Priority procurement of capacity generated from indigenous Malampaya gas had been directed by the Energy Regulatory Commission (ERC) in the power purchase agreement (PPA) underwritten by Manila Electric Company (Meralco) with First Gen Corporation of the Lopez group.

Owing to that ruling, the regulatory body stipulated that the Meralco supply deal shall only use imported liquefied natural gas (LNG) if there is shortfall or shortage of Malampaya gas that needs to be fed into the 1,000-megawatt Santa Rita and 500MW San Lorenzo plants of First Gen.

“The Commission resolved that LNG may be used by FGPC (First Gas Power Corp) and FGP Corp as an alternative fuel source to run the said plants, but only in case of shortage or unavailability of natural gas supply in the Malampaya field,” the ERC has reiterated.

First Gas is the corporate vehicle and operating entity for the Santa Rita plant; while FGP Corp is the corporate entity that owns and operates San Lorenzo plant – both of which are gas-fired generating assets of First Gen.

The ERC order established that shortage of gas supply from the country’s Malampaya field would constitute a ‘force majeure event’, and that is also a trigger for the First Gen plants to shift to LNG use.

ERC Chairperson Monalisa C. Dimalanta said “we have consistently ruled that if recovery of certain costs have no basis under the PPAs or power supply agreements, these cannot be passed on to end-users.”

She expounded that “DUs remain as regulated entities and there are basic regulatory frameworks that must be observed in all their dealings. This obligation cannot be taken lightly as it goes into the core of the privilege under the franchises granted by legislature to DUs.”

The ERC chief qualified that if the intent of First Gen is to use LNG as supplemental fuel during normal operations – not just an alternative fuel during force majeure event – then there is a need to amend the corresponding PPAs previously cemented between Meralco and First Gen.

The ERC verdict further stated that “while the pass-through to customers and Meralco’s payment to FGPC and FGP of the costs of LNG during commercial operations is allowed, recovery shall be based only on the landed cost, subject to verification by the Commission.”

It added that “any cost other than the landed cost of LNG - such as the additional fixed costs resulting from storage, testing, and commissioning of LNG facilities -- are not contemplated under the PPAs. Thus, allowing these requires an amendment to the PPAs for which the parties may first seek proper approval from the Commission in a separate application to allow recovery from consumers.

The regulatory body specified that its decision stemmed from Meralco’s application seeking the ERC’s approval on the pass-on to consumers for the recovery of LNG fuel costs used in the electricity generation of the First Gen plants – specifically those utilizing during commissioning and testing up to the commercial operations phase of the fuel shift.

The bid for cost recovery had been anchored on the new gas sale and purchase agreement (GSPA) that First Gen had inked with its gas supplier – primarily with Prime Energy which is the new operator of the Malampaya gas field.

In its filing with the ERC, Meralco argued that “FGPC and FGP are allowed to use other sources of gas other than from the Malampaya field, provided that the same is under competitive price and supply terms.”

Relative to that, the Commission rendered that “the subject PPAs allow for the supply from other sources of gas”, but only in cases of a ‘force majeure’ event’ – particularly a shortage of gas production from the Malampaya field.