P255-B penalties vs SMC default

San Miguel Corp. unit SMC Global Power’s plan to withdraw its power service agreements from covering the supply of electricity from the Ilijan natural gas plant and the Sual coal plant may cost the conglomerate an arm and leg.

Its threat to make true its pull out on 3 October will cost a whopping P255.5 billion penalty that has to be paid to power distributor Manila Electric Co.

A copy of the “Termination upon Event of Default” provision of its supply deal with Meralco obtained by the Daily Tribune shows that a unilateral pullout from the PSA will make SMC Global Power liable.

Based on the terms in the PSA, the agreed damages “upon the occurrence of a Power Supplier Event of Default” or when SMC Global Power failed to deliver on its commitments, “Meralco shall be entitled to liquidated damages, in lieu of all other damages to which it may be entitled” in the amount of P100,000 per megawatt per day of the contract capacity for the remaining term of the agreement.”

This equates to a P100,000 penalty per day for the remaining seven years.

SMC Global Power has a pending petition with the Energy Regulatory Commission for an adjustment in the agreed PSA price citing a “change in circumstances” which are the spike in coal prices and supply restrictions from the fast-depleting Malampaya natural gas field.

The unit of the Asian conglomerate claims P15 billion in losses from such changes in circumstances. It seeks to recover P5.2 billion within six months by passing the higher costs to consumers through higher monthly bills.

With the remaining seven years left in the 10-year PSA, SMC Global Power will have to fork out P255.5 billion to buy itself out including penalties.

Notice needed

According to the provisions of the PSA, the procedure that should apply in an event of default are that the defaulting party should give a termination notice where details of the event that resulted in the default and if Meralco wanted to dispute it, the utility firm must inform SMC Global Power within 15 days of receipt of the termination notice.

SMC Global Power, however, is using the termination in the event of the “Change in Circumstances” provision of the PSA that states “if a Change in Circumstances” occurs, the power supplier (SMC Global Power) may terminate the PSA “upon 60 days prior written notice to the other party”.

Consumer groups, however, disputed before the ERC the SMC Global Power’s invoking change in circumstances since they said that the rise in the cost of coal and the depletion of the Malampaya reserves should have been included in the price it offered Meralco for the PSAs.

According to the PSA, events of default happen after an actual failure by the Power Supplier (SMC Global Power) to make available the contract capacity and deliver “the associated energy or any portion thereof, to Meralco.”

Penalty clauses

A former energy official said the PSA provides the safeguards in the terms of the deal.

“Once you enter a competitive selection process, there are penalty clauses, if the commitments are not delivered,” the source said.

He added the role of the government is to prod the contractors to make public the terms of the deal since their welfare is affected if the PSA falls through.

“We should look at those penalty clauses, what happens next is contained in the terms of reference,” he said, adding that the terms of reference are drafted by Meralco and it specifies what will happen in case the winning bidder fails to comply with its commitments.

“They participated in a bid, the problem SMC Global Power faces is how to change what is contained in the terms of reference,” the source said.

Backing out of the deal will carry sanctions, the former public official said.

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