . . . . . 18 Environment . . . . . . . . . . . . . . . . . . . . . . . 19 5. FINANCIAL ANALYSIS. . . . . . . . . . . . . . . . . . . . . 20 NEA: Past Results and Financial Position . . . . . . . . . . . 20 Future Position . . . . . . . . . . . . . . . . . . . . . 21 Financing Plan . . . . . . . . . . . . . . . . . . . . . 22 Future Operating Results. . . . . . . . . . . . . . . . . 23 Cooperatives: 23 Past Results and Financial Position . . . . . . . . . . . 23 Future Position . . . . . . . . . . . . . . . . . . . . . 23 Pampanga Rural Electric Cooperative . . . . . . . . . . . 24 Benguet Electric Cooperative. . . . . . . . . . . . . . . 24 La Union Electric Cooperative . . . . . . . . . . . . . . 24 Ilocos Norte Rural Electric Cooperative . . . . . . . . . 25 Catanduanes Electric Cooperative . . . . . . . . . . . . 25 General . . . . . . . . . . . . . . . . . . . . . . . . . 25 6. ECONOMIC JUSTIFICATION . . . . . . . . . . . . . . . . . . 26 Power Demand. . . . . . . . . . . . . . . . . . . . . . . 26 Scope . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Internal Economic Rate of Return . . . . . . . . . . . . 26 7. SUMMARY OF PROPOSED AGREEMENTS . . . . 27 ANNEXES 1. NEA Organization Chart 2. Assumptions in Financial Forecasts 3. Statement of Policy 4. Related Documents and Data Available in the Project File 5. Map IBRD 13281 This report is based on information obtained by B. Abadian, J. Cavallotti and J. Sneddon during an appraisal mission to Manila in September/October 1977.  PHILIPPINES NATIONAL ELECTRIFICATION ADMINISTRATION APPRAISAL OF THE RURAL ELECTRIFICATION PROJECT 1. THE POWER SECTOR General 1.C1 The power sector in the Philippines has historically been poorly coordinated and uneven in performance and institutional strength. In 1970, there were 336 private utilities and 122 public utilities, most of which were very small and located in urban areas. Since then a number have been taken over by rural cooperatives and some have ceased operating. As of August 1977, about 85 utilities and 73 cooperatives were actually supplying consumers. The Manila Electric Company (MECO), responsible for generation and distribution in the greater Manila area, dominates the private sector, while the National Power Corporation (NPC) is the largest public utility. MECO accounted for about 63%, and NPC 29%, of total electricity generated by utilities in 1976. Many of the smaller utilities have distributed power purchased from NPC and MECO but some have also generated their own power, accounting for the remaining 8%. Only about 26 of the 85 utilities sold more than 5 Gwh in 1976 and only about 19 of the 39 generating plants owned were larger than 1 MW. Service by the small utilities (and some of the larger) has been substandard, costly, and confined to the centers of urban areas; no attempt had been made to carry power to villages. The absence of reliable power supplies has caused many industries to resort to captive plants to meet their power needs. 1.02 Fragmented ownership of the generation and distribution facilities became an important obstacle to the coordinated development of the power sector. The Government, therefore, formed the National Electrification Administration (NEA) in 1969 under Republic Act 6038 (revoked in 1973 and replaced by Presidential Decree 269), which declared the national objective of total electrification on an area coverage I1 basis through electric cooperatives. Little progress was made until after the declaration of martial law in late 1972. The Government announced in Presidential Decree No. 40 that the total electrification of the country was a national policy objective which should be achieved by establishing island grids, integrating generating systems and consolidating electric distribution franchise systems. NPC was made responsible for island grids, the development of all future generation supplying the grids and ultimately, for owning and operating all generating facilities. MECO, now the largest generating as well as distribut- ing company, will eventualLy become only a distributing utility; negotiations for transferring the bulk of MECO's generating plants and transmission lines to Government are nearing conclusion. 1.03 The Department of Energy (DOE), created in 1977, is the policymaking body for the power sector responsible for formulating policies and programs /1 Area coverage means connecting every house or building provided that the cost of doing so is reasonable in relation to overall system costs.  - 2 - on power development and coordinating the activities of all organizations connected with electric power, including approval of the power project pipeline and the ratemaking policy. Responsibility for granting power franchises is also covered and assurances were obtained during negotiations and incorporated into the Guarantee Agreement that licenses for power genera- tion and distribution will continue to be granted by NEA. The DOE coordinates policy for NEA, NPC, MECO and all other utilities. NPC and NEA both report to it. The Department Secretary is the Chairman of the boards of directors of both NEA and NPC to ensure coordination of the two corporations. 