VZCZCXYZ0003
RR RUEHWEB

DE RUEHML #2633/01 1740909
ZNR UUUUU ZZH
R 230909Z JUN 06
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC 1666
INFO RHEBAAA/USDOE WASHDC
RUEHUL/AMEMBASSY SEOUL 2331

UNCLAS MANILA 002633 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB/ESC AND EAP/MTS 
STATE PASS USAID FOR AA/ANE, AA/G 
STATE PASS EXIM, OPIC 
STATE PASS USTR FOR BWEISEL AND DKATZ 
DOE FOR TOM CUTLER 
TREASURY FOR OASIA, LMOGHTADER 
USDOC FOR 4430 ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN 
 
E.O. 12958:  N/A 
TAGS: ECON ENRG EPET PGOV EAID RP
SUBJECT:  AMBASSADOR CALLS ON ENERGY SECRETARY 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET - PROTECT 
ACCORDINGLY 
 
-------- 
Summary 
-------- 
 
¶1. (SBU) In the Ambassador's initial call, Energy Secretary 
Lotilla highlighted the need to increase competition and 
privatization in the electric power sector.  Lotilla 
described promising developments in alternative energy 
sources throughout the country, including geothermal 
projects, the expansion of ethanol production, and greater 
utilization of bio-mass energy from sugarcane.  He noted 
that diversification of energy sources away from fossil 
fuels has eased the burden of adjusting to higher oil prices 
in the power sector, though transportation relies heavily on 
imported oil.  The Ambassador offered that the Embassy could 
serve as a useful channel to help engage the U.S. private 
sector in working towards the Energy Department's goals of 
market driven prices and privatization of assets.  End 
Summary. 
 
------------------- 
Power Sector Reform 
------------------- 
 
¶2. (U) The Ambassador, accompanied by Econoffs and USAID 
officer, called on Secretary Raphael Lotilla on June 21 to 
review power sector developments and privatization efforts. 
Lotilla confidently described his agency's mandate "to bring 
power to the people" as a major part of President Arroyo's 
ten-point agenda.  He noted that 2,500 villages throughout 
the Philippines are without electricity and that lack of 
electric power keeps these villages poor.  Lotilla stated 
that, although Philippine electricity prices are among the 
highest in the region, the country spends less per capita on 
energy ($570 annually per person) than neighboring countries 
($1,000 or more). 
 
¶3. (SBU) Secretary Lotilla underscored the need for greater 
privatization, noting that the present system favors the 
"entrenched interests" of old public utility providers.  He 
added that the goal of legislation such as the 2001 Electric 
Power Industry Reform Act was to introduce competition, 
noting that the Ramos Administration back in the 1990s held 
that the power sector was the last major hurdle in reforming 
the economy.  Lotilla said that progress was indeed slow but 
reforms continue.  He said that competition was needed to 
determine correct pricing that would, in turn, ensure 
investment in new capacity.  The government must undertake 
reforms while guarding against the old public monopoly 
becoming a private one.  He said that on June 23 the first 
ever spot market for electricity would begin, though on a 
limited scale, for electricity in Manila, and help to 
encourage market-based prices.  However, Lotilla cautioned 
that "the market is not a substitute for long-term supply 
contracts", which he cited as key to maintaining a stable 
supply and lower consumer prices.  He also observed that 
Luzon Island overall has a slight overcapacity in supply 
that would work to the advantage of consumers. 
 
¶4. (U) Lotilla noted the positive role of U.S. and other 
foreign investment in the power sector.  Chevron, for 
example, was the largest investor in natural gas, though 
other companies like Shell receive wider media coverage 
here.  He said that the Korean government's power plant 
investment channels its profits into foreign assistance for 
the Philippines.  Lotilla contended that foreign investment 
in the sector was set to increase, with a number of firms 
interested in expansion. 
 
--------------------------- 
Alternative Energy Sources 
--------------------------- 
 
¶5. (U) Secretary Lotilla reported that the Philippines is 
second only to the U.S. in total production of geothermal 
energy.  He said that Leyte Island, particularly endowed 
with geothermal resources, has the potential for exporting 
power to other parts of the Visayas region, which comprises 
the central islands of the Philippines.  He added that there 
is interest in expanding the role of geothermal energy in 
Mindanao, which has seen rising demand for non-hydroelectric 
sources of power.  However, there are logistical challenges 
in transmitting the electricity from one island to another 
as well as security vulnerabilities and natural disaster 
risks.  He concluded that coal will continue to be an 
important energy source and said that preferably more clean- 
burning coal-fired plants would come online. 
 
¶6. (U) Secretary Lotilla described the potential for 
utilizing bio-mass energy, particularly in sugarcane 
processing areas such as the Negros region in the west 
central part of the Philippines.  The mills generate steam 
when producing sugar, 40% of which is unused; investors are 
interested in harnessing this energy. 
 
¶7. (U) The Ambassador described her recent visit to the Ford 
plant in the Philippines that has begun production of 
flexible-fuel engines capable of using gasoline with up to 
20% ethanol.  Lotilla noted that farmers are indeed 
interested in entering into contracts with refineries to 
make ethanol more widely available in the domestic market. 
The Department of Energy is taking an "island by island 
approach" to ethanol, but Lotilla said that there is already 
a 50 centavo savings per liter (or about four U.S. cents per 
gallon) for consumers purchasing an ethanol-blend of 
gasoline.  (Note:  Current price of gasoline in Manila is 
about $2.80 per gallon for regular). 
 
¶8. (U) Lotilla acknowledged the assistance from USAID in 
expanding the use of alternative fuels for power and 
transport.  He noted that the Energy Department has 
submitted a request to USAID for a study of the potential of 
jathropa, a plant-based bio-diesel fuel.  He has also 
requested a study on the effects of excise tax reduction 
incentives to encourage use of alternate fuel vehicles. 
 
-------------- 
Global Issues 
-------------- 
 
¶9. (U) Secretary Lotilla said that most of the oil used by 
the Philippines is for transportation, not power generation, 
with 96% imported.  He stated that the GRP is keenly 
interested in the resolution of ongoing geopolitical events 
that affect the global energy picture.  Lotilla noted the 
uncertainty over the Iran situation as a major factor in 
higher oil prices.  Regarding GRP measures in response to 
the high oil prices, Lotilla clarified that the VAT tax will 
not be suspended from fuel, as has been reported, but rather 
the tariff duties on oil might be temporarily reduced from 
3% to 1%.  He explained that the easing of the tariff would 
not result in an overall reduction in government revenues 
since the tariff as well as the new 12 percent VAT are based 
on a percentage of the price, with higher oil prices 
generating increased revenues. 
 
¶10.  (U) Lotilla said that the GRP has no plans to develop 
strategic oil reserves because the costs are prohibitive. 
GRP maintains a 60-day reserve. 
 
¶11. (U) The Ambassador invited Lotilla to encourage his 
staff to work closely with the Embassy, especially in 
dealing with bottlenecks in the privatization of power 
sector assets.  In particular, the Ambassador expressed a 
willingness to serve as a catalyst in facilitating 
engagement with the U.S. private sector and building closer 
dialogue to promote reforms.  The Ambassador underscored 
that global energy developments present a mutual challenge, 
and Lotilla expressed his appreciation for this offer of 
closer collaboration and for the overall discussion. 
 
KENNEY