First case of BBM’s failure of governance

THE San Miguel energy companies’ predicament is becoming a classic case of an administration’s failure to govern, unless it intervenes quickly and uses all its political clout and persuasive powers to resolve the issues. I do hope it is the last such case of failure in governance.

The San Miguel’s quagmire is a very serious problem that could affect Meralco’s 7.5 million consumers, at the very center of the nation. It could even impact the economy as a whole and dent investor confidence. In broad strokes, the problem is as follows;

San Miguel’s two energy firms — South Premiere Power Corp. (SPPC) and San Miguel Energy Corp. (SMEC), operating two of the country’s biggest power plants — have been losing billions of pesos, and will go under if they continue generating power which they sell to Meralco. SPPC claims the consortium running the Malampaya gas field had unilaterally reduced its supply of gas needed to run its Ilijan plant. SMEC on the other hand claimed that its coal-fired Sual plant could not afford the tripling of gas prices, mainly due to Russia’s invasion of Ukraine.

The two energy firms asked the Energy Regulatory Commission (ERC) to allow it to increase the price of power it sells to Meralco, for retail distribution. The ERC rejected the request, claiming that the SMC firms had committed to a fixed price. No, the SMC firms said, there were provisions in the contracts that the price could be re-negotiated if there is a “change in circumstances,” as the power supply agreements put it. The insufficient gas supply from Malampaya and the war-induced soaring coal price certainly created a major “change in circumstances,” it claimed

Legalistic

The ERC took a very legalistic standpoint, claiming that the SMC firms’ contract with Meralco cannot be revised. It lectured the SMC firms that as “prudent business entities,” they “should have risk-mitigating strategies to ensure compliance with its contractual obligations.” It ignored the SMC firms’ computations — concurred with by the ERC’s own staff — that their plea for a price hike is the cheaper option than having Meralco get its energy supply from the market or from new contracts.

The SMC firms claimed that with the reduction of its gas supply from Malampaya and the unexpected rise in coal prices, they will lose about P10 billion this year if they continue operations without a change in the electricity price that they charge Meralco.

They reported that they have lost P5 billion just for the January to May 2022 billing period. in their operations. SMC ran to the Court of Appeals, which issued a temporary restraining order in the case of SPPC that allowed it to shut down its Ilijan operations. The court has not yet acted on the SMEC plea for its Sual coal-fired plant. The ERC said the Solicitor General will ask the appellate court to lift its restraining order.

The other day the consortium, which includes the state-owned Philippine National Oil Co. and Dennis Uy’s Udenna Corp., claimed in a press release that there was no “live contract” to sell to SMEC. Whatever that means, SMEC yesterday said it had already bought the gas — “bank gas” — from PNOC for $1.2 billion in July.

Amazing

Amazing, isn’t it? How can SMC, the biggest industrial conglomerate, be lying? But then how could a state-owned PNOC be lying? I don’t think San Miguel’s lawyers — reportedly the most expensive and among the best in corporate law — would have bungled writing the firms’ contracts, that it had no escape clause for an extraordinary rise in its coal costs for its Sual plant, or that it didn’t really contract Malampaya to provide it with $1.2 billion worth of natural gas for its Ilijan plant.

The squabble has ended up in the Court of Appeals. It will all end up in the courts, and most probably finally land in the Supreme Court, which will take years to issue a decision.

The ERC commissioners who voted against San Miguel’s pleas could just walk away and forget this stressful episode, with its chairman going back to the Aboitiz conglomerate (a major player in the power-generation industry), where she worked before. I don’t think San Miguel CEO and biggest stockholder Ramon Ang can walk away, with tens of billions of his and his shareholders’ funds at stake.

Stakes

Yet the stakes are very high, with immediate impacts not just on SMC or Meralco but on us citizens. No way would SMC operate the two plants to incur billions of pesos in losses which could affect the entire conglomerate. Since SMC is the country’s largest industrial conglomerate, this would have a terrible domino effect on our entire corporate sector, even triggering a banking crisis.

SPPC’s Ilijan plant and SMEC’s Sual plant together generate 1,800 megawatts, or about 15 percent of the Luzon grid’s 11,200 megawatt consumption. Peak system demand is currently 10,000 MW to 10,500 MW in Luzon for December to February (colder months).

This means that any unexpected reduction in the generation capacity of the other operating power plants, mainly from intermittent solar capacity or from aging diesel or coal plants, could potentially affect up to 1000 MW of peak demand, which means potential brownouts for up to 15 percent of Meralco’s ‘s franchise area.

But that is just for the cold months. The system demand is expected to reach up to 13,000 MW during the summer months of 2023 (starting March and up to June). Without the San Miguel plants, and with no replacement for their power output, there would be a massive supply deficit ranging from 2,500 to 3,000 MW, affecting up to 40 percent of Meralco’s franchise area. Brownouts in Luzon could be on a scale similar to those in the early years of the Cory Aquino regime

The President, unless I am just not aware of it, is nowhere in this gargantuan problem that would affect all of us.

Governance

Governance isn’t just a matter of issuing orders, running the machinery of state, or enforcing the law. Perhaps even more important for a president, is his intervention in cases where two parties — especially big ones — are clashing, whose outcome would affect the entire nation, and whose welfare the Republic’s chief executive is under oath to take care of. Indeed in olden times, that ruler called King proved his power to govern if he could bring two of his warring vassals to a settlement.

A recent crisis in the US illustrates what good governance is. US President Biden’s administration intervened to get the railroad companies and their labor unions to agree to a wage hike. However, four of the 12 railway labor unions voted against the agreement. After rail workers threatened a nationwide strike if their wage demands are not met, Biden asked Congress to urgently pass a law that would impose an agreement between the rail companies and their workers. Railway strike stopped. That’s governance.

Only President Marcos in this land of 110 million people has the clout and the persuasive powers of the presidency to resolve this crisis. So far, he hasn’t.

It’s not too late though.

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First case of BBM’s failure of governance
Source: Breaking News PH