Masinloc and Philippine power rates (1)

Except for the self-congratulatory releases from the energy bureaucracy, the response to the successful bidding of the 600-MW coal-powered Masinloc plant has been muted. At $ 930 million, the bid of Singapore-based and AES-led consortium was 50% more than the winning bid of YNN Pacific, which forfeited its rights after failing to pay the required downpayment last year. The Power Sector Assets and Liabilities Management Corporation (PSALM) has divulged neither the bids of the five other bidders nor its reservation price. But its announcement did say that all the bids surpassed the latter. Some reporters revealed all the bids, but the figures have neither been confirmed nor denied. This is PSALM's release.
In the first round, all the competing bids were revealed to members of Congress whose various committees launched investigations in aid of one thing or another. But let’s get back to this later.

So, what would the sale, if concluded successfully, mean for the Philippine electricity consumer? The short and long answers are, it depends on how competitive the electricity markets in the country will really be in in both the medium and long term.

To understand the consequences for the consumer, we need first to understand how the privatization of NPC assets affects NPC rates in the short run. In the short short run, it won’t. This is because of the so-called regulatory lag, which delays warranted upward or downward adjustments in rates due to changed circumstances. But in the medium and longer term, my bet is the high valuation by the winning bidder presages higher rates, and not just higher rates, but higher rates based on higher profit margins for the new owner of the generation asset. (In nominal terms, there is no way but up for rates because of higher fuel prices based ultimately on world demand).

If the sale is concluded, then, before the end of the year, the new owners will be a new participant in the wholesale market. Most of its net revenues will depend on the market-clearing price and its operating costs----mainly variable or fuel costs. Let’s grant that the latter does play a role in the equation, because the new managers, with greater accountability to the new owners, have greater and more palpable incentives to reduce costs. But I find it difficult to imagine that the differences in the bids can be attributed to this factor. In my experience, the owners and managers of newly privatized power assets usually retain the technical personnel, whose bright ideas were just suppressed and ignored by a system lacking in incentives and accountability. The new owners don’t have an Einstein up their sleeve and even if they did, the other bidders would have had access to him or her, at the right price.

My guess is that the new owners can justify their high valuation or recoup their investmentsonly by exercising market power in the wholesale market. In the long run, this is not necessarily bad for the consumer. But in the the short and immediate periods, expect higher rates, but don’t blame me.