VZCZCXRO8935
RR RUEHCHI RUEHDT RUEHHM
DE RUEHBK #3219/01 1461020
ZNR UUUUU ZZH
R 261020Z MAY 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 9107
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHCHI/AMCONSUL CHIANG MAI 1862
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 BANGKOK 003219 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/MLS, EB, AND EB/ESC/IEC/ENR 
STATE PLEASE PASS TO USTR 
COMMERCE FOR JEAN KELLY 
ENERGY FOR IN AND PI 
JUSTICE FOR STUART CHEMTOB 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EINV KPRV TH
SUBJECT: GREATER COMPETITION IN THAILAND'S ELECTRIC POWER 
SECTOR? 
 
REF: A. 05 BANGKOK 7124 
     ¶B. 06 BANGKOK 1861 
     ¶C. 05 BANGKOK 6761 
 
BANGKOK 00003219  001.2 OF 003 
 
 
¶1.  SUMMARY:  The Royal Thai Government (RTG)'s unsuccessful 
attempt to privatize the state-owned electric power producer 
EGAT Plc has unexpectedly revived hopes for greater 
competition in the electric power sector.  In view of EGAT's 
reversion to its former status as a state-owned enterprise, 
as a result of Supreme Administrative Court (SAC) decisions 
in November 2005 and March 2006, the energy bureaucrats 
drafting the nation's Power Development Plan (PDP) are 
considering allocating less capacity to EGAT and its 
subsidiaries and making the next round of bidding by 
independent power producers (IPPs) more competitive.  The 
test will be the guidelines the RTG sets for the next round 
of IPP bidding, expected in early 2007.  Advocates of greater 
competition have not yet carried the day.  EGAT is still the 
overwhelmingly dominant player in the sector.  A permanent 
regulator for the sector is not yet in place, and Thailand's 
broader regime of competition policy is underdeveloped, a 
contentious issue in our bilateral Free Trade Agreement (FTA) 
talks.  End Summary. 
 
¶2.  EGAT'S REVERSION TO SOE STATUS:  As set out in REFs A and 
B, the RTG's attempt to partially privatize the Electric 
Generating Authority of Thailand ended in complete failure. 
In November 2005, the SAC suspended the initial public 
offering (IPO) of shares pending its decision on whether the 
royal decrees transforming the state agency into a public 
company called EGAT Plc and transferring various assets to 
the the newly organized company were legal.  In March 2006, 
the court ruled in favor of petitioners who claimed that the 
process by which EGAT Plc was formed was illegitimate.  EGAT 
has since reverted to state-owned enterprise (SOE) status, 
and the RTG does not have plans to move forward with 
privatization anytime soon.  The "caretaker" status of the 
government has put almost all policy initiatives on hold, and 
the policy of privatizing SOEs is particularly unpopular with 
the critics of Prime Minister Thaksin Shinawatra, largely 
because of its association with his government and the 
perception that Thaksin and/or his "cronies" would somehow 
make a profit from the privatization. 
 
¶3.  DRAFTING A NEW PDP:  Notwithstanding the ongoing 
political crisis, the energy bureaucrats are drafting a new 
power development plan (PDP) so as to prepare for a new round 
of bidding by IPPs.  According to the Economic Policy and 
Planning Office of the Ministry of Energy, the completed PDP 
is expected in July or August. The round of bidding was 
initially scheduled to take place last year, but it was 
delayed in part because of the controversy surrounding EGAT's 
now failed IPO.  Going forward, the single most important 
decision in the new PDP concerns the allocation of capacity 
to the private sector, explains Dr. Bart Lucarelli, Chairman 
of the Energy Committee of the American Chamber of Commerce 
in Thailand.  The more capacity that is allocated to the 
private sector, the more likely that international players 
will submit serious bids because they will see a future 
beyond the present round in Thailand's electricity market. 
 
¶4.  ALLOCATION OF NEW CAPACITY:  According to the RTG's 
original plan in 2005, EGAT was guaranteed 50 percent of all 
new capacity between 2011-2015, as explained in REF C.  Dr. 
Lucarelli and others were sharply critical of that decision 
at the time, particularly when it appeared that EGAT 
affiliates and subsidiaries EGCO and RATCH would be allowed 
to bid on the 50 percent of capacity to be allocated to IPPs. 
   Analysts covering the sector agree that, if EGCO and RATCH 
were not allowed to participate in the country's first round 
of IPP bidding since 1994, then it would allow more 
international players to move into the electricity market. 
Since both companies have low costs and large footprints in 
the country, they are seen to have a big advantage over 
outsiders.  &If RATCH and ECGO are allowed to bid, some 
bidders will drop out,8 explained Mark Hutchinson, Head of 
Research at Mullis Captital, an investment bank specializing 
in energy deals.  "Putting together a bid is an expensive 
process.  But even so, there are some very competitive 
 
BANGKOK 00003219  002.2 OF 003 
 
 
international players that would like to be in this market." 
 
