Provisions Manifestly Disadvantageous to Quezon Electric Cooperative I under the Renewable Energy Supply Agreement

Going now to the Renewable Energy Supply Agreement, it would appear that the said agreement is unconscionably tilted in favor of the Seller, Coco Resources Corporation.  The Seller is still to submit a proposal “to undertake the development, engineering, financing, construction and operation of a 10-Megawatt energy generation plant on a build, operate and own (BOO) basis to be constructed in Brgy. Muligin, Unisan, Quezon”.  There is still no definitive price certain agreed upon between the parties, that is, the price of kilowatt per hour to be sold by Coco Resources Corp. to the offtaker (Buyer) Quezon Electric Cooperative I. In the absence of an agreed offtake of per kilowatt hour, there is no basis for financial projections of the project. It would appear further that there are no financials submitted before the DBP. The loan application should be sent back to the proponent. Quezelco should be allowed to revisit the RESA.

I  Quezon Electric Cooperative I shall provide the following:

2.8        RESPONSIBILITIES OF BUYER

BUYER shall:

a. Provide in confidence all relevant and necessary data and information in order for the SELLER to be able to develop and finalize its design and engineering works for the Power Plant;

b. Provide to the SELLER access to all parts of the existing distribution system in order of the SELLER to determine the most efficient and economic method of connection of the inter-phasing systems between the power plant and existing power system;

c.  Secure all necessary rights of way and use of all the real estate required for the construction and installation of an interconnecting transmission line from the Power Plant’s battery limits to the BUYER’s existing power system grid, on or before 180 days of the Target Completion Date of the Power Plant.

Practically, the bulk of the obligation is on the part of the Buyer.  Quezelco obligated itself to virtually deliver the site of the Power Plant to Coco Resources Corporation on a silver platter. Recently, a Farm-to-Market road was constructed in Bgy. Muliguin preparatory to the groundbreaking of the power plant.  In other words, government funds were used in jumpstarting the project.

II Coco Resources Corporation has the following exclusive rights:

3.2  Seller Rights

In pursuance of its obligations under Article 3.1 SELLER shall among other things have full right to:

i.    call for tenders and award contracts with or without tender;

ii.    arrange for the preparation of detailed designs and approve or reject the same;

iii.   appoint and remove consultants and professional advisers;

iv. purchase equipment;

v.   appoint, organize and direct staff, manage and supervise the Project;

vi. enter into contracts for the supply of materials and services, including contracts with BUYER; and

vii. do all other things necessary or desirable for the completion of the Power Plant in accordance with the Specifications and generally accepted engineering standards by the Target Completion Dates.

This is the clincher.  As 100% Suarez owned, the old man will be pursued by contractors of all colors. Remember that the Rated/Nominal Capacity Output of the Power Plant as proposed is 11.2 Megawatt and not 10 Megawatt as announced.  This papers over the loan application with a government-owned bank, Development Bank of the Philippines (DBP).  It is now public knowledge that the contract signing or closing is scheduled on August 31, 2009.  CRC or UBC has already applied for a P1 Billion loan from DBP.  With P1Billion practically in his pocket, the old man can call “for tenders and award contracts with or without tender.” DBP,  now once the money is tranched out, is already out of the picture.

The Renewable Energy Supply Agreement further stipulates confidentiality which states:

III 3.10   Confidentiality.

BUYER and SELLER agrees that all information and documents (whether financial, technical or otherwise) obtained by it or its agents from SELLER or from BUYER or its agent’s inspections which are not generally publicly available shall be kept confidential and not disclosed to any other person or entity without the prior written approval of SELLER or, as the case may be, BUYER, except as required by law. Provided that BUYER and SELLER may, with the consent of the other, issue from time to time press releases containing non-sensitive information in relation to the progress of the construction of the Power Plant. This covenant shall survive the termination of this Agreement.

Since Quezelco 1 is an electric cooperative owned by its members, there is no reason why this stipulation on confidentiality is provided.  CRC and Quezelco 1 should conduct an exhaustive public hearing for the benefit of the latter’s members to arrive at collective decision. A contract this magnitude should not be left with the Quezelco Board alone. The total membership should be consulted.

There is no significant outages that would warrant additional sourcing of power for Quezelco. CRC/UBC admits that there is negligible demand growth of 4% per annum. This trend can well be addressed by the DOE.

V.      Fuel cost on account of Quezelco I.

7.5     Fees

a.   Save as provided in (b) below, in respect of each Month, or part thereof, falling within the Cooperation Period, BUYER shall pay to SELLER Minimum Monthly Energy Fees and Fuel Fees in each case calculated as provided in the Seventh Schedule (Delivery of Power and Energy).

This is an anomaly.  Why should a power generator pass on the fuel cost to the Offtaker? All that the Seller has to do is to operate the plant in optimal capacity on a take and pay basis without being bothered by the cost of fuel or sourcing thereof. In the determination of pricing, where there are additional costs, naturally the commodity becomes pricey.

VI.     Quezelco I as bystander only.

Under 3.4:

3.4 Monitor Progress

BUYER shall be entitled at its own cost to monitor the progress and quality of the construction and installation work and for this purpose, SELLER shall:

i     submit to BUYER a quarterly report of construction progress, which shall be in such detail as is reasonable in the circumstances;

ii.    ensure that BUYER and any experts appointed by BUYER in connection with the Project are afforded reasonable access to the Site at times to be agreed with SELLER provided that such access does not materially interfere with the works comprising the Project or expose any person on the Site to any danger;

iii.   make available for inspection at the Site copies of all plans and design other than any proprietary information of SELLER or any sub-contractor in relation to the Project or any part thereof.

