Strings that bind

“It was decided that the transmission business, then operated by the government and integrated into the National Power Corporation, would be sold off via privatization together with Napocor’s generating facilities.

In the jargon of electricity transmission and distribution where the principal assets are transmission towers, transformers, and cables and power lines, the sub-sector is referred to as the “wires” business.

The term needs no explanation. The nomenclature is graphic enough. Once energy is created by the power generators who convert fuel, whether fossil-based or renewables, into electrons, these are transmitted through those giant steel towers we see in the countryside to the wooden, steel and concrete posts owned by the distribution utilities (DU).

It is a value chain because the pricing of those electrons follows distinct rules applicable only to the specific link from generation, transmission and eventually to distribution. Simply scan your unbundled electricity bill and one can readily see the separate cost components.

One of the most important aspects of this chain is the specific regulatory environment surrounding each sub-sector. Generation, where the electrons are created from converting fuels to electricity, is deregulated. Power generations are free from price controls save for the requirement that their pricing be “reasonable” however that is defined.

The wires business which involves the transmission sector and the DU is regulated. The principal regulatory agency is the Energy Regulatory Commission. Pricing for the transmission and distribution sector must go through the ERC or the Wholesale Electricity Spot Market where marginal pricing and supply and demand theoretically temper prices should there be a substantial number of sellers and adequate supplies for the economics to kick in.

In the aftermath and economic fallout of the debilitating power crisis under Corazon Aquino where eight- to 12-hour rolling outages were the order of the day, it was decided that the transmission business, then operated by the government and integrated into the National Power Corporation (Napocor) would be sold off via privatization together with Napocor’s generating facilities. The whole chain would then be under the private sector as the DU were already limited to Filipino franchises under the provisions of the Constitution.

That, however, was neither the initial plan nor the most optimal. As the generating assets of Napocor were aging, operationally expensive, largely fossil-fueled and pollutive, and extremely inefficient without fresh capital infusions from the government, the optimal proposal was to separate the generating assets from the transmission facilities, privatize the former and earn enough to maintain island grids and keep the transmission wires business within the state’s balance sheet.

The National Transmission Corporation (TransCo) was taken from Napocor’s rib and became a stand-alone enterprise. TransCo had some of our most skilled engineers.

As a separate enterprise it was highly profitable compared to the debt-ridden Napocor. Unfortunately, a chemistry of bungling and myopia soon took over and threw a monkey wrench into the privatization program.

TransCo was privatized for a song under the most controversial terms and conditions decidedly detrimental to the government’s original objective to raise cash. When sold to a group that had the China-owned National Grid of China as an industrial partner, the privatization payments accruing to the government were remitted through extended tranches funded by the earnings of the enterprise operators. Critics see a downside in that.

Given values based on discounted cash flows and internal rates of return (DCF-IRR), the deal had definitely favored entities buying-in. Add to the controversy subsequent drastic changes in its Filipino ownership and today’s reported non-remittance of P6 billion in earnings, management control concerns, critical dependence, unconstitutionality and national security issues, it is easy to see where wires seemingly coil tightly around a critical utility.

Rather than view the electricity transmission as a wires business, imagine instead strings that hopefully bind international friendships rather constrain it.