Philippines - Seventh Power Project

Document of The World Bank FOR OFFICIAL USE ONLY F i Report No. 1552-PH STAFF PROJECT REPORT THE SEVENTH POWER PROJECT IN THE PHILIPPINES May 27, 1977 Projects Department East Asia & Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performanE, of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1.00 = Philippine Peso (P) 7.50 P 1.00 100 centavos F 1.00 = US$0.133 P 1 million = US$133,333 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) ABBREVIATIONS AND ACRONYMS NPC - National Power Corporation MECO - Manila Electric Company NEA - National Electrification Administration PDC - Power Development Council UP - University of the Philippines NPC'S FISCAL YEAR Up to 1975: July 1 - June 30 1976 onward: January 1 - December 31 This report was prepared by Messrs. H. Maeda and J. M. Sneddon and is based on information obtained during missions to the Philippines in October/ November 1975, March/April 1976 and February 1977. Advice was received on training from E.H. Chittleburgh, CPS, on the tariff study from J.J. Warford, CPS and on energy resources from B. Abadian, EAP, Economist.  FOR OFFICIAL USE ONLY PHILIPPINES NATIONAL POWER CORPORATION APPRAISAL OF THE SEVENTH POWER PROJECT STAFF PROJECT REPORT TABLE OF CONTENTS Page No. INTRODUCTION AND SUMMARY A. THE POWER SECTOR ........................................ i B. THE PROJECT .............................. ............... v Chapter 1 THE POWER SECTOR ...... ............................ 1 General .......*............. .* ...................... 1 Demand and Supply for Electric Power .... ........... 2 Development Program ................................... 4 Annex 1.1 Generation Facilities of NPC and MECO Chapter 2 THE BORROWER ........................, 7 Organization and Management ............................. 7 Manpower and Training ..................... 8 Tariff Policy ......................... 9 Audit ................................................... 10 Annex 2.1 Present Tariff Schedule Chapter 3 DEMAND ............................................ 11 Past Trends ............................................. 11 Future Forecast ................... . 0.................... . 11 Annex 3.1 Demand Forecast - Luzon Grid Chapter 4 PROGRAM AND PROJECT ..... .......................... 13 Development Program in Luzon ............ .. .............. 13 Project Description ................ .. ................... 14 Cost Estimate ........ .................... ............... 16 Amount of Loan ........ ............. ..................... 17 Engineering and Construction ............ .. .............. 17 Procurement and Disbursement ............ .. .............. 18 Environmental Aspect ................ .. ...... ............ 19 Annex 4.1 System Development Program Luzon Grid Annex 4.2 List of Subprojects Annex 4.3 Project Cost Estimate r Thb document hs a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosd without World bank authorization.  -2- Page No. Chapter 5 FINANCIAL ANALYSIS ..... ....... .. . .. .. . ............... 20 Past Performance .. ... ................ .... ... ....... . .... 20 Future Position ... ..... ...... ................... '0. 20 Future Operating Results ..... ..... .a. o...... .. . . .. ......... 22 Debt Control ....................... * .***.****.. ....... 23 Receivables ............................ ....... ....... 24 Annexes 5.1, 5.2 Past Performance 1971-75 Annexes 5.3 through 5.14 Future Financial Forecast 1976-83 Annex 5.15 Assumptions in Financial Forecast Chapter 6 ECONOMIC ANALYSIS .............................. 25 Return on Investment ..................*..........* ...*..... 25 Power Supply Cost and Tariffs ....... ..................... 26 Annex 6.1 Calculation of Internal Economic Return Chapter 7 SUHI4ARY OF AGREEMENTS ..................... - ..... 27 ANNEX Related Documents and Data Available in the Project File Attachment - NPC Organization (World Bank 16254) Project Implementation Schedule Maps - IBRD 3562R3 IBRD 3563R3  PHILIPPINES NATIONAL POWER CORPORATION APPRAISAL OF THE SEVENTH POWER PROJECT INTRODUCTION AND SUMMARY A. THE POWER SECTOR Background 1. The three major regions of the Philippines are in very different stages of power development. Most of the past power development has taken place on the island of Luzon, where about half of the population live and most industrialization has occurred. Some grid development has also taken place on the main southern island of Mindanao, particularly in the northern part where the availability of easily developed low cost hydropower has at- tracted substatial industrial investment. In the Visayas, which comprises all other major islands located in the central part of the Philippine Archipelago, grids are only now beginning to be constructed. 2. Historically, ownership of the power sector has been fragmented. The largest utility in the country has been the privately-owned Manila Electric Company (MECO) which holds the franchise for the greater Manila area. The National Power Corporation (NPC), which is the second largest utility and totally Government-owned, generates and transmits power in bulk, selling to other utilities and large industrial consumers. In addition, there are a number of small utilities in the country, operating largely in isolation. In 1970, there were 336 privately-owned and 122 publicly-owned utilities, most of which were very small and were located in urban areas. Since then a number have been taken over by rural cooperatives and some have ceased operating. As of December 1975, about 120 utilities and 51 cooperatives were actually supplying consumers. 3. This fragmented ownership has made the integrated development of the sector slow and difficult. To overcome this problem, the Government has taken steps to consolidate ownership of the sector. In 1972 NPC was made responsible for constructing all future generation facilities and estab- lishing island grids. The Government is in the process of purchasing most of MECO's generating plants, which will be operated by NPC in the future. When this process is completed, MECO will become primarily a power distributor. The Government has also established the National Electrification Adminis- tration (NEA) with responsibility for integrating small utilities and ex- tending power service to rural areas. 4. In tlarch 1976, the Government established the Energy Development Board to be responsible for the exploration and development of primary energy resources, including geothermal energy, water, oil, gas, and coal. The Board will work closely with the existing Power Development Council (PDC), the body responsible for formulating policies and programs on electric power develop- ment and coordinating the activities of all organizations connected with  - ii - power. PDC coordinates policy for NPC, NEA, HECO and all other utilities and is responsible for approving major power projects and tariff rate policies. It is attached to the Department of Public Works, Transport and Communications, to which NPC and NEA also report. The sector was organized in this manner during the first half of 1976 and has yet to be tested in practice. 5. Since 1957 the Bank has made six loans and one IDA credit amounting to $160.3 million, net of cancellations, to NPC and the Government for pro- jects in the power sector. The most recent was a loan of $61 million (Loan No. 1034-PH) in 1974 to finance the construction of the 100 MW Pantabangan hydro power plant and expansion of transmission systems in Luzon. Construction of the generating plant was completed in April 1977 as originally scheduled and the plant has since been operating at full capacity. Work on transmission lines has been slow and completion will be delayed by one year. IFC made a loan of $8 million to MIECO and an equity investment of $4 million in 1967. Present Access to Service 6. The electrification of the country has been progressing steadily. The per capita consumption of electricity in 1974 was estimated at 280 kWh, compared with 490 kWh in Korea, 184 kWh in Thailand and 120 kWh in India. Over 30% of the population is currently served with electricity compared with 23% in 1970. Although regional imbalances presently exist, with 46% of the households electrified in Luzon compared with 15% in Mindanao and 13% in the Visayas, NEA's rural electrification program is expected to improve the situation. The total electricity supply in 1974 was estimated at about 11.9 billion kWh; 50% was provided by MIECO, 20% by NPC, 21% by self-generating industries, and 9% by small utilities. On the consumption side, industrial consumers represented about 55%; residential consumers, 20%; and commercial, agricultural and other users, 25%. 7. NPC and a few self-generating utilities, including MECO, have pro- vided reliable and continuous power supply to about 90% of the total consumers, but services by other self-generating utilities have been substandard with power available for only a few hours each day. The situation has worsened in some rural areas because small utilities have lost interest in maintaining their business in apprehension of being taken over by NEA and some of them have even ceased operation. However, within a few years NEA's program will more than compensate for the deteriorating service from small utilities. Sector Development Objectives 8. The Government is committed to a policy of rapid industrialization which is central to its objectives of fostering growth, employment and exports. It is also committed to a policy of dispersing industrial growth from the already congested Manila Metropolitan Area to other regions of the country. In order to meet these objectives and to realize the planned annual growth in Gross National Product of 7% during the next 10 years, it is estimated that electricity consumption in the Visayas and in Mindanao will need to grow at annual rates of about 16% and 13% respectively, compared with about 8% in Luzon. This would result in an overall annual growth in consumption of 11%. Because NPC is the institution primarily responsible for power generation, it has a critical role to play in helping the Philippines realize its economic objectives.  - iii - 9. About 80% of the power generation in the Philippines is currently dependent on imported oil and the remaining 20% on hydro resources. The Gov- ernment has decided to diversify energy resources by developing indigenous hydro and geothermal power and by introducing nuclear energy. The construc- tion of the first geothermal power plant is underway in southern Luzon, while explorations for more geothermal energy are being undertaken in several parts of the country and have already shown promising results. Investigations are also progressing at several potential hydro power sites. In addition, NPC has started the construction of its first nuclear power plant with financing from the United States Export-Import Bank and commercial banks. 10. NEA has set a target of establishing an electric cooperative in each province by 1977, completing the country's "backbone" system by 1980, providing electricity to all barrios by 1984, and attaining total electrification of the country by 1990. The United States Agency for International Development has been providing financial and technical assistance for this program. By December 1975, a total of 75 cooperatives had already been formed; 51 were operating, serving a rural population of about 2 million on a 24-hour-day basis. In the course of establishing cooperatives, NEA takes over and inte- grates some of the existing small utilities, particularly those with exorbitant rates and poor service. By March 1976, the number of utilities taken over by NEA had reached 106. NEA's activities in the power distribution sector will eventually result in only the largest 10-15 private utilities remaining in business. Sector Investment Program and Costs 11. The sector investment program required to meet the expected demand increase is huge. It will almost triple the country's generating capacity by expanding it from about 3,100 MW in 1974 to about 8,500 MW in 1985. Emphasis will be placed on the development of non-oil sources of generation. If imple- mented as planned, the program would reduce oil-fired generating capacity from 81% of the total in 1974 to 53% in 1985; hydropower would correspondingly in- crease from 19% to 31%; and geothermal and nuclear power would share the re- maining 16%. Although the objective of diversifying energy resources is rea- sonable, the program is very ambitious and involves certain risks. Financial constraints may hinder the timely development of capital-intensive hydropower projects, and technical problems may arise in developing nuclear and geothermal sources of energy. In particular, sufficient geothermal steam may not be secured in time for the planned development of 745 MW of geothermal genera- tion. The program therefore needs continuous review and, if difficulties do arise, it is possible that additional oil-fired thermal plants will be needed. 