The sanctity of a contract is a basic principle not only in the business world, but also in human relations. It is what ensures equilibrium by strengthening confidence in engagement among people.
Last year, two units of conglomerate San Miguel Corporation (SMC), Excellent Energy Resources Inc. (EERI), and Masinloc Power Partners Co. Ltd. (MPPCL), obtained power supply agreements through an auction, or what is termed in the industry as the competitive selection process (CSP).
The contracts are for the future requirements of Manila Electric Co. (Meralco), which starts in 2024.
The CSP was aggressively pursued during the watch of former Energy secretary Alfonso Cusi since it ensured a level field in the fierce energy business.
EERI will source energy from liquefied natural gas and will produce 1,200 megawatts (MW) of electricity, while the MPPCL coal plant has been upgraded for an output of 600 MW.
EERI won the CSP for the supply of electricity at P4.1462 per kilowatt hour (kWh), while MPPCL offered P4.2605 per kwh, compared to the current electricity charges of the Meralco of P10.4612 per kWh.
The contracts cover a 20-year period starting 2024.
Both offers were even lower than the P4.30 per kWh being charged by Sual coal plant and Ilijan that gets its natural gas fuel from Malampaya.
Sual is the biggest coal plant in the country, owned by Team Energy but operated by San Miguel Energy Corp., while Ilijan, with an output of 1,200 MW, the biggest natural gas power plant, was recently transferred to the ownership of South Premiere Power Corp., an SMC subsidiary.
What piques curiosity is that SMC claimed the contracted electricity prices of both Ilijan and Sual are too low to recover fuel costs.
SMC had petitioned the Energy Regulatory Commission (ERC) to amend its tariff and collect an additional P4 per kWh for the Sual coal plant and an additional P0.80 per kWh for the Ilijan natural gas facility.
How then can SMC prospectively offer a price that is below what it considers as a loss?
The remedy, of course, would be for the conglomerate to seek a relief from the ERC once the contract has started.
Thus, ultimately, it will be electricity users or the consumers who will be made to bear the “adjustments” after the long-term contracts were obtained.
Meralco as distributor merely passes on costs of obtaining electricity. Thus, increased charges from power plants contribute to pushing monthly bills higher.
Just recently, SMC sought with the ERC an adjustment in rates on its existing supply contracts as a result of “soaring coal prices and unilateral Malampaya gas supply restrictions.”
In the petition, P5.2 billion is being sought to be recovered over a six-month period.
The adjustments are needed “so it could continue sourcing fuel and fulfill its power supply contracts.”
There is something crooked in bidding too low then twist the government’s arm later after securing the long-term deals.
ERC should be discerning enough when reviewing these price increase petitions.