Last of 2 parts
ASTONISHING, just plain crazy, or a biased decision.
In this entire planet, only the three members of the Energy Regulatory Commission (ERC) — going by their denial of the San Miguel Energy Corp. (SMEC) petition for an increase in electricity rates — seems to ignore the earth-shaking impact all over the world of Russia’s invasion of Ukraine. That war, in its 11th month now, has resulted in an unprecedented skyrocketing of fuel prices, especially for coal which the SMEC plant uses.
As a World Bank article pointed out: “The Russian invasion of Ukraine has disrupted the global energy market. The consequences for global growth will be significant: higher energy prices alone are likely to reduce global output by nearly 1 percent by the end of 2023, our recent analysis suggests.”
SMEC had petitioned the ERC for an increase in electricity prices at which its coal-fired Sual plant sells to Meralco, for distribution to retail consumers.* Other than the Indonesian ban on its coal exports announced in January, the Russian-Ukraine war for various reasons (such as the West’s sanction to ban imports from that country) drastically pushed up coal prices, from $170 per metric ton in January 2022 to $326 per metric ton in May 2022.
This resulted in SMEC losing P4 billion from January to May and made its power supply agreement with Meralco commercially unviable. Indeed all countries in the world — except the coal-producing ones — saw their power rates zoom to incorporate the rise in coal prices.
The three ERC members — including its chairman, Monalisa Dimalanta, the former counsel and compliance officer of the Aboitiz conglomerate that is one of San Miguel’s rivals in the industry — in nearly a surreal manner dismissed SMEC’s argument regarding the impact of the Ukraine war.
It said: The “Philippine government … has not enacted any law in response” to the Ukraine-Russia war, and therefore the rise in coal prices was not among the factors creating a “Change in Circumstances” under the terms of SMEC’s power supply agreement (PSA) with Meralco. On what planet do the three ERC commissioners live?
Their argument is so absurd. If nuclear war breaks out between the US and China — which will engulf us because of the “temporary” US military bases here — resulting in the stoppage of coal and oil imports to the country, the ERC will still insist that SMEC continue its operations at pre-war prices or suffer very stiff penalties if there is no law passed recognizing a state of war exists in the region.
The ERC majority wasn’t really forthright in its argument, and was being selective. Yes, the PSA specified that “new laws” (e.g., increase in taxes or plant regulations) could be grounds for changing the agreement, particularly its rates.
However, it ignored SMEC’s argument that the PSA’s Article 11.4(d) specified that there would be the so-called Change in Circumstances (which would allow a revision of the contract) if “unreimbursed new charges, disallowed pass-through amounts” exceeds 2 percent of the contract price. SMEC claimed the unexpected drastic increase in the cost of coal because of the Ukraine war and Indonesia’s move to ban the export of its coal have created a “change in circumstances,” requiring a change in the contract prices.
That seems common sense to me. An analogy would be the rates that the Land Transportation Franchising and Regulatory Board (LTFRB) allows buses and jeepneys to impose. These are fixed rates, in the sense that these public utility vehicles don’t change their rates every time fuel prices change, or when the number of passengers decrease (as during the Covid-19 lockdowns). But if fuel prices double, or when the cost of spare parts drastically increase due to a major peso depreciation, they can ask the LTFRB for a change in the erstwhile “fixed rates.” Their only other option would be to stay home, and find another job — and leave commuters without transportation.
It would be the two dissenting ERC members — Alexis Lambatan and Marko Romeo Fuentes — who discussed at length the impact of the rising coal prices.
Their dissenting opinion pointed out: “The massive disruptions in the commodity fuel value chain due to the (i) Covid-19 pandemic exacerbated by the (ii) Indonesian coal export ban and the (iii) Russia-Ukraine War inevitably caused the increase in the coal fuel prices beyond not only the expectations and projections of (SMEC), but even the prior evaluation of this commission when it issued the provisional authority [to undertake the PSA].”
