SC Champions Consumer Rights, Orders ERC to Review its Approval of MERALCO’s Unbundled Rates

October 9, 2019

The Supreme Court (SC), during its En Banc session on October 8, 2019 and in a decision penned by Senior Justice Antonio T. Carpio, voided the adoption by the Energy Regulatory Commission (ERC) of the current or replacement cost in the valuation of Manila Electric Company (MERALCO)’s regulatory asset base.

In the case of National Association of Electricity Consumers for Reforms, Inc., Petitioner, vs. Energy Regulatory Commission, et al. Respondents (G.R. No. 226443), the Court, partially granted NASECORE’s petition, also remanded the case to the ERC to determine the valuation of MERALCO’s regulatory asset base, as well as the parameters whether expenses that are not directly and entirely related to the operation of a distribution utility shall be passed on wholly or partially to the consumers, in order that electricity shall be provided to consumers “in the least cost manner.”

The case stemmed from the petition for review on certiorari filed by NASECORE assailing the Court of Appeals (CA) decision dated February 29, 2016 and Resolution dated August 18, 2016, which affirmed ERC Orders dated June 21, 2011 and February 4, 2013.

The Court held that ERC’s order was in violation of its statutory mandate to approve rates that will provide electricity to consumers “in the least cost manner.” Thus, it remanded to ERC the case for determination of a reasonable and fair valuation of the regulatory asset base that will provide electricity to consumers “in the least cost manner.”

In its June 21, 2011 Order, the ERC affirmed its findings and conclusion in its March 20, 2003 Decision and Order dated May 20, 2003, and declared MERALCO’s approved unbundled rates final. The ERC held that the Commission on Audit (COA)’s findings of “excess revenues” or “over-recovery” on the part of the MERALCO were due to the following factors of the application of the disallowances under MERALCO’s Performance Based Rate (PBR) application to its Return on Rate Base (RORB) application, and the calculation of MERALCO’s revenues using historical costs of the assets and a 12% RORB; and 3) the calculation of MERALCO’s disallowances and revenues without regard to incrementals.

The ERC found that COA’s application of the disallowances under MERALCO’s PBR application to its RORB application was not supported by established rules on rate-making, and that it was a clear violation of the principle against retroactive rule-making, which prohibits the adjustment of rates previously fixed by the regulatory body following a prescribed procedure. The ERC also found that COA’s calculation of MERALCO’s revenues using the historical costs of the assets and a 12% rate of return is contrary to existing laws and jurisprudence, which allows the use of present market value in fixing the rates to be applied prospectively and the use of a Weighted Average Cost of Capital (WACC) in determining the reasonable return to which the utility is entitled. The ERC likewise found that COA’s calculation cannot be adopted because it failed to take into account the incrementals, and the revenues for 2000 should not be compared to revenues for 2004 and 2007 to determine whether it was reasonable.

NASECORE filed a motion for reconsideration but the same was denied for lack of merit by the ERC in its February 4, 2013 Order. NASECORE elevated the case to the CA, which denied NASECORE’s appeal and subsequent motion for reconsideration. The CA held that the ERC dutifully complied with the Court’s Order in the 2006 case of Manila Electric Company, Inc. v. Lualhati (539 Phil 509). The CA held that conduct of a COA audit was not a requisite for the ERC’s exercise of its rate-fixing powers, and that the ERC was not bound to accept and adopt any finding that the COA audit may come up with.

In partially granting the petition, the SC found that the ERC failed to properly consider COA’s findings as well as to comply with its statutory mandate to approve a rate that provides electricity to consumers “in the least cost manner” as expressly provided in ERC’s charter.

Section 38 of the Government Auditing Code of the Philippines and Book V, Title I, Subtitle B, Chapter 4, Section 22 of the Administrative Code of 1987 specifically authorizes COA to examine accounts of public utilities in connection with the fixing of rates of every nature.

The Court said that MERALCO and other electricity distribution utilities are monopolies that are regulated by the State, particularly on the rates they charge consumers. The same rationale in regulating power acquisition costs by distribution utilities applies to the allowable depreciation of capital assets by distribution utilities in the present case.

The Court further said that considering the case was remanded to the ERC, movant-intervenors Clark Electric Distribution Corporation, et al. can raise the issues raised before this present petition with the ERC instead.

The Supreme Court Public Information Office will be posting a copy of the decision in the SC website once it receives the official copy from the Office of the Clerk of Court En Banc. ###