Sep 192014
 

http://wikileaks.org/cable/2006/03/06MANILA1220.html#

Reference ID Created Released Classification Origin
06MANILA1220 2006-03-17 09:15 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Manila
VZCZCXRO2374
PP RUEHCHI RUEHDT RUEHHM
DE RUEHML #1220/01 0760915
ZNR UUUUU ZZH
P 170915Z MAR 06
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC PRIORITY 0039
INFO RHEBAAA/USDOE WASHDC
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHZS/ASEAN COLLECTIVE
UNCLAS SECTION 01 OF 03 MANILA 001220

SIPDIS

SIPDIS

SENSITIVE

STATE FOR EB/ESC AND EAP/MTS
STATE PASS USAID FOR AA/ANE, AA/G
STATE PASS EXIM, OPIC AND USTR
DOE FOR TOM CUTLER
TREASURY FOR LMoghtader
TREASURY ALSO FOR OASIA
USDOC FOR 4430 ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN

E.O. 12958: N/A
TAGS: ENRG EPET PGOV EAID RP
SUBJECT: APEC Amb Michalak Meeting with Energy Secretary

SENSITIVE BUT UNCLASSIFIED – NOT FOR INTERNET – PROTECT
ACCORDINGLY

——-
Summary
——-

¶1. (SBU) Energy Secretary Lotilla told Ambassador
Michalak on March 15 that the privatization of National
Power Corporation (NPC) generating plants will move
forward when the Manila Electric Company signs a contract
soon to purchase NPC’s electricity. The Philippines
mandated ethanol and coco bio-diesel use in vehicles
within two years to reduce oil imports, but lowered
ethanol duties to facilitate imports with a lack of local
processing. Michalak noted APEC Energy Group efforts to
promote conservation, alternative energy, and information-
sharing in the region. Mindanao faces a near-term power
shortage but new plants and more rainfall may prevent a
power crisis that would undermine peace and stability
dividends. The regulatory commission is promoting
investor confidence by rationalizing prices for
transmission and distribution and making changes
automatic. End Summary.

¶2. (U) Participants – USG: Ambassador Michael Michalak,
Charg d’Affaires Paul Jones, Econoff Cleveland Charles.
GRP: Energy Secretary Raphael Lotilla.

——————————————–
Power Company Needs Contracts to Sell Plants
——————————————–

¶3. (SBU) Lotilla admitted privatization of the National
Power Corporation (NPC) had stalled, and identified the
lack of transitional supply contracts as the primary
reason investors were unwilling to buy power plants. The
Manila Electric Company (Meralco), which distributes 75%
of Luzon’s power, is reluctant to contract from NPC
because it is already committed to buying from many
independent power producers (IPP). Open access would
leave it with numerous stranded costs. Lotilla said the
Lopez family controlling Meralco owned several IPPs,
complicating the negotiations. He said the government
would not intentionally target Meralco just because some
Lopez members did not support President Arroyo. The GRP
is a major stockholder in Meralco, he noted, and would
lose money if the company suffers financially. He said
NPC must be allowed to sell directly to those requiring
one megawatt and more, such as companies like Intel,
which uses 9-10 megawatts (mw). This would benefit
industry, improve investor sentiment, and generate jobs
and economic growth. In return, Meralco wants to buy
from its own IPPs at contracted levels so it does not pay
for unused capacity. Lotilla expected NPC and Meralco to
sign an agreement within two weeks.

¶4. (SBU) Michalak pointed out that power is a regional
problem, especially for Indonesia, Thailand, and to some
degree Malaysia. APEC is working to integrate discussion
and resolution of these issues at the global, regional,
and bilateral level. The APEC Energy Working Group is
especially active in conservation and alternative fuels,
exploring ways to set prices and establish a distribution
network for ethanol and other bio-fuels, and cooperate
and share information on whether resources available are
directed as use for fuel or food.

———————————–
Bio-fuels for the Philippine Future
———————————–

¶5. (SBU) Lotilla noted that USAID is providing
assistance in drafting a bill on bio-fuel use that has
passed the House and is under debate in the Senate. The
GRP is requiring a 5% mix of bio-fuel or ethanol in two
years and a 1% mix of coco bio-diesel. The country
lowered tariffs on ethanol and increased imports in
September 2005 and is now reviving the industry it
abandoned in the 1970s when sugar prices skyrocketed.

