ERC rejection of “least cost” option forces SMC to cease supplying power to Meralco under Ilijan PSA

Seven months after it first filed a joint petition with Meralco for a temporary rate hike--which was rejected by the Energy Regulatory Commission (ERC), despite proving to be the least costly for power consumers--San Miguel Global Power has notified Meralco that it is ceasing supply on its 670MW power supply agreement (PSA) effective December 7. 

This comes after the Court of Appeals issued a Notice of Resolution and a Temporary Restraining Order enjoining the ERC and Meralco from implementing the ERC Order denying the joint petition filed by SMGP’s subsidiary South Premier Power Corp (SPPC) and Meralco for temporary relief for a 60-day period. The cessation of supply, covered by the resolution and the TRO, is immediately executory. 

Ramon S. Ang, President and Chief Executive Officer of SMGP parent San Miguel Corporation, emphasized that from the beginning, the power firm did not want to have to terminate the PSA, and that was why it was seeking just a temporary, six-month relief. 

This was to help mitigate continuing losses of SPPC’s Ilijan power plant arising from both the extraordinary and unprecedented rise in global fuel prices brought on by the Russia-Ukraine war, as well as the unilateral gas restrictions issued by government on the Malampaya gas facility--the only viable source of fuel for the Ilijan plant. 

This forced SPPC to source capacity from the Wholesale Electricity Spot Market (WESM), which triggered even higher price spikes, further affecting the company’s costs to supply Meralco. 

“From the very start, we were very transparent and clear with the ERC: We were not asking for a permanent increase, we did not want to be relieved of our contractual commitments, we were just asking for temporary, equitable relief, given the undeniable and unforeseen circumstances that affect not just us, but all Filipinos and many economies worldwide,” Ang said. 

“Unfortunately, despite being shown that granting our petition would have been the cheapest option for consumers, the ERC still denied our petition, fully-aware that this would force us to either continue absorbing significant losses--which no company can sustain--or terminate the PSAs, which would ultimately lead to higher electricity costs for consumers: much, much higher than what we were asking for,” he added. 

Meanwhile, SMGP stressed that the right to unilaterally terminate is allowed under the PSA itself, as part of necessary mitigation measures under the long-term, fixed rate supply deal, particularly in the event of a “change in circumstances”. 

The filing of a petition for a rate increase is also another mitigation measure under the PSA, but this was denied by the ERC’s new leadership. 

This, despite the fact that Meralco's expert assessment and simulations showed the proposed temporary rate hike would be the “least cost option” for consumers, compared to the power distributor having to source emergency power supply, or conducting a fresh round of competitive bidding. 

This finding was also independently validated by no less than the ERC’s own Regulatory Operations Service (ERC-ROS). 

Despite the cessation of supply of the contract capacity, SMGP emphasized that there will be no impact on current level of system supply because the company will still continue to offer its available and uncontracted capacity to qualified off takers and to the spot market. 

Also, the company said that the 1,200-MW Ilijan plant has already been on extended outage since June 2022 following the refusal of Shell Philippines Exploration BV (SPEX) to supply the 70 petajoules (PJ) in banked gas from Malampaya that SPPC acquired from PNOC that same month and, therefore, does not currently form part of its readily available generation capacity. 

In the meantime, the plant is undergoing repair works to improve its fuel efficiency and generation ramp rate. It is expected to restart operations once the LNG terminal that the company has tolled becomes operational as early as April 2023. 

Earlier, SMGP reiterated its strong commitment to help consumers weather higher electricity costs, by proposing to make the entire 1200MW capacity of the Ilijan Plant available to Meralco at a minimal capital recovery fee of only P1.0/kwh. 

To help address the plant’s current fuel supply constraints, SPPC has also offered various options to optimize sourcing of fuel for the Ilijan facility—whether from its own allocation of Malampaya gas or liquid fuel. 

This, it said, would give Meralco the flexibility to manage its overall power costs, while ensuring adequate power supply in the coming months.