PSALM sets prequalification standards for TransCo bidders

26 May 2006

Investor groups interested in bidding for the 25-year concession of the National Transmission Corporation (TransCo) must have a member or affiliate who can meet the technical prequalification criteria. At the same time, this member or affiliate must have a net asset value or market capitalization of $500 million.

These are among the requirements set by the Power Sector Assets and Liabilities Management Corporation (PSALM) for the TransCo bidding which is slated for September 2006.

To be qualified, prospective bidders must have a member or affiliate with sufficient experience in operating and maintaining electricity transmission systems comparable to that of the Philippines, with at least 6,000 circuit kilometers and a minimum 6,000 megawatts peak demand and a voltage level of 115 kilovolts (kV) to 230 kV.

Interested investors can now start submitting their expressions of interest. PSALM will receive these expressions of interest until mid-July 2006. Qualified bidders will then be given ample time to conduct their due diligence. The transaction documents for the forthcoming bidding are now available.

In compliance with the 60%-40% equity rule on ownership of local entities as stipulated in the Philippine Constitution, foreign investors who will bid for TransCo must have a net asset value or market capitalization of at least $175 million. Their Filipino partners, on the other hand, must have $300 million.

"The $500-million market capitalization was set to optimize the TransCo assets and to ensure the earnestness of investors interested in bidding for the transmission company, including its operation and maintenance," said PSALM President Ms. Nieves L. Osorio.

As specified in the Electric Power Industry Reform Act (EPIRA), the TransCo bidders should not have any interest in the electricity generation, distribution or supply sector, whether held directly or indirectly.

Ms. Osorio stressed that only bidders who pass the prequalification phase would be allowed to submit bids.

The forthcoming bidding is the third attempt to privatize TransCo after two failures in 2003. This time, PSALM firmly believes that the chances of success for the privatization of the transmission company are greater primarily because of a number of significant developments that have occurred after the first bid attempt.

Ms. Osorio noted that there is greater visibility and certainty on the critical regulatory framework, particularly after the Final Determination of TransCo's regulated asset base (RAB) is released by the Energy Regulatory Commission (ERC) in 16 June 2006. The RAB will be the basis for TransCo's annual maximum allowable revenue (MAR) which, in turn, will determine the transmission wheeling rates. The wheeling charges are the main source of revenue for the TransCo concessionaire.

The transmission rates were first set by the ERC in 2003, the start of the first regulatory period. The second regulatory period starts this year, after which a reset will be made every five years. Prior to the start of the five-year regulatory period, the ERC would determine the concessionaire's annual revenue requirement based on its projected operating and maintenance expenses, estimated tax payments, regulatory depreciation charges on assets used, and investors' return on capital.

Ms. Osorio also cited more investor interest in TransCo based on the results of an informal pre-marketing survey that the corporation recently conducted. "Several parties have already expressed interest in bidding for the TransCo concession," she said.

In the privatization structure agreed upon by the PSALM Board, TransCo will be privatized through a 25-year concession contract that may be extended to another 25 years depending on the results of the review of the concessionaire's performance.

Strategic Communications and Partnership Division
Tel. No. (632) 9029067