It argued that “[SMEC and Meralco] could never have contemplated these extraordinary circumstances to account for the possible and present risks when the bid was made at the time the PSA was executed… These external developments widely disputed the global order particularly on the production and delivery of commodities that no financial forecasting and hedging by the parties could have reasonably addressed and captured.
If this isn’t a case which is not only affected by a single change in circumstance but a hodgepodge of fundamental and extraordinary changes in circumstances, then we don’t know what ‘change in circumstances’ is.”
The two dissenting ERC commissioners even went to the extent of revealing their three colleagues’ selectivity in their majority rulings. They revealed that the commission had earlier acknowledged the impact of the Russia-Ukraine war when it had allowed “fuel cost recoveries” by generation companies in the Wholesale Electricity Spot Market (WESM). Yet the commission, because of the majority vote of three, is disallowing SMEC to increase its rates due to the same factor, the rise in fuel prices because of the Russia-Ukraine war.
“If we have allowed cost recovery in the WESM for uncontracted power generators, why cannot we give the same consideration, say at least a temporary relief to the plight of contracted power generators (i.e., the San Miguel firms)? (Italics in the original.)
The ERC majority facetiously ignored the SMEC and the dissenting commissioners’ arguments, declaring:
“As a prudent business entity it is expected that SMEC should have risk-mitigating strategies to ensure compliance with its contractual obligations.”
In short, the three ERC commissioners are saying: “You should have foreseen Russia’s invasion of Ukraine and mentioned that in your contract, you blockheads.”
Whoever — the ERC or the SMEC — is right is really irrelevant now. SMEC’s finances are hemorrhaging, probably fatally, if it is not allowed to increase its rates while it continues operating. With P4 billion losses in the year to August, it has no choice but to close down, as it has in fact informed Meralco, if it doesn’t get the rate hikes for its power.
The ERC isn’t a court deciding the legality of changes in contracts. Its primordial purposes are to ensure that energy prices are fair for the producers, distributors and consumers and for the country to have a stable electricity supply.
SMEC’s closure — including the close-down of San Miguel’s gas-fired plant in Ilijan, Batangas — which the ERC also has refused to grant a price increase — would blow a big hole in our electricity supply, as the two plants account for 20 percent of the grid
Meralco would have to replace the lost electricity by getting it from the market or contracting new agreements — which would be expensive, according to Meralco simulations. The ERC’s dissenting opinion reported that the ERC’s own Regulatory Operations Service confirmed that Meralco conclusion, that granting the two San Miguel firms’ price adjustment request will result in the cheapest increase in retail electricity prices, of about P1.57 per kWh for six months to recover SMECs losses due to the coal costs.
President Ferdinand Marcos, Jr. was very much ill-advised in issuing a press release asking the Court of Appeals to reverse its temporary restraining order that favored the San Miguel firms. The order will be in place until it decides for any reason to lift it or until it issues a decision whether or not to order the ERC to accede to their demand for a change in their prices.
It won’t be surprising if the Court of Appeals bows down to Marcos, who after all will be deciding their promotion to the next judiciary level, for two of them to chair another appellate court or to become a justice of the Supreme Court. Should they do that, the SMC firms will close down and we will experience at first long brownouts, and then a sharp increase in our electricity bill as Meralco would have to get its electricity through an uncontracted, and therefore, more expensive market.
*To clarify confusing reports, two San Miguel firms are asking for a change in their power supply agreements with Meralco that would involve price increases. Its South Premiere Power Corp., whose woes I discussed last Monday, claims an increase is necessary since the National Power Corp. abruptly reduced by as much as 50 percent its gas fuel supply from the Malampaya Gas Field, forcing it to either buy expensive natural gas elsewhere or source electricity from the market. This column is about San Miguel Energy Corp. which generates its electricity from the coal-fired Sual Plant in Pangasinan.
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