¶5.  STANDING UP TO EGAT:  Since the collapse of EGAT,s 
privatization, there has been a perceptible shift in official 
thinking toward EGAT among energy bureaucrats.  While there 
is no concrete indication that the new PDP will allocate 
anything less than the 50 percent of capacity previously 
envisioned, Embassy contacts confirm that the number has been 
a subject of discussion among the energy bureaucrats.  The 
regulators have also moved in other ways to contain EGAT's 
influence on the sector.  The Electricity Regulatory Board 
(ERB) has stood firm on not allowing companies (such as ECGO 
and RATCH) in which EGAT owns a stake greater than 25 percent 
from bidding on the capacity allocated to IPPs.  The 
bureaucrats are also considering imposing similar 
restrictions on management control.  Although the caretaker 
Minister of Energy appears unwilling to lead any push against 
EGAT, Dr. Vichit Lorjirachunkul, a key member of the ERB,s 
IPP Bid Solicitation Subcommittee, is pushing for an 
allocation arrangement where all electric power that EGAT 
purchases from offshore sources (in Cambodia and Laos, for 
example) counts against EGAT's 50 percent. The Ministry of 
Energy position is that offshore production count equally (by 
being subtracted from the total before allocation is made to 
either EGAT or the IPPs.  Additionally, the IPP Bid 
Solicitation Subcommittee is considering other restrictions 
based on Stock Exchange of Thailand regulations that would 
place limits on state enterprise representation on boards of 
IPPs.  SET regulations say that connected companies in which 
cross-holding exceeds 10 percent must be barred from bidding 
in a particular project, to avoid a conflict of interest. 
 
¶6.  RATIONALE:  While many motives come into play behind the 
regulators, recent shift to a more independent posture 
vis--vis EGAT, the most important objective reason flows 
from the failure of the EGAT IPO.  The logic behind 
allocating half of new capacity to EGAT assumed that the 
power producer was a company that would have access to 
capital markets.  Now that EGAT will be a wholly state-owned 
enterprise for the foreseeable future, it will be dependent 
upon the government for financing, and few observers believe 
that the RTG will have sufficient resources.  There is also 
growing recognition that EGAT could use subsidiaries to bid 
on contracts reserved for IPPs in order to successfully scare 
away competitors whose presence could lead to lower prices 
for consumers.  "If a company doesn't already have a project 
in Thailand that it can build off of, then they will probably 
stay away from the next round of IPP bidding, according to 
one industry source.  "For the remaining players, the quality 
of the bids is likely to be lower because they are unlikely 
to put the proper money into a bid that they are unlikely to 
win." 
 
¶7.  EGAT'S CONTINUED DOMINANCE:  EGAT's recent interest in 
purchasing Glow Energy, either directly or through a 
subsidiary, stands as evidence of its tendency to try to 
maintain a dominant position within the sector.  Glow is a 
local IPP, in which Belgium-based Suez has a 67.3 percent 
stake.  Control of the company came into question in March 
because of the merger of Suez with Gaz de France, which led 
to speculation that Suez would liquidate its holding in the 
local IPP.  EGAT President Kraisri Karnasutra publicly 
expressed EGAT's desire to buy Glow, the only remaining IPP 
with which it does not already have a connection.  The 
controversy died down when it became clear that Suez does not 
plan to put Glow up for sale, a point Glow management 
confirmed to econoff. Additionally, analysts have expressed 
concern that projections of future power demand by both EGAT 
and the RTG represent another means of bolstering EGAT's 
position.  By underestimating future demand, for example, IPP 
bidding could be postponed.  Then, in the event of a 
projected power shortage, EGAT would be in a position to win 
no-bid approval for its own power construction projects. 
While hardly certain, such scenario is on the minds of 
potential investors, who have conveyed these concerns to the 
RTG. 
 
¶8.  COMPETITION POLICY:  Compounding the problem for would be 
investors in the power sector is Thailand,s undeveloped 
 
BANGKOK 00003219  003.2 OF 003 
 
 
regime of competition policy.  Many experts such as Dr. 
Piyasavasti Amranand criticized RTG plans for the EGAT IPO in 
2005 on the grounds that the government failed to establish 
an independent regulator beforehand.  With respect to RTG 
competition policy generally, Dr. Duenden Nikomborirak, 
Research Director for Economic Governance, Sectoral Economics 
Program, at the Thailand Development Research Institute 
(TDRI), has also emphasized that, "Thailand has a law only on 
paper; its implementation has been obstructed by the lobbying 
of big business and political intervention."  The result is 
that Thailand lags behind Singapore, Indonesia, and even 
Vietnam.  State enterprises are effectively exempt from 
Thailand's 1999 Trade Competition Act.  The lack of a 
definition under Article 25 for "dominant player" in 
particular renders the act a paper tiger in countering 
anti-competitive behavior other than outright monopoly, she 
concludes.  This lack of a definition has led to the 
dismissal of complaints against pay television UBC and brewer 
Chang Beer.  No one in the power industry is looking to the 
Trade Competition Act to check EGAT's anti-competitive 
behavior. 
 
¶9.  COMMENT:  The Embassy concurs with Dr. Lucarelli, who 
told Econoff that recent moves to balance EGAT's power are 
welcome and should be encouraged.  The health of the electric 
power sector is critical to Thailand,s continued economic 
growth, and liberalization of the sector would enhance the 
competitiveness of the Thai economy both by example for other 
sectors and through greater efficiency, especially if passed 
along to users in the form of lower electricity rates.  In 
the absence of EGAT,s privatization any time soon, the next 
round of IPP bidding represents the most promising 
opportunity to introduce greater competition into the power 
sector.  In view of both the place of the sector in the 
economy and U.S. business interest in its development, when 
bilateral FTA talks resume, U.S. negotiators may expect that 
conditions in the power sector will be a highly visible 
measure of the RTG,s commitment to the principles set forth 
in the competition provisions of the agreement. 
BOYCE