1.04 The intrasectoral responsibilities of NEA and NPC are clearly defined. If properly implemented, the reorganization of the sector will lead to better coordination in power development. Progress is already apparent. NEA's eEforts in setting up rural cooperatives have been welcomed in the provinces, and consumers have shown themselves willing to pay the cost of power supplies whether at low or high tariff levels. NPC has committed itself to a massive generation and transmission development program, not only in Luzon, where its activities were concentrated in the past, but also in Mindanao and the Visayas. NEA should have no difficulty in carrying out its share of the program but NPC's responsibilities have been greatly increased and it is reorganizing to meet these. Its mana- gerial, technical and financial ability to carry out its ambitious program has yet to be proven. The Bank's Role in the Sector 1.05 To date :he Bank has made seven loans to NPC, and IDA one credit to the Government, totaling US$218.3 million, to assist in the development of the Philippines' power sector. The first loan, for US$14.4 million, was made in 1957 to provide partial financing for the Binga hydroelectric project. The most recent, signed in August 1977, made US$58 million available for expansion of the transmission system in Luzon, the first stage of a central load dispatching system, and consultants' services. Although some of the projects financed either exceeded the original execution schedules or experienced cost overruns, all of them are being operated satisfactorily. 1.06 The proposed loan of US$60.0 million would be the first from the Bank to NEA for power expansion and would help finance the 1979-1980 portion of the rural electrification program; it would provide access to electricity service for more than 5.3 million individuals in the countryside and help to increase incomes arong the poorest population. Main Characteristics of the Sector 1.07 Electricity generation in the Philippines grew at an annual rate of 11.0% over the period 1970-1976, while GDP grew at a rate of 6.0% over the same period. Per capita electricity generation is estimated at 323 kwh. Installed capacity at the end of 1976 was 3,542 MW including self-production; oil-fired thermal power plants accounted for 80% of total energy generation. 1.08 There are currently approximately 2.3 million subscribers for an estimated population of 43 million. The population serviced throughout the country rose from 27% in 1972 to 32% in 1976 as shown below:  -3 - Towns Cities Total Population Status 1972 1976 1972 1976 1972 % 1976 % Served by Electric System 5,432 8,064 5,390 5,731 10,822 28 13,795 32 Not served 25,153 26,082 2,842 3,125 27,995 72 29,207 68 Total ('0OOs) 30,585 34,146 8,232 8,856 38,817 100 43,002 100 There are marked contrasts in electricity consumption among the different regiLons. The Luzon market accounts for 73% of all consumption. In its turn, the central area around Manila accounts for more than 80% of consumption on Luzon although less than 65% of the Luzon population lives in this region. 1.09 Public utility companies supply 79% of total electric power, the rest being produced by self-production. Self-suppliers (mainly sugar mills, cement plants, and mining enterprises) own 20% of the country's installed capacity. The following tab:Le shows installed capacity and power generated in the Philippines in 1976. INSTALLED CAPACITY AND POWER GENERATION IN PHILIPPINES IN 1976 Capacity Generation Hydro Thermal Total Hydro Thermal Total ----- MW ---------- GWh ---------- 1. Public Service 644 2,178 2,822 2,818 8,243 11,061 (a) Governmental 625 97 722 2,733 478 3,211 NPC 625 81 706 2,733 478 3,211 Others - 16 16 - - - (b) Private 19 2,081 2,100 85 7,765 7,850 MECO 15 1,836 1,851 77 6,889 6,966 DLPCO 3 66 69 6 204 210 VECO - 61 61 - 262 262 Cooperatives - 49 49 - 81 81 Others 1 69 70 2 329 331 2. Self Producers - 720 720 - 2,837 2,837 Luzon - 226 226 - 681 681 Visayas - 332 332 - 1,336 1,336 Mindanao - 162 162 - 820 820 3. Total 644 2,898 3,542 2,818 11,080 13,898 Percentage (%) 18.2 81.8 100.0 20.2 79.8 100.0  - 4 - Information about the generating capacities and energy production of NPC and MECO is readily available, but a complete analysis of past trends in the Philippines power sector is hampered by a lack of data about the capacities and production of the Bnwl utilities and -rivp--- I'ed rlans r-^-ol_ idated statistics of energy consumption for private utilities by class of customer are not readily available except for MECO's customers. As the Government has just set up a Department of Energy on which the electric utilities will depend (para 1.03), it is expected that this basic information will be kept up to date in future to assure the best allocation of resources in the expansion of- the power sector. Development Program 1.10 NEA aims to establish a cooperative in each province by the end of 1977, complete the backbone or primary distribution system by 1980, provide electricity to all barrios by 1984, and attain total electrification of the country by 1990. The following plan has been devised to achieve those targets: No. of Barrios No. of New Year to be Energized Connections Annually Annually 1977 2,524 278,900 1980 4,531 436,137 1984 2,414 572,100 1.11 NPC is also embarking on a large program to provide the generating plant and transmission lines required for the electrification of the country as a whole, as well as meeting the increase in demand in areas which already have adequate service, such as the greater Manila area. 1.12 Significant changes are expected to take place in the sources of electric energy in the coming years. The relative importance of petroleum for power generation would decline to be replaced by hydro, geothermal and nuclear as shown below: INSTALLED CAPACITY 1976 1985 Energy Source MW % MW % Petroleum 2,898 81.8 4,494 52.8 Hydro 644 18.2 2,677 31.5 Geothermal - - 745 8.7 Nuclear - - 600 7.0 Total 3,542 100.0 8,516 100.0  1.13 The capital investment required for the proposed development program from 1977 through 1983 is estimated at US$7.3 billion (P 54.0 bil- lion) at current prices including finance charges and price escalation, as shown below: Investment 1977-1983 IJS$ Million % NPC 6,000 82.0 MECO 400 5.5 NEA 500 7.0 Other 400 5.5 Total 7,300 100.0 The Government will have to provide a large part of the investment required for the power expansion program in the coming years since existing consumers are only able to contribute about 8% to the construction program even though the rate of return may reach about 10% on revalued net fixed assets. This is acceptable due to the fact that the cost of residential service is at present as high as 5% of the disposable personal income and current coop tariffs approximate the marginal cost of power. 