12. The rapid expansion in generating capacity will need to be accom- panied by a vigorous program of extending the transmission network. In 1976, NPC had a total of 3,600 km of transmission lines and about 1,200 MVA of sub- station capacity to supply utility and non-utility consumers. About 3,300 km of transmission network are located in Luzon, 200 km in Mindanao and 100 km in the Visayas. As noted in earlier paragraphs, the grid system has been con- centrated in the Central Luzon area, and the population in northern and southern Luzon and large parts of Mindanao and the Visayas either has no access to electricity or has to rely on unreliable and costly generation by small local utilities. NEA is vigorously promoting the rural electrification program throughout the country, but progress of this important program is  - iv - dependent on the rapid expansion of NPC's grid system into rural areas. The Bank Group has been assisting the grid expansion under the loans for Fifth and Sixth proiects (Loan No. 809-PH, Credit No. 296-PH, and Loan No. 1034-PH), by financing about 1,100 km of transmission lines and 1,200 MVA of substation facilities in Luzon. The Overseas Economic Cooperation Fund of Japan has provided funds for the first stage of grid expansion in the Cagayan valley in northern Luzon. NPC is also expanding the grids in Mindanao and the Visayas with assistance from the Asian Development Bank and an export credit agency of France. In general, NPC has been able to finance a large part of its generating program from export credits and other commercial sources on reason- able terms, but needs to rely more heavily on official sources of development financing to support its transmission program for which commercial sources of finance are less readily available. 13. The total sector investment at the end of 1974 was about $954 mil- lion with NPC accounting for $405 million, or 42%; MECO, 45%; and NEA and other utilities, 13%. The development program envisaged through 1983 will require a total investment of about $6.7 billion (P 50.6 billion) at current prices including financial charges; this would represent an increase in the share of power in public investment from 10% in recent years to about 35% in the future. NPC's share of the investment program will amount to $5.8 billion (P 43.9 billion) or about 87% of the total. About 65% of this amount will be invested in Luzon, 19% in Mindanao, and 16% in the Visayas. Investment by MECO on its transmission and distribution system will be about $450 million (P 3.4 billion) through 1983. Another $440 million (P 3.3 billion) will be spent by NEA through 1983 in financing rural cooperatives to acquire the assets of private utilities and to expand the distribution system in rural areas. Investment in the remainder of the sector is likely to be small in comparison as it will cover only distribution costs for small utilities not absorbed in the NEA cooperative system. Constraints on Sector Development 14. NPC was created in 1936 as a non-stock public corporation, but was converted to a stock corporation wholly owned by the Government in 1960. Its corporate powers are vested in a Board of Directors which includes the General Manager. Although NPC was originally chartered to develop hydropower re- sources in the country, its role and responsibilities have been dramatically expanded in the past few years following the government's decision to make NPC the prime force in the development of power generation from all sources. This change in sector policy was so fundamental that NPC has not yet been able to adjust fully to the new situation. NPC has constructed five hydro- power stations and one thermal power station in its 40-year history, but it will need to construct and operate about 75 large power projects in the next 15 years. To carry out a program of the required magnitude successfully, NPC will need to greatly improve its capacity to construct and operate a much larger, more modern, and more complex power system. In particular, NPC needs to improve its capability for system planning and financial management and control, to streamline and improve its internal organization and to develop effective training programs for its personnel.  -v - 15. The Government recognizes the difficult situation NPC faces and has taken a number of steps to improve its implementation capability and to enable the staff to cope with the large development program. Salary scales and merit systems have been improved to make NPC more competitive with private industry, specialized engineers have been recruited from other government agencies for the newly organized nuclear and geothermal units and basic agreement has been reached to transfer MECO's operating personnel as well as its generating facilities to NPC. There have also been changes in the composition of NPC's Board. Its members, including its chairman, now consist of some of the most highly qualified technocrats in the country. More recently, a Corporate Planning Staff and a Human Resources Development Division have been set up in the head office. The Corporate Planning Staff is responsible for advising NPC management on long range policy planning and assisting the various departments in NPC in implementing long range plans approved by NPC's management. The Human Resources Development Division is responsible for assessing manpower requirements, developing a recruitment and training program and establishing and managing a proposed NPC training center. NPC is also planning to engage consultants associated with an operating utility to review NPC's existing management and administrative structure and assist in implementing the necessary reforms. While a signifi- cant beginning has been made, continuous vigorous efforts will be necessary to enable NPC to meet its rapidly growing responsibilities. B. THE PROJECT 16. The project was prepared by NPC. A Bank mission appraised the pro- ject in March/April 1976. At the time of the appraisal, the project proposal included the construction and equipping of the Kalayaan pumped storage plant in Luzon. However, as the Government subsequently received financing offer for this component from another source, the Bank was requested to consider financing the proposed transmission project which is also urgently needed. Because of the proposed change in content and scope of the project a follow-up appraisal took place in February 1977. Project Description and Objectives 17. The proposed project has been designed to assist the Government in financing the very large power program needed for the Philippines' future economic development and to assist NPC in its continuing efforts to improve its institutional capacity. The requirements of the power sector were dis- cussed in the Bank's Basic Economic Report (No. 1095a-PH) and have been the subject of an active dialogue between the Bank and the Government. The main institutional emphasis of the proposed project is reflected in substantial assistance to NPC for improving its organization, training programs, and financial policies and procedures. 18. The proposed project would consist of: (a) expansion of the transmission system in Luzon; (b) the first stage of a communication system and control center in Luzon;  - vi - (c) support for NPC's training activities; and (d) consultants' services for management improvement and a tariff study. 19. The transmission program supported under the project would include about 1,360 km of transmission lines and substation capacity of 225 MVA, which upon completion will extend NPC's transmission grid to cover almost all of the island of Luzon. The 230 KV and 115 KV facilities to be provided under the project would either strengthen existing systems which will be overloaded in a few years or provide a bulk supply of power to areas which presently do not have power supply but expect rapid load development mainly due to the estab- lishment of new industries. The 69 KV lines will extend NPC's power supply to rural areas where NEA is promoting the rural electrification program. 20. The project would also provide for a communication network linking all power plants and major substations and a central control center equipped with system monitoring, data acquisition and remote control facilities. NPC presently does not have such a control system, which is unusual for a system as large as the Luzon grid, and even a minor disturbance could easily lead to a total system collapse. Upon completion, the control center would conti- nuously monitor all generating plants and major substations so that the cost of system operation can be minimized, system security improved and, in case of system disturbances, service restored with the minimum effect on consumers. 21. As discussed in paragraphs 14 and 15, NPC's present organization, particularly that of the head office, was designed for the execution of a small number of projects and was suitable for the situation that existed before 1973. The currently expanded role of NPC in the sector necessarily requires a reorganization and redefinition of responsibilities to enable NPC to meet the challenge of the next decade. In order to assist in this process, NPC has agreed to engage: (a) a financial manager to plan and manage NPC's finances and conduct negotiations with financial institutions by not later than December 31, 1977; and (b) a management advisory team, which would be financed under the proposed loan, to assist NPC in organizing the head and regional offices, redefining authority and responsibilities, and executing day-to-day operations. A qualified systems planning advisor would be a member of this team and would assist the manager of the Corporate Planning Department in analyzing the power system, forecasting market demand, and optimizing the investment program. NPC proposes to appoint consultants associated with an operating utility for such services. It is estimated that about 108 man-months of consultants' services would be required, and the team would be appointed by October 1, 1977. It has also been agreed that NPC implement a management improvement program within twelve months after the completion of the consul- tant's report. 22. A manpower development study for NPC has been carried out by the College of Public Administration of the University of the Philippines (UP). The study estimates that NPC will need to expand the number of its employees from about 5,800 at present to more than 10,000 in 1985 and that training will be needed in a wide variety of disciplines to support this rapid expan- sion. The study recommended the immediate establishment of a comprehensive training program, including the development of an NPC training school. To  - vii - meet the urgent need for improving managerial capability, funds are included in the proposed loan to provide overseas training for 12 to 15 of the middle management staff of NPC. They would be attached to appropriate foreign utilities for about six months in order to learn utility management practices. To help with NPC's longer term manpower requirements, provision has been made in the project for the establishment of an NPC training center. Agreement has been reached during negotiations that NPC would review its training pro- gram once a year in consultation with the Bank. 23. Electricity tariffs in the Philippines are complex and diversified, reflecting the fragmented structure of the power sector which has precluded a comprehensive tariff study. The recently initiated reorganization and inte- gration of the power sector, however, would now facilitate such a study, which is needed to ascertain the sector's costs and tariffs on a marginal cost basis and to enable the Government to make more informed decisions on its pricing policy. The Government and NPC have agreed to initiate such a study and to establish a unit within NPC which would be responsible for reviewing NPC's tariffs on a continuous basis. The Government has agreed to consult the Bank on any significant changes in its power sector tariff policy. Project Cost and Financing 24. The total cost of the project is estimated to be about $92 million (net of taxes) of which $58 million (or 63%) would be in foreign exchange. The cost estimates include a physical contingency of 12% and an overall price contingency equivalent to about 30% of total project cost (including physical contingency). For local costs, price contingencies amount to 9% in 1977-79, and 8% thereafter; for foreign exchange costs, price contingencies amount to 7.5% in 1977-79, and 7% thereafter. The unit cost for overseas training of NPC personnel was estimated at $25,000 per participant for six months. Unit costs per man-month of consulting services were assumed at $6,000. 