This Supreme Court decision clarifies the scope of power supply obligations under contracts involving privatized energy assets. The Court affirmed that SEM-Calaca Power Corporation (SCPC) is only required to supply 10.841% of MERALCO’s energy needs, capped at 169,000 kW at any given hour, based on the Asset Purchase Agreement (APA). This ruling confirms that the privatization of the power sector did not automatically transfer unlimited supply obligations to the new owners, and it respected the negotiated terms of the APA, providing clarity and stability in the energy market.

Calaca’s Capacity: Was the Power Plant’s Output Capped After Privatization?

The privatization of the National Power Corporation (NPC) assets aimed to reform the electric power industry, as envisioned in the Electric Power Industry Reform Act of 2001 (EPIRA). As part of this initiative, the Power Sector Assets and Liabilities Management Corporation (PSALM) was created to manage the sale of NPC’s assets. Among these assets was the 600-MW Batangas Coal-Fired Thermal Power Plant in Calaca, Batangas (Calaca Power Plant), which was eventually acquired by DMCI Holdings, Inc. (DMCI) and later transferred to SEM-Calaca Power Corporation (SCPC). The dispute arose from differing interpretations of Schedule W of the Asset Purchase Agreement (APA) between PSALM and SCPC regarding the latter’s obligation to supply electricity to MERALCO, a major power distributor.

PSALM argued that SCPC was obligated to supply the entire 10.841% of MERALCO’s energy requirements without any cap, effectively stepping into the shoes of NPC and PSALM. SCPC, on the other hand, contended that its obligation was limited to 169,000 kW at any given hour. The Energy Regulatory Commission (ERC) sided with SCPC, ruling that its obligation was indeed capped at 169,000 kW. The Court of Appeals (CA) affirmed the ERC’s decision, leading PSALM to elevate the case to the Supreme Court.

The Supreme Court’s analysis centered on interpreting the terms of the APA, particularly Schedule W, which outlined SCPC’s power supply contracts. Article 1370 of the Civil Code states that “[i]f the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.” However, when the terms are ambiguous, courts must look beyond the literal meaning to ascertain the parties’ true intent. In this case, the Court found that the figures 10.841% and 169,000 kW in Schedule W were indeed ambiguous, necessitating further interpretation.

The ERC, as affirmed by the Supreme Court, correctly interpreted the contract to harmonize its various stipulations. Article 1374 of the Civil Code mandates that “[t]he various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.” Here, the ERC reconciled the 10.841% requirement with the 169,000 kW figure to give effect to both provisions. By doing so, the ERC avoided an interpretation that would render either figure insignificant or lead to an absurd outcome.

Moreover, the Supreme Court considered the circumstances surrounding the execution of the APA. At the time of the sale, the Calaca Power Plant had a limited dependable capacity. It would be unreasonable to require SCPC to supply an unlimited amount of power to MERALCO when the plant’s capacity was constrained. “The reasonableness of the result obtained, after analysis and construction of the contract, must also be carefully considered.”

PSALM also argued that other stipulations in the contract, such as SCPC’s option to enter into back-to-back supply contracts, indicated that there was no cap on SCPC’s supply obligations. The Supreme Court rejected this argument, agreeing with the ERC’s explanation that SCPC’s responsibility to cover shortfalls only applied up to the 169,000 kW limit. Any additional shortfalls were the responsibility of NPC under its Transition Supply Contract (TSC) with MERALCO. The Supreme Court emphasized that “NPC and PSALM’s obligation to supply the entire energy contract to MERALCO, including the obligation to replace any curtailed energy, was not passed on or assigned to SCPC.”

The Court also acknowledged the ERC’s expertise in interpreting contracts within the energy sector. It is general practice among the courts that the rulings of administrative agencies like the ERC are accorded great respect, owing to a traditional deference given to such administrative agencies equipped with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters. Factual findings of administrative agencies that are affirmed by the Court of Appeals are generally conclusive on the parties and not reviewable by this Court.

The decision underscores the importance of clear and unambiguous contract drafting, especially in complex transactions like the privatization of energy assets. It also highlights the role of regulatory bodies like the ERC in resolving disputes and ensuring a stable and reliable energy supply. Finally, it reinforces the principle that contracts must be interpreted in a way that gives effect to all their provisions and avoids unreasonable or absurd outcomes.

FAQs

What was the key issue in this case?	The central issue was whether SEM-Calaca Power Corporation’s (SCPC) obligation to supply electricity to MERALCO was capped at 169,000 kW or required it to supply 10.841% of MERALCO’s total energy requirements without limit.
What did Schedule W of the APA specify?	Schedule W of the Asset Purchase Agreement (APA) outlined the power supply contracts assumed by SCPC, including the contract with MERALCO, listing both a percentage (10.841%) and a capacity (169,000 kW).
How did the ERC interpret Schedule W?	The Energy Regulatory Commission (ERC) interpreted Schedule W to mean that SCPC was obligated to deliver 10.841% of MERALCO’s energy requirements, but not exceeding a 169,000 kW capacity allocation at any given hour.
Why did the Supreme Court uphold the ERC’s interpretation?	The Supreme Court upheld the ERC’s interpretation because it harmonized all the provisions of the contract, avoided an absurd result given the Calaca Power Plant’s capacity, and respected the ERC’s expertise in energy matters.
What is the significance of Article 1374 of the Civil Code?	Article 1374 of the Civil Code states that contracts should be interpreted by considering all stipulations together, attributing doubtful ones with a sense resulting from the whole, which guided the ERC’s decision.
What was PSALM’s main argument?	PSALM argued that SCPC stepped into the shoes of NPC and PSALM, assuming the obligation to supply 10.841% of MERALCO’s energy needs without any capacity limit.
What was SCPC’s main argument?	SCPC argued that its obligation was capped at 169,000 kW, as indicated in Schedule W of the APA, and that PSALM’s interpretation would lead to an unreasonable outcome.
What responsibility did NPC have in supplying MERALCO?	Under the Transition Supply Contract (TSC), NPC was responsible for covering any shortfall in MERALCO’s energy supply beyond the 169,000 kW limit assigned to SCPC.
How does the dependable capacity of Calaca Power Plant factor into the decision?	The limited dependable capacity of Calaca Power Plant (330 MW) supported the interpretation that SCPC’s obligation was capped because it would be unreasonable to require SCPC to supply beyond the plant’s capacity.

This decision provides crucial guidance on interpreting power supply contracts in the context of privatized energy assets. By affirming the ERC’s interpretation, the Supreme Court ensures that the obligations of power suppliers are clearly defined and aligned with the practical realities of power plant capacity and contractual agreements. The ruling emphasizes the need for clarity in contract drafting and reinforces the authority of regulatory bodies in resolving disputes within the energy sector.

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Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION v. SEM-CALACA POWER CORPORATION, G.R. No. 204719, December 05, 2016