First of 2 parts

THE Energy Regulatory Commission (ERC) seems intent on driving San Miguel’s power-generation corporations — San Miguel Energy and South Premiere Power — to bankruptcy.

It has rejected their pleas, initially made together with Meralco, the buyer of its electricity for retail distribution, for an orderly increase in rates required by unforeseen circumstances, including the Russian invasion of Ukraine.

President Ferdinand Marcos Jr. has unwisely joined the fray, issuing a press statement last week asking the Court of Appeals that issued a temporary restraining order favoring the San Miguel firms, to reverse its order. This is the first time a Philippine president has asked a court — which is beyond the authority of the executive branch — to reverse its ruling. Not even his father who had dictatorial powers ever publicly intervened with the courts, even just through a public statement.

In his statement, Marcos said: “The instantaneous effect of the temporary suspension on the implementation of the power supply agreement will consequently expose approximately 7.5 million registered Meralco consumers in the National Capital Region and other areas in Central Luzon and Calabarzon to higher electricity prices without preparation usually observed in case of power supply agreement termination.”

Marcos is wrong, factually, and is merely scaring the court — and the public. San Miguel did not ask the court for the suspension of the supply agreement, only for the ERC to raise the electricity rates specified there. With San Miguel’s plants continuing operations, even at huge losses, there is therefore no “instantaneous suspension on the implementation of the supply agreement.”

Marcos’ unprecedented statement, purportedly to prevent a rise in electricity prices, however, could lead to a power crisis. If San Miguel decides that with the President himself backing the ERC decision, which precludes any change in the electricity prices it provides Meralco, running its plants without a price adjustment would ultimately cost it tens of billions of pesos in losses, leading to their bankruptcy. With its plant’s losses amounting to P43 million per day, San Miguel may just decide to cut is losses immediately — blowing a hole in the country’s power capacity.

San Miguel’s coal-fired Sual, Pangasinan plant, with a capacity of 1,300 megawatts and its Ilijan, Batangas natural-gas plant with 1,200 MW are the biggest in their sectors, and account for 20 percent of the country’s power capacity. Their closure would mean rotating or even extended brownouts in Luzon.

Confiscatory

San Miguel in its petitions for a rate increase claimed that for government to insist that it continue to operate its plants at a loss of billions of pesos would be “confiscatory.” San Miguel apparently meant that it would be a matter of months for these plants to lose so much money that they shut down, to be confiscated by government. It claimed the losses of its Ilijan plant totaled P1.5 billion for the January to May 2022 billing period.

The San Miguel firms had two entirely different reasons to ask for a rise in rates above those agreed at the start of their 10-year power supply agreements (PSA) made in 2019. In the case of South Premiere Power, it claimed that the National Power Corp. unilaterally restricted its natural gas supply (from the Malampaya Gas Field) in March 2021 to its Ilijan gas-fueled plant, reducing its output by 30 to 50 percent. This forced it to buy expensive power from the market to comply with its PSA with Meralco, drastically inflating its cost of supplying Meralco with power.

This was totally unexpected as this was the first time that gas supply was drastically reduced, with the Malampaya expected to restrict its sales only by 2024.

Marcos has unfortunately complicated the issue, as he had appointed as ERC’s chairman Monalisa Dimalanta, whose previous job was compliance officer and chief legal counsel of the Aboitiz Power Corp., one of San Miguel’s competitors in the industry. The Aboitizes have been one of Marcos’ closest allies in the business sector, although one of San Miguel’s biggest stockholders has been his close buddy since his England schooling days.

Aboitizes

Dimalanta’s closeness to the Aboitizes probably would have convinced San Miguel that the ERC would not issue an objective decision on its plea. In its petitions to the ERC and to the Court of Appeals, the San Miguel firms claimed that the ERC’s decisions were “tainted with grave abuse of discretion and its hostility towards and confiscatory conduct against them are apparent.”

Because Dimalanta’s previous employment has cast doubt on her objectivity, the first thing Marcos should do is to replace her. Her appointment to the ERC post is a classic instance of the “revolving-door” issue in government regulation of the private sector.

The San Miguel firms in August petitioned the ERC to amend their power supply agreement with Meralco so it could recover its unexpected costs, and that these would be cheaper than just having them go bankrupt and close down. San Miguel presented data, which Meralco and even the ERC’s technical staff concurred with.

The calculations showed that if ERC agrees to its petition for a rate increase, there would be an increase of P1.57/kWh. The estimated additional cost to Meralco’s 7.5 million customers would be P5.2 billion. On the other hand, if the San Miguel firm stops operations, since it cannot continue in the face of humongous losses, Meralco would have to secure expensive emergency supply contracts that would be priced twice more at P3.49/kWh, and cost consumers five times more, at P23 billion.

The worst-case scenario — involving Meralco’s bidding out the contracts — would result in additional cost to Meralco customers of P25 billion. The two ERC commissioners who dissented with the majority’s (three commissioners’) decision in their written dissent said that the body’s “chief of tariffs and rates division confirmed that the granting of (the power firm’s) price adjustment remains to be the cheapest option.”

Change in circumstances

The ERC, however, insisted that the contract specified a fixed rate with only minimal yearly escalation, and therefore cannot be changed.

The ERA was totally wrong on that argument, as the contract had a provision, as nearly all contracts do, on what it called a “change in circumstances” that would justify revising the rates, as the losses incurred due to the drastic reduction by Malampaya of its gas supply to the firm were over 2 percent of the contract price.

The ERC in a very facile manner dismissed that argument: “As a prudent business entity, it is expected that SPPC (the San Miguel subsidiary) would have risk-mitigating strategies in place to ensure compliance with its contractual obligations. This is even more so expected when it enters into long-term contracts imbued with public interest. When SPPC entered into a contract with a 10-year term, SPPC assumed the responsibilities borne by it in the said contract for the entire period.”

I don’t think the largest amount of prudence would have informed SPPC that its natural gas supply to power plants in Luzon since 2002 would suddenly be curtailed without any warning at all.

This government and the nation will have rough sailing in the coming months. Marcos in his press release swallowed hook, line and sinker the argument of the ERC, which is a quasi-judicial entity independent of the executive branch. Marcos didn’t even mention San Miguel’s basis for going to the court, which is the sudden restriction of Malampaya gas supply to its plant. His energy secretary Raphael Lotilla seems to have forgotten his primary responsibility is to ensure energy sufficiency, and commented that the “San Miguel companies should have made sure that their contracts are viable despite changes in circumstances.” In hindsight yes, but shouldn’t the energy secretary step into the fray to ensure that we continue to have electricity, rather than engaging in “should-haves”?

Quagmire

So far I cannot see how Marcos would get out of the rut he has got himself into with his press statement. Even if the Court of Appeals complies with the President’s request — perhaps if its members are hoping of being appointed by him to the Supreme Court someday — would San Miguel agree to its power firms’ losing tens of billions of pesos, which could result in their financial hemorrhage, even maybe infecting the entire conglomerate? It would just close down the plants, take the losses. Luzon, which its two plants mainly provide power to, would have brownouts — ironically a reminder of the first months of the Cory Aquino regime after Marcos’ father was toppled.

I’ve been very careful of libel laws that — for the moment — I cannot specify who the “they” in this column’s title refers to. But it is “they” who would benefit from the San Miguel firms’ removal from the power generation business.

On Wednesday, December 7 : ERC didn’t know Russians invaded Ukraine?

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