Quezon Electric Cooperative I (Quezelco I) cannot translate its objections into something protective of its interest like rescission of the contract or any other legal escape valves. On the other hand, it is CRC which has vast arsenal of escape valves where it finds itself mired in inescapable delay.

VII.    Under 3.5 Disclaimer:

3.5 DISCLAIMER

SELLER:

i     accepts that any engineering review conducted by BUYER is solely for its own information and accordingly by conducting such review BUYER makes no representation as to the engineering soundness of the Power Plant;

ii     shall in no way represent to any third party that, as a result of any review by BUYER, BUYER is responsible for the engineering soundness of the Power Plant; and

iii. shall, subject to other provisions of this Agreement, be solely responsible for the economic and technical feasibility, operational capability and reliability of the Power Plant.

In other words, its comments or objections are pointless and only made part of the records. Can Quezelco 1 complain to the DBP about deviations from specifications that render the project inferior? Under this provision, it looks like CRC has the right to prevent Quezelco 1 from reporting any deviation to DBP, a third party to the RESA.

VIII.   Under 3.8 while “Quezelco I has the right to first refusal, the Seller shall be free to sell the project to any third party”.

IX.     Under the Construction Time Table, the Seller is not liable for liquidated damages in case of unconscionable delay.

X.      Under 3.5-Substantial Completion, the Seller has no liability in case of abandonment.

If seller has no liability for abandonment, what happens now to the loan of P1 Billion with the DBP? Or to the project as abandoned?

XI.     The Cooperative Period is not fixed under the RESA.

XII.    Under 7.7, all taxes are borne by Quezelco I. All Statements of Accounts of Seller is irreducible by taxes, national or local.

XIII.   Under 7.13 Changes and Circumstances, Quezelco I assumes all the losses.

XIV.   Monthly Bill is subject to Foreign Currency Adjustment.

As to computation of minimum contracted electrical quality and monthly energy fees, they are subject to an Incremental Currency Rate Adjustment (ICRA) and Generation Rate Adjustment Mechanism (GRAM) which shall be calculated or determined in accordance with Energy Regulatory Commission (ERC) rules.  Since the fuel of this power plant is touted to be locally sourced, there is no need for Incremental Currency Rate Adjustment (ICRA) because no foreign currency in involved in fuel acquisition, unlike gas- or coal-fired power plants. Our consumers face the prospect of more expensive KWh.

These are the most glaring lopsided provisions advantageous to the proponent and very onerous to Quezelco.  There are others which we reserve for future discussion. What is worrisome is the effect of these manifest prejudicial stipulations on the consumers and members of the Offtaker. By all indications, Cong. Suarez has exerted his influence over the Quezelco Board to pass muster on the RESA.

With the RESA on the drawing board, the CRC/UBC now has a pending loan application with the Development Bank of the Philippines and it looks like, as we intimate above, that the approval thereof is being fasttracked. Quezelco members and the affected local government units in Quezon involved in this project, i.e., Bgy, Muliguin, Municipality of Unisan, and the Province of Quezon, should band together and oppose this midnight transaction. By expressing their opposition on the project thru their respective Sanggunian, it fails to get social acceptance. Without social acceptance, the approval of its Environmental Clearance Certificate is jeopardized.

Quezon Electric Cooperative I (Quezelco I) is an electric cooperative that supplies energy to the 3^rd and 4^th District of Quezon.  It has about 130,000 members spread in its 23 municipalities with a land area almost 4,000,000 hectares.  The members of Quezelco I are kept in the dark, in the absence of a public hearing, as to the true intent of the said RESA which purports to supply Quezelco I with 10-Megawatt of its 25-Megawatt energy requirement.

CRC/UBC may supply Quezelco 1 with 2MW only without running afoul with the contract

Incidentally, the said RESA stipulates that:

3.15 Substantial Completion.

Upon substantial completion of the Power Plant, SELLER may certify partial completion of the Power Plant thus Completion Date has occurred notwithstanding that the Power Plant is unable to produce more or less about 10 MW, provided that the Power plant output shall not be less than 2 MW, but in that event, adjustments shall be made to the Minimum Monthly Energy Fees as provided in the Seventh Schedule (Delivery of Power and Energy). (emphasis ours)

In other words, while it boasts of a 10-Megawatt output in reality its Rated Nominal Output is actually 11.2-Megawatt (Project Scope and Specifications IV [i] and 2, pp. 41-42, RESA), but it is comfortable at 2-Megawatt.  The loan presentation is for the financing of an 11.2 Megawatt generator, with normal acceptable operational supply of 2-Megawatt.  Why not be forthright in just applying for 2MW instead of 10MW?

The rule of thumb in the establishment of power plant US$1 Million per Megawatt.  In other words, if the Rated/Nominal Capacity Output is only 11.2-Megawatt, its financial requirement should be $11.2 Million.

Every thing now falls into place. Had the division of Quezon into two provinces pushed thru, this business deal is a foregone conclusion. It would appear now that there is nothing noble in the Suarez position for the creation of Quezon del Sur. This project is the best retirement agenda, courtesy of the DBP and Quezelco. As can be gleaned from the Project Information Memorandum, the proponent is eyeing a second power plant to be located either in Catanauan or Calauag.