VZCZCXYZ0000
OO RUEHWEB

DE RUEHML #1656 1960326
ZNR UUUUU ZZH
O 140326Z JUL 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1266
INFO RHEBAAA/USDOE WASHDC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE

UNCLAS MANILA 001656 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA, EB/ESC AND EAP/PMBS 
STATE PASS USAID FOR AA/ANE, AA/G 
STATE PASS EXIM, OPIC AND USTR 
USAID FOR AA/ANE AND AA/EGAT 
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 EFIN EXIM RP
SUBJECT: AES' PHILIPPINE INVESTMENT: BUYER'S REMORSE? 
 
REF:  MANILA 01417 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) Summary: Officials of U.S. energy giant AES alleged in a 
meeting with Embassy officers on July 1 that the Philippine 
state-owned National Power Corporation was abusing its market power, 
and the Energy Regulatory Commission was violating its own 
guidelines in order to lower the wholesale price of electricity. 
AES became the largest U.S. investor in the Philippine energy sector 
in April 2008 when it finalized the purchase of a 660-megawatt 
coal-fired plant in Masinloc, Zambales Province for $930 million. 
The company now finds that artificially depressed electricity rates 
and increasing fuel costs have eliminated profit margins.  AES 
warned of a chilling effect on energy-sector investments that will 
create eventual electricity shortages.  End summary. 
 
¶2.  (SBU) The AES executives said they had been induced to purchase 
the Masinloc power plant by government assurances that 
power-generating assets were being privatized and that the Energy 
Regulatory Commission would follow and enforce rules that tie prices 
to the cost of supplies.  According to AES executives, the 
government now subsidizes the government-owned power corporation and 
brings rates down to a level below even the variable costs of power 
generation, making it impossible for AES and other independent power 
producers to recover their fixed costs and make debt repayments. 
The executives informed Embassy officers of the difficulties their 
company faced and solicited practical approaches for dealing with 
the sensitive financial and political ramifications of this problem. 
 
 
¶3.  (SBU) The AES executives pointed out that coal prices had 
increased from $67 per metric ton in July 2007, the month of their 
successful bid, to $170 per metric ton in July 2008.  Government 
regulations state that the recovery period (i.e., the lag in 
adjusting wholesale prices to reflect changes in the cost of inputs) 
for utilities shall not exceed six months, but in practice, there 
were much longer delays.  The AES executives claimed that the 
extended recovery period amounted to a huge subsidy for the cost of 
electricity, and noted that the National Power Corporation has not 
filed for increased cost recovery since July 2006, which 
artificially depresses prices. 
 
¶4.  (SBU) The AES executives said like most of the existing power 
producers, they strongly support retail competition and open access, 
as espoused by the Electric Power Industry Reform Act, but the cost 
of electricity must reflect the true price and allow for better 
price signals to influence electricity consumption.  Only then, they 
maintained, would private power generators be able to compete on a 
level playing field, paving pave the way for open access.  ("Open 
access" would allow consumers drawing more than one megawatt of 
energy to contract directly with power generation companies.  The 
legal trigger to allow open access is privatization of 70% of 
National Power Corporation generation assets. Currently, about 48% 
of National Power Corporation assets have been privatized through 
the Power Sector Assets and Liabilities Management Corporation or 
PSALM.) 
 
¶5.  (SBU) The AES executives warned that the current situation would 
strongly discourage any additional investment in power generation 
and that the stage was being set for serious power shortages within 
the next three to five years, a situation similar to the crisis that 
gripped the country back in the 1990s. 
 
¶6.  (SBU) Comment:  AES paid $930 million for this coal-fired plant, 
a record sale price for any Philippine government-owned asset.  With 
the current electricity market dynamics it is hard to imagine that 
AES will recover its investment any time soon. 
 
Kenney