A departure from tradition.
That is the Sept. 29, 2022 decision of the Energy Regulatory Commission denying the joint petition of SMC Global Power and Meralco for a price or rate increase to cover the 3.5-fold increase in prices of coal, the basic material for SMC’s 1,200-megawatt coal-fired Sual Power plant.
In late 2019, SMC committed to supply 300 mw to Meralco at a fixed rate for 10 years until 2029—using electricity either from its 1,200-mw Sual plant or from any other sources.
Crucial decisions of the ERC are usually unanimous, seldom split.
The five commissioners in the decision were split—three vs. two, with the ERC Chairman, Monalisa Dimalanta, joining Commissioners Catherine Maceda and Floresinda G. Baldo-Digal to eke out a majority decision.
Two commissioners penned the dissenting opinion—Alexis Lumbatan and Marko Romeo L. Fuentes.
The split decision shows how controversial the SMC-Meralco rate increase petition is.
The two dissenters said the majority appreciated the wrong issue.
There are two issues involved: One, a straight denial of price adjustment, and two, granting price adjustment based on a rate impact scenario painted by the petitioners.
The dissenters in effect are saying the majority denied the rate increase without consideration of the consequences of such a denial.
Of course, Lumbatan and Fuentes are saying in effect the price increase should have been granted because doing so would better serve the public.
Their reasons:
1) “The Power Supply Agreement (PSA) entered into by MERALCO and SMEC allows them to claim a temporary price adjustment for a specific period based on a Change in Circumstances (CIC);
2) “Based on the matters submitted and admitted in evidence, CIC is satisfactorily found to exist to warrant price adjustment; and
3)”Based on the rate impact simulations presented before the Commission and the evaluation made by the Regulatory Operations Service (ROS), a denial of the Joint Motion for Price Adjustment would expose the consumers to unknown and even higher rates than granting the same, not only in the near term but until 2029.”
The minority opinion thinks that when San Miguel made a bid in December 2019 to provide power at an agreed price (the power supply agreement or PSA), it did so thinking it was entitled to what is called CIC—Change in Circumstances.
Because if there was no CIC provision, “other bidders, if not all, would not have participated in the first place, or the offered rates from the bidders could have significantly increased, in view of an all-risk power supply assumption, to levels that would no longer be prudent for MERALCO to pursue given its mandate to optimize its cost of power supply.”
“The dissenting minority believes that the prevailing market conditions and other pertinent external factors, which could be reasonably contemplated at the time of the CSP by the bid participants and upon contract execution by the Parties, should be considered as the proper context for the offered and contracted price,” Lumbatan and Fuentes argued.
As to reason No. 2, coal increased in price because Russia invaded Ukraine and a run on coal just before the war.
The Ukraine war triggered a sharp rise in prices of oil and other energy products like coal. Coal provides 60 percent of the Philippine power requirement.
From an average price of $50 to $130 per ton before the war, coal rose to $175.72 in the second half of 2021, and then to $225.60 by January 2022, and to $304.80 during January to May 2022.
Russia is among the world’s largest coal producers. Sanctions against it, by NATO and western power, constrained Russia’s coal exports.
In 2019 when SMC bidded to supply power to Meralco, coal was averaging $65 per ton. Based on that, SMC quoted a price of P4.4017 per kilowatt hour in 2019 for its electricity.
This is much lower than prevailing electricity prices then quoted in the open wholesale market.
Since then, world coal prices have risen 369 percent or by 3.7 times.
This event qualifies as a change in circumstances (CIC) that necessitates a price relief for SMC and Meralco. But the majority in the ERC does not want to listen.
Now, for Reason No. 3: Denial of the price adjustment would do more harm to consumers and even higher rates – in the short term, and in the long term, or until 2029.
There are four scenarios:
— A rate increase of P1.57per kwh (without the CIC claim) or an additional cost of P5.2 billion to Meralco consumers;
— A rate increase of P1.92 per kwh (with CIC), or an additional P12.6 billion to be paid by Meralco consumers;
— A rate increase of 56 centavos per kwh over 2023 to 2029, an additional cost of P25 billion;
— A rate increase of P2.87 per kwh, with CIC approved; an additional cost of P1.6 billion per month.
These scenarios in effect paint two things: One, a calibrated and regulated rate increase; and two, an unregulated rate increase wherein all hell breaks loose and electricity prices surge beyond control, as San Miguel wiggles itself out of an unfair contract.
“What remains to be clear in the simulations made by MERALCO is that the granting of the price adjustment is actually the cheapest option available,” note the two dissenting ERC commissioners.
Common sense tells you that a company cannot be forced by the state to supply a product or service at a price far below its cost of production and thus sustain incalculable losses (P15 billion so far, for SMC).
That would be tantamount to oppression or involuntary servitude.
SMC is studying its option to get out of its highly disadvantageous PSAs or power supply agreements.
Conclude the dissenting ERC Commissioners Lumbatan and Fuentes:
“With all the possible consequences discussed, it behooves the Commission to exercise our equity jurisdiction.
“The dissenting minority finds it just and necessary under the circumstances to grant the joint motion to cushion the impact of high cost of fuels and so as not to disrupt the basic and essential services being rendered by both MERALCO and SMEC to the consuming public.
“And in so doing, We can not only serve substantial justice, but as well safeguard strong public interest.”
