AMBASSADOR CALLS ON ENERGY SECRETARY

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

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Summary
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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.

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Power Sector Reform
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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.

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Alternative Energy Sources
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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.

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Global Issues
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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