2. THE BORROWER Organization and Management 2.01 The Borrower would be NEA, a stock corporation fully owned by the Government with an authorized capital of two billion pesos, of which P 618 million was paid up at end-1976. Corporate powers are vested in a Board of Administrators of iEive members, including NEA's executive head, who is an ex-officio member. The Chairman and members are Presidential appointees and serve for six-year terms. The General Manager of NPC is also a member of the Board. 2.02 NEA was originally created in 1969; its duties and responsibilities were redefined in Presidential Decree 269 of August 1973, which is currently NEA's charter. The main objective of NEA is the total electrification of the Philippines on an area coverage basis. NEA is empowered to make loans to public service entities with preference to cooperatives. NEA is also responsible for licensing electric power franchises and assurances were obtained and provisions included in the Guarantee Agreement that it will continue to do so under the new DOE. Since 1972, NEA has mainly granted franchises to rural electric cooperatives, 91 of which were in existence at mid-1977 with 73 supplying electricity and 18 with buildings, backbone lines and distribution systems under construction. 2.03 NEA has its head office in Manila. The current organization chart is shown in Annex 1. Three Deputy Administrators are responsible for administration and cooperative development, engineering and materials, and  finance and franchises. In addition, training, special studies and other divisions report directly to the Acting Administrator. NEA has met its responsibilities efficiently as evidenced by the success of the program; it is generally a well-operated and managed organization but the rapid acceler- ation of the electrification program has caused certain strains. Emphasis has been on initial organization of cooperatives and program implementation with the day to day utility operations taking a secondary role. 2.04 Staff of NEA are closely involved in the formation and operation of the cooperatives. NEA has developed manuals which lay down standard operating procedures to be followed by cooperatives. NEA audit, engineering and other administration staff ensure that these procedures are followed. Standard operating practices are based on those of the National Rural Electric Cooperative Association of US, which originally provided consultants to NEA under USAID auspices. 2.05 Ten year development and financial plans are compiled for coops in the initial feasibility and architectural and engineering studies. These have not been updated annually as the coop situation and projected load growth has changed. Currently, five-year plans are only available for five coops. It was agreed during negotiations that NEA will form a planning unit that inter-alia would prepare five year plans for all coops by end-1978 and 10 year plans by end-1979; thereafter all would be updated annually. Audit and Accounts 2.06 NEA's annual accounts were made up on a Government department basis until 1974, which precluded the preparation of income statements and balance sheets. Since 1974, income statements and balance sheets have been prepared in the conventional commercial form. Accounting is good and the staff which includes a number of CPA's, are competent. 2.07 The audit of NEA's annual accounts is carried out by the Auditor of the Administration who is appointed by the Auditor-General, the ex-officio auditor. The Auditor of the Administration who serves full time in NEA headquarters approves all checks prior to payment; the procedure used has in effect, been a pre-audit rather than a post-audit analysis of the balance sheet. It was agreed during negotiations that the Government, with the assistance of the Bank, will undertake a review of the auditing procedures for NEA. Consolidation and Coordination of Information 2.08 NEA obtains monthly reports on coop operations, construction and other aspects of coop activities. The available information has not been consolidated in the past and it was agreed during negotiations that an information section will be established in the planning unit to gather and consolidate informal'ion and statistics relating to all coops.  -7- Cooperatives 2.09 Organization and Management. Cooperatives are organized with the help of NEA at the request of district electrification committees which are formed from local municipal councilors. A feasibility study is carried out of the proposed cooperative area by NEA staff to ensure that the coop- erative would be financially viable. The cooperative is then registered with a board of directors each of whom represents one or more munici- palities /1 as required to limit the maximum number of board members to about seven. The coops then conclude a loan agreement with NEA. A manager, and architectural and engineering consultants are appointed on terms and conditions and with qualifications and experience satisfactory to NEA. 2.10 Consultants. Local consulting firms plan and design the system and buildings and supervise the construction of both. These firms have gained considerable experience in the design and construction of distribution systems during the first five years of program implementation. The local firms will continue to be supervised by NEA with the assistance of Stanley Consultants, Inc. of the U.S. (financed by USAID), whose present contract extends through 1980. 2.11 Reports and Progress Certificates. Cooperatives send reports to NEA on all aspects of operations: (a) monthly operations; (b) annual budgets - capital and operating; and (c) construction progress and related certificates. The construction progress certificates are required by NEA before funds are released to the cooperative to make payments to the contractor. Certificates are issued by the A&E consultants and progress is often also verified by NEA staff. 2.12 Audit and Accounts. Coop accounting and management audits are carried out by NEA staff to verify that accounts and books are properly maintained and up to date. However, a final audit of the annual accounts is not carried out and currently the annual income statements and balance sheets of each coop have no audit certificate. Agreement was obtained during negotiations that the annual accounts of each coop be certified by auditors acceptable to the Bank for the year ending December 31, 1978 and every year thereafter. 2.13 Manpower and Training. NEA trains all the personnel required to man the coops, including managers, accountants, linemen, electricians, and plant operators. Courses and training tours have also been sponsored in the US. By the end of 1976, a total of 516 courses had been held covering 19,400 participants. 2.14 The Philippines is one of the most advanced developing countries in the field of rural electrification. The RE program is working well and /1 Approximately equivalent to a US county.  - 8 - is being pursued vigorously; consequently, other developing countries are studying the program for possible use in promoting their own RE programs. During 1976, a conference-study tour on rural electrification was held with about 40 participants from 13 countries. 2.15 NEA and the cooperatives are well-manned with adequately trained and qualified staff. The manpower needs of the RE program are met by recruitment from the educated and skilled manpower available in the Philippines, who are then given specific training in the standard procedures and the functions in which they will be employed in NEA or the cooperatives. 2.16 Insurance. Individual coops have arranged some insurance coverage but generally coops carry only motor vehicle insurance. NEA is in process of establishing a mutual insurance fund to provide adequate coverage for coop facilities. It was agreed during negotiations that all coops would hold insurance coverage satisfactory to the Bank. 2.17 Tariff Policy. General NEA policy is that each cooperative is an individual entity which must be financially self-supporting, although subsidies are provided in the form of tax exemption and low lending rates that do not exceed 3% p.a. Tariffs are fixed by the individual coop boards to meet this objective. In doing so, the coops endeavor to comply with targets laid down by NEA that tariffs should be fixed to cover cash operating expenses 1/ in the first year of operation and cash operating expenses plus 15%, 25%, 35% and 50% of the sixth year's debt service for the second through fifth years of operation, respectively, so that an aggregate of 125% of the sixth year's amortization and interest is available to the coop at the beginning of that year. 2.18 Anomalies currently exist in the tariff levels among the cooperatives. Although these will be addressed during the tariff study to be carried out under Loan 1460-PH (made in 1977 to NPC), two aspects were discussed during appraisal. The first is the large variation in tariff levels among coops. Tariff levels currently range from P 0.15 (USJ2.0) to g 1.16 (USd15.6), depending on whether the power comes from cheap hydro sources in northern Mindanao or from diesel generation for a small coop in South Leyte. Some cross funding from prosperous to less prosperous coops may be justified and could be achieved by NEA having different terms of lending for the cooper- atives. The second aspect is that there is little or no subsidy for poor consumers. Generally, coops have a flat rate per kWh whether or not covered by the minimum charge. Under Loan 1460-PH, it was agreed that the Government will consult with the Bank on its tariff policies when the ongoing tariff study is completed, which is expected at end-1978. /1 Operating expenses excluding depreciation, interest and amortization.  -9- Load Promotion Programs 2.19 NEA promotes the use of electric power through the following programs: (a) Illumination for Learning and Work; (b) Rural Water Service; (c) Fishermen's Assistance; (d) Small-Scale Industry; and (e) Irrigation. 2.20 The Illumination for Learning and Work project is a program for making loans of a maximum of 1 50,000 (US$6,700) to RE coops willing to onlend to school boards for schoolhouse wiring. Close liaison is maintained with the Department of Education and Culture; evening classes are organized for adult education, vocational courses, social activities, and other instruc- tion using educational television. Nine hundred and four public schools with 7,281 classrooms had been electrified by mid-1977. Thousands of adults and out-of-school youths have enrolled in various evening classes and for the formal five-year secondary and college courses offered in these schools. 