Bound to rules

The existence of the power supply agreement has become a hindrance to San Miguel Corp. in its desire to abandon a deal where its discounted offer became the company’s undoing.

Its energy arm SMC Global Corp., which runs the Ilijan natural gas plant and the Sual coal plant through two subsidiaries, claims to have accumulated P15 billion in losses and counting as a result of higher fuel prices and limited supply from the Malampaya field.

Since SMC exists in a business world governed by contracts, it cannot just impose its will and maintain its integrity intact when it wants out of a soured deal.

It did attempt to just stand up and leave as it notified the Energy Regulatory Commission and its principal in the power deals, Manila Electric Co., that SMC Global Power will pull out of the PSA if its petition for rate adjustments are denied.

“Another anomaly is that the PSA’s pricing method does not allow adjustments except for situations covered by the ‘change in circumstances’ clause.

Another anomaly is that the PSA’s pricing method does not allow adjustments except for situations covered by the “change in circumstances” clause.

SMC Global Power invoked the “change in circumstances” provision which consumer groups challenged before the ERC as they said that SMC should have considered the cost of fuel and the widely known depleted state of the natural gas supply in the bid it submitted.

Instead, it submitted a very low bid to obtain the contracts and, as the notorious big business practice, runs to the government to adjust the price it used for the deal.

This time, the PSA stipulated a “default” provision in which either of the parties involved will have to suffer heavy penalties in case of unilateral withdrawal.

Thus, if SMC Global Power makes good its threat to pull out on 3 October, it is clear in the PS, that it will have to suffer a penalty of P255.5 billion.

The “Termination upon Event of Default” provision of the PSA showed that a unilateral pullout makes SMC Global Power liable.

Based on the terms in the PSA, the agreed damages “upon the occurrence of a Power Supplier Event of Default” or when SMC Global Power failed to deliver on its commitments, “Meralco shall be entitled to liquidated damages, in lieu of all other damages to which it may be entitled” in the amount of P100,000 per megawatt per day of the contract capacity for the remaining term of the agreement.”

The penalty is computed as P100,000 a day for 1,000 megawatts multiplied by 365 days for seven years which is the remaining duration of the PSA.

A former Department of Energy official said the competitive selection process was designed to favor electricity users and not big businesses.

“The problem with San Miguel Global Power’s move is that they cannot just change the terms of the PSA,” the former public figure pointed out.

“The contract has terms that specify what happens, for instance, when the bid fails or if a party withdraws so the rules will apply,” according to the source.

SMC Global Power can’t be compelled to stay in the deal but it owes the consumers from whom it built an empire, to face the consequences.

“Thus, if SMC Global Power makes good its threat to pull out on 3 October, it is clear in the PS, that it will have to suffer a penalty of P255.5 billion.