Still the best option

Contrary to what others may think, SMC Global Power’s power supply agreement (PSA) with the Manlla Electric Co. is still very much alive.

The fixed rate PSAs, which were entered into between Meralco and SMCGP units San Miguel Energy Corp. (SMEC) and South Premiere Power Corp. (SPPC) in September 2019 following a competition selection process and approved by the Energy Regulatory Commission, do not allow passing on regular generation cost fluctuations to consumers.

However, these agreements contained an exit clause, which is actually found in most, if not all, major contracts. After all, parties to a contract cannot be expected to be able to comply with their contractual obligations, especially if events beyond their control prevent them from doing so.

The Civil Code, in particular Article 1267, provides that “when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part.”

SMCGP’s agreement with Meralco specifically states that the “power supplier is entitled to unilaterally terminate the PSAs… if the parties fail to reach a mutually satisfactory resolution within 60 days” on a host of occurrences which include situations such as “if the ERC denied, in whole or in part, the joint motion for price increase; “no order is issued by the ERC granting the joint motion for price adjustment within 16 months from receipt of the notice of change in circumstance;” and “if the total amount of unreimbursed CIC claims exceeds two percent of the contract price applied to the minimum energy off-take for one contract year.”

There were major changes in circumstances (CIC) brought about by soaring coal prices due to the Russia-Ukraine war which nobody ever expected to happen, not even by San Miguel or Meralco at the time the PSAs were entered into. There was also the gas supply restrictions of the Malampaya gas wells which forced SPPC to source higher-priced power from the wholesale electricity spot market, or WESM, just to meet its supply obligations under the PSA.

It was within SMCGP’s rights under its contracts with Meralco to unilaterally terminate the PSAs due to these major CICs. But in an attempt to save the PSAs, the SMCGP sought to recover just a small portion of its actual fuel costs without any margin and only for the months of January to May this year. For a period of six months, Meralco customers will have to pay just a little more.

This means that SMCGP was even willing to shoulder the billions of losses incurred last year due to these CICs.

Meralco even emphasized that it could not afford to lose these PSAs with San Miguel, which supply more than 1,200 megawatts of baseload and mid-merit capacities.

If the ERC allows the temporary increase in rates and recovery of losses due to CIC sought by San Miguel and Meralco, that meant an increase in electricity rates in Luzon by 30 centavos per kilowatt-hour over six months.

Meralco has emphasized that preserving the existing PSAs with SMC is the least cost option for consumers.

However, the ERC failed to consider the inevitable scenario that if the proposed rate hike is not approved and SMCGP terminates the PSAs, Meralco will be forced to buy power at much higher prices either from the spot market or from other power suppliers via new PSAs.

Based on Meralco’s computations, this could translate to higher electricity bills for consumers – higher than what it would have been if the joint petition was approved, and for quite possibly a longer period of time.

The ERC junked the petition by a vote of 3-2, even as it disregarded the computations submitted by Meralco and validated by ERC’s own Regulatory Operations Office.

Even the ERC ROO had confirmed it did not have any other data or information that could contradict or disprove the computations and simulations submitted by Meralco.

Two of the commission’s members voted to grant the petition, arguing extensively their position on the matter. But the ERC chairperson voted to deny, thus breaking the deadlock.

In reaction, SMC Global said: “We believe these numbers speak for themselves. The ERC, armed with such data, knows too well that denying the petition will not only cripple us, but more importantly, burden consumers who will have to face higher electricity bills.”

So now the waiting game begins. Will SMCGP proceed to terminate its PSAs with Meralco to avert incurring further losses which could put at risk its other business obligations? Or will it continue to put the consumers’ interest ahead of its own as usual, and just bite the bullet?

But of course, SMC has not exhausted its legal remedies. Whether SMC will go to court or not to assert its rights remains to be seen.

The mounting losses being incurred by SMC’s power units has naturally worried the company’s investors but no less than SMC president and CEO Ramon Ang has allayed their fears by saying that SMCGP remains in a stable position to navigate these circumstances, that he is confident that they will be able to manage the company’s maturing obligations in 2023 and beyond, that if necessary, there will be SMC parent support, and for the bondholders, SMCGP will continue to be fully-compliant with its financial covenants at all times.

There are other companies that are offering to step in should SMCGP be forced to terminate its contract with Meralco. But how can they possibly offer better prices if they too are similarly facing the same change in circumstances?

It will be a disservice to the Filipino consumers if ERC continues to brush aside SMCGP and Meralco’s valid arguments for the temporary rate adjustment. Preserving these PSAs by allowing SMCGP to recover even a small portion of its additional costs brought about by these CICs and for a period of only six months remains the best and least-cost option especially in the long run.

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