25. The proposed loan of $58 million would finance the foreign exchange component of the project. NPC would finance the balance of project costs. Project Execution 26. The transmission project consists of a total of 50 small and simple subprojects. NPC has gained sufficient experience with this type of work through the implementation of the Fifth and Sixth Power Project and would be able to carry out the engineering and construction supervision of the trans- mission project using its own staff. NPC has agreed to appoint a project manager for the project, who would report directly to the Luzon regional manager, in order to ensure adequate coordination and timely completion of the numerous subprojects. NPC would procure equipment and materials and would tender civil works contracts, which are expected to be carried out by local contractors. Since NPC's experience in system control and communication is very limited, it has agreed to retain qualified engineering consultants for detailed design, procurement and construction supervision. 27. NPC would be responsible for retaining consultants for advisory services and selecting candidates and arranging courses for overseas train- ing. The overseas training of NPC's middle management staff would be carried  - viii - out in four phases; each phase would be limited to a six-month course and 3 or 4 participants so that the program would not jeopardize NPC's daily business acti+ ities. Procurement and Disbursement 28. Equipment and materials financed by the proposed loan would be pro- cured through international competitive bidding in accordance with the Bank's Guidelines. Although the project consists of numerous subprojects, contracts would be grouped into several packages large enough to attract foreign bidders. For purposes of bid evaluation, qualified local manufacturers would receive a preference of 15% or the level of custom duties, whichever is less. Civil works contracts for erection of transmission lines and construction of communi- cation and control as well as NPC's training center would be awarded on the basis of competitive bidding, advertised locally in accordance with local procedures, which are acceptable to the Bank. 29. The Bank loan would be disbursed for 100% of foreign exchange cost of imported goods, 100% of the ex-factory price of locally manufactured goods procured under international competitive bidding, 15% for civil works expendi- tures, and 100% of the foreign exchange cost or 65% of the total cost of consultants' services and overseas training. Financial Analysis 30. To carry out its very large future program, NPC will need to expand its asset base by ten times over the next eight years. To cover capital expenditures of $5.8 billion (P 43.9 billion), NPC will borrow about $3.6 bil- lion (P 26.9 billion) abroad to cover foreign costs. Arrangements have already been completed for about $1.7 billion (P 13.0 billion) of foreign financing; accordingly, the prospects appear to be favorable for raising the additional borrowing required. The balance of NPC's investment requirements of $2.2 bil- lion (P 17.0 billion) would have to be provided from within the Philippines either from NPC's internal cash generation or in the form of Government equity contributions to NPC. On this basis, the debt/equity ratio would not rise above 46/54, which would allow a margin for debt revaluation during the forecast period if currency parities change. 31. Since 1972 NPC has been attempting to earn reasonable revenues. The rate of return on currently valued net fixed assets in operation rose from 4.5% in 1971 to 6.4% in 1975; this is primarily the result of a series of tariff increases. However, the higher than expected cost inflation has prevented INPC from achieving the 8% rate of return previously agreed upon with the Bank. In fact, the rate of return for 1976 is estimated to have fallen to 3.5%. A 35% tariff increase was implemented in November 1976 and as a result the rate of return is expected to rise to 5.3% in 1977. 32. Substantial funds are required by NPC over the coming years which must come from a combination of internal cash generation and Government equity, as NPC will need to use its borrowing capability primarily for foreign rather than local borrowing. The rate of return should therefore be fixed in the future at the highest level possible, taking into account consumers tariffs and the amount of budget resources that the Government can allocae to the  - ix - power sector. With an 8% rate of return on its annually revalued net fixed assets in operation, NPC's internal cash generation would contribute only 4% of the resources needed to finance the total power investment program proposed through 1983. Thus, the Government would need to contribute $2.0 billion in the form of equity contributions. During negotiations it was agreed to continue the existing covenant which requires NPC to earn an 8% rate of return. However, in order to provide for a larger share of financing from internal cash generation, the Government and NPC have also agreed to review with the Bank, by not later than June 30, 1979, NPC's tariff levels and determine a schedule of tariff increases which would enable NPC to earn, at the earliest feasible time, rates of return higher than 8%. 33. The current debt control test agreed between NPC and the Bank pro- vides that the Borrower shall not incur debt without the agreement of the Bank unless its net revenues for the fiscal year next preceding such incur- rence, or for a later 12-month period ended prior to such incurrence, shall have been at least 1.3 times the maximum annual debt service requirement for any succeeding fiscal year on all debt (including the debt to be incurred). Because of increasing needs to borrow to finance its capital program, NPC has had to seek the Bank's agreement to incurring each new debt during the past few years. A change was needed to provide covenants which would give adequate freedom to NPC to manage its debt and still assure its major creditor, the Bank, periodic opportunities to review NPC's investment and borrowing program. Therefore, agreement was reached with NPC that: NPC would submit annually a copy of its ten-year development program with the supporting financial plan to the Bank for its review, and NPC would only undertake a major project, invest- ment, or acquisition (defined as those exceeding $50 million equivalent) after having established in consultation with the Bank that such investment, project, or asset (i) forms part of a least cost development program for NPC; (ii) will be undertaken or acquired through means which will ensure a reasonable cost; and (iii) will be financed under a reasonable financing plan. These covenants are expected to provide NPC greater flexibility than in the past and at the same time allow for adequate discussion between NPC and the Bank to reach agreement on a least-cost development program. In addition, it has been agreed that NPC's medium-term borrowings (i.e., debt maturing within 5 years) would be limited to a total of $50 million equivalent. 34. NPC has undertaken in the agreement for Loan 1034-PH that by December 31, 1976, outstanding accounts for electricity supplied will not exceed the previous three months revenues. Efforts have been made to reduce outstanding accounts and arrangements were made in 1973 with certain utilities to amortise their accounts receivable over periods ranging from 36-60 months; on December 31, 1975, a balance of P 5.7 million remained from an original amount of P 23.4 million to be amortized. Consumers accounts receivable at end-1975 were P 92.3 million, excluding the unamortized balance remaining, or about four months' billings. As NPC was unable to disconnect major consumers because of the effect such action would have on the towns and areas served by delinquent utilities, NPC did not meet the covenant by end-1976. Therefore, the relevant covenant has been repeated in the Loan Agreement but the deadline date has been extended to December 31, 1978.  x Economic Analysis 35. Electricity consumption in Luzon has shown a steady growth during the last decade and the rate of household electrification increased from 35% in 1970 to 46% in 1975. However, most of the people who enjoy electricity live in the central part of Luzon including the Manila metropolitan area. In the northern and sourthern part of the island only 15% of households have an electricity supply provided largely by small, self-generating uti- lities only for a limited time each day at high cost. To rectify the situa- tion, NEA has embarked on an ambitious program of total electrification, but its success depends heavily on availability of NPC's power. With the com- pletion of the proposed project, almost the whole of Luzon except for few remote areas will be covered by NPC's transmission grid and forty additional large industries are expected to be connected to the grid by 1981. Thus, the proposed project would substantially contribute to the country's total elec- trification and industrialization program by providing low cost, reliable power supplies throughout Luzon. 36. Each of the 50 transmission subprojects has been reviewed and is either the least cost alternative or the only solution available. The basic design has been standardized by NPC to minimize the engineering, construction and maintenance costs and a significant reduction in unit cost is unlikely to result from further design modifications without jeopardizing equipment safety and reliable operation of the system. 37. Since the proposed project is a timeslice of NPC's transmission expansion program in Luzon and forms a part of the generation-transmission- distribution chain of power supply, it is very difficult to quantify benefits attributable to the project. Therefore, an internal rate of return calcula- tion has been made on the basis of NPC's overall investment program in Luzon for the period 1977/82, including both generation and transmission. Efficiency prices were used with all taxes and duties excluded and foreign exchange costs shadow priced. Revenues based on the expected level of NPC's bulk supply tariffs have been used for the benefit. 