Title
National Association of Electricity Consumers for Reforms, Inc. vs. Energy Regulatory Commission
Case
G.R. No. 226443
Decision Date
Oct 8, 2019
NASECORE challenged ERC's approval of MERALCO's rates, citing COA audit findings of excess profits. SC remanded issues of recoverable expenses, rate base valuation, and potential refunds to ERC for review.
partial grant
petition
statutory mandate

Case Summary (G.R. No. 226443)

Factual Background

The litigation arose from this Court’s directive in Lualhati that the ERC seek COA assistance in conducting a complete audit of MERALCO’s books, records and accounts in connection with provisionally approved rate increases and unbundled rates. Pursuant to that directive, the ERC requested COA to audit whether MERALCO’s implementation of approved distribution rates produced a fair return and whether generation cost recovery had been revenue-neutral. COA conducted a post-audit and transmitted Special Audits Office Report No. 2009-01 on 12 November 2009.

COA Audit and Findings

The COA audit covered test years 2004 and 2007 and employed the Return on Rate Base (RORB) cost-based methodology. COA identified what it characterized as excess or deficiency revenues under three different rates of return: the ERC-approved fifteen point five zero percent based on MERALCO’s 2000 WACC; MERALCO’s actual WACC for 2004 and 2007; and a twelve percent reasonable return established in jurisprudence. COA also disallowed certain operating expenses, including portions of employee pension and benefits, as not reasonable and necessary for distribution service. COA further excluded certain property and equipment from the rate base as not used and useful during the test periods.

Proceedings Before the ERC

The ERC invited comments and received submissions from Genaro Lualhati, NASECORE and MERALCO. NASECORE urged that MERALCO’s provisionally approved fifteen point five zero percent return was excessive compared to a twelve percent benchmark, argued that MERALCO had over-recovered and sought refunds, and requested that further rate adjustments be held in abeyance pending comprehensive audits. MERALCO defended the recoverability of pension and benefits, asserted that ERC’s rate-setting discretion permitted a WACC-based return, and objected to COA’s application of PBR disallowances to a RORB framework. In its 21 June 2011 Order, the ERC affirmed its earlier decision and declared MERALCO’s approved unbundled rates final, rejecting wholesale adoption of COA’s findings on the grounds that COA applied different rate-making principles, test years and accounting methodologies and that adoption would amount to retroactive rate-making.

Court of Appeals Decision

On appeal, the Court of Appeals affirmed the ERC. The CA found that the ERC had complied with this Court’s directive in Lualhati and observed that a COA audit is not a prerequisite to the ERC’s exercise of its rate-fixing powers. The CA concluded that the ERC was not obliged to accept COA’s conclusions, particularly because COA used different test years and accounting methods from those employed in MERALCO’s rate application.

Issues Presented to the Supreme Court

NASECORE raised four principal issues: whether the ERC accorded proper weight to COA’s findings; whether MERALCO’s operating expenses, specifically pension and benefits, were recoverable from consumers; whether certain properties should have been included in the rate base; and whether amounts recovered in excess of lawful limits should be treated as “over recovery” and refunded to consumers.

Parties’ Contentions Before the Supreme Court

NASECORE contended that COA’s audit demonstrated over-recovery and that ERC should have given COA’s findings controlling weight. MERALCO, COA and the ERC, through the Office of the Solicitor General, defended the ERC’s rate-making determinations. Movant-intervenors sought leave to intervene on grounds of transcendental importance and potential direct impact on other distribution utilities should COA audits be deemed prerequisite to rate approvals.

Supreme Court’s Analysis of COA’s Statutory Authority

The Court examined Section 38 of the Government Auditing Code and the corresponding provision in the Administrative Code of 1987, which expressly authorized COA to examine and audit public utilities “in connection with the fixing of rates of every nature.” The Court reiterated that Lualhati had directed the ERC to request COA assistance, but that a COA audit is not a mandatory precondition to ERC’s rate-setting power. The Court nonetheless emphasized COA’s statutory mandate and that its audit results should be considered by ERC in rate proceedings.

Supreme Court’s Analysis of Rate Regulation Principles

The Court reviewed the basic elements of rate-making—rate of return, rate base, and the resulting revenue requirement—and summarized the traditional R = O + (V − D) r formula. The Court contrasted valuation and regulatory methodologies, explaining RORB and Performance-Based Regulation (PBR), and noted ERC’s shift toward PBR for wheeling rates and MERALCO’s early adoption of PBR features. The Court surveyed international and domestic jurisprudence on asset valuation, including the historical cost, present market value, and reproduction cost approaches, and discussed the Optimized Depreciated Replacement Cost (ODRC) method that the ERC had endorsed for certain guidelines.

Analysis on Operating Expenses and Assets in Rate Base

The Court found that ERC failed to adequately consider COA’s factual findings concerning operating expenses and asset utility. COA had not disputed that pension costs could be necessary expenses, but it required MERALCO to justify the amounts with documentary support. COA also disallowed certain nonessential assets—such as a museum, theater and recreational facilities—from inclusion in the rate base on the ground they were not incidental to distribution operations and could be dispensed with without impairing service. The Court agreed that consumers should not bear costs unrelated or not primarily related to distribution service and directed ERC to formulate parameters on passthrough of such expenses.

Analysis on Valuation Methodology and Least Cost Manner

The Court held that under EPIRA a distribution utility had the obligation to supply electricity “in the least cost manner,” and that the statute’s standards superseded prior inconsistent standards. The Court concluded that ERC’s adoption of present or replacement cost valu

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