Best of both worlds for SMC

Best of both worlds for SMC | Daily Tribune

San Miguel Corp.’s fireworks for the new year courtesy of the 13th Division of the Court of Appeals, or CA, allowing the Asian conglomerate to violate the terms of power supply agreements, or PSAs, with Meralco is not only about higher electricity rates.

A review of the provisions of the PSAs of South Premiere Power Corp. and San Miguel Energy Corp. with Meralco showed huge penalties that SMC’s units skirted in abandoning the deals obtained through a competitive selection process.

The CA on 28 December 2023 upheld a 27 July 2023 ruling rejecting the motion to reverse its decision voiding the Energy Regulatory Commission’s dismissal of a price adjustment since the PSAs have a fixed price term that does not allow losses to be passed on to electricity users.

The decision of the 13th division justices of the Court of Appeals, chaired by Associate Justice Victoria Isabel Paredes and members Associate Justices Mary Charlene Hernandez-Azura and Florencio Mamauag Jr., effectively sent shivers to the business sector as it directly attacked the sanctity of business contracts.

Introduced during the term of former Energy Secretary Al Cusi and hailed as a crucial policy to keep electricity prices low was the competitive selection process or CSP, which was effectively trampled on by the CA ruling. Under the Electricity Power Industry Reform Act, the ERC oversees the CSP and acts as the quasi-judicial body for the sector.

According to the contract, a breach would have been costly for SMC. In the “Termination upon Event of Default” provision of the PSA, a one-sided withdrawal makes SMC Global Power, the parent of SPPC and SMEC, liable for P255.5 billion which is required to be paid in full, within 15 days from the demand for payment.

The penalty is imposed over the volume of electricity it committed to the PSA but failed to deliver.

Terms in the PSA indicated that SMC and Meralco agreed on damages “upon the occurrence of a Power Supplier Event of Default” or when SMC Global Power failed to deliver on its committed supply. The penalty is P100,000 a day for 1,000 megawatts multiplied by seven years which is the remaining duration of the PSA.

In its petition with the ERC, SPPC and SMEC invoked “change in circumstance” to seek temporary relief from the ERC since the deal did not provide for changes in fuel costs to be collected from consumers.

SMC Global Power then warned the ERC during the deliberation of the petition for a temporary price adjustment that if the regulator fails to act on the plea, it will terminate the PSAs. The SMC threat was fulfilled courtesy of the CA’s 13th Division.

The court order effectively placed the burden of SMC walking out of its contracts on the shoulders of electricity users, who have to pay for the higher cost of electricity as a result.

To corner the contracts with Meralco, SMC Global Power submitted extremely low bids to the surprise of energy stakeholders since it involved its coal plants when global prices of fossil fuel were rising.

SMC gave an assurance that it can comply with the straight pricing scheme under the PSA.

The PSAs allow price escalation indexed on inflation but not a revision of the contract price since it would violate the essence of the CSP.

A review of the PSA indicated that “change in circumstances” can’t be invoked to rescind the deal since its definition in the deal did not provide for changes in fuel costs.

Bad business decisions have costs and it is only in the Philippines that big businesses are pampered and consumers are forced to suffer from it.

Meralco’s straight pricing contract was ideal in protecting the welfare of consumers, aside from being shielded from price surges, the penalties that SMGP avoided could have been applied to reducing electricity bills.

SMC’s maneuvering in the energy sector is solid proof that in the Philippines, those with enough influence and financial clout can have their cake and it, too.