SMC liable to pay over P1M in penalties daily if it ends power service contract

San Miguel Corp.’s power supply agreements (PSAs) which it sought to terminate can be simply terminated because it is imbued with the public interest and contains a “stipulation pour atrui” which means that the ultimate beneficiary would be the consumers.

“The favor bestowed clear upon a third party (consumers) is clear and deliberate, and not merely incidental,” according to the provisions of the PSA.

The favor bestowed upon a third party is clear and deliberate, and not merely incidental, as found in Article 7.3 of the PSA: “In case Power Supplier fails to deliver the Contract Capacity and Associated Energy to Meralco due to unavailability of supply from its plant, Wholesale Electricity Spot Market, and any other source, power supplier shall pay a fine equivalent to P908 multiplied by each megawatt-hour during a day, which shall be used to reduce the generation charge to the consumers”.

Thus, in case San Miguel Global Power pulls out from its deals and withholds 1 gigawatt of electricity from its Sual coal plant and the Ilijan natural gas plant, it would be liable for P908,000 a day each for San Miguel Energy Corp and South Premiere Power Corp. based on the PSA provision.

The amount is aside from the P1,000 per megawatt-a-day penalty during the remaining life of the PSA, or a sum of P255.5 billion each for SMEC and SPPC or a total of P510 billion if SMC is found in default under the PSA if it unilaterally terminates the deal.

ERC said that since the deal is a contract imbued with the public interest and contains a stipulation pour atrui, it should be adhered to faithfully.

SMC Global Power had notified ERC of its intent to terminate the PSAs of SMEC and SPPC even before the regulator handed down the ruling to dismiss the petition for a P4.80 increase in its fixed PSA contracted rates.

Termination of the PSA will directly or indirectly violate the policies laid down in sections 2 and of the Electric Power Industry Reform Act about the quality, reliability, security, and affordability of the supply of electric power.

Also breached is the requirement to ensure transparent and reasonable prices of electricity and the protection of public interest as it is affected by the rates and services of utility firms and other providers of electric power.

Data overstated

The Commission also noted that the figure presented on the price impact of PSA terminations appears “to have been deliberately picked to present an aggravated picture of the termination scenarios.”

ERC revealed that on 04 August 2022, the SMC affiliates issued notices of termination that they received from SPPC and SMEC effective 04 October 2022.

The Commission underscored that it has no basis to approve the proposed recovery of billions of pesos considering the parties’ admission that the “corresponding data thereof is yet to be generated/gathered as of date.”

The parties also admitted during the hearings that, should the Joint Motion for Price Adjustment be given favorable action, there will be subsequent filings for more price adjustments.

Finally, the Commission observed that there are still available remedies for MERALCO to pursue under the PSAs, consistent with its continuing duty to ensure the supply of electricity in the least cost manner to its captive market.

“The role of the regulator is always a balancing act. The Commission deliberated on many occasions on these Joint Motions fully conscious that the consequences of the ruling go beyond the businesses of the immediate parties but will extend further and demonstrate how we, in the Philippine power industry, honor the sanctity of contracts, uphold the results of the bidding process, and hold ourselves accountable to all stakeholders,” ERC Chairperson Monalisa Dimalanta said.

“We were mindful as well of the limits of regulation. As we protect consumer interests, our rulings cannot be oppressive to businesses. We tried, as we ruled on these Joint Motions, to decide on the basis of the clear terms of the PSAs that the parties signed up for, and on the basis of law,” it added.

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