38. The internal rate of return of NPC's program in Luzon for the 1977-82 period is estimated to be at least 10%. By using a discount rate of 12% which is considered to approximate the opportunity cost of capital, the average cost of power supply in Luzon was found to be 22.0 centavos per kWh, about 6% over the expected average tariff of 20.7 centavos. This means that the bulk tariffs designed to recover NPC's accounting costs would largely recover the economic cost of power supply in future. The comprehensive tariff study included in the proposed loan would examine in detail the sector costs on a marginal cost basis and provide the Government with guidelines for setting a rational power pricing policy for both bulk supply and retail sales (para 23). Conclusion, Recommendations, Loan Conditions 39. Recent policy decisions by the Government on the power sector have clearly defined the objectives and strategies for the sector's development. NPC has been given a major role and responsibility in the sector; the country's economic development will to an important degree depend on NPC's future performance; however, NPC has not yet fully adjusted itself to the new  - xi - situation. Much needs to be done: technical capability needs to be rapidly expanded to cope with the massive development program, financing needs to be secured, planning improved, a comprehensive training program developed, and sound public utility management introduced. The proposed loan would help NPC to improve its overall institutional capability and also to extend power supplies to industries and rural areas. Works involved in the physical component of the project are ordinary ones, and project risks are no greater than can normally be expected for this type of project. There may be some risks associated with the institutional aspects of the project. However, these are expected to be minimized as NPC has agreed on principles of mana- gerial reform and has already taken various steps in the right direction. To ensure achievement of the project objectives, particularly NPC's institution- building efforts, the Bank staff will maintain close contact with NPC and the Government regarding the overall power program and will closely review progress on the project. The project is suitable for a Bank loan of $58 million equiv- alent, with a term of 20 years, including 4-1/2 years of grace. Major cove- nants include the appointment of a financial manager and a management advisory team (para 21), implementation of the management reorganization (para 21), implementation of the training program (para 22), the rate-of-return covenant (para 32), and the debt limitation covenant (para 33).   Chapter 1 THE POWER SECTOR General 1.01 The power sector in the Philippines has been complex, poorly co- ordinated and uneven in performance and institutional strength. In 1970 there were 336 private and 122 public utilities. The Manila Electric Company (MECO) dominated the private sector while the National Power Corporation (NPC) was the largest public utility. MECO accounted for about 60%, and NPC 30% of total electricity generated by utilities. Most of the other utilities distri- buted power purchased from NPC or MECO, but some generated as well which accounted for the remaining 10%. Of the 458 utilities, only about thirty sold more than 5 GWh annually, and of about 350 generating plants which they owned, only about twenty were larger than 1 MW in size. Services by small utilities, particularly those which generated power, were substandard and very costly. Because of the unavailability of a reliable power supply, some industries had to resort to captive power plants to satisfy their needs. 1.02 The fragmented ownership of power generation and distribution facilities became an increasingly important obstacle to the coordinated development of the power sector in the main islands of the Philippines. The Government, therefore, declared in Presidential Decree No. 40 of November, 1972 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 the construction of national grids, the develop- ment of all future generation supplying the grids and, ultimately for owning and operating all generating facilities. MECO, presently the largest generat- ing as well as distributing company, will eventually become only a distributing utility; negotiations for transferring the bulk of MECO's generating and trans- mission facilities to the Government are underway (para 1.04). The National Electrification Administration (NEA), established in 1969, was made responsible for integrating the distribution sector and extending power supplies to rural areas. The Power Development Council (PDC), created in 1970, is the policy- making body for the power sector responsible for formulating policies and programs on power development and coordinating the activities of all organ- izations connected with electric power, including approval of major power projects and rate-making policy. PDC coordinates policy for NPC, NEA, MECO and all other utilities. It is attached to the Department of Public Works, Transport and Communications, to which NPC and NEA also report. The Department Secretary is Chairman of PDC to ensure the coordination of the Department and PDC. In March 1976 the Energy Development Board was created to govern the exploration and development of primary energy resources, in- cTuding geothermal energy, water, oil, gas and coal. Once a primary energy resource is programmed or developed for electric power generation, PDC takes over the reponsibility. 1.03 The new policy clearly defines intra-sectoral responsibilities, in particular those of NPC and NEA. If properly implemented, the policy will lead to better coordination in the development of the sector. Encouraging signs of progress are already apparent; NPC has launched a massive generation  development program not only in Luzon where its activities were concentrated in the past but also in Mindanao and the Visayas; NEA's efforts to establish rural cooperatives for electrification have already produced positive results. However, managerial, technical and financial capability to carry out this ambitious program, particularly for NPC, has yet to be proven. 1.04 Government and MECO contracted in October 1975 that Government would purchase MECO's Gardner, Snyder and Malaya I plants by March 1976, and Malaya II when completed in 1979. NPC is expected to own and operate these plants but may contract their operation to MECO. Agreement on the terms of the takeover has not yet been reached. The delay has been due to agreeing to the value of the plants which were to be sold at about 1975 market value for the Gardner and Snyder plants, and at cost for the Malaya plants. Details of settlement of the purchase price have not yet been agreed. On completion of this transfer, MECO will be left with only old plant on a standby basis and will purchase all of its power from NPC. It will become the largest distri- buting utility in the country and its future capital expenditure will be for distribution facilities only, a relatively small amount compared to NPC's investment (para 1.10). No difficulty is anticipated in transferring plant operating staff to NPC as salaries at these levels are competitive. Planning and engineering staff have already formed a consulting firm. Demand and Supply for Electric Power 1.05 Information about the generating capacities and energy production of NPC and MECO is readily available (Annex 1.1), but a complete analysis of past trends in the Philippine power sector is hampered by a lack of data about the capacities and production of the small utilities and privately owned plants. Based on information from various sources an estimate was made for each region on the status of electricity supply in 1974 as shown below:  - 3 - Estimated Installed Capacity and Energy Production, 1974 Region and Installed Capacity Energy Production Utility (MW) (%) (GWh) (%) Luzon NPC 501 22.3 1,979 22.4 MECO 1,517 67.6 5,969 67.4 Other /a 228 10.1 900 10.7 Total 2,246 100.0 8,848 100.0 Visayas NPC 2 5.2 5 3.6 Other /a 385 94.8 1,400 96.4 Total 387 100.0 1,405 100.0 Mindanao NPC 152 31.2 421 25.2 Other /a 335 68.8 1,250 74.8 Total 487 100.0 1,671 100.0 Philippines NPC 655 21.0 2,405 20.2 N4ECO 1,517 48.6 5,969 50.0 Other /a 948 30.4 3,550 29.8 Total 3,120 100.0 11,924 100.0 Sources: NEA, Annual Report, 1974-75. /a Includes small utilities and self generation of private industries. Utilities are estimated to represent about 30% and industries 70%. 1.06 The electrification of the country has gathered momentum since NEA embarked on its rural electrification program in 1970. NPC has also con- tributed by expanding its transmission systems into rural areas financed partly by the Fifth and Sixth Power Loans. The table below summarizes the progress of electrification. Percentage of Households Electrified 1970 1975 Region Luzon 34.8 46.4 Visayas 9.8 12.9 Mindanao 10.5 15.2 Philippines 23.4 31.3  - 4 - Large disparities among the three regions still exist. However, NEA's effort to complete the "backbone" system 1/ by 1980 and to provide electricity to all barrios 2/ in the country by 1984 will rectify the situation very rapidly. Development Program 1.07 The lack of comprehensive data on past trends, particularly for small utilities and self-generating industries, hinders a discussion of the Philippines' future power requirements. However, based on available informatior, an estimate was made of probable future trends in demand and supply for each region. 1.08 The demand forecasts and development program for Luzon will be discussed in detail in Chapters 3 and 4. Present power supplies in the Visayas and Mindanao rely largely on small utilities and private industries with NPC supplying only 4% and 25% of total energy consumption, respectively. Demands are presently suppressed. Potential demand growth is considered much higher in these regions than in Luzon because of the very small starting base and government's policy of promoting industrial development in the regions. NPC has embarked on ambitious development programs both in the Visayas and Mindanao to supply suppressed demands and to absorb the loads of existing utilities and industries by phasing out small and inefficient plants. How- ever, much will depend on NPC's capability to carry out such programs and the demand growth will be largely determined by the rate of capacity increase. 1.09 Based on NPC's development program and assuming that the shares of generation by small utilities and industries will decrease from the present level of 30% to 15% of the total in 1985, the overall electricity production in the country will increase at 10.7% per annum and generating capacity at 9.5% during the period 1974-85 as shown below: 1/ The "backbone" system is the main distribution system (13.8 kV) linking all towns within each cooperative area. 2/ A barrio is the smallest administrative unit.  -5- Region and Actual Projected Growth Rate Utility 1974 1985 1974-85 Energy Production GWh % GWh _ % p.a. Luzon 8,848 74.2 21,048 57.7 8.2 Visayas 1,405 11.8 6,980 19.1 15.7 Mindanao 1,671 14.0 8,499 23.2 13.3 Total 11,924 100 36,527 100 10.7 Installed Capacity By Region MW % NW % _ p.a. Luzon 2,246 72.0 5,097 59.8 7.7 Visayas 387 12.4 1,537 18.1 13.3 Mindanao 487 15.6 1,882 22.1 13.1 Total 3,120 100 8,516 100 9.5 By Utility NPC 655 21.0 6,632 77.9 23.4 MECO 1,517 48.6 425 5.0 - Other 948 30.4 1,459 17.1 4.0 Total 3,120 100 8,516 100 9.5 As can be seen from the table, significant changes are expected in the share of power supply among regions as well as among utilities. Another drastic change will take place in the source of electricity energy. The relative importance of petroleum will decline to be replaced by hydro, geothermal and nuclear as shown below: Energy Source Installed Capacity (MW) Percentage Share (%) 1974 1985 1974 1985 Petroleum 2,513 4,494 80.6 52.8 Hydro 607 2,677 19.4 31.5 Geothermal 0 745 0 8.7 Nuclear 0 600 0 7.0 Total 3,120 8,516 100 100 1.10 The capital investment required for the proposed program is huge. Since NPC is wholly responsible for generation and transmission, the bulk of the sector's investment will be required by NPC; NEA, MECO and other utilities will need relatively small amounts. It is estimated that NPC's  program would require for the period 1976-1983 investment outlays of about $5.8 billion (P 43.9 billion) in current prices (including P 2.3 billion for acquiring MECO's assets) divided among the three regions as follows: P Millions US$ Millions % Luzon 28,652 3,820 65 Mindanao 8,169 1,089 19 Visayas 7,064 942 16 43,885 5,851 100 The above figures include price escalation at 8% per annum and interest during construction. At 1976 prices the proposed program would require outlays of about $4.4 billion (P 33.3 billion) compared with actual expenditures by NPC of about P 1.6 billion during 1967-75, also at 1976 prices. Investments by MECO and NEA through 1983 are expected to be about P 3.4 billion and P 3.3 billion respectively; investments in distribution by other utilities are not known. 1.11 The financial implications of such an investment program are con- siderable. NPC currently has the largest corporate asset base in the Philippines, P 2.7 billion at end-1975; by end 1983, the asset base will be P 32.0 billion at current prices (P 20.4 billion at 1976 prices). Because of its large size, the high foreign exchange component and the limited funds available domestically, the bulk of this program will have to be borrowed abroad. It is estimated that 61% will be borrowed, corresponding to the estimated foreign cost. NPC will require a significant increase in its equity to enable such financing to be obtainable. The equity contribution in addition to internal cash generation required to cover local costs would be about P 15.3 billion (including P 2.3 billion to finance NPC's acquisition of MECO's plants) in current prices or about one-third of the total program during the period.  