PAMANTASAN NG LUNGSOD NG MAYNILA

(University of the City of Manila)

Gen. Muralla Street, Intramuros, Manila

GRADUATE SCHOOL OF MANAGEMENT

CASE ANALYSIS

LIVING WITH KEPCO-SPC AND COAL*

On 27 June 2011, President Benigno Aquino III (P-Noy) inaugurated the 103MW x 2Units Circulating Fluidized Bed Combustion (CFBC) Cebu Coal-Fired Thermal Power Plant located at the City of Naga in the Province of Cebu. The power plant is a joint undertaking of Koreas KEPCO (Korea Electric Power Company) and the Philippines SPC (Salcon Power Corporation), or KSPC for short. With the commercial operation of the power plant, the power outlook for the province of Cebu including its neighboring provinces is more or less stabilized. There is no doubt about this as no less than the Department of Energy (DOE), National Power Corporation (NPC), the Transmission Corporation of the Philippines (TRANSCO), National Grid Corporation of the Philippines (NGCP), Department of Environment and Natural Resources (DENR), and the local governments of the City of Naga and the Province of Cebu are well aware of the Projects contribution to the worsening power situation in the Visayas. The construction of the Power Plant started in January 2008. The rotating brownouts can now be put in the past and the local government of Cebu headed by Governor Gwendolyn Garcia can now shift into high gear on its development plans and efforts for the province, especially for Metropolitan Cebu. Two days after the Power Plants inauguration, environmental crusaders and advocates said P-Noys presence in the affair was more than ceremonial (Annex A). They alleged that P-Noy gave coal-fired power plants, including this KSPCowned Power Plant, the bane of environmental crusaders with their emissions of sulfur dioxide, greenhouse gases and deposits of coal combustion waste, his imprimatur. In his speech, P-Noy described Cebu as a hostage of its own success, framing our choices as one of two evils. And this, we have to balance, P-Noy added. What problem do we want to deal with --- unstable power supply or the coal dust issue? The problem of coal dust has a solution. There are ways to mitigate it unlike a power shortage. What can you really do with that? Project Brief of the Power Plant On 10 December 2007, Doosan Heavy Industries & Construction Co., Ltd. (Supplier) and Kepco-Salcon Power Corporation (Owner) entered into a Contract with the latter engaging the services of the former to achieve the engineering, design, procurement and supply of equipment, pursuant to standards and time
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This case was written by Prof. Ador G. Paulino, faculty at the Graduate School of Management, PLM. This case is for use in classroom discussion only. Cases are not meant to illustrate either correct or incorrect handling of management and/or administrative affairs. The case was inspired by the 29th June 2011 Cebu Daily News article under the same title. Page | 1

CASE LIVING WITH KEPCO-SPC AND COAL

frame set forth in the Contract including the testing, commissioning, pilot- and commercial-run, and eventual turnover of the power plant to latter. KSPC, the Owner, is a company organized under the laws of the Republic of the Philippines, with business address at 7/F Cebu Holdings Center, Cebu Business Park, Cebu City, Philippines. KSPC is a joint undertaking of Korea Electric Power Corporation (KEPCO) and Salcon Power Corporation (SPC); thus, the acronym KSPC. Doosan, the Supplier/Contractor, is a company organized under the laws of the Republic of Korea, with office and factory address at 555 Gwigok-Dong, Changwon-Si, Gyeongsangnam-Do, South Korea. Specifically for the purpose of this Cebu Project, Doosan established its Philippines Branch Office pursuant to and in accordance with the Corporation Code of the Philippines (Batas Pambasa Bilang 68) approved on 1 May 1980 and the Foreign Investment Act of 1991 (Republic Act No. 7042, as amended). Doosans Branch Offices registration numbered FS200805177 was approved and issued by the Securities and Exchange Commission (SEC) on 4 April 2008. The business address of Doosans Philippines-Cebu Branch Office is at KSPC Power Plant Complex, Barangay Colon, Naga City, Cebu, Philippines. The Projects brief is summarized below, to wit: Title Location Owner Supplier/Contra ctor Contract Approval Date Completion Date 2 Units x 103MW Circulating Fluidized Bed Combustion (CFBC) Cebu Coal-Fired Power Plant Barangay Colon, City of Naga, Province of Cebu, the Philippines KEPCO-SPC Power Corporation (KSPC) Doosan Heavy Industries & Construction Co., Ltd. (Doosan) 10 December 2007 Unit #1 - 28 February 2011 Unit #2 - 31 May 2011 The Project called for Doosan to put up, in favor of KSPC, 2 Units x 103MW, circulating fluidized bed combustion coal-fired thermal power plant in Barangay Colon, City of Naga in the Province of Cebu, Philippines. Doosan shall, specifically, provide engineering, design, procurement and supply of equipment, pursuant to the standards and time frame set forth in the Contract including the testing, commissioning, pilot- and commercial-run, and eventual turnover of the power plant to KSPC.

