Republic vs. Manila Electric Company

Parties and Setting

MERALCO and NAPOCOR entered into the CSE on November 21, 1994, with an effective term for ten years starting January 1, 1995. The CSE required MERALCO to pay minimum monthly charges even in years when MERALCO actually drew electric power and energy below the minimum quantities stipulated for those years.

In 2002, 2003, and 2004, MERALCO drew less than the CSE minimum quantities due to circumstances described as beyond the reasonable control of the parties. MERALCO did not pay the minimum monthly charges and instead paid only charges corresponding to the actual power and energy taken. In response, NAPOCOR served claims for the contracted but undrawn power and energy beginning with the billing month of January 2002. MERALCO objected and also served notices, including a notice of termination of the CSE.

Factual Background: The Settlement Agreement and Its Regulatory Approval Mechanism

MERALCO advanced counterclaims against NAPOCOR, including losses allegedly caused by NAPOCOR’s delayed construction of transmission lines that prevented MERALCO from fully dispatching contracted electricity with independent power producers (IPPs), and unrealized revenues allegedly stemming from NAPOCOR’s continued supply of electricity to directly connected customers within MERALCO’s franchise area in alleged violation of the MERALCO franchise and the CSE.

Because the parties recognized that delays in resolving their dispute would be inimical to public interest, MERALCO and NAPOCOR agreed to undergo mediation. They appointed Ambassador Sedfrey A. Ordonez and Antonio V. del Rosario as mediators. The mediation required about 20 meetings, during which NAPOCOR and government participation included high-level officials such as then Energy Secretary Vincent S. Perez, Jr. and PSALM President Edgardo M. del Fonso.

The mediation resulted in the execution on July 15, 2003 of a settlement entitled “An Agreement Resolving The Issues In Mediation Between The National Power Corporation And The Manila Electric Company In Regard To The 1994 Contract For The Sale Of Electricity”, referred to as the Settlement Agreement. The Settlement Agreement covered charges connected with Section 2.1 (Contract Demand and Contract Energy of MERALCO) in relation to Section 5.2 (Transmission Service) and Section 7 (Direct Connection within MERALCO’s franchise area) under the CSE.

Under the Settlement Agreement, MERALCO agreed to pay NAPOCOR P27,515,000,000.00, an amount corresponding to the value of the difference between the aggregate contracted energy for 2002, 2003, and 2004 on one hand, and on the other the total energy MERALCO actually purchased from January 2002 until April 30, 2003, plus the energy MERALCO was scheduled to purchase thereafter up to December 31, 2004. NAPOCOR reciprocated by agreeing to grant MERALCO credits valued at P7,465,000,000.00 for delayed completion of transmission facilities and for energy corresponding to NAPOCOR’s sales to directly connected customers within MERALCO’s franchise area. Consequently, the net amount payable by MERALCO to NAPOCOR was reduced to P20,050,000,000.00.

Subsequently, from the execution of the Settlement Agreement until December 31, 2004, MERALCO took further electricity and made payments exceeding the parties’ estimate. The net amount due under the Settlement Agreement was further reduced to about P14,000,000,000.00.

The Settlement Agreement contained a pass-through provision allowing MERALCO to pay NAPOCOR the net settlement amount from collections recovered from MERALCO’s consumers once the ERC approved the pass-through. The agreement contemplated payment over a five to six-year period starting with the first billing month immediately following ERC approval of the recovery mechanism, ending 60 months after the last billing month.

The Settlement Agreement was implemented in coordination with regulatory approval. Under Section 3.1, it took effect upon ERC approval of MERALCO’s recovery of the settlement amounts from consumers, for which the parties filed a joint petition with the ERC. On April 15, 2004, NAPOCOR and MERALCO filed their joint application in the ERC seeking approval of the pass-through and provisional authority to implement it subject to final resolution after hearing.

ERC Proceedings and the OSG’s Intervention

Hearings on the joint application were conducted from July 22, 2004 until October 7, 2005, with NAPOCOR represented by counsel designated by the OSG. On July 10, 2006, MERALCO submitted its memorandum and the case was deemed submitted for resolution.

On May 13, 2008, almost two years after submission for resolution, the OSG filed with the ERC a motion for leave to intervene, attaching an opposition challenging the validity of the Settlement Agreement. In light of the opposition, the ERC suspended proceedings and deferred approval of the joint application.

