Anti-consumer ruling

The power sector is abuzz with speculations as to what would be San Miguel Corp.’s next move in so far as the Energy Regulatory Commission’s denial of its petition to be allowed to temporarily raise its rates on its fixed-rate power supply agreements (PSAs) with Meralco covering two power plants by 30 centavos per kilowatt-hour over six months.

If we are to go by SMC’s recent statements, then the ERC better be prepared for a tough legal battle ahead.

In its joint petition with Meralco, SMC emphasized that its coal power plant in Sual, Pangasinan and its natural gas-fired power plant in Ilijan, Batangas had already incurred losses of P15 billion due to rising prices of coal and natural gas, as well as restrictions in supply brought about by global factors beyond its control such as the Russia-Ukraine conflict.

SMC president Ramon Ang earlier said that for all of last year, they had to absorb expanding costs because any price increase is unpopular. But the war in Ukraine has taken prices far beyond what they and Meralco could have even imagined in 2019 when they signed the PSAs. At that time, the forecast for coal was only $65 per metric tons for 10 years. Now it is already at $400 per metric ton.

Meralco for its part had also warned that consumers would be burdened by as much as P25.8 billion if it was forced to secure new PSAs to replace those of SMC plus an additional P1.6 billion for one month if its agreements with SMC are terminated and the power distribution company is forced to source from the spot market.

A change in circumstance allowed SMC to terminate its contracts with Meralco but the former wanted to preserve the PSAs by allowing it to just increase the rates temporarily. After all, the PSAs being fixed-rate agreements would still be good for consumers in the long run.

But in denying the petition, the ERC said while it is not blind to the woes and difficulties faced by consumers and businesses, it had to decided based on what is laid down in the power supply agreements which Meralco and SMC Global Power Holdings Corp. entered into on their own free will without pressure from anyone.

ERC said the PSAs did not provide room for price adjustment but only a guaranteed supply of energy to Meralco consumers at a fixed price.

But SMC believes that its power subsidiary SMCGP will weather its present challenges as it remains in a stable position to navigate these circumstances.

Ang said the company remains fundamentally strong, with a sound strategy to manage all of its financial covenants and obligations, even as it pursues its expansion and transition to battery energy storage and cleaner power technologies.

He assured investors and bondholders of the power unit that ERC’s recent decision, while significantly impacting its two power facilities with fixed-rate PSAs, would have no adverse implication on a consolidated basis for SMCGP.

He said they are confident they would be able to manage the company’s maturing obligations in 2023 and beyond and that, if necessary, there will be SMC parent support. For the bondholders, Ang assured them that SMCGP would continue to be fully compliant with its financial covenants at all times.

By 2023, SMCGP would be realizing at least P8 to P10 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) from the battery energy storage system project while its new Mariveles power plant is expected to come online, contributing an additional P5 billion to P6 billion in annual EBITDA.

Ang also emphasized that all of SMCGP’s capacity is fully contracted. Meanwhile, to address continuously rising coal prices to better manage costs, SMCGP has also been able to push further use of low-grade coal for its coal plants, which are relatively cheaper than high-grade coal.

But SMC revealed that it continues to evaluate legal remedies to strengthen its claim for cost recovery, or possibly reverse the ERC ruling, even as termination remains a recourse for the company, as affirmed even by the ERC in its decision and as provided for in its PSAs with Meralco.

With a termination of the PSA, the company can eventually dispatch the capacities originally covered by the PSAs, to supply either the Wholesale Electricity Spot Market (WESM), Meralco for its emergency power requirements, or distribution utilities and electric cooperatives at prevailing market terms. These would allow it to recover in full its power generation costs.

Meralco will also be forced to source up to 1,000 megawatts from the WESM and to enter into higher-priced emergency power supply agreements. And because of this, Meralco said that it would also exhaust all available remedies to prevent the termination of its power supply deals with SMC.

Bottom line is, it is the public which eventually will have to contend with higher electricity costs with the termination of SMC’s PSAs.

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