2.21 The Rural Water Service Program began in 1976, the purpose being the formation of village water supply coops to construct facilities for a potable water supply comprising an electric pump, a small storage tank and a communal .standpipe distribution system. Five associations had been formed by mid-1977 and six feasibility studies were under evaluation. 2.22 The Fishermen's Assistance Program provides loans to associations for the construction of ice plants, cold storage plants and markets. By mid- 1977, NEA had lent F 4.8 million (US$140,000) to five fishermen's associations. 2.23 The Small-Scale Industry Program aims at fostering employment in the provincial areas by using electric power. The Bank made a loan to NEA of US$ 2.3 million in 1975 to assist in financing machinery for these coops. Total loans of 1 3.35 million (US$447,000) had been committed to ten coops by NEA at mid-1977. 3. THE POWER MARKET Historic Background 3.01 Electric power generated in the Philippines totalled 13,896 Gwh in 1976: Luzon producing 73% (10,150 Gwh), the Visayas 13% (1,773 Gwh) and Mindanao 14% (1,973 Gwh). A considerable amount of the electric power generated in the Visayas (74%) and Mindanao (27%) was produced by captive industrial plant.  - 10 - 3.02 The Luzon interconnected system is the main electricity system in the Philippines and comprises the generating and transmission facilities of the two largest- public utility companies operating in the region, namely MECO, serving the Manila metropolitan area and adjacent zones, and NPC, which supplies the proviLncial districts of Luzon. Electric power consumption in the area served by NPC-MECO grew at an average rate of 11.3% between 1960 and 1975; over the same period, GNP rose at an average of 5.8% a year, while the population growth rate was 3.1%. Growth in electric power consumption and GNP from 1960 to 1L975 was as follows: Consumption Growth Rate GNP Growth Rate Period % per year % per year 1960-19165 14.5 5.4 1965-1970 12.3 5.4 1970-1975 7.2 6.5 3.03 The drop in the growth rate in the last five-year period was a result of a drastic fall in consumption in 1974 (-1%) by comparison with 1973. The fall was due to severe restriction in consumption and an increase in tariffs applied in the Manila metropolitan area following the rise in international oil prices. Nevertheless, the Luzon market recovered quickly, the consumption growth rate reaching 12.2% in 1975 and 8% in 1976. 3.04 A summary of development in the integrated Luzon market is given below: Peak Demand Generation (Gwh) Losses Consumption Load Factor Year MW MECO NPC Total Gwh % Gwh % 1960 368 981 869 1,850 256 13.8 1,594 57 1965 671 2,514 989 3,503 371 10.6 3,132 60 1970 1,120 4,771 1,373 6,144 545 8.9 5,599 63 1975 1,481 6,873 1,669 8,542 601 7.0 7,941 66 3.05 The load factor in the Luzon integrated system is high owing to the fact that industrial consumption predominates and that there have been certain restrictions on peak-hour demand in recent years. MECO's losses in transmission and clistribution (9%), and NPC's in transmission (5.8%), are reasonable and have decreased as a whole from 14% in 1960 to 7% in 1976. Small producers in Luzon as well as in the Visayas and Mindanao generally show high losses ('over 20%). 3.06 Statistical data on development in electric power production and consumption in the Visayas and Mindanao, is extremely sketchy and unreliable. Some data on energy production over the 1970-76 period are given below:  - 11 - Energy Produced (Gwh) NPC Others Total Year Visayas Mindanao Visayas Mindanao Visayas Mindanao 1970 8 362 300 315 308 677 1974 5 421 1,400 1,250 1,405 1,671 1976 9 814 1,764 1,159 1,773 1,973 The Forecast 3.07 Demand forecasts in the Luzon grid prepared by NPC and MECO foresee a growth rate of 10.0% annually for the period 1977-81, which seems reasonable. Provincial demand is estimated to rise 15% per year, while demand in the Manila metropolitan area is expected to grow at 7.8% a year. Lahmeyer International, the German consulting firm now reviewing the future generating expansion program for the Luzon mainland, has estimated the power demand growth rate at 11.5% through the 1977-85 period, which is considered optimistic. This forecast is based on a correlation between economic and population growth and the associated increase in power energy. Reasonable demand growth (Gwh) in the Luzon interconnected grid based on an annual growth rate of 10%, is shown in Table 3.1 and summarized below: Sales Generation Requirements MECO NPC Total MW Gwh 1976 6,316 2,244 8,560 1,591 9,353 1981 9,242 4,576 13,818 2,669 14,964 3.08 The existing generating capacity in Mindanao is approximately 554 MW of which 201 MW is owned by NPC. Demand growth to be met by NPC is estimated at about 40% a year over the next five years. The forecast assumes that NPC would absorb the load of existing utilities and would connect to its system some :industries with large power demands. Currently demand in the region is increasing so rapidly that a large diesel installa- tion has been committed to augment the existing hydroelectric generation and avoid possible power rationing. 