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