Annex 1.I National Power Corporation (NPC) Seventh Power Project Generating Facilities - NPC,MECO as of December 31, 1975 1/ Capacity (MW)- Total Year in Region Plant Type Units Installed Service Owner Luzon Caliraya hydro 4 x 8 32 1945-50 NPC Ambuklao hydro 3 x 25 75 1956-57 NPC Binga hydro 4 x 25 100 1960 NPC Angat hydro 2 x 6 + 4 x 50 212 1967-68 NPC Bataan thermal 1 x 75 75 1972 NPC Botocan hydro 1 + 2 x 7.5 16 1946-48 MECO Blaisdell thermal 2 x 4 + 10 + 12.5 30.5 1947-53 MECO,stand-by Rockwell thermal 5 x 25 + 3 x 60 305 1955-63 MECO Tegen thermal 2 x 100 200 1965-66 MECO Gardner thermal 150 + 200 350 1968-70 MECO, but to be transferred to NPC Snyder thermal 200 + 300 500 1971-72 NECO, but to be transferred to NPC Malaya thermal 300 300 1975 MECO, but to be Sub-total 2,195.5 transferred to NPC Balongbong hydro/diesel - 0.45 1956-67 NPC-isolated Buhi-Barit hydro - 1.8 1957 NPC-isolated Cawayan hydro - 0.4 1959 NPC-isolated Ligao diesel - 3.0 1973 NPC-isolated Tiwi diesel - 2.5 1975 NPC-isolated Total 2,203.65 Mindanao Maria Cristina hydro 2 x 25 + 2 x 50 150 1953-71 NPC Agusan hydro 1.6 1957 NPC Total 151.6 Visayas Amlan hydro 0.8 1961 NPC Loboc hydro 1.2 1968 NPC Total 2.0 1/ Installed capacity shown above is nameplate capacity. However, due to overloading capability, MECO defines its gross capacity as 1,847 MW compared to nameplate capacity of 1,701.5 MW. Before the commissioning of the Malaya plant in 1975, MECO's gross capacity was 1,517.MW.   Chapter 2 THE BORROWER Organization and Management 2.01 The Borrower of the proposed loan would be NPC, a stock corporation fully owned by the Government. Its corporate powers are vested in a Board of seven members including the General Manager who is Vice-Chairman. The Chairman and members are Presidential appointees representing Luzon, Visayas, Mindanao, labor and the business sector. 2.02 NPC was originally chartered to develop hydroelectric resources in the country without much responsibility for coordinating and taking the ini- tiative in the power sector development. In recent years, however, the Government made several policy decisions to enlarge NPC's role and respon- sibility in the sector. It authorized NPC to generate power from sources other than hydroenergy, regionalized NPC's organization in 1971 to accelerate electrification in Mindanao and the Visayas, and, in 1972, made NPC responsi- ble for the development of all future generating facilities (para 1.02). In view of its extended responsibility, NPC is now urgently required to strengthen and expand its managerial capability to the level of a well organized utility. 2.03 NPC has its head office in Manila and three regional offices in Luzon, the Visayas and Mindanao. Its organization, historically oriented for executing a small number of projects, has been clearly deficient for carrying out its expanded role. On the one hand, the head office has retained most of the power on project-related matters such as project design, procurement and contract administration, leaving little authority and freedom to regional offices which have actually executed projects. This has tended to delay project implementation. On the other hand, such important functions of uti- lity management as formulation of long-range investment programs and system operation have been almost entirely left to regional offices. This has led to inadequate planning and coordination of utility activities. 2.04 NPC is aware of the organizational deficiencies and has already taken certain remedial steps. A Corporate Planning Staff and a Human Re- sources Development Division have been set up in the head office. The Corporate Planning Staff has a staff function to advise the management on long-range policy planning and to assist other departments and regional offices in implementing such policies as approved by the management. It has four functional divisions; finance and investment, power development, management planning and management information. If properly staffed and given expert advice during the initial stage, this would improve NPC's mana- gerial capability considerably. The Human Resources Development Division, which would be expanded into a department, is responsible for manpower planning and training (para. 2.08). The present organization of NPC is shown in Attachment (W.B. 16254). NPC is also approaching consultants associated with an operating utility for management advisory services. The team consisting of experts in each major field of utility management would assist NPC in reorganization, orientation of the Corporate Planning Staff, particularly in system planning, and execution of day-to-day operations.  - 8 - The objective is not merely to recommend necessary managerial reforms but, more importantly, to provide continuous, in-house assistance in implementing such reforms. This is satisfactory to the Bank and funds to cover the foreign exchange cost of such services are included in the proposed loan. During negotiations, confirmation has been obtained from NPC that it will appoint by October 1, 1977 such an advisory team on terms and conditions acceptable to the Bank, and that it will implement the management improvement to be recommended by the team and to be agreed between NPC and the Bank within twelve months of such recommendations. 2.05 NPC, in the past, has been successful in obtaining foreign financing for its investment program. However, due to weak financial management, efforts have been concentrated on obtaining whatever foreign financing was available without giving due consideration either to optimizing the development program or to analyzing the financial consequences of the borrowings as obtained. In view of huge financial requirements of NPC, agreement was reached during negotiations that a highly qualified and experienced financial manager would be appointed not later than December 31, 1977. It was further agreed that the Bank would continuously review NPC's development program and overall financing plan (para 5.13). Manpower and Training 2.06 NPC had about 3,500 employees of all kinds as of June 1974. The number had grown to 5,842 by December, 1976 as the development program began to gather momentum. In order to carry out its huge development program and to successfully operate its business, NPC will have to expand its manpower rapidly both in quantity and quality. The manpower study carried out by the University of the Philippines (UP) estimates that over 10,000 employees of all skills and disciplines will be needed by 1985, excluding MECO's plant operat- ing staff who will transfer to NPC when Government acquires MECO's generating plants. 2.07 Because of sporadic construction activities in the past, NPC relied heavily on temporary staff, even for highly professional positions such as senior engineers, in order to avoid high administrative costs during slack periods. In December 1976, only 36% of the total of 5,842 employees were permanent staff; the majority of the remainder were filling what should be established positions. This policy, although prudent in the past, has led to the present situation of under-staffing, particularly in the managerial and supervisory category. NPC's management has taken a number of steps to improve its capability. Salary scales and merit systems have been improved to make NPC more competitive with private industry; specialized engineers have been trans- ferred to NPC from other government agencies particularly in the nuclear and geothermal fields; qualified engineering consultants have been employed to meet the immediate needs for priority projects; and scholarship and training programs, although in an unorganized manner, have been undertaken for NPC staff. These measures have proven particularly effective in securing young engineers and skilled workers. 2.08 Skilled and educated manpower is readily available in the country. What is required of NPC is long-term manpower planning, a motivative personnel policy and a comprehensive training program. NPC retained in 1976 a manpower  - 9 - study team from the College of Public Administration of the UP who have analyzed the present organization and manpower situation and projected future manpower requirements, both in terms of quantity and quality. Their main recommendations are (i) establishment of Human Resources Development Depart- ment responsible for the overall manpower development program, (ii) a crash training program for the period 1977-79 to build up engineering and management skills, (iii) immediate review of personnel policies to better motivate and mobilize employees and (iv) restructuring the NPC organization to ensure better utilization of available manpower. The Human Resources Development Department would be responsible for formulating a manpower development policy, designing and administering training programs, conducting research on manpower requirements, establishing a personnel information system and establishing and managing an NPC training center. The recommendations clearly identify the present deficiencies and need for future improvement of NPC's manpower policy. NPC agrees with the recommendations in principle and has already created an organizational unit for manpower development at division level, and recruited the chief of the unit from the UP. The 1977-78 training program presently under review by the NPC Board aims at improving technical and administrative capability and developing desirable work attitudes through 28 training courses for about 2,500 employees. During negotiations it has been agreed that NPC would (i) establish by December 31, 1979 its training center, (ii) prepare and submit to the Bank during the third quarter of each fiscal year a detailed implementation schedule of the training program for the following year, and (iii) review with the Bank during the first quarter of each fiscal year the accomplishments on training during the preceeding year. 2.09 The proposed loan includes funds for financing the foreign exchange cost of the training center to support NPC's long-term manpower development program. Also included are funds for overseas training of 12-15 middle management staff as a part of the crash program; they will be attached to overseas utilities for the purpose of learning utility management practice. The Asian Development Bank has also provided in its latest loan to NPC funds for a short-term training program to strengthen NPC's engineering and project management capability; this will supplement our efforts to assist NPC's train- ing program. Tariff Policy 2.10 Comprehensive tariff studies of the power sector have never been made: the way in which the sector was organized in the past precluded such a study. Large disparities exist in the tariff levels among regions and sup- pliers. NPC, by its charter, has three different bulk tariffs for its Luzon, Mindanao and Visayas regions (Annex 2.1). Tariffs in Mindanao are much lower than in Luzon: 3.08 centavos (4.1 US mills) compared to 11.3 centavos (15.1 US.mills) per kWh including fuel surcharges in FY1975. Small utilities selling electricity to ultimate consumers also have a wide range of operating costs depending on such factors as the size of operation, load density, and source of energy. Therefore, a residential consumer of a utility purchasing cheap power from the NPC's hydropower system in Mindanao would be charged only 12 centavos per kWh while another residential consumer of a small self-generating utility would have to pay as high as 80 centavos per kWh. The Bank has sug- gested that a comprehensive study be made of the sector costs and tariffs on a marginal cost basis to enable the Government to make decisions on the power  - 10- pricing policy with full knowledge of the consequential cost of such policy. It was felt that the local staff could carry out the study adequately, and agreement was reached during negotiations that NPC would establish not later than September 30, 1977 a special unit responsible for carrying out the tariff study in