Due process denied

The Energy Regulatory Commission (ERC) suffered a heavy blow late last month when the Court of Appeals ruled that ERC’s directive invalidating San Miguel Corp.’s notice to terminate two power supply agreements (PSAs) with Meralco are unconstitutional, being violative of the right to due process.

In its ruling handed down last June 27 on the consolidated petitions of South Premier Power Corp. (SPPC) and San Miguel Energy Corp. (SMEC), the CA’s 13th Division decided in favor of the SMC power subsidiaries as it annulled and set aside ERC’s controversial Sept. 29, 2022 order for having been issued with grave abuse of discretion amounting to lack or excess of jurisdiction.

The controversy stemmed from ERC’s denial of separate petitions filed by SPPC and SMEC jointly with Meralco for a provisional six-month increase in the fixed power rates as provided for in their respective PSAs with Meralco due to change in circumstances such as rising international coal prices brought about by the Russia-Ukraine conflict and the cessation of gas supply by the Malampaya consortium that adversely affected SMEC’s 1,200-megawatt Sual coal-fired power plant and SPPC’s natural gas power plant in Ilijan. The rates being proposed would allow SPPC and SMEC to recover only a small part of the additional operational costs.

Both PSAs covered a supply period of 10 years from Dec. 26, 2019 to Dec. 25, 2029 subject to extension with prior approval of the ERC.

On Aug. 5, 2022, Meralco informed the ERC that it received a notice of termination from SPPC and SMEC of both their PSAs.

The contractual termination was exercised by SPPC and SMEC due to the unexpected increase in supply costs amounting to P1.5 billion for SPPC and P3.75 billion for SMEC that have exceeded the threshold levels provided under the PSAs.

Then on Sept. 29, the ERC en banc denied both joint motions for price adjustment, saying that the fixed price nature of their PSAs is meant precisely to protect consumers from market volatilities due to external factors like increases in fuel cost and that under the PSAs, SPPC and SMEC must assume all risks attendant to market conditions and economic realities.

Although not subject of the case, the ERC, to everyone’s surprise, ordered SPPC, SMEC and Meralco to continue enforcing the terms of the PSAs and preserve. The regulatory body said that while it may appear that the parties have an absolute option to terminate the PSAs by mutual agreement, PSAs are contracts imbued with public interest as electricity is a basic necessity that must be supplied in the least cost manner.

On the change of circumstances (CIC) provisions in their respective PSAs with Meralco being invoked by SPPC and SMEC, the ERC held that there is nothing in the enumeration of instances in the definition of CIC that contemplates abrupt or sudden increases in costs of operations.

It has been observed that this was the first time that the ERC was divided on an issue brought before it, with the ERC chairman coming in to break the tie. The dissenting minority in fact voted to grant the motions filed by SPPC, SMEC and Meralco on the ground that the PSAs allow applicants to claim a temporary price adjustment for a specific period bases on a CIC, that based on evidence there was CIC that warranted a price adjustment, and that based on rate impact simulations presented before the ERC including one by Meralco and by ERC’s own regulatory operations service that a denial of the price adjustment would in fact expose consumers to unknown and higher rates than the one being asked for not only in the near term but until 2029.

To correct a wrong committed against SPPC and SMEC, the CA last June 27 not only annulled and set aside ERC’s order but also granted the motions for price adjustment.

In its ruling, the appellate court pointed out that ERC’s order invalidating the notice of termination given by SPPC and SMEC and directing Meralco to preserve the PSAs effectively denied them the right to due process.

It emphasized that the validity of the notice of termination was not raised as an issue in the proceedings before the ERC. “When the ERC ruled on an issue that was clearly not submitted by the parties for adjudication before it, petitioners’ right to due process was violated,” the CA said.

The court also noted that the determination of the validity of the notices of termination of the PSAs is not within the scope of jurisdiction of the ERC, but instead must be referred to the proper tribunal in accordance with the arbitration clause in the PSAs. “When the majority of the ERC exercised adjudicative powers upon a matter that should have been brought to an arbitral tribunal, it evidently did so with grave abuse of discretion,” the CA pointed out.

It added that when these notices were served, SPPC and SMEC were validly exercising their rights to terminate the PSAs and therefore the court is also without authority to compel them to continue being parties to the agreements.

The CA likewise explained that the issuance of the notice of gas restriction and the extraordinary surge in fuel costs brought about by the coal export ban and Russia’s invasion of Ukraine amount to a change in circumstance as contemplated in the PSAs, both of which warrant a price adjustment being changes or variations that are abrupt and extraordinary.

It also emphasized that contrary to ERC’s claim, PSAs are not financial contracts and that by executing the same, SMEC and SPPC did not assume all risks, especially those that trigger the CIC provision.

Had ERC granted the petitions last Sept. 29, 2022, then the six-month staggered period for the increase would have been over last March or April, and Meralco consumers would have been enjoying today lower electricity rates as the PSAs would have been preserved, not terminated. Now, because of ERC’s flawed ruling, we all have to suffer because Meralco now has to get power at much higher rates from other sources.

The issue is however far from over. ERC chief Monalisa Dimalanta has in fact sought guidance from the Office of the Solicitor General on the best legal recourse, filing a motion for reconsideration being one of them.

She has also described the CA decision as unfortunate and disconcerting, even as she emphasized that the ERC remains committed to the rule of law in protecting the consumers.

Again, the ERC seems to have forgotten that it is mandated not only to protect the consumers (which it has failed to do so in this particular case) but also other stakeholders, and to promote competition and encourage market development and balance the interests of all stakeholders. It is also mandated by law to be an independent electric power industry regulator, which has hardly been the case lately.

For comments, e-mail at [email protected]