PSA not just a piece of paper

The pass-through provision in the energy contracts means that the higher charges will ultimately have to be endured by consumers through higher electricity bills.

By TDT

August 18, 2022

Petitions to alter electricity rates etched into power supply agreements should be dismissed outright.

The Energy Regulatory Commission, in doing so, would be sending a message to stakeholders in the cutthroat energy generation business to respect the sanctity of contracts.

San Miguel Corp. has a pending ERC petition to collect an additional P4 per kilowatt-hour for the Sual coal plant under the San Miguel Energy Corp. and an additional P0.80 per kWh for the Ilijan natural gas facility of its unit South Premiere Power Corp.

The PSA is among processes that energy companies go through to satisfy the so-called competitive selection process that the government enshrined to ensure the lowest cost of electricity.

PSA, thus, is awarded through an auction, and in the case of Meralco, a bidding was held for electricity supply that SMEC and SPPC supposedly clinched through the extremely cheap offer.

Thus, the PSA, a contract, fixed the amount of electricity that would best benefit the consumers based on the capability of the sources of energy.

On 9 June, however, the SMC units sought the ERC’s intervention to have the terms changed, citing the rising coal prices and the intermittent flow of natural gas from the Malampaya field as excuses.
Those two factors, however, are well-known risks that the contractors should have assumed in making their ridiculously low offer, which seems to be the practice of the big guns just to clinch auctioned contracts.

For instance, two other SMC energy units — Excellent Energy Resources Inc. and Masinloc Power Partners Ltd. Co. — won Meralco contracts to deliver 1,200 MW of capacity for P4.1462 per kWh and 600 MW of capacity for P4.2605 per kWh over a 20-year period starting 2024.

SMC’s offer was below the P4.30 per kWh that Sual and Ilijan charge under the PSA with Meralco. The conglomerate is now seeking to amend the agreed price since it argued that it is too low for the power plants to recover fuel costs.

The practice of twisting the government’s arm, since SMC said the continued supply of electricity from its power plants hang in the balance if it fails to have the ERC adjustment, begs the question on the purpose of entering into a contract.

When SMC Global Power, the parent of both SMEC and SPPC, made its bid for the Meralco contracts, the terms and conditions were clear about the commercial risks that they should assume and, thus, should have been reflected in their offer.

Other power companies, which wanted to bid but had to truthfully consider the risks involved, either dropped out from the bid or had submitted prices more grounded on reality; that meant they inevitably lost out to SMC.

Those with existing PSA with Meralco are expected to seek similar adjustments on their agreed rates if the ERC goes along with the SMC plea.

It is hard to imagine the multiplier effect of such a possibility on power rates.

The pass-through provision in the energy contracts means that the higher charges will ultimately have to be endured by consumers through higher electricity bills.

Thus, the ERC’s action on the petition will have a full impact on consumer welfare which is under constant threat amid the pandemic.


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