collaboration with the Government and other utilities. The proposed loan nevertheless include funds for financing costs of consultant services in case specialized advice is required during the course of the study from external consultants on a short term basis. In view of the importance of and the Bank's interest in tariff structures, the Guarantee Agreement provides for periodic review and consultation between the Bank and the Government on tariff policy. Audit 2.11 The Auditor-General is ex-officio auditor of NPC. He appoints the Auditor of the Corporation to carry out the audit work at NPC, a situation previously accepted by the Bank. All transactions are checked prior to pay- ment and the Auditor can stop payment, overriding the General Manager if he thinks fit. Although NPC has an internal auditor in addition to the Corpo- ration Auditor, the main audit concentrates on whether or not individual transactions are covered by budgets giving less attention than is usual in other utilities, to broad audit considerations. Undertakings have previously been received that pre-auditing would be reconsidered but the system is time- honored for all Government corporations in the Philippines. The Auditor is employed full-time at NPC but is paid through the government payroll funded by NPC. Pre-auditing coupled with the employment status of the Auditor makes him a prima facie official of NPC, casting doubt on the independence and objectivity of the audit. During negotiations it was agreed that the Govern- ment would review its auditing procedures relating to NPC and implement, in agreement with the Bank, a program to improve it by October 1, 1978. If the audit is still u-nsatisfactory after the changes have been implemented, NPC would be required to employ a public accounting firm of international standing as auditors or financial consultants to report on the audit and the annual accounts.  ANNEX 2.1 Page 1 NATIONAL POWER CORPORATION Present Tariff Schedule effective: November 15, 1976 NPC's tariffs have three schedules, each for Luzon, Mindanao and the Visayas, as follows: 1) SCHEDULE 1 - FOR THE LUZON REGION (a) Applicability - Applicable to electric power and energy supplied to electric utilities and non-utilities within the Luzon Region served by CORPORATION. (b) Rates - Per Meter Demand Charge: Per Month First 1000 KW of billing demand P 5.00 per KW Next 9000 KW of billing demand 3.00 per KW All excess KW 1.00 per KW Basic Energy Charge: First 300 KWH per KW of billing demand P 0.175 per KWH Next 150 KWH per KW of billing demand 0.165 per KWH All excess KWH 0.160 per KWH Minimum Charge: The monthly minimum charge shall be based on the KW of billing demand and Contract Energy.  ANNEX 2.1 Page 2 2) SCHEDULE 2 - FOR THE MINDANAO REGION (a) Applicability - Applicable to electric power and energy supplied to electric utilities and non-utilities within the Mindanao Region served by CORPORATION. (b) Rates - Per Meter Demand Charge: Per Month First 1000 KW of billing demand P 2.00 per KW Next 9000 KW of billing demand 1.50 per KW All excess KW 1.00 per KW Basic Energy Charge: First 300 KWH per KW of billing demand P 0.045 per KWH Next 150 KWH per KW of billing demand 0.030 per KWH All excess KWH 0.020 per KWH Minimum Charge: The monthly minimum charge shall be based on the KW of billing demand and Contract Energy. 3) SCHEDULE 3 - FOR THE VISAYAS REGION (a) Applicability - Applicable to electric power and energy supplied to electric utilities and non-utilities within the Visayas Region served by Corporation. (b) Rates - Per Meter Demand Charge: Per Month All kilowatts of billing demand P 10.00 per KW Basic Energy Charge: First 300 KWH per KW of billing demand P 0.20 per KWH Next 150 KWH per KW of billing demand 0.18 per KWH All excess KWH 0.16 per KWH  ANNEX 2.1 Page 3 Minimum Charge: The monthly minimum charge shall be based on the KW of billing demand and Contract Energy. In addition to the basic schedules, there are special conditions as described below: (a) Prompt Payment Discount: a 3% discount when the bill is paid on or before the 15th day of the month following the billing period. (b) Power Factor Adjustment: a penalty of P 0.40 per KW of billing demand for each 1% below 85% of lagging power factor. (c) Fuel Cost Adjustment: differences between the actual cost of fuel burned and the base price of P 16.0 per million BTU shall be proportioned to the basic energy charges. (d) Cost of Purchased Power: the total cost of purchased power shall be prorated on the basis of a ratio of such purchased power to the total generation of the grid. (e) Primary Voltage Discount: the sum of customer's demand and energy charges will be reduced depending on the de- livery voltage as follows: Nominal Primary Voltage Discount (%) Delivery Voltage Luzon Grid Agus Grid 67 KV 3.0 5.0 110 KV and over 5.0 7.0 (f) Insurance Adjustment: in the event NPC is required to further insure its operating assets, the additional cost shall be added on a per kwh basis.   - 11 - Chapter 3 DEMAND Past Trends 3.01 The interconnected system in Luzon comprises the metropolitan Manila area served by MECO and provincial areas of NPC. MECO's consumers can be categorized into three major groups; residential, commercial and industrial, each representing 26, 30 and 40% of the total consumption in 1973, with the remaining 4% for street lighting and resale. NPC sold 36% of its total energy to retail utilities, 45% to large industries and 19% to agricultural and public demands in 1973. In the past MECO and NPC operated their systems independently from each other, but with a certain amount of seasonal inter- change of power between them. 3.02 After steady increases of consumption averaging about 13% per year in the 1960s, the Luzon system shifted to a slower growth pattern with an annual increase of less than 10% in the early 1970s. Shown below is the past trend of power consumption in Luzon: NPC MECO Total Year Consumption Growth Rate Consumption Growth Rate Consumption Growth Rate (GWh) (%) (GWh) (%) (GWh) (%) 1960-1970 - 21.9 - 11.8 - 13.1 1971 1,403 19.0 5,289 5.4 6,692 8.0 1972 1,571 12.0 5,645 6.7 7,216 7.8 1973 1,799 14.5 6,082 7.7 7,881 9.2 1974 1,979 10.0 5,969 (1.9) 7,948 0.9 1975 2,228 12.6 6,493 8.8 8,721 9.7 In 1974, a drastic increase of MECO's tariffs and energy conservation measures enforced by the Government resulted in an unprecedented decline of electricity consumption in the Manila area. Most severely affected were residential demands which registered a 10% decline in consumption over 1973 in spite of a 4% increase in number of customers. It is considered, however, that this was a temporary phenomenon and the power demand will resume its growth pattern of 8-9% per year. Future Forecast 3.03 The latest demand forecasts prepared by NPC and MECO in early 1976 are shown in Annex 3.1 and summarized below:  - 12 - NPC MECO Total Calendar Consumption Growth Rate Consumption Growth Rate Consumption Growth Rate Year (GWh) (%) (GWh) M (GWh) M 1975 2,228 - 6,493 - 8,721 - (Actual) 1980 4,544 14.8 8,457 5.4 13,001 8.3 1985 8,344 12.9 11,315 6.0 19,659 8.6 The general trend continues to be a faster growth for NPC's provincial demand than for MECO. This is a reflection of (a) saturating effects in MECO's already congested franchise area, (b) the government policy of dispersing industries to rural areas and (c) the government's ambitious program for rural electrification. As a result MECO's share in energy consumption continues to decline from 81% in 1970 and 75% in 1975 to 65% in 1980 and 58% in 1985. 3.04 NPC's provincial load comprises (a) small utilities who distribute power to ultimate consumers, (b) large industrial consumers and (c) miscella- neous load. Its forecast is based on (a) the past trend of existing utility customers, (b) the transmission expansion program to connect new customers and (c) information on future industrial customers obtained individually and from the Board of Investment. The utility load is expected to grow at about 11%; an increase of existing customers at 9% plus 2% contributed by new customers. The industrial load will increase much faster than utility -- about 19% per year during 1975-85. The high growth rate for the industrial demand is jus- tified in view of planned dispersal of industries. The consumption pattern will change significantly with industrial loads increasing from 42% of the total sales in 1975 to 62% in 1985, utility loads from 36% in 1975 to 27% in 1985 and others from 22% to 11%, excluding sales to MECO. 3.05 In preparing its demand forecast, MECO utilized four different approaches: (a) elasticity to economic variables, (b) time series, (c) mul- tiple regression, and (d) international comparison. However, the final esti- mates seem to be determined by largely relying on professional judgement. A low growth rate of 4.8% assumed for industry is a reflection of the other side of the industrial dispersal policy. Residential and commercial demands are forecast to grow at 6.4% and 5.6% per year, respectively. This is considered reasonable as a short-term forecast which inevitably reflects the setback experienced in 1974, a 10.0% and 1.2% decline in consumption, respectively. However, as a long-range forecast, it might be on the low side. A forecast based on elasticity of residential power use to personal expenditures and of commercial power use to service output (although MECO discarded the results as unduly optimistic) predicts a growth rate of about 12% and 13%, respectively. Nevertheless, MECO's forecast has been accepted as a conservative basis for reviewing the future investment program.  NATIONAL POWER CORPORATION (NPC) SEVENTH POWER PROJECT Demand Forecast - Luzon Grid 1/ average annual rate Calender Year 1975 1976 1977 1978 1979 198C 1981 1982 1983 1984 1985 of growth (7%) Actual 1975 1980 1975 Energy Requirements (GWh) I I t 1980 1985 1985 NPC's Provincial Loads Utility 769 839 920 1,053 1,181 1,326 1,480 1,611 1,755 1,917 2,127 11.5 9.9 10.7 Industry 884 1,007 15564 1,764 2,263 2,333 2,668 3,095 3,588 4,133 4,894 21.4 16.0 18.7 Miscellaneous 469 485 511 543 580 612 654 691 728 775 822 5.5 6.1 5.8 Sub-total 2,122 2,379 2,995 3,360 4,024 4,271 4,802 5,397 6,071 6,825 7,843 15.0 12.9 14.0 System Loss 106 152 191 214 257 273 307 344 388 436 501 Total 2,228 2,531 3,186 3,574 4,281 4,544 5,109 5,741 6,459 7,261 8,344 15.3 12.9 14.1 MECO's Loads Residential 1,412 1,487 1,597 1,711 1,819 1,924 - - - - - 6.4 - - Commercial 1,773 1,834 1,953 2,076 2,203 2,335 - - - - - 5.6 - - Industry 2,441 2,572 2,701 2,831 2,958 3,,085 - - - - - 4.8 - - Others 283 299 315 330 345 360 - - - - - 4.9 - - Sub-total 5,909 6,192 6,566 6,948 7,325 7,704 - - - - - 5.4 - - System Loss 584 606 642 680 716 753 - - - - - Total 6,493 6,798 7,208 7,628 8,041 8,457 8,969 9,525 10,105 10,696 11,315 5.4 6.O 6.0 Total 8,721 94329 2 13,001 14078 15,266 16,564 17,957 19.659 8.3 8.6 8.6 Peak Demand (MW) 1.513 1,582 1,757 1,892 2,073 2.180 2 352 2.550 2.767 2,998 3.253 7.6 8.3 8.0 1/ A preliminary figure for 1976 shows a demand increase of 5.37% compared to forecast 7.0%. she total generation is estimated at 9,185 C-Wh instead of 9,329 shown above. In spite of this setback, NPC revised its forecast upward with the total generation in 1985 reaching 21,262 GWh compared to 19,659 GWh shown above. However, in this report, the original forecast shown above is used.   - 13 - Chapter 4 PROGRAM AND PROJECT Development Program in Luzon 4.01 In response to the Government's policy of diversifying energy re- sources and reducing dependence on imported oil, NPC formulated an ambitious development program for the Luzon grid including MECO's franchise area. The program envisages introduction of the first nuclear unit of 600 MW in the early 1980s, development of about 500 MW of geothermal power and about 1,000 MW of hydropower generation by 1985. It does not include any fossil-fuel thermal plant after the on-going Malaya 2 project. The program is shown in Annex 4.1 and summarized below: /a Luzon Grid Installed Generating Capacity Type 1975 1980 1985 IW % MW % MW % hydro 437 20 537 18 1,437 /b 31 oil-fired thermal 1,766 80 2,216 75 2,091 /c 45 geothermal - - 220 7 495 11 nuclear - - - 600 13 Total 2,203 100 2,973 100 4,623 100 /a Includes presently isolated plant which will be connected to the grid by 1980. /b Includes 300 MW of pumped-storage plant at Kalayaan. Ic Assumes retirement of 156 MW of old thermal plant. 