MANILA 00001220 002 OF 003

After blending, Lotilla noted, there are forex savings of
30 centavos per liter (about 2 and a half U.S. cents per
gallon). Coco diesel is still more expensive. But Ford
Philippines is becoming the first manufacturer in the
region to produce flexi-fuel cars that will take up to
20% ethanol. Lotilla said APEC could promote the use of
bio-fuels, minimize costs, and facilitate trade by
encouraging the adoption of regional standards for
ethanol. The Philippines, he said, had the same
standards as California in aromatics and sulfur, but this
constraint made RP fuel more expensive than fuel in other
markets in the region.

—————————————
Reduced Dependence on Oil in Energy Mix
—————————————

¶6. (SBU) Lotilla responded to a question about the mix
of energy sources by noting that the Philippines has
reduced the amount of oil generating electricity from 24%
as recently as 2000 to just 12-13% today. On Luzon, it
has fallen to 1% by maximizing hydropower, coal,
geothermal, and natural gas. The Chevron-Shell Malampaya
project began producing gas in 2002 and now feeds three
power plants generating 2700 mw, about 23% of the
country’s power. Chevron is expected to spend $15
billion worldwide on capital expenditures and the
Philippines wants a portion of that.

————————–
Meeting the Power Shortage
————————–

¶7. (SBU) Charg commented that power disruptions in
Mindanao could undermine efforts to achieve sustained
peace and stability. Lotilla admitted that among the
three grids, Mindanao faced the greatest hurdles to a
guaranteed electricity supply. He blamed a recent
localized brownout on the distribution cooperative
covering an area near a hydroelectric dam. The
cooperative owed the transmission company over one
billion pesos because it did not collect payments from
reluctant customers and egregious system losses. “It is
a governance failure,” he said. Overall, Mindanao has
little excess capacity after the dry conditions during El
Nino reduced hydropower generation to 20% capacity.
Mindanao is relying on diesel, bunker fuel, and power
barges to meet electricity demand until a 200-mw coal
plant is operational in early 2007.

¶8. (SBU) Lotilla said Luzon will still have
overcapacity for several more years, with 10,500 mw of
dependable supply and peak use of only 6,500 mw. Power
demand is growing by 6% per year in the Visayas so it
will face shortages sooner than Luzon, where demand is
only growing 4.8%. The Korean company Kepco committed to
building a 200-mw coal-fired power plant on Cebu near an
existing facility that should be on-line by 2010. Panay
Island may get a 100-mw coal plant; Negros may expand its
supply with geothermal development and a proposed wind
farm. Lotilla said he hoped Mirant would expand
production from its own facilities now that it is out of
bankruptcy in the U.S. The Energy Department and Mirant
have discussed converting the Sual plant to Build-Own-
Operate instead of a BOT that transfers the plant to the
government in 20 years.

¶9. (SBU) Nuclear power is too controversial after the
expensive construction of a plant in Bataan never came on
line, Lotilla commented, adding that an additional 1200
mw, the minimum nuclear output, is excessive for Luzon at
present. Lotilla said he was, nonetheless, open to
nuclear energy, and the Philippines continues to train
scientists in the field. He mentioned that new power
plants, especially for coal, would need environmental
impact assessments. Ocean thermal is still under
research. The GRP hopes more gas or oil will be
discovered off Palawan. China is doing some exploration
in undisputed waters in the South China Sea. Michalak
mentioned that the U.S. Geological Survey has signed an

MANILA 00001220 003 OF 003

agreement to conduct a mineral survey of the Philippines
once the GRP approved funding of about $1 million.
Lotilla was impressed that the survey would include on-
shore coal and geothermal resources that come under the
purview of the Energy Department. Michalak also
emphasized that energy security requires an efficient and
well-supplied global market and the APEC Energy Working
Group continued to highlight the conservation and
environment pieces of the energy picture.

—————————————
Regulatory Steps Assuage Investor Fears
—————————————

¶10. (SBU) Lotilla said the country has a long history
of energy regulation. The current Energy Regulatory
Commission (ERC) has established many guidelines,
including a new mechanism to allow transmission and
distribution companies the automatic recovery of costs
due to fuel and foreign exchange. Previously, they had
to wait one quarter before submitting data and then were
forced to spread the recovery over years. Now the ERC is
looking at the spot market and trying to minimize price
volatility, but Lotilla said “we just have to take some
risks.” The main issue is price — the ERC only allows
2.50 pesos per kilowatt hour, not enough to attract
investors. Transmission bottlenecks exist but only
create short-term volatility. Senators may prevent
Transco’s sale because it makes money, Lotilla said, but
it is profitable only because government loans are
excluded from its balance sheet. A Department study
determined that the country’s transmission tariffs are
higher than the regional average so the ERC may compel
the company to charge less.

¶11. (U) Ambassador Michalak did not have a chance to
clear this cable before departing post.

Jones

   

 

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