Chinese power firm starts due diligence on TransCo

The State Grid Corp. (SG) of China, one of 12 foreign groups eyeing the National Transmission Corp. (TransCo) assets, has started its due diligence on TransCo early this week, industry sources said.

They said TransCo and Power Sector Assets and Liabilities Management Corp. (PSALM) officials met last Aug. 29 with SG representatives to signal the start of the due diligence process of China ’s biggest power generation firm.

SG, ranked 40th in the 2005 Fortune Global 500, was spun off from the State Power Corp. of China as a part of a restructuring program in March 2003.

At present, SG is in charge of the transmission and distribution of power in north and northeast China. It controls power transmission in 22 of the nation’s 27 provinces.

"They asked us about system operations, particularly on who will dispatch. And they also asked what we want to do with our 3,000 employees. And I, on one hand, said that I want them to hire them, if ever they win in the bidding for the concession. And they, on the other hand, assured me that they also do share the same vision. They said they will not be able to bring in new people, except for one or two people from the head office," TranCo president Alan Ortiz said.

Another concern raised by the Asian group is on the tariff rate being given to the transmission firm.

"They also expressed wariness over tariff setting. But I said that the ERC (Energy Regulatory Commission) has matured now and that they know the industry better than before," Ortiz said.

Ortiz noted that the regulatory environment remains their main concern – i.e. next regulatory reset, tariff setting, foreign exchange movements.

"We assured them that everything is already in the formula. We said that if they exceed 10 percent, we can have an automatic reset, but if we exceed 20 percent we can open up the whole forex formula – so there are sufficient safeguards for forex movements," he said.

Apart from regulation, Ortiz said the preparation of the Transmission Development Plan (TDP) is also one of the matters discussed during the meeting with the prospective bidder.

"On the TDP, they asked what is the process and if whether they will be involved. They are also impressed that the country has long-term and short-term planning," he said.

On the concern about the capital expenditure (capex) recovery, Ortiz said "the concession will have to invest in the whole capex program, and they will be able to recover through their regular MAR (maximum allowable revenue)."

By next week, TransCo and PSALM are expected to meet the American and Canadian firms that would conduct their respective due diligence processes.

"I’m impressed with the people that have expressed interest to bid for TransCo. They’re the people I already know, and I’m sure there’ll be more. So the chances of pulling it off successfully are better compared to before," Ortiz added.