‘SMC-Meralco deals yield lessons’

BY LENIE LECTURA – OCTOBER 11, 2022
from Business Mirror

The Department of Energy (DOE) said the termination of the power supply agreements (PSAs) between San Miguel Corp. (SMC) and the Manila Electric Co. (Meralco) after their joint petition for a temporary rate hike was denied by regulators should be considered as “a learning experience.”

When asked if the rules on the competitive selection process (CSP) will be amended by the DOE following the concerns raised by the Energy Regulatory Commission (ERC) and the petitioners led by Meralco, South Premiere Power Corp. (SPPC) and San Miguel Energy Corp. (SMEC), Lotilla said there are other parties involved in administering the rules for the competitive auction.

“I think the CSP rules is not only governed by the policies of DOE but also by the regulatory requirement of the ERC, as well as those by promulgated by the distribution utilities (DUs), including Meralco itself.  So, this particular case is a learning experience for everyone,” he said.

After this, Lotilla said there is a need “to make a clear distinction” of the policy role of the DOE and the regulatory aspect of the ERC.

In so far as the fixed-rate term of the PSAs agreed upon by the parties, Lotilla said Meralco and SMC should have included conditions that would still make the terms of their contracts viable amid changes in circumstances.

“As I have said, it’s a learning experience for everybody that if we provide for fixed-rate contacts then there must be other terms and conditions that will make the contract implementable notwithstanding the highly volatile prices in the commodities market.

So, I am sure that if you have the two of the major private companies, which are engaged in power, that they will be intelligently analyzing the terms of reference of the contracts that they have entered into and that moving forward we will both be benefiting from the lesson,” he said.

The approved PSAs of Meralco and SMC already include a change in circumstance clause, similar to force majeure provisions of other contracts.  SPPC claimed that the coal power plant in Sual, Pangasinan and SMEC’s natural gas-fired power plant in Ilijan, Batangas have incurred combined losses of P15 billion due to the soaring prices of coal. They said a temporary rate increase was needed to enable these plants to continue supplying power to Meralco.

SPPC and SMEC continue to operate at a loss because the costs of operating their power plants have increased. Of the staggering losses of P15 billion, the companies have already absorbed more than P10 billion of the losses that were incurred last year.

However, the ERC denied their joint plea to adjust their previously approved power rates by P0.30 per kilowatt hour (kWh) over a period of six months.  With this, SMC said it would terminate the PSAs with Meralco after 60 days from receipt of the ERC orders dated September 29. SPPC and SMEC said they received the ERC orders on October 3.

Once the termination of the PSAs take effect, SPPC and SMEC will have to sell its power in the Wholesale Electricity Spot Market (WESM) and enter into bilateral contracts with other offtakers, the pricing of which will be market-based.

Under current WESM rules, power plants that are able to operate need to offer their capacities to the market. If for example, SMC contracts were terminated, it will have to sell at the spot market but likely at higher prices.

Meralco said SPPC and SMEC continued to supply power at the ERC-approved rates, albeit under protest.

“We would like to assure our customers that we will exhaust all remedies to prevent termination of the PSAs with SPPC and SMEC since we believe that preserving these contracts will still be least-cost for our customers,” Atty. Jose Ronald V. Valles, Meralco FVP and Regulatory Management Office, said.

“Should SPPC and SMEC decide to pursue the contract termination, we will ensure continuity of stable, reliable and adequate supply for our customers by getting supply from other sources like the WESM and other generation companies.”

Emergency supply deals

Meralco has already forged emergency supply deals with other power suppliers to ensure continuity of stable, reliable and adequate supply to its customers.

Valles said Meralco had received five lowest emergency power supply agreement (EPSA) offers from Consunji-led SEM-Calaca Power Corp. (SCPC-Calaca)-200 MW; GNPower Dinginin Ltd. Co. (GNPD)-300 MW from Aboitiz Power Corp.; Masinloc Power Partners Co. Ltd (MPPCL)-250 MW; SMC Consolidated Power Corp. (SCPC-Limay)-200 MW; and South Premiere Power Corp. (SPPC)-120 MW. However, last September 16, Valles said SEM Calaca withdrew its offer due to “technical issues in its power plant, specifically that of Unit 2.” Thus, after immediately conducting rate simulations, Meralco said it will replace the 200 MW that should have been provided by SEM Calaca from the WESM as it has the lowest cost to Meralco’s customers, instead of taking such capacity from the other power suppliers that had the next lowest EPSA offers.

The said EPSAs are pending at the DOE for approval for a Certificate of Exemption from CSP (COE-CSP) and until that is issued, Meralco cannot implement the EPSAs with the power suppliers.

“We are hoping for the swift action of the DOE in exempting the EPSAs from undergoing CSP. Without these EPSAs, our customers may become exposed to volatile prices,” said Valles. When sought for comment on their pending applications for a COE-CSP, Lotilla said the agency is still reviewing these.

“It is something that we are discussing with the power bureau. We will share as soon as this is decided on,” he said.

Meralco utility economics head Lawrence Fernandez said the impending termination of the PSAs does not mean that power plants will stop operating. It only means they will stop supplying Meralco at the contract rates.

“Right now, given the situation, we don’t see any change or effect in the generation charge, maybe for the November supply month.”