G.R. No. 191150 - National Association of Electricity Consumers for Reforms vs. Manila Electric Co.

MERALCO, a major electricity utility, initially filed an application for the revision of its current rate schedules and appraisal of its properties with the Energy Regulatory Board (ERB) on April 14, 2000 (ERB Case No. 2000-57).
During the pendency of that case, the Electric Power Industry Reform Act of 2001 (EPIRA) was enacted, which abolished the ERB and created the Energy Regulatory Commission (ERC), directing all electric distribution utilities to file applications for approval of their unbundled rates with the new commission.

MERALCO subsequently filed for approval of its unbundled rates with the ERC, consolidating its pending cases into ERC Case No. 2001-646.
Initially, the ERC applied the Rate on Return Base (RORB) methodology, which sets rates based on historical costs plus a reasonable rate of return, as evidenced by its Decision in March 2003 fixing the rate of return (first at 12%, later revised to 15.5%).
The matter reached the Supreme Court via separate petitions (MERALCO’s and the ERC’s), culminating in the provisional approval of the rates in the 2006 Lualhati decision, pending a comprehensive audit by the Commission on Audit (COA).

Adoption and Implementation of the Performance-Based Regulation (PBR) System

After extensive public consultations, the ERC signaled a shift from the RORB to the Performance-Based Regulation (PBR) methodology via Resolution No. 4, Series of 2003, and later implemented this through the Distribution Wheeling Rate Guidelines (DWRG) promulgated in Resolution No. 12-02, Series of 2004.
Under the PBR methodology, rates are determined through a forecast-based Annual Revenue Requirement (ARR) using a Building Block analysis with a classical weighted average cost of capital (WACC). This ARR is then used to derive the Maximum Annual Price (MAP).
MERALCO, as one of the first entrants under PBR alongside other utilities, filed an application on September 1, 2006, for the approval of its ARR and performance incentive scheme for the regulatory period 2007-2011 (ERC Case No. 2006-045 RC).

The ERC conducted formal public consultations and issued a Draft Determination on May 16, 2007, incorporating stakeholder inputs to evaluate MERALCO’s proposals on rates and performance incentives.
Despite ample opportunity for intervention, petitioners (including NASECORE, FOVA, and FOLVA, among others) and other stakeholders largely failed to present evidence or file timely petitions for intervention during these hearings.
After considering all evidence and comments, the ERC rendered its Decision on August 30, 2007 (with an attached Final Determination) approving MERALCO’s application with substantial disallowances and reductions, which later became final after the denial of a reconsideration request on December 5, 2007.

Pursuant to ERC directives, MERALCO filed separate applications on January 11, 2008, and April 1, 2008 for translating the MAP into distribution rates for different customer classes for the first and second regulatory years (ERC Case Nos. 2008-004 RC and 2008-018 RC).
On May 29, 2008, the ERC approved with modifications these separate applications and consolidated them into one price reset starting July 1, 2008, due to delays in issuing the final determination for ARR.
The ERC later modified its decision on April 13, 2009, to adjust the rate computations—most notably eliminating the corporate income tax (CIT) component—after MERALCO manifested its intention to defer its recovery to protect consumers.

Petitioners and intervenors/oppositors, including various sector stakeholders, challenged the ERC’s shift to the PBR methodology, its approval of MERALCO’s rates, and the absence of a required comprehensive COA audit as mandated in earlier decisions (notably Lualhati).
The petitioners contended that the new PBR system was inconsistent with EPIRA provisions designed to ensure reasonable electricity prices and that excessive profits were being recorded by MERALCO.
The CA, in its January 29, 2010 Decision, upheld the ERC rulings, dismissing both the collateral attack on the regulatory shift and the demand for a COA audit, citing that the technical and factual findings were within the administrative agency’s exclusive authority.

The case eventually reached the Supreme Court on a petition for review on certiorari, focusing on whether the CA correctly upheld the ERC ruling on the approval and modification of MERALCO’s rate applications under the PBR methodology.
Central to the petition was the argument that the procedural and substantive aspects of the ERC’s new rate-setting mechanism were flawed and that the CA erred in not requiring further audit or reconsideration of earlier methodologies.

Whether or not the Court of Appeals correctly upheld the ERC’s ruling approving and modifying MERALCO’s applications for translating the ERC-approved ARR into distribution rates under the PBR methodology for the first and second regulatory years of the 2007-2011 period.

Whether the ERC’s shift from the RORB to the PBR methodology is inconsistent with the EPIRA, particularly concerning the mandate to ensure a reasonable price of electricity.
Whether the ERC should have awaited a complete audit by the COA (as directed in the earlier Lualhati decision) before approving MERALCO’s rate applications under the new PBR framework.
Whether the approved rates, calculated under the PBR system, are unreasonable and unjustified, resulting in excessive profits for MERALCO.

Whether the petition, which focuses on factual issues regarding cost recovery and performance incentives, should be entertained under a Rule 45 petition that is limited to questions of law.
Whether the failure of petitioners to raise objections during the public consultation and initial rate-setting proceedings precludes their challenge to the adopted methodology and approved rates.