This regulatory development prompted MERALCO to initiate on November 23, 2009 an action for declaratory relief in the RTC in Pasig: Special Civil Action No. 3392.

Trial Court Proceedings: Motions to Stay, Arbitration Demand, Pre-Trial, and Waiver

On August 20, 2010, the petitioner filed in the RTC its comment on MERALCO’s petition for declaratory relief, praying for a stay of proceedings and for MERALCO and NAPOCOR to be directed to resort to arbitration. On September 16, 2010, the OSG representative appeared and moved to suspend proceedings, but the RTC denied the motion. On September 30, 2010, the OSG filed a motion to dismiss or stay and to refer the parties to arbitration. On October 28, 2010, the OSG filed an urgent supplemental motion to cancel the hearing scheduled for November 4, 2010.

The RTC issued its first assailed order on November 3, 2010, denying the OSG’s motions to dismiss or stay and to refer the parties to arbitration. The RTC ruled that MERALCO and NAPOCOR were not required to undergo arbitration because the arbitration clause invoked by the OSG was found in the CSE, while the RTC case for declaratory relief concerned the Settlement Agreement. It further found no unsettled dispute arising from the CSE requiring arbitration, and noted that the parties to the Settlement Agreement had not requested arbitration for disputes arising from the Settlement Agreement. It also held that the OSG had no standing to demand arbitration because it was not a party to the Settlement Agreement or the CSE.

The RTC also reasoned that the ERC had itself ruled that issues raised by the OSG in earlier proceedings were outside its jurisdiction, allowing the RTC to resolve the issues presented in the declaratory relief action.

On November 4, 2010, pre-trial was initially held, but the RTC reset it through its second assailed order due to the OSG’s non-appearance. The RTC then scheduled pre-trial for November 24, 2010. The OSG filed on November 22, 2010 a motion to cancel the pre-trial and a motion for inhibition. It also brought to the CA C.A.-G.R. SP No. 116863, seeking certiorari, prohibition, and mandamus, and requesting a temporary restraining order (TRO) and writ of preliminary injunction (WPI). The OSG alleged grave abuse of discretion, including refusal to inhibit, refusal to compel arbitration, proceeding with pre-trial, and declaring the petitioner in default while also deeming it to have waived the right to participate and present evidence.

During the hearing of November 24, 2010, the OSG’s representatives argued for cancellation of the pre-trial and claimed judicial bias in favor of MERALCO. The RTC denied the motion to cancel the pre-trial and declared the petitioner to have waived its right to participate in pre-trial and to present evidence in its behalf.

Court of Appeals Proceedings

The CA granted the TRO on December 1, 2010, and granted the WPI on February 3, 2011, enjoining the RTC judge from conducting further proceedings in Special Civil Action No. 3392 and from issuing orders that would render the case moot and academic during the pendency of C.A.-G.R. SP No. 116863.

In its decision promulgated on October 14, 2011, the CA denied both the original and supplemental petitions and upheld, in effect, the RTC’s interlocutory orders of November 3, 2010 and November 4, 2010, as well as the pre-trial order of November 24, 2010. The CA ordered the RTC to proceed with trial in Special Civil Action No. 3392 and to resolve the case with dispatch. The CA denied the petitioner’s motion for reconsideration on April 25, 2012.

Issues Raised on Review

In seeking reversal through a petition for review on certiorari, the petitioner argued that the CA erred in proceeding despite alleged fundamental issues at the heart of the controversy. It urged that (1) disputes between MERALCO and NAPOCOR should be resolved through arbitration rather than mediation under the arbitration agreement in the CSE, (2) the RTC lacked jurisdiction over the subject matter, and (3) the RTC’s actions violated its rights, including alleged partiality warranting inhibition and the impropriety of proceeding with pre-trial and declaring waiver despite the filing of its certiorari petition. The petitioner also advanced substantive attacks on the Settlement Agreement, including claims that it was grossly disadvantageous to the government, that the pass-through provision contravened law, morals, public interest, and public policy, and that the Settlement Agreement was entered into without OSG participation and legal guidance.

Supreme Court’s Disposition: Mootness Due to the Merits Decision

The Supreme Court denied the petition and affirmed the CA. It first held that the petition’s challenge to interlocutory orders had become moot and academic because the RTC had already rendered a decision on the merits in Special Civil Action No. 3392 on May 29, 2012, granting MERALCO’s petition for declaratory relief and declaring the Settlement Agreement valid and binding, while reserving the pass-through provision for consideration and approval of