Among the main arguments San Miguel Corp. presented in its effort to overturn the straight and fixed pricing scheme on electricity supply it blamed for P15 billion losses is that the spike in the price of coal was unforeseen.
Its affiliate, San Miguel Energy Corp., which runs the Sual coal plant, is seeking a P4 per kilowatt hour increase over five months that the Energy Regulatory Commission dismissed recently.
SMC said it will exhaust legal remedies to pursue the revision of its contracted price in the power supply agreement, but the ERC ruling expressly said was not allowed.
The exercise of prudence expected of a leader in the business field should have made San Miguel Corp. avoid its huge losses as a result of volatile coal prices.
Thus, invoking the change in circumstances provision in the PSA to clinch the ERC’s approval can’t apply.
Rather, oppositors said it was a failure on SMC’s part to put in place price risk management to shield its energy unit from foreseeable volatility of coal prices caused by external disruptions, such as the Eastern European conflict.
Unfortunately for the applicants, nowhere was it provided in the PSA that electricity consumers will foot the bill for their poor business judgment and mismanagement of risks.
They cited the case of the Ayala Group’s AC Energy, which also holds a PSA with a straight energy price from the same competitive selection process that involved SMC Global Power.
AC Energy did not ask for a price adjustment which proved that applicants are not experiencing an unforeseen event. AC Energy protected its contract through a coal hedging strategy.
When Meralco conducted two consecutive rounds of a competitive selection process that mandated a straight energy price in 2019, a total of six PSAs were executed.
Two of the PSAs involved AC Energy’s South Luzon Thermal Energy Corp.’s coal-fired power plant.
AC Energy did not complain of billions of losses due to the two PSAs with a straight energy price.
AC Energy has PSAs with straight energy prices for a coal plant and another for combined coal and solar farms.
The Lopez Group’s First Gen Hydro Power Corporation also has one PSA with a straight energy price for supply from geothermal power plants.
Consumer groups complained that SMC Global Power never showed proof of their claimed losses and that its threat to pull out from the PSAs with Meralco was intended to get new deals with higher charges.
Straight energy pricing protects consumers from shouldering pass-on fuel and currency exchange risks which is common among extremely volatile fossil fuels.
To prevent generating companies from taking advantage of consumers, a straight pricing method should be mandated in all power supply agreements, consumer advocates under the Power for Consumer Coalition stated.
AC Energy’s 2020 Annual Report indicated the company managed commodity price risks through hedging.
AC Energy’s report defined a commodity price risk as realizing reduced profit margins or an increase in the volatility of future earnings that are affected by the pricing uncertainty in coal supply and foreign exchange risk.
The risk is measured based on the potential impact of market volatility on the earnings target.
In SMC Energy Corp’s notion with ERC and other presentations, there were no discussions of due diligence regarding commodity price risks of coal, which was an error in itself considering they are committing themselves to a straight energy price, according to oppositors.
The bone of contention is that SMC failed to come up with a plan to shield its business from market risks resulting in huge losses which it now wanted electricity users to assume through higher bills.