Brief Description

KSPC and Doosan signed two contracts for the Cebu Power Plant (CPP) Project, i.e., (1) Off-shore Contract (or Equipment Supply Contract); and, (2) Onshore Contract (or Construction Contract). The first contract is managed by Doosans Overseas Project Management Team #2 (or 2PM) based in Changwon, Korea, while the second is the responsibility of Doosans Philippines-Cebu Branch Office. The execution of the CPP can be divided into four major phases: (1) Engineering; (2) Construction; (3) Procurement and Supply of Equipment; and, (4) Commissioning. Like any other construction project, the contract price is fixed lump-sum (in US$, Korean Won, and Philippine Peso currencies) and no escalation clause, except for approved change orders and/or change of law[s] in the Philippines, the terms of payment of the Doosan by KSPC is monthly and based on the pre-defined major milestones spread over the 42-months duration of the project. In the event the Doosan completes the CPP ahead of schedule, which in this case it did, there is no benefit or any reward to be given by KSPC. The Coal Ash and Coal Dust Issue
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CASE LIVING WITH KEPCO-SPC AND COAL

In Doosans execution of the CPP, two instances came into light with the issue of the coal ash and coal dust, i.e., during the start and completion of the construction, respectively. In both times, it was the environmental crusaders and advocates with the support of local media in Cebu that the issue was raised or became viral in the internet lingo. At this point, it is worthy to note the difference between coal ash and coal dust. Coal ash is the residue of the coal after its use as a fuel by the power plant. The coal ash emitted by the power plant through the coal silos have passed the environmental standards during the various tests conducted prior to, during, and after the commissioning of the power plant. There is a coal yard in the power plant used as temporary storage of unused coal and coal ash. The coal dust, on the other hand, is the result of winds blowing into the coal yard going towards the direction of the national highway bringing with it particles of the coal and the residue. Before the construction of the CPP started, the site where the power plant was erected used to be the coal yard area of the existing Naga Power Plant owned by SPC, but previously by the Philippine government, the NPC. Because the site had to be graded and the soil composition required reinforcement of concrete piling, the coal ash in the area had to be moved. Despite securing approval from the Owner, KSPC, and, in turn, KSPC from the local government of Naga City, Doosan was accused through the media for allegedly dumping the coal ash in connivance with local residents. The environmental crusaders and advocates said, The arbitrary dumping by Doosan of the coal ash poses high risks to the health of the people in the community and the local environment as well. Although Doosan had something to do in moving the coal ash from the power plants proposed site to the designated dumping area, it did so, however, with the proper clearance and guidance of the Owner, KSPC. It must be noted the coal ash in this instance is not a product of the operation of the CPP because the power plant has yet to be erected. Even prior to the completion of Unit #2 of CPP, Naga City Mayor Valdemor Chiong was bombarded with complaints from local residents about the coal dust being blown from the coal yard area to the national highway. The mayor relayed to KSPC the concern of the residents. KSPC responded accordingly and issued a change order request to Doosan, specifically to reinforce the coal dust prevention facilities in the coal yard area, which was completed way ahead before the inauguration ceremony of the power plant. The coal dust issue was again hyped by the media two days after P-Noy inaugurated the power plant (refer to Annex A). The final note from the Cebu Daily News article said, We dont fault Aquino for being pragmatic in saying that Cebu has to live with coal-fired plants. Metropolitan Cebu Development Plan and Metropolitan Cebu Development Council Most, if not all, development planners and strategists would agree that development is both a process and an outcome. And, for one to know the process[es] in reaching the desired outcome[s], and saying further that there was indeed development that took place, a development plan must be formulated and printed in black-and-white; not merely imagined or envisioned in the minds of the development planners. In December 1997, the Central Visayas Regional Development Council (RDC) after conducting various planning consultations passed a resolution approving the creation of the Metro Cebu Development Council (MCDC). The MCDC is mandated to coordinate the actions of local government units and national government agencies

