ABS-TV5 Partnership, SMC rate hike petition, and Budget 2023

* My column in BusinessWorld last August 29.
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SMC PETITION FOR POWER INCREASE

These two recent reports in BusinessWorld might send another chill down the spines of consumers in the Meralco franchise area:

“SMC power unit says losses hit P15B, seeks rate hike” (Aug. 2)

“SMC unit warns of power price surge starting Oct.” (Aug. 24).

San Miguel Corp. (SMC) has two power generation companies (gencos) — San Miguel Energy Corp. (SMEC), a coal plant in Sual, Pangasinan, and South Premiere Power Corp. (SPPC), a natural gas plant in Ilijan, Batangas — which it declared had incurred combined losses of P15 billion: P10 billion in 2021, and P5 billion in January-May 2022.

SMEC committed 330 MW and SPPC committed 670 MW, for a total of 1,000 MW, to Meralco from December 2019 to December 2029. SPPC has asked the Energy Regulatory Commission (ERC) for a rate increase from January to May 2022 of P0.80/kWh (from P4.30 to P5.10/kWh), and SMEC asked for a big increase of P4/kwh (from P4.30 to P8.30/kWh).

SMC issued notices of termination of their power supply agreements (PSAs) to Meralco, blaming the unexpected “change in circumstance,” especially the global surge of oil and coal prices. If the ERC will not give them the requested relief, the termination will be effective on Oct. 4 or five weeks from now.

SMC’s petition is understandable — but if granted by the ERC it can be dangerous. For two reasons.

One, it will set as a bad precedent that PSAs and contracts can be revised and amended depending on one’s corporate influence. Bidders can shrewdly offer a low price to ensure winning a supply contract and, when things go bad, lobby to change the contract. If granted by the ERC, they must also grant PSA revisions and rate hike adjustments of other gencos that will come to them for similar reasons.

Two, both SMEC and SPPC benefitted from previous low fuel prices, with combined net income of P15.75 billion in 2020, and yet there were no petitions to lower their contract prices. Other gencos of First Gen (EDC, FGPC), Aboitiz, even NPC were less lucky in 2020 (see Table 2).

So, both gencos were rewarded when fuel prices were low and they must be rewarded again via relief when fuel prices are high. Since SMC is a very influential conglomerate in the country, the ERC or the courts may likely grant their petition. If so, there are two possible compromises.

One, any change in existing contract rates must be based on marginal cost, not full recovery; and keep the relief to bare a minimum, just enough to continue operations and not close down.

Two, the gencos that are granted relief in contract amendment may be disqualified from participating in future competitive selection processes (CSP) as they have a track record of petitioning to change rules midway.

BUDGET 2023 AND HIGH INTEREST PAYMENT

The proposed budget for 2023 is huge — P5.27 trillion — but the good thing is that it is just a 4.9% increase over this year’s budget, which is 9.2% higher than 2021’s budget. Interest expenses remain high — from P300+ billion a year few years ago to P500+ billion a year in 2022 and 2023. It comprises 10-11% of the total budget.

Salaries, allowances, and bonuses for government personnel kept rising in 2020 and 2021 even when many workers and professionals lost their jobs and businesses during the two-year COVID-19 lockdowns. Personnel services including pensions will reach P1.6 trillion in 2023.

There is high inequality in the pensions of military and uniformed personnel (MUP) vs. civilian personnel. In 2014, the MUP pensions were 18 times larger than the pensions of civilians. This further rose to 22 times in 2016 and 2021, 41 times in 2022, and are projected to decline to 17 times in 2023 (see Table 3).

The Department of Budget and Management’s Rightsizing program for the various agencies will be important. Government size must taper down, giving relief to taxpayers. It is good that many of President Ferdinand Marcos, Jr.’s campaign pronouncements of many other subsidies are not being pushed through by the economic team.