Asian Energy Advisors

Neal Cruz, an opinion columnist with the PDI, has been fairly well briefed by an obviously-not-disinterested but quite knowledgeable party on Masinloc.  But he gets some things wrong in his column this morning, or is at least misleading.

Now, he gets some things right – a lot of things right, actually. But for the benefit of public discussion – and in the interest of electricity consumers – let me explore where I think he went astray.

First, why would anyone consider PSALM’s acceptance of a high bid price as being greedy? What’s up with that? Do the PSALM staff get a percentage cut?  Does not the bid price in full redound to the benefit of the Philippine government and the Philippine people in general?

If anyone is to be accused of greed, a more logical case could be made that it would be First Gas in that they tried to snag an asset from the Philippine people possibly worth approximately $550 million or more for only $275 million.

Now I wouldn’t make that accusation – I think the First Gas bid simply reflected a huge amount of market and regulatory uncertainty and soverign risk. But someone COULD make that argument and at least I could follow their line of thinking. 

But here is where he really starts going astray – quite possibly because he’s not aware of what it costs to build a power plant.  $562 million is not fundamentally a “horrendously high” and certainly not an “obscenely high” price for Masinloc.

Masinloc is the most recent, large coal-fired power plant built in the Philippines by Napocor. But even the private sector, I expect, would be challenged in bringing on-line the next 600 MW coal-fired plant in the Philippines at that price or better. As someone in the development community commented to me recently, “If I knew with certainty that I could bring on-line a new 600 MW plant at a cost no more than the YNN bid, I would be happy.”

I have also had discussions with economists at UP who have run analyses on the income value of Masinloc and essentially concluded (I’m paraphrasing – hope I’m not too inaccurate here) that if the owner were able to receive prices in line with generally expected market prices for their electricity sales over the remaining life of that asset, the owner would be expected to be able to make a fair profit after paying an acquisition price on the order of what YNN bid.

So it’s just not clear that the YNN bid price is outrageous from a fundamental value standpoint. Now it might be considered outrageously risky given the uncertainty mentioned above – but Neal did not make that distinction.

And he also goes astray when he asserts that should the government force Meralco to sign a supply contract with YNN (not that I think they should) that “the resulting high-priced contract will result in horrendously high power rates for consumers.” That’s simply is not imminently obvious to me.

And finally he makes a point that had Masinloc been bid out with a supply contract, other bidders would have submitted higher bids. I suppose his point here is that we might have had a different winner.  But this says nothing at all about whether the ratepayer would have benefited.  That is a crucial issue that someone needs to be looking at.