3.09 Existing power supplies in the Visayas subgrids depend almost entirely on private utilities and captive industries (351 MW) which run 90% of the installed capacity in the region. NPC has launched a major generation development program, starting with diesel plants and proceeding to thermal, hydro and geothermal plants to meet th'e forecast growth in energy demand. The estimated demand in the areas presently served or to be served  - 12 - by NPC is forecast to increase from 52 Gwh in 1977 to 1812 Gwh in 1981. The forecast assumes interconnection of networks on the individual islands followed by interconnection of island grids to cover potential demand, especially from current captive plant and several private franchises with very high generating costs. Details are given in Table 3.1. The Rural Electric Cooperatives 3.10 Energy sales from cooperatives accounted for 370 Gwh in 1976 with the following breakdown: 81% in Luzon, 8% in the Visayas and 11% in Mindanao. Growth in sales by comparison with 1975 was 72%. Energy losses accounted for 22% of generation and the energy produced by the cooperatives was 81 Gwh (17%) of their requirements of 478 Gwh. The high losses were mainly due to the fact that the old distribution networks acquired by the cooperatives are generally inadequate and overloaded. NEA has agreed to plan a program of rehabilitation of the old distribution networks to reduce losses to a 12% average by the end of 1982. The plan will be sent to the Bank for review by mid-1978. 3.11 Energy sales are forecast to increase from 460 Gwh in 1977 to 1,430 Gwh in 1981. The mission based its estimates of growth in energy sales on the following assumptions: residential: 33 Kwh-month; commercial: 180 Kwh-month; industrial: 10,800 Kwh-month and others: 2,000 Kwh-month. These figures give a weighted monthly consumption per consumer of 55 Kwh-month which is about the present average consumption per capita in the majority of towns and villages currently served by the cooperatives. Historic and forecast energy sales (see Table 3.2) are summarized below: -------- in Gwh ---- 1974 1976 1981 Energy requirements 136 478 1,668 Energy generated 15 81 320 Purchases 121 397 1,348 Losses 31 107 237 Sales 105 371 1,431 3.12 Although the rural electric cooperatives maintain monthly statistics, NEA does not consolidate such data. Neither the cooperatives /1 nor NEA make analyses in the short or medium term of their power markets or of likely trends in consumption by categories and number of consumers. As is recommended in para 2.05, the planning unit would assist the cooperatives in preparing five- year plans and forecasts by the end of 1978 and 10-year plans by the end of 1979; thereafter all the plans would be updated annually. All the information on cooperative activities would also be centralized in the unit. /1 Only five coops did so for the appraisal.  Table 3.1: FORECAST POWER M4ARKET Actual Forecast 1976 1977 1978 1979 1980 1981 LUZON GRID Sales (GWh) (a) MECO Residential 1,486 1,574 1,668 1,766 1,869 1,985 Commercial 1,958 2,213 2,430 2,646 2,877 3,124 Industrial 2,571 2,770 2,983 3,179 3,409 3,650 Street lights 47 50 52 55 57 61 Others 254 278 298 317 336 422 Subtotal 6,316 6,855 7,431 7,963 8,548 9,242 Losses (GWh) 649 706 722 761 808 872 Total MECO 6,966 7,561 8,153 8,724 9,356 10,114 (b) NPC Utility 781 988 1,110 1,399 1,555 1,700 Industry 967 1,154 1,380 1,625 1,890 2,096 Miscellaneous 496 551 611 653 731 780 Subtotal 2,244 2,693 3,101 3,677 4,176 4,576 Losses (GWh) 143 161 186 220 250 274 Total NPC 2,387 2,854 3,287 3,897 4,426 4,850 Generation (GWh) 9,353 10,415 11,440 12,621 13,782 14,964 Peak demand (MW) 1,591 1,774 1,972 2,153 2,420 2,669 MINDANAO GRID NPC Sales Utility 159 139 177 565 671 842 Industry 600 814 1,075 1,633 2,391 3,330 Miscellaneous 10 10 16 17 20 23 Subtotal 769 963 1,268 2,215 3,082 4,195 Losses 45 67 76 121 169 190 Generation (GWh) 814 1,030 1,344 2,336 3,251 4,385 Peak demand (MW) 143 186 232 380 530 715 VISAYAS SUBGRIDS NPC sales (GWh) 8.4 49 435 963 1,214 1,727 Losses 0.6 2.6 26 53 72 85 Generation (GWh) 9.0 51.6 461 1,016 1,286 1,812 Peak demand (MW) 2.0 20 70 165 209 295  Table 3.2: ACTUAL AND FORECAST POWER MARKET OF THE ELECTRIC COOPERATIVES Actual Forecast 1974 1975 1976 1977 1978 1979 1980 1981 Luzon Energy requirements (Gwh) 122.1 223.3 390.7 449.4 591.1 801.7 936.5 1,098.3 Energy generated 4.9 8.9 15.6 18.4 26.3 26.6 30.8 30.4 Energy purchased 117.2 214.4 375.1 431.0 564.8 775.1 905.7 1,067.9 Maximum demand (MW) 39.8 70.8 120.5 135.0 177.5 240.8 274.1 321.0 Load factor (%) 0.35 0.36 0.37 0.37 0.38 0.38 0.39 0.39 Sales (Gwh) 94.0 169.7 300.9 346.0 472.9 657.4 786.7 944.5 Losses (Gwh) 28.1 53.6 89.8 103.4 118.2 144.3 149.8 153.8 (%) 23.0 24.0 23.0 23.0 20.0 18.0 16.0 14.0 Visayas Energy requirements (Gwh) 4.6 10.5 36.8 60.0 117.3 207.3 273.2 336.7 Energy generated 4.6 10.3 36.5 58.0 112.0 199.5 245.0 278.7 Energy purchased - - 0.3 2.0 5.3 7.8 28.2 58.0 Maximum demand (MW) 1.1 3.5 12.4 19.6 38.2 65.8 86.6 103.9 Load factor (%) 0.35 0.34 0.34 0.35 0.35 0.36 0.36 0.37 Sales (Cwh) 3.5 8.4 29.5 48.0 95.0 170.0 226.8 286.2 Losses (Gwh) 1.1 2.1 7.3 12.0 22.3 37.3 46.4 50.5 (%) 24.0 20.0 20.0 20.0 19.0 18.0 17.0 15.0 Mindanao Energy requirements (Gwh) 9.1 18.6 50.1 86.2 108.9 149.5 201.8 232.9 Energy generated 5.6 11.9 28.4 45.2 61.1 62.4 75.2 10.9 Energy purchased 3.5 6.7 21.7 41.0 47.8 87.1 126.6 222.0 Maximum demand (MW) 3.1 6.2 16.8 28.1 35.5 47.4 64.0 71.8 Load factor (Z) 0.34 0.34 0.34 0.35 0.35 0.36 0.36 0.37 Sales (Gwh) 7.3 14.8 40.1 69.0 87.1 122.6 169.5 200.3 Losses (Gwh) 1.8 3.8 10.0 17.2 21.8 26.9 32.3 32.6 (%) 20.0 20.0 20.0 20.0 20.0 18.0 16.0 14.0 Total Energy requirements (Gwh) l35.8 252.4 477.6 595.6 817.3 1,158.5 1,411.5 1,667.9 Energy generated 15.1 31.3 80.5 121.6 199.4 288.5 351.0 320.0 Energy purchased ]20.7 221.1 397.1 474.0 617.9 870.0 1,060.5 1,347.9 Sales (Gwh) 104.8 192.9 370.5 463.0 655.0 950.0 1,1d3.0 1,431.0 Losses (Gwh) 31.0 59.5 107.1 132.6 162.3 208.5 228.5 236.9 (M) 23.0 24.0 23.0 22.0 20.0 18.0 16.0 14.0 November 1977  - 13 - 4. PROGRAM AND PROJECT General 4.01 The Rural Electrification Program in the Philippines is designed to accomplish the Government's objective of bringing electric service to the whole population by 1990. NEA, the national executing agency, has set late 1980 as the deadline for achieving its short-term goal of completing the backbone or primary distribution systems connecting all the municipalities within the area of operation of each cooperative. Medium-term goals, to be achieved by 1984, call for the electrification of all barrios and for the connection of approximately 4.3 million dwellings housing some 26 million individuals. To enable every Filipino to have the benefit of power service by 1990, the rural electric cooperatives would have to connect an average of 600,000 households a year between 1985 and 1990. 4.02 The rural electrification program for 1978-80 prepared by NEA with the assistance of Stanley Consultants, Inc. (USA) is shown in Table 4.1 and summarized below: RURAL ELECTRIFICATION PROGRAM (1978-1980) To be energized Household Backbone system Lateral Lines Year Towns Barrios Connections (Kms) (Kms.) 1978 279 3,549 365,656 6,715 3,227 1979 316 4,009 441,763 6,689 3,703 1980 183 4,531 436,137 4,100 4,087 4.03 Accomplishment of the targets set by NEA as a means of carrying out the Government's objectives will depend to a large extent on the Govern- ment's own capacity to make the necessary funds available on time to meet local costs and the availability of sufficient skilled manpower to implement such an ambitious program. According to NEA and its consultants, the country does possess a large enough labor force with the skills and technical training needed to accomplish the targets set. Government gave assurances that any gap in the funds required for the construction of the program scheduled for 1978-1980 would be made available to NEA as required. Generation and Transmission Facilities 4.04 The present generating capacity of the electricity cooperatives is 49 MW. A further 69 MW in diesel units is in the process of installation to supply power in some areas not currently serviced by NPC. As NPC extends its service and the cooperative systems are connected to the NPC grid,  - 14 - smaller and less efficient plants will be removed and relocated on other islands where generating capacity needs to be increased or in areas without electric power service. 4.05 By 1980, approximately 4,072 Km. of 69 Kv transmission lines are to be constructed. Since NEA's policy is not to duplicate the services provided by NPC, the cooperatives would set up about 716 Km of transmission lines in areas where NPC does not construct them. Program Costs 4.06 The investment costs of the 1978-1980 rural electrification program are estimated at the equivalent of US$228.9 million, with a foreign exchange component of US$112.9 million (49%). Details of the annual program of investments are given in Table 4.2. 4.07 Program cost estimates have been based on estimates for a standard project requiring 151 Km of primary distribution lines, 65 Km of secondary lines and 98 Km of service drops at a direct weighted cost of US$147 per consumer for the backbone system, US$126 per consumer on the lateral primary lines and US$66 per low voltage connection. These costs reflect September 1977 price levels. The standard project as described is the average project individual cooperatives would execute in the various regions of the country. Table 4.3 details costs of the standard project. The Project 4.08 Scope. The proposed project would help finance the 1979-80 program of NEA, and comprises the construction of 230 individual subprojects of which 94 would be new projects and 136 would be expansion of the present distribu- tion systems, including rehabilitation of some old distribution facilities acquired by the cooperatives from private franchise holders or from municipalities. 4.09 Objectives. One of the fundamental objectives of the proposed project is improvement in the standard of living of the rural poor, who constitute the majority of the low-income population. Once a permanent and reliable electric power supply is available, NEA, in conjunction with the cooperatives, would go on to organize: drinking-water supply projects, thus improving sanitation in the barrios; pump irrigation projects, opening the way for increased farm output; small-scale industry projects, generating new employment opportunities and reducing the rural exodus to urban centers; and projects to promote electricity consumption by using electric motors to power mills now operated by diesel equipment, which is costlier to run and maintain. In addition, project construction work will provide employment for approximately 12,000 individuals. Description of the Project 4.10 The project includes the following items: (a) 476 Km of 69 Kv transmission lines;  - 15 - (b) 20,334 Km of primary distribution lines at 13.2/7.6 KV; (c) 8,743 Km of secondary distribution lines at 220V; (d) electric motors, pumps and machinery for load promotion; (e) headquarters facilities, including warehouses for cooperatives; and (f) consultants' services. 