4.02 The significance of the program is a change in the composition of the energy source; oil-fired thermal would fall from 80% of the total in 1975 to 45% by 1985 to be replaced by hydro, geothermal and nuclear energy. Al- though the objective of diversifying energy sources is reasonable, the program involves certain risks, financially and technically. Hydro, geothermal and nuclear projects, although more economical on a long-term basis, are more capital intensive than conventional thermal projects and may create finan- cial constraints which will hinder timely development of such projects. These projects are also technically more complicated and require higher contingencies, both in cost and scheduling, than thermal projects. In par- ticular, sufficient geothermal steam may not be secured in time for the planned development of geothermal generation. The program, therefore, needs continuous review so that, should difficulties arise, adequate remedial actions can be taken. It was agreed during negotiations that the Bank would continuously review NPC's development program and overall financing plan (para. 5.13).  - 14 - 4.03 In addition to the above-mentioned generating facilities, NPC had, in 1976, about 3,300 km of transmission lines with voltage ranging between 13.8 kV and 230 kV and about 900 MiVA of substation capacity to supply 116 utility and 95 non-utility customers in Luzon. However, the grid system is concentrated in the central Luzon area and people in northern and southern Luzon areas do not enjoy a stable supply of electricity by NPC; they either receive unreliable and costly power supplies by self-generating small utilities or none at all. Although NEA is vigorously promoting the rural electrification program throughout the country, this cannot be achieved without rapid expansion of NPC's grid system into rural areas. The Bank has been assisting the grid expansion under the Fifth and Sixth Power Loans by financing about 1,100 km of transmission lines and about 1,200 MVA of sub- station facilities. The Overseas Economic Cooperation Fund of Japan has provided funds for the first stage of grid expansion into the Cagayan Valley in northern Luzon. These projects are expected to be completed by 1979. NPC plans to further expand its grid system to meet the growing industrial demand and to supply cooperatives under NEA's rural electrifica- tion scheme. The proposed project would make a further contribution to NPC's grid expansion. Project Description 4.04 The proposed project comprises: (a) expansion of the transmission system in Luzon; (b) the first stage of establishing communication systems and a control center in Luzon; (c) NPC's training activities; and (d) consultants's services for management improvement and a tariff study. 4.05 The transmission expansion project which covers the entire Luzon region would build the following transmission and substation facilities: The Grid Expansion Project Transmission Lines (km) Substations (M1VA) Project Area 230 KV 115 KV 69 KV Total 230 KV 115 KV Total (1) Ilocos region 102 - 162 264 50 - 50 (2) Central Luzon - - 118 118 - /a - - (3) Zambales region 123 - - 123 50 - 50 (4) Laguna-Batangas 19 69 28 116 - 125 125 (5) Southern Luzon 380 - 185 565 - /a - - (6) Cagayan Valley - - 172 172 - - - Total 624 69 665 1,358 100 125 225 /a Although no transformer capacity would be added, some switchgear installations are included in the project.  - 15 - 4.06 The 230 KV and 115 KV facilities either strengthen existing systems which will be overloaded in a few years or provide a bulk supply of power to areas which presently do not have power supply but expect rapid load develop- ment mainly due to the establishment of new industries. The 69 KV lines will extend NPC's power supply to rural areas where NEA is promoting rural electri- fication schemes. NPC will deliver power at 69 KV to NEA which will install the 69 KV substations; hence no 69 KV substation facilities are included in the project. NPC and NEA have been closely coordinating their programs so that timely power supply by NPC is available when NEA's system is ready for operation. Details of the transmission expansion subprojects are shown in Annex 4.2 and attached maps (IBRD 3562R3 and IBRD 3563R3). 4.07 Presently NPC does not have a control center and therefore the operation of its power plants is based on predetermined generator loading schedules. Telephone communication between the regional office and the power plants is very limited and the monitoring of the power system is not avail- able. This is an unusual situation for a system as large as the Luzon grid. The proposed project would construct a microwave and power-line carrier net- work linking all power plants and major substations, existing and to be commissioned up to the end of 1981, and a central control center equipped with system monitoring, data acquisition and remote control facilities. Although a computerized system is essential to modern control techniques, the timing and extent of its introduction require further study and review. Provision is nevertheless made in the proposed loan for such a computer system and agreement was reached during negotiations that NPC should seek Bank's agree- ment on the scope of the control center as a condition of disbursement against this item. Upon completion, the control center would continuously monitor and supervise operation of all generating plants and major substations so that the cost of system operation can be minimized, system security maximized and, in case of system disturbances, service can be restored with the minimum effects on consumers. 4.08 The training program and consultants' services for management im- provement and the tariff study have been discussed in paragraphs 2.04-2.10.  - 16 - Cost Estimate 4.09 The project cost estimate is shown in Annexes 4.2 and 4.3 and summarized below: % Price Increase % over Base Price in US$ million Foreign plus Physical Local Foreign Total Exchange Contingency A. Transmission System Ilocos Region 4.35 8.06 12.41 Central Luzon Region 1.07 3.08 4.15 Zambales Region 1.97 3.78 5.75 Laguna-Batangas 3.37 4.43 7.80 Southern Luzon 2.07 8.11 10.18 Cagayan Valley 1.19 1.69 2.88 Engineering and Administration 2.20 - 2.20 Subtotal 16.22 29.15 45.37 64 30 B. Communication and Control Communication Network 0.83 4.87 5.70 Control Facilities 2.21 2.97 5.18 Engineering and Administration 0.55 0.93 1.48 Subtotal 3.59 8.77 12.36 71 31 C. Training and Advisory Services Overseas Training - 0.41 0.41 Training School 2.34 2.38 4.72 Management Advisory Team 0.11 0.72 0.83 Tariff Study - 0.03 0.03 Subtotal 2.45 3.54 5.99 59 22 Total Base Cost 22.26 41.46 63.72 65 Physical Contingency 3.51 3.96 7.47 53 Price Contingency 8.57 12.58 21.15 59 Total Project Cost 34.34 58.00 92.34 63 30  - 17 - The base cost shown above is in late-1976 prices and does not include customs duties or taxes since NPC is exempt from such levies. The cost estimate for the transmission expansion has been prepared by NPC based on recent bidding experiences under the Fifth and Sixth Power Projects. The estimate for the communication and control facilities has been prepared by NPC and its consultants, Electrowatt of Zurich, who carried out a feasibility study financed under the Sixth Power Loan. The costs for training and advisory services are based on man-month requirement for such activities (para. 4.14) except for the estimate for the training center which has been prepared by NPC and the UP study team. The foreign component includes indirect foreign costs of local contracts for civil works and erection. These include costs for fuel, construction equipment and materials, and are estimated at 15% of the total local contracts. 4.10 Physical contingencies of 15% on the local cost component and 5% on the foreign exchange component have been provided. In addition a pro- vision for the computer and telex system has been provided as a physical contingency for the control center (para. 4.07). Price contingencies have been applied at different rates; 9% for 1977-79 and 8% thereafter for the local cost and 7.5% for 1977-79 and 7% thereafter for the foreign cost. The overall price contingency thus calculated would amount to 30% of the pro- ject cost including the physical contingency. In calculating contingencies, percentages for the local cost were also applied to the indirect foreign cost. Amount of Loan 4.11 The project's foreign exchange component of US$58.0 million equiva- lent is about 63% of the total cost of US$92.3 million equivalent before interest during construction. The proposed loan of US$58 million would cover the full foreign exchange cost. The local cost would be financed by NPC. Engineering and Construction 4.12 The transmission project which has been prepared by NPC consists of a total of fifty (50) small and simple subprojects. NPC has gained sufficient experience of this type of project through the implementation of the Fifth and Sixth Power Projects and plans to carry out the engineering and construction supervision of the transmission project using its own staff. This is acceptable to the Bank. However, NPC has agreed during negotiations to appoint a project manager with adequate authority and responsibility, re- porting directly to the Luzon regional manager. This is considered necessary to ensure adequate coordination and timely completion of the numerous subpro- ject; NPC has normally given very limited responsibility to project managers who report to the third level of management in regional offices. Contracts for major equipment and materials would be on a supply basis and erection would be carried out by local contractors. 4.13 Since NPC's experience in system control and communication is vary limited, it intends to retain qualified engineering consultants for detailed design, procurement and construction supervision. An assurance has been obtained during negotiations that NPC will appoint such consultants on terms and conditions acceptable to the Bank. The estimated foreign exchange cost of consultants' services is US$0.93 million for 144 man-months at a unit cost of $6,080 per man-month plus reimbursable costs.  - 18 - 4.14 NPC would be responsible for retaining consultants for advisory services and selecting candidates and arranging courses for overseas train- ing. The management advisory services would require 108 man-months of experts' services during a three-year period at an unit cost of $6,000 per man-month. The overseas training of NPC's middle management staff would be carried out in four schedules; each schedule would have a six-month course limited to 3 or 4 participants so that it would not jeopardize NPC's daily business activities. 4.15 The transmission project would have a different construction schedule for each subproject with completion ranging between mid-1980 and end-1981. The communication system and the control center will be completed by the end of 1981. Management advisory services would require three years, the training center and overseas training would take two years and the tariff study would be completed within one year. The project implementation schedule is attached. Procurement and Disbursement 4.16 Equipment and materials financed by the proposed loan will be pro- cured through international competitive bidding in accordance with the Bank's guidelines. Since some of the project materials could be manufactured locally, the loan documents should include the usual margin of preference for local suppliers. Although the project consists of numerous subprojects, contracts would be grouped into several packages large enough to attract foreign bidders. Competitive bidding in accordance with local procedures is appropriate for civil works and erection of the transmission lines, substations, control center and training school because works involved are individually small and physically scattered throughout Luzon and, therefore, would not attract foreign firms. Bank staff have reviewed the local procedures and they are acceptable. 