ERC rejects Meralco-SMC PSA over supply necessity concerns

From AB Capital's The Opening Bell: Three Moves

Event

The Energy Regulatory Commission (ERC) rejected Meralco's proposed 200MW baseload power supply agreement (PSA) with San Miguel Corp.'s (SMC) Sual Power Inc. (SPI), citing failure to establish the urgency and immediate necessity of the supply addition. SPI emerged as the lowest bidder in Meralco's competitive selection process with a bid of P4.2955/kWh, but the ERC noted that Meralco is still projected to have a 372MW supply surplus in 2026. While the regulator acknowledged that Meralco could face supply deficits from 2027 onward, it ruled that the need for the contract was not yet sufficiently immediate.

View

For Meralco (MER), we see limited earnings impact as generation costs are largely pass-through and the PSA was intended to address future supply needs. However, the decision delays the opportunity to lock in competitively priced baseload capacity ahead of its projected supply gap. For SMC, the rejection delays potential contracted revenue visibility from SPI, with the key question now being whether MER will revive the PSA or if SPI will need to seek alternative offtake, potentially through the spot market.

Catalyst

The key next step is Meralco's response and whether it will revise and resubmit the PSA, defer procurement, or pursue alternative supply arrangements. We will also watch whether the decision sets a broader precedent for future PSA approvals.

Action

The decision does not change our investment view on either name. MER remains one of our top picks, supported by its defensive earnings profile, regulated franchise, and strong earnings visibility. For SMC, the impact should be manageable at the group level, with SPI's offtake strategy the key watch point. The plant remains competitive given its operating track record and low-cost bid.

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