4.11 The single-circuit 69 KV transmission lines would be mounted on wooden poles 45' to 75' long, with ACSR conductors and a steel shield wire; 4-unit suspended insulator chains and average spans of 110 m. The primary distribution system would be mounted on wooden poles 35' to 55' long, using ACSR-type conductors sized to meet the anticipated load density, and pin-type insulators. The average span of the lines would be approximately 65 m. Approximately 70% of the low voltage distribution systems would be mounted on the same poles used for the primary distribu- tion networks. Power transformer installations and distribution networks have been designed with sufficient capacity to supply forecast loads for about 10 years and also designed for a voltage drop of not more than 10% under full load conditions. The design of the backbone system to cover 10 years' load growth to be constructed initially constitutes the least cost solution. With other alternatives (for example to build the backbone system to cover 5 or 7 years' load growth) the incremental cost to replace the conductors for a larger size and the unavoidable shortages of energy in the system would be an uneconomic solution. Location 4.12 The facilities making up the proposed project would be constructed irn various regions of the island of Luzon, the Visayas and Mindanao (see Map IBRD 13281). The rural areas in the various islands to be served have all been the subject of feasibility studies and they were selected on the basis of the following criteria: (a) proper timing, to ensure that NPC and the cooperatives will have completed the generating and transmission facilities by the time the distribution networks are to be energized; and (b) consideration of the need to provide service to areas where the lack or high cost of electricity has seriously constrained economic development. Project Cost 4.13 The estimated cost of the project is US$160.5 million, with a foreign exchange component of US$81.8 million, as shown in Table 4.2 and as summarized below:  - 16 - In millions of US$ In millions of P Local Foreign Total Local Foreign Total Materials 20.2 61.3 81.5 149.5 453.6 603.1 Labor 16.7 - 16.7 123.6 - 123.6 Consultants 0.2 0.3 0.5 1.4 2.2 3.6 Engineering (A&E) 5.1 - 5.1 37.7 - 37.7 Transportation and Administration 4.0 - 4.0 29.6 - 29.6 Working Equipment 0.8 4.0 4.8 5.9 29.6 35.5 Special Projects 9.3 - 9.3 68.8 - 68.8 Headquarters Facilities 5.2 - 5.2 38.5 - 38.5 Load Promotion 0.1 0.5 0.6 1.1 3.7 4.8 Subtotal 61.6 66.1 127.7 456.1 489.1 945.2 Contingencies Physical 4.3 3.4 7.7 31.8 25.2 57.0 Price 12.8 12.3 25.1 94.7 91.0 185.7 Subtotal 17.1 15.7 32.8 126.5 116.2 242.7 Grand Total 78.7 81.8 160.5 582.6 605.3 1,187.9 Percentage 49.0 51.0 100.0 49.0 51.0 100.0 The base costs were prepared by NEA and its consultants and reflect September 1977 prices. Physical contingencies have been estimated at 5% for materials and 8% for civil works. Price escalation has been calculated on the basis of an assumed inflation rate of 7.5% from 1977 to 1979 and 7% thereafter for foreign costs and 8% for local costs. Financing 4.14 A Bank loan of US$60.0 million is proposed, which would finance the foreign exchange costs as follows:  - 17 - Millions of US$ Hardware 7.6 Insulators 1.6 Conductors 16.7 Transformers, etc. 14.8 Meters 6.9 Street Lights 1.2 Miscellaneous (Radio Communication Equipment, Tools and Billing Machines) 0.7 Materials for Load Promotion 0.5 Total Equipment and Materials 50.0 Consultants 0.3 Contingencies 9.7 Total 60.0 NEA expects to finance from other external sources the balance of US$21.8 mil- lion of the foreign exchange costs which will be needed in 1980 to complete the 1979-80 program. OECF is expected to finance NEA's program in the Cagayan Valley and NEA has been discussing the possibility of additional financing with other external sources. Local costs (US$78.7 million equiva- lent) would be financed by the Government through equity contributions to NEA. The Government gave assurances that any gap in the local or foreign funds required for the 1978-80 program would be made available to NEA as required. Engineering and Construction 4.15 The electric cooperatives will use the services of the following four local architecture and engineering (A&E) firms for engineering design and construction supervision of the physical facilities: Trans-Asia, Adrian Wilson Inc., DCCD Engineering Corp., and Engineering and Development Corporation of the Philippines. These firms have gained considerable experience in the design and construction of distribution systems during the first five years of program implementation. The firms will be supervised by NEA, with the assistance of Stanley Consultants Inc. of the United States. In addition, NEA would engage outside expertise for specialized tasks in management and engineering to improve the administration of the project during construction as required. 4.[6 In general, the transmission lines and the backbone distribution system would be built by independent contractors. The lateral lines from the backbone and the service drops to the consumer connections would be undertaken by the cooperatives on force account./l Each contractor would use one or two teams of workers with an average of 100 men per subproject. Each cooperative /1 The cooperatives obtain the rights-of-way of their lines free of charge.  - 18 - would employ between 50 and 70 laborers. The construction period for each subproject would range between 4 and 11 months, depending on the scope of the works; the average rate of progress would be 1.5 km a day for contractors and 1 km a day for cooperatives on the backbone system.