PSALM shakes down SMC

Is the government through its Power Sector Assets and Liabilities Management Corp. trying to shake down the Philippines’ largest conglomerate and largest corporation in revenues?  Is this shakedown related to fund-raising for the 2016 presidential elections?

On Thursday, Sept. 10, PSALM filed a suit against South Premier Power Corp., the SMC subsidiary which administers the 1,200-megawatt  Ilijan power plant in Batangas as its independent power producer administrator.  As administrator, SPPC buys power from Ilijan and sells it to retailer Meralco, at a profit.  SPPC pays PSALM a guaranteed amount every year (P36 billion a year in my estimate) whether Ilijan is operating or not, whether SPPC is making money or not.

This month, PSALM unilaterally and arbitrarily terminated SPPC’s contract as administrator of Ilijan for the SMC subsidiary’s alleged failure to pay P6.46 billion ($138 million) in contractual obligations.   PSALM also confiscated SMC’s $60-million cash bond issued by a New Zealand bank.

San Miguel quickly went to court to stop PSALM from canceling its IPPA contract, arguing the termination is illegal and the claimed amounts “are PSALM’s erroneous calculations”.

PSALM’s error stems from an unusual situation sometime in 2011 when the gas producer Malampaya shut down for maintenance and thus could not feed Ilijan its needed gas to generate power.  Ilijan instead shifted to diesel which is very expensive.  This “liquid event price”  (LEP) was an astronomical  P30,710.47 per kilowatt hour (kwh).   But that spike lasted only for 30 days, according to SMC officials.

In the rest of the days in the past five years (that’s 1,825 days), SPPC was getting power from Ilijan and selling it at P4.54 to P5 per kwh to Meralco.  PSALM, however, had wanted since the beginning of the dispute to apply the horrendous P30,710 per kwh price, and not this P4.54 to P5 per kwh, for a period of one year.  The price difference, in PSALM’s calculation, is P6.46 billion.

In August, PSALM got a new chief, a certain  Lourdes Alzona, a 20-year veteran of the National Power Corp. (which went bankrupt) and PSALM vice president for finance for seven years before her promotion.   Though she is PSALM chief executive officer until June 30, 2016 only, she decided to take a hard line against San Miguel.  She sued.  She collected SMC’s $60-million performance bond.

Stung, SMC went to court and got a temporary restraining order for 17 days which was extended by another 17 days.   SMC president Ramon S. Ang threatened to sue Alzona for harassment and everyone behind the harassment suit.

Indeed, the PSALM collection suit is nothing but harassment.  SMC had no reason to not to pay the P6.46 billion if it were a legitimate claim.

Back in 2010, San Miguel offered $871 million (P38.23 billion at the peso-dollar rate at that time) to administer Ilijan’s 1,200-mw power capacity —that is guarantee to buy its capacity and sell it to users like Meralco at the best price possible. 

Part of the capacity was to be sold also to the open market called Wholesale Electricity Spot Market where sellers of electricity haggled with buyers depending on the need and the supply situation.  This is how the P30,710 per kwh came about—during a period of severe shortage when no electricity was more expensive than paying a ransom price.

According to SMC officials, that period occurred only for about 30 days and apparently never occurred again.  But PSALM insists that should be the pricing for Ilijan’s electricity for a year.  “Do you believe there is a buyer at WESM who will pay P30,710 per kwh for electricity?,” asks an aghast Ang.  The going rate now at WESM is P2 per kwh.

Aside from paying the government P38 billion for the right to manage a plant that nobody wanted in 2010, SMC has also paid the government P144 billion (up to last August), representing power SPPC procured from Ilijan and sold to Meralco in the past five years.  That’s a total of P182 billion (about $4.136 billion at P44 to $1).

Please note that San Miguel, on its own, could have readily built a plant of Ilijan’s size (1,200 mw) for only $1 billion.  SMC paid $4 billion for a second-hand plant that should have cost SMC only $1 billion to build and own forever.  Ilijan is not even owned by SMC.  It is owned by KEPCO.  SMC is just an administrator.

Thus, a P6.46 billion “obligations” is small change compared to the P182 billion San Miguel has given the government in the past five years.   SMC has six more years to manage Ilijan or until 2022; so the government can expect  SMC to pay it P36 billion per year  or P216 billion in six more years.

“We do not make much money from Ilijan,” Ramon Ang winces.   “We have given the government P182 billion so far because we want to help the government,” he explains.

San Miguel is probably one of the most generous corporations, if not the most generous corporation in the Philippines.

Just a week ago, it agreed to sell a Central Luzon electric cooperative 300 megawatts per day of electricity at the unheard of concessional price of P3.20 per kwh.   The 300 mw will come from a newly finished clean coal power plant owned by San Miguel in Limay, Bataan.

If you check your electric bill, you are paying anywhere from P8 to P12 per kwh.  In effect, Ramon Ang has reduced electricity bill in Central Luzon by 70 percent.  This makes electricity in most of Central Luzon (except Bulacan which is a territory of Meralco) the cheapest in the land.    Power is about 20 percent of production cost of a factory.  If you reduce that by two-thirds so that power cost is only 7 percent of production cost, you attract investors and businesses in droves.  There will be more purchasing power in the hands of consumers which means greater demand for goods and services.

RSA has also offered the same P3.20 per kwh price for electricity to an Albay electric coop.   San Miguel also owns a third of the electricity provider in Olongapo.

So who is greedy?  PSALM.  Why is it greedy?  Think of 2016.


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