4.17 The Bank loan would be disbursed against 100% of the foreign ex- change cost of imported goods and services, 100% of the ex-factory price of locally manufactured items procured under international competitive bidding, 15% of the total cost of contracts procured under local procedures and 100% of the foreign exchange cost or 65% of the total cost, whichever is higher, of consultants' services and overseas training. No disbursements would be made retroactively. The estimated schedule of loan disbursements is shown below:  D45/A-9 - 19 - IBRD Fiscal Year Cumulative Disbursements and Semester US$1,000 1977/78 December 31, 1977 370 June 30, 1978 880 1978/79 December 31, 1978 3,950 June 30, 1979 12,800 1979/80 December 31, 1979 28,800 June 30, 1980 38,700 1980/81 December 31, 1980 48,100 June 30, 1981 54,750 1981/82 December 31, 1981 58,000 Environmental Aspects 4.18 No environmental problems are anticipated. Transmission lines mostly pass through rural and mountainous areas and compensation will be made for rights-of-way. Air and water pollution problems will not arise.   National Power Corporation System Development Program - Luzon Grid 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 actual Load Forecast (1) Energy Consumption (GWh) 8,721 9,236 10,394 11,202 12,322 13,001 14,078 15,266 16,564 17,957 19,659 (2) Peak Demand (MW) 1,513 1,582 1,757 1,892 2,073 2,180 2,352 2,550 2,767 2,998 3,253 System Capability (3) Available Energy (GWh) 10,565 10,565 11,858 13,190 16,076 16,590 16,470 17,156 18,502 21,222 22,358 (4) Dependable Capacity (MW) 1,915 1,915 2,128 2,199 2,617 2,669 2,969 3,125 3,477 3,827 4,029 (5) Reserve I/ (4)-(2) (MW) 402 333 371 307 544 489 617 575 710 829 776 (5)/(2) (%) 26.6 21.0 17.4 16.2 26.2 22.4 26.2 22.6 25.6 27.6 23.8 Development Program 2/ 3/ 4/ Malaya 1(T) Pantabangan (H) Tiwi 1(G) Malaya 2(T) Los Banos 2(G) Kalayaan- (P) Tiwi 3(G) Los Banos4(G) Bagac 5/(N) Abulog T(H) 285 MW 70 MW 52 MW 314 MW 52 MW 300 MW 52 MW 52 MW 456 MW 150 MW 1,870 GWh 293 GWh 343 GWh 2,200 GWh 343 GWh (120) GWh 343 GWh 343 GWh 3,000 GWh 793 GWh Bataan 2(T) Rehabilitation Tiwi 2(G) Tiwi 4(G) Tabu 4/(H) Geothermal(C) 143 MW MECO plant (T) 52 MW 52 MW 300 MW 52 MW 1,000 GWh 19 MW 343 GWh 343 GWh 660 GWh 343 GWh 1,160 GWh Los Banos l(G) Los Banos 3(G) 52 MW 52 MW 343 GWh 343 GWh Note: 1. Reserve should not be smaller than the larger of (1) 22% of peak demand or (2) the sum of the largest class and the second largest class unit in operation. However, this criteria can not be satisfied in the near future. 2. Capacity shown is net dependable capacity. 3. The Kalayaan plant was assumed to operate 6 hours a day, 6 days a week, 26 weeks a year during the dry season, at an overall efficiency of 0.7. Thus the plant would be a net consumer of 120 GWh per year. 4. The sequence of future hydro development is tentative and subject to change after detailed studies and priority assessments. Tabu in 1983 will be replaced by Magat (268 MWM991 GWh). 5. The nuclear plant was assumed to be dependable for only 80% of the rated capacity during the initial two years of operation. NPC hopes to commission the Bagac nuclear plant in 1982 which is considered optimistic. 6. type of generation shown in parenthesis means: (T); thermal (H); hydro (G); geothermal (P); pumped atorage hydro (N); nuclear   Annex 4.2 Page 1 of 7 pages Seventh Power Project List of Subprojects and Breakdown of Cost Estimate Part 1. Transmission System Legend 1 cct: single-circuit line 2 cct: double-circuit line 1/2 cct: double-circuit line with only one circuit strung initially. 1 add: stringing of the second circuit on 1/2 cct. recond: replacing existing conductors with new, larger-size ones. 230/115 kV,50 MVA: voltage and capacity of a transformer. 230 kV, 2F: voltage and number of feeders. C: increasing system capacity to relieve overloading. N: extending the grid to areas presently not served. R: improving system reliability. Basic Cost (US$ thousands) Local Foreign Description Objec- supply& Land& tive emeetion r-o-w indirect direct Total I. Ilocos Region A. Transmission Lines 1. 230 kV lubuagan-Narvacan,90 km,1/2 cct. C 2,334 294 412 2,691 5,731 2. 230 kV Ambuklao-Binga, 12 km, 1 cct. C 248 20 44 329 641 3. 69 kV Guinaoang-Junction, 30 km, 1 cct. N 169 37 30 264 500 4. 69 kV Bontoc-Junction-Lagawe, 40 km, 1 cct. N 225 49 40 352 666 5. 69 kV Bangued-Licuan, 43 km, 1 cct. N 242 53 43 378 716 6. 69 kV Tap-Manabo, 23 km, 1 cct. N 130 28 23 202 383 7. 69 kV Bauang-San Fernando, 5 km, recond C 9 - 2 25 36 8. 69 kV BCI-San Fernando, 21 km, recond C 41 7 105 153 Subtotal - Transmission Lines 3,398 481 601 4,346 8,826 B. Substations 1. 230/115kV, 50 MVA at Narvacan C 330 89 58 2,017 2,494 2. 230 kV, 1F at Ambuklao C 16 - 3 291 310 3. 230 kV, 2F at Binga C 32 - 6 583 621 h. 69 kV, 1F at Beckel C 6 - 1 155 162 Subtotal - Substations 384 89 68 3,o46 3,587 TOTAL - Ilocos Region 3,782 570 669 7,392 12,413  Annex 4.2 Page 2 of 7 pages Basic Cost (US$ thousands) Description Local Foreign Objec- supply& land & tive erection r-o-w indirect direct Total II. Central Luzon Region A. Transmission Lines 1. 69 kV Pantabangan-Baler,76km, lcct. N 428 93 76 668 1,265 2. 69 kV Cabanatuan -Cruz na Daan,42 km,recond C 82 - 14 210 306 Subtotal - Transmission lines 510 93 90 878 1,571 B. Substations 1. 230 kV, 7F at Prado1/ C,R 249 213 44 2,068 2,574 Prado- ___ ___~~~~ ___ __ 2_ TOTAL - Central Luzon Region 759 306 134 2,946 4,145 IIl. Zambales Region A. Transmission Lines 1. 230 kV Olongapo-Sta.Cruz, 123 km,lcct. C 1,571 230 277 2,412 4,490 B. Substations 1. 230/69 kV, 50 MVA at Sta.Cruz. C 64 89 11 786 950 2. 230 kV, 1F at Olongapo C 16 - 3 291 310 Subtotal - Substations 80 89 14 1,077 12260 TOTAL - Zambales Region 1,651 319 291 3,1489 5,750 IV. Laguna-Batangas Region A. Transmission Lines 1. 230 kV Malaya-KalayaanTap,17km, 1 add. C 24 - 4 172 200 2. 230 kV Tap-Kalayaan, 1.5km, 2x2 cct. N 116 13 21 119 269 *3. 115 kV Binan-Trece Martirez,22km, 2 cct. N 610 466 108 920 2,104 **4. 115 kV Trece Martirez-Ternate, 16 km, lcct.N 166 170 29 169 534 **5. 115 kV Trece Martirez-Rosario, 15 km, lcct.N 156 160 27 159 502 **6. 115 kV Trece Martirez-Mendez, 15.5 km,lcct.N 161 165 28 164 518 7. 69 kV Siniloan-Baras, 28 km, 1 cct. N 158 222 28 246 654 Subtotal - Transmission Lines 1,391 1,196 245 1,949 4,781 1/ A 50 MVA transformer is being financed under Loan 1034-PH. * designed for 230 kV, but operated initially at 115 kV. ** towers to be retired from existing lines will be used.  Annex 4.2 Page 3 of 7 pages Basic Cost (uS$ thousands) Local Foreign Objec- supply & land& Description tive erection r-o-w indirect direct Total B. Substations 1. 115/13.8 kV, 50 MVA at Ternate N 38 80 7 367 492 2. 115/34.5 kV, 50 MVA at Rosario N 32 80 6 301 419 3. 115 kV, 5 F at Trece Martirez N 278 160 49 1,229 1,716 4. 115/13.8 kV, 25 MVA at Mendez N 31 80 5 275 391 Subtotal - Substations 379 40O 67 2,172 3,o18 TOTAL - Laguna Batangas Region 1.770 1,596 312 4 7,799 V. Southern Luzon Region A. Transmission Lines 1. 230 kV Kalayaan Tap-Gumaca,116 kmj add.C 161 - 29 1,174 1,364 2. 230 kV Gumaca-Labo, 86 km, 1 add. C 120 - 21 870 1,011 3. 230 kV Labo-Naga, 97 km, 1 add. C 135 - 24 982 1,141 4. 230 kV Naga-Legaspi, 81 km, 1 add. C 113 - 20 820 953 5. 69 kV San Jose-Carainoan, 43 km, 1 cct. N 242 83 43 378 746 6. 69 kV Pitogo-Mulanay, 50 km, 1 cct. N 282 96 50 440 868 7. 69 kV Siniloan-Infanta, 46 km, 1 cct. N 259 106 46 404 815 8. 69 kV Sorsogon-Gubat, 19 km, 1 cct. N 107 36 19 167 329 9. 69 kV Tap-Tinambac, 27 km, 1 cct. N 152 52 27 237 468 Subtotal - Transmission Lines 1,571 373 279 5,472 7,695 B. Substations 1. 230 kV, 2 F at Gumaca C 32 - 6 583 621 2. 230 kV, 2 F at Labo C 32 - 6 583 621 3. 230 kV, 2 F at Naga C 32 - 6 583 621 4. 230 kV, 2 F at Legaspi C 32 - 6 583 621 Siibtota] - Substations 128 _ 24 2,332 2,484 TOTAL - Southern Luzon Region 1.699 373 303 7,804 10,179  Annex 4.2 Page 4 of 7 pages Basic Cost (US$ thousands) Local Foreign Description Objec- supply & land& tive erection r-o-w indirect direct Total VI. Cagayan Valley Region A. Transmission Lines 1.69 kV Lal-lo-Gonzaga, 40 km, 1 oct. N 225 49 40 352 666 2.69 kV Tuguegarao-Solana, 10 km, 1 cct. N 56 12 10 88 166 3.69 kV Santiago-Jones, 28 km, 1 cct. N 158 34 28 246 466 4.69 kV Jones-Saguday, 17 km, 1 cct. N 107 21 19 149 296 5.69 kV Cauayan-Roxas, 29 km, 1 cct. N 163 36 29 255 483 6,69 kV Solana Tap-Casinsingan, 13 km, 1 cot.N 73 16 13 114 216 7.69 kV Tap-Baggao, 8 km, 1 cct. N 45 10 8 70 133 8.69 kV Tuguegarao-Capsan, 27 km, 1 cct. N 152 33 27 237 449 Subtotal - Transmission Lines 979 211 174 1,511 2,875 B. Substations None ______ TOTAL - Cagayan Valley Region 979 211 174 1,511 2,875 VII. Summary 1. Transmission Lines 9,420 2,584 1,666 16,568 30,238 2. Substations 1,220 791 217 10,695 12,923 3. Administration 2,200 - - - 2,200 Subtotal 12,840 3,375 1,883 27,263 45,361 4. Physical Contingency - 15% on local and indirect foreign 1,926 506 282 1,363 4,077 5% on direct foreign 5. Price Contingency 6,393 8,637 15,030 TOTAL - Transmission System 25,0_40 39,_428 64,468  Annex 4.2 Page 5 of 7 pages Part 2. Communication System and Control Center Base Cost ($ thousand) Local Foreign Total I. Communication System indirect direct 1. Microwave system with 14 channels connecting 11 remote stations to the control center, with 3 relay stations. 608 107 2,385 3,100 2. PLC system linking 34 power plants and substations. 115 20 1,035 1,170 3. Telehpone system at 36 power plants,substations and offices. 106 19 1,305 1,430 Subtotal 829 146 4,725 5,700 II. Control Facilities 1. Data acquisition and remote control system divided into 11 subsystems covering 34 remote stations 213 37 2,O6C 2,310 2. Control center with auxiliary equipment and a building 1,997 353 520 2,870 Subtotal 2,210 390 2,580 5,180 ITI.Engineering and Administration 550 - _ 930 ',480 TOTAL 32_589 536 8,235 12,360 IV. Physical Contingency 1. 5% on direct forex, 15% on indirect foreign and local. 538 492 1,030 2. Telex system 50 315 365 3. DuJal computer system at control center. 140 1,350 1,490 Subtotal 728 2,157 2,885 V. Price Contingency 1,531 3,188 4,719 TOTAL 5 848 14 116 19,964  Annex 4.2 Page 6 of 7 pages Part 3. Training and Advisory Services I. Overseas Training Number of participants 15 Fees and subsistence per participant: $25,000 Air fare per participant : $ 2,500 Subtotal 15x(25,000+2,500)=$412,500 II. Training School Foreign ($ thousand) Local indirect direct Total 1. Land --- 5 ha 300 - - 300 2. Site preparation, 5 ha 200 20 - 220 3. School building, 5,200 sq m 1,150 250 - 1,400 4. Dormitories, 3,800 sq m 693 117 - 810 5. Equipment, instruments and tools Electric Laboratory - - 950 950 Mechanical Laboratory - - 600 600 Tnstrumentation Laboratory - - 265 265 Chemistry Laboratory - - 100 100 Others - - 75 75 Subtotal 2,343 387 1,990 4,720 III. Managment Advisory Team 1. Man-month requirement Home Office Philippines Total Project Manager 12 6 18 Management Advisors - 6xg = 54 54 Organizational Study 6x3 = 18 6x3 = 18 36 Subtotal 30 78 108 2. Foreign Cost Fees 108 x $6,000 = $648,oo0 Travel 20 x $2,500 = $ 50.000 Others $ 22,000 $720,000 3. Local Cost 78 x P 350 x 30D 7.5 . $108,000  Annex 4.2 Page 7 of 7 pages IV. Tariff Study 3 man-months in the field: 9ODx ($220+$60) = $25,200 2 round trips : 2 x 2,400 = $ 4,800 Subtotal $30,000 V. Summary ($ thousand) Local Foreign Total 1. Overseas Training - 410 T10 2. Training School 2,343 2,377 4,720 3. Management Advisory Team 108 720 828 4. Tariff Study - 30 30 Subtotal 2,451 3,537 5,988 5. Physical Contingency on 2. 348 162 510 6. Price Contingency 647 750 1,397 TOTAL 3 446 4,449 7_895 ___ 449 ,9  SEVENTH POWER PROJECT Project Cost Estimate (in US$ million) Base Price Physical Contingency Price Contingency Total Cost Local Foreign Total Local Foreign Local Foreign Local Foreign Total A. Transmission System Ilocos Region 4.35 8.o6 12.41 0.65 0.45 Central Luzon Region 1.07 3.08 4.15 0.16 0.17 Zambales Region 1.97 3.78 5.75 0.30 0.21 Laguna-Batangas Region 3.37 4.43 7.80 0.50 0.25 Southern Luzon Region 2.07 8.11 10.18 0.31 o.46 Cagayan Valley Region 1.19 1.69 2.88 0.18 0.10 Engineering and Administration 2.20 - 2.20 0.33 - _ _ Subtotal 16.22 29.15 45.37 2.43 1.64 6.39 8.64 25.04 39.43 64.47 B. Communication and Control Communication Network 0.83 4.87 5.70 0.12 0.26 Control Facilities 2.21 2.97 5.18 0.53 1.85 Engineering and Administration 0.55 0.93 1.48 0.08 0.05 _ _ Subtotal 3.59 8.77 12.36 0.73 2.16 1.53 3.19 5.85 14.12 19.97 C. Training and Advisory Services Overseas Training - 0.41 0.41 - - Training School 2.34 2.38 4.72 0.35 0.16 Management Advisory Team 0.11 0.72 0.83 - _ Tariff Study - 0.03 0.03 - - - Subtotal 2.45 3.54 5.99 0-35 0.16 o.65 0.75 3.45 4.45 7 9