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in Metro Cebu. The RDC of Central Visayas identified Metro Cebu as comprised of 10 local government units (municipalities and cities) located in the central eastern part of mainland Cebu, from Compostela in the north and Naga in the south, and the island of Mactan. The MCDC membership includes all the mayors of the LGUs within Metro Cebu and the governor of Cebu province. Since 1997, the MCDC has not done much to address the common concerns of LGUs in Metro Cebu. As posted by Fernando Fajardo in Cebu Daily News Online on 23 February 2011, each member city and town continues to do its own thing without regard to what the others are doing. Conceptually, there is nothing wrong with the MCDC. However, the interest of some LGUs to joining the council is very wanting, for one reason or another like not wanting to report to another higher person, i.e., a mayor to a governor. A case in point, 5 out of 11 intended members to the council complied with the requirement to contribute funds for the operation of the council. In December 1999, the MCDC endorsed a resolution asking the President to issue an Executive Order (EO) creating the MCDC. Pending the issuance of the EO, the MCDC approved in March 2000 a Memorandum of Agreement for signing by all its members to serve as basis for its operation. Of the 11 original intended members of the council, only two, the municipality of Compostela and Cordova, gave their mayors the authority to sign the said Memorandum of Agreement. The interim MCDC chairman at that time, former Cebu governor Pablo Garcia himself, had reservations on the sustainability of the council. In 2002, the MCDC upon recommendation of Governor Pablo Garcia passed a resolution requesting the national legislators from Metro Cebu to legislate for the creation of a Metro Cebu Development Authority (MCDA). Like the EO, no local legislation came to pass. Thus, in the absence of an EO or any enacting law, the council also went into limbo during the next two years. By August 2005, the Central Visayas RDC secretariat reconvened the MCDC. During the meeting, the members of MCDC designated Governor Gwendolyn Garcia as its chairperson. In October 2005, the RDC passed a resolution expanding the coverage of Metro Cebu to include Danao City in the north and San Fernando and Carcar in the south. Thereafter, the MCDC met twice in the early months and in December 2008; and, organized a Conference on Metropolitan Planning and Management. It is worthy to note, however, the MCDC only reconvened again as a body in February 2011. This time, the meeting was to tackle the problems increasingly felt by the members, like the recent flooding and ever worsening traffic situation in Metro Cebu. The Turtle Pace Why the slow motion? The very obvious reason is the failure of LGUs (cities and towns) of Metro Cebu to working as one. They failed to realize the importance of coordination to solving their common problems and pursue their common interests. They also failed to recognize the critical role that Metro Cebu plays in contributing to the growth and development of the province of Cebu in particular and the nation in general. Today, about half of the worlds population is estimated to already living in highly urbanized cities and metropolis. And, much of the worlds output (in terms of goods and services) also comes from these areas. Thus, the more competitive the cities or metropolis are, the higher share in the national output. Many countries, including China, are taking it as a challenge how to make their cities become more competitive and grow.

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On this note, one might ask, is Metro Cebu ready to competing with growing cities and metropolis in and outside the country? Yet, it is difficult to imagine how Metro Cebu will perform in the light of the threats of globalization and competitiveness of the different centers of economic activities in the world. There is no argument that one needs to look at Metro Cebu as one integrated economic unit, but is it so? Some development planners argue that for a metropolitan area to function efficiently, e.g., it must first have an integrated land use and transport plan. Apparently, this was once prepared during the 80s and 90s, specifically under the Metro Cebu Land Use and Transport Study (MCLUTS), which unfortunately was good only up to 2000. So, what happened to 2001 to 2010, and this year 2011 and beyond, 2012 onwards? The plan, according to reports, was fully implemented except for a few remaining projects, i.e., proposed circumferential road in Cebu City and the reclamation projects in Mactan island. It is also worthy to note of the Australian government-funded modernization of Cebus traffic light system as well as the Japanese government-funded Metro Cebu Development Projects I and II, the Cebu South Reclamation Project, and other related project. What do you think have guided Metro Cebus development in the last decade and what will guide it this year and beyond? The ordinary Juan Dela Cruz would say, Nothing, except the whims and caprices of most of our local officials who are only preoccupied with one thing --- the next election. RDC-7 Dissolves MCDC, Mulls Metro Cebu Board The efforts of the (Cebus) provincial capitol to mobilize Metro Cebu LGUs went into effect with the dissolution by the Central Visayas Regional Development Council (RDC-7) of the Metro Cebu Development Council (MCDC) on 24 th June 2011 (Bongcac, 2011; Retrieved from http://cdn.ph/news_details.php?id=10203 on 25th June 2011). Ms. Gwendolyn Garcia, Cebu Governor, instead presented a resolution to recognize Metro Cebu Development Coordination Board (MCDCB) replacing the MCDC. Governor Garcia, RDC-7 vice chairperson said, Rest assured, we are proceeding with our development plans with utmost care and not for the whimsical fancies of some politicians. It seems the governor was referring to her arch critic, Mr. Tomas Osmea of Cebu Citys south district. Mr. Osmea apparently opposed the inclusion of Cebu City in the board, saying it will place the city under the Capitols control. Nonetheless, Mayor Rama joined other Cebu mayors in signing an agreement supporting the creation of the board. Moreover, the boards membership was expanded to include civil society, the academe and non-government organizations (NGOs). Fr. Margarito Alingasa, Church sector representative, asked that the board be given a clear organizational framework. Fr. Alingasa likewise proposed the board be free of political interventions and run by a professional administrative body with total accountability thats not subject to the whimsical fancies of the LGUs. Is this another motherhood request that everyone knows is most unlikely to be heard and most likely to happen? The Ramon Aboitiz Foundation, Inc. (RAFI), one of the private sector members to the board, was tasked to draft the boards operational framework, Governor Garcia said. The board will solicit the cooperation of its members considering it was created with the mutual agreement of participating LGUs, added Governor Garcia.

