Bigger picture

Allowing such adjustments also undermines the sanctity of contracts, integrity of the bidding process and credibility of SMC’s other supply contracts — all of which significantly impact consumer welfare.

By TDT

August 11, 2022

On the surface, the appeal of San Miguel Corporation (SMC) seems innocuous enough — it just needs temporary, “equitable” relief from soaring coal prices and unilateral Malampaya gas supply restrictions.

Over a six-month period, SMC wants to recover P5.2 billion from electricity consumers, so that it could continue sourcing fuel and fulfill its power supply contract with Meralco.

SMC also wants to amend its tariff and collect an additional P4 per kilowatt-hour (kwh) for the Sual coal plant and an additional P0.80 per kwh for the Ilijan natural gas facility.

Meralco, on its part, said the tariff adjustment appeal will ensure that SMC will continue to provide supply, fearing that if SMC plants terminate their supply, electricity consumers will inevitably suffer.

It is clear that SMC may indeed decide to terminate the power supply contract without any approval from the Energy Regulatory Commission (ERC) because of its alleged staggering losses.

The fact is consumers are already suffering, and may suffer more if rates go up.

Granting additional rates to money-losing contracts is unprecedented, never mind that it is temporary. The point is, doing so would open the floodgates to similar claims. And there are four independent power producers (IPPs) who are in the same boat as SMC.

If ERC decides in favor of SMC, these other power companies can also apply for temporary tariff adjustment.

Following the principle of fairness and “equitable” relief, they can pass through their high fuel costs to electricity consumers regardless of the electricity rates stated in their contracts.

It hardly seems fair that Juan and Maria de la Cruz should bear the brunt of wrong business decisions.

When SMC and these IPPs bid for Meralco contracts, the terms and conditions were very clear. They knew the commercial risks that came with the power supply contracts and their bids were supposed to reflect these risks.

Other power companies that had the good sense to spot the flawed contract terms either dropped out from the competitive selection process, or submitted prices that were more grounded on reality, inevitably losing out to SMC. They must be heaving sighs of relief right now.

Unfortunately, the same could not be said for electricity consumers who will have to wait for ERC to make its Solomonic decision.

In the meantime, one can only hope that the commissioners and new chairperson of the ERC have a sound appreciation of the facts, implications and long-term impacts of the SMC case on electricity consumers and the power industry as a whole.

For one, passing through the financial penalties of bad business decisions to innocent Filipino consumers — especially when they are struggling because of the pandemic and high inflation — is unconscionable.

More to the point, “temporary and partial relief” does not automatically mean one-time. It could continue or recur once a legal precedent has been set.

With no clear endgame in the Ukraine-Russia war, one can only expect that fuel prices will remain elevated for quite some time. In which case, SMC and other IPPs can keep running to ERC for tariff relief every time they incur significant losses.

Allowing such adjustments also undermines the sanctity of contracts, integrity of the bidding process and credibility of SMC’s other supply contracts — all of which significantly impact consumer welfare.

When Meralco said electricity consumers will inevitably suffer if SMC pulls out of their agreement, it seems the message is that IPPs can unilaterally end a supply agreement when it no longer suits their business interests.

Similarly, it gives IPPs the opportunity to game the system by submitting lowball bids and then applying to ERC for “temporary” tariff adjustments to get the price that they want.

The pending SMC appeal also puts the credibility of its other contracts into question.

Last year, two SMC companies — Excellent Energy Resources Inc. and Masinloc Power Partners Ltd. Co. — won Meralco contracts to deliver 1,200 megawatts (MW) of capacity for P4.1462 per kwh and 600MW of capacity for P4.2605 per kwh. The contracts cover a 20-year period starting 2024.

Both rates are even lower than the P4.3 per kwh being charged by Sual and Ilijan, which SMC claims is too low to recover its fuel costs. What rate adjustment should consumers then expect from Excellent Energy Resources and Masinloc Power Partners once the two start operating, if at all?

This matter goes well beyond the profit and loss statement of SMC. It has ethical, legal and consumer welfare issues tied to it, which deserve public scrutiny and careful deliberation.

To make the right call in the SMC case, ERC needs to see the bigger picture.


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