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Garcia further noted the RDC-7 created the MCDC to coordinate the actions of LGUs in Metro Cebu and the national government agencies in dealing with metrowide concerns in 1997. It consisted of the Province of Cebu and the cities of Cebu, Mandaue, Lapu Lapu, Talisay and Naga and the municipalities of Compostela, Liloan, Consolacion, Cordova and Minglanilla. Unfortunately, Garcia said the MCDC became inactive from September 2002 to July 2005. Despite this, the RDC through MCDCs recommendation in 2005 expanded the coverage of Metro Cebu to include Danao City in the north, San Fernando town and Carcar City in the south. The inclusion of more members meant the payment of one-fourth of one percent of the LGUs Internal Revenue Allotment share as membership fee. The MCDC never became fully operation due to opposition from some LGUs, lamented Governor Garcia. On 12 April 2011, the Metro Cebu council members signed an agreement to establish the Metro Cebu Development Coordination Board (MCDCB). Governor Garcia said, The goal was to achieve an integrated, inclusive and sustained development of Metro Cebu.

Living with KEPCO and coal Cebu Daily News / 8:27am / Wednesday / 29th June 2011

Annex A

CASE LIVING WITH KEPCO-SPC AND COAL

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Because Cebu cant live with brownouts, rotating or not, the province will have to manage its growth with a wary eye for the danger of coal ash pollution and acid rain. When President Benigno Aquino III inaugurated the 220-megawatt power plant of the Korean Electric Company-SPC in Naga last Monday, his presence was more than ceremonial. He gave coal-fired plants, the bane of environmental crusaders with their emissions of sulfur dioxide, greenhouse gases and deposits of coal combustion waste, his imprimatur. How sad, and how dangerous. We would have been more impressed if Aquino had thundered a challenge to the plants Korean investors. He could have threatened the full force of the law, even closure, if the company fails to deliver on its promise of clean coal technology and abide by emission and waste disposal standards. Not that Filipinos dont make gracious hosts. But from previous months experience with secret truck haulings of coal ash residue in Naga and Toledo cities by parties unwilling to identify their industrial source, and the ordeal of Naga residents who found specks of coal dust flying into their homes and gardens from an open stockyard of delivered coal, which prompted Gov. Gwendolyn Garcia and Naga Mayor Val Chiong to temporarily pull back Kepcos business permit, we have reason to be wary. Coal-fired power plants will keep Cebuanos in a cat-and-mouse game of enforcement of environment standards for the lifetime of these facilities. It was surprising to hear President Aquino gush about Kepco-SPC being very friendly to the environment. That kind of glowing track record has yet to be demonstrated in its host city and province. He should have said coal ash is listed as an air pollutant in the Philippine Clean Air Act or Republic Act No. 8749 and that standards would be strictly imposed, with no favored status. Aquino apparently had not read the well-documented stories in the Cebu press since 2009 about the tricky choices being made for coal ash waste pits in the submerged Balili property and tests for toxic metal content in heaps of ash found in open fields. He could have asked the environment court of Judge Marilyn Yap in Mandaue City. She ordered all coal-fired plants in Naga and Toledo last March 16 not to carry their ash waste outside their premises. Shes not convinced that health and safety issues have been addressed in the mysterious ash dumping going on. President Aquino, in his speech, described Cebu as a hostage of its own success, framing our choices as one of two evils. We have to balance this, Aquino said. What problem do we want to deal withunstable power supply or the coal dust issue? The problem of coal dust has a solution. There are ways to mitigate it unlike a power shortage. What can you really do with that?

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As if its our fault that economic growth has brought us to a checkmate. Choosing the lesser evil is a tired practice of Philippine elections. Aquino should know that by now. It has long misled voters to aspire for a quality of life and citizenship that is far below our true capabilities and creative power. A farther vision, one President Aquino could choose to demonstrate, would have telescoped the challenge of power generation to one of a commitment to renewable energy and finding a balance where economic growth and sound ecological principles coexist. He could have challenged citizens to stay vigilant. We dont fault Aquino for being pragmatic in saying that Cebu has to live with coalfired plants. But we are bothered that his outlookseeing Third World options limited by bigticket promises of Korean investorsdoesnt make the stretch to recognize that Cebu deserves more than that.

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