Legal basis and purpose of TRAC
- Section 43(f) of Republic Act No. 9136 (the Electric Power Industry Reform Act of 2001 or EPIRA) requires rates that allow recovery of just and reasonable costs to enable distribution utilities to operate viably.
- The ERC establishes the tax recovery adjustment mechanism to support transparent and reasonable electric power pricing under a regime of free and fair competition.
- The tax recovery adjustment mechanism is designed to achieve greater operational and economic efficiency.
- The mechanism is designed to ensure full recovery of all just and reasonable costs to enable ECs to operate viably.
- The mechanism is designed to maintain the quality, reliability, security and affordability of electric power supply.
Coverage: who must use the mechanism
- The Guidelines apply to all Electric Cooperatives (ECs) registered under Presidential Decree No. 269 where local franchise and business taxes are levied within their franchise area.
- The mechanism covers EC recovery of local franchise tax and business tax imposed by local government units (LGUs) within an EC’s franchise territory.
Key definitions for calculations
- “Act” means Republic Act No. 9136 (EPIRA).
- “Energy Regulatory Commission or ERC” means the regulatory agency created under Section 38 of the Act.
- “Electric Cooperatives or ECs” means distribution utilities organized and incorporated under Presidential Decree No. 269, as amended by Presidential Decree No. 1645 and Republic Act No. 6938 (the Cooperative Code of the Philippines).
- “Gross Receipts” means the total amount paid for distribution charges; for these Guidelines, gross receipt refers to total distribution-charge amounts from the time the unbundled rates were approved, or otherwise the total customer bill excluding receipts from NPC/TransCO and universal charges.
- “Distribution Charges” means distribution, supply, metering, and other charges/adjustments, including subsidy on lifeline charge, lifeline subsidy discount, and inter class cross subsidy charge.
- “Local Franchise Tax Rate” means the franchise tax rate imposed by provinces and cities on businesses enjoying a franchise under Sections 137 and 151 of Republic Act No. 7160 (the Local Government Code of 1991).
- “Business Tax Rate” means the business tax rate imposed by cities and municipalities under Sections 143 and 151 of Republic Act No. 7160.
Formulae for franchise and business tax recovery
- ECs must calculate the Franchise Tax and Business Tax Recovery Adjustment Charge using the formula in Section 2.1.1.
- Franchise Tax and Business Tax formula (2.1.1): FT = DC of the customer bill x (Ft + Bt).
- Under Section 2.1.1, FT means amount of taxes to be recovered in PhP.
- Under Section 2.1.1, DC means distribution charges in the customer bill in PhP, Ft means local franchise tax rate in %, and Bt means business tax rate in %.
- EC computation of local franchise tax and business tax must be based on the total distribution charges of the customer’s bill.
ERC approval and verification rules
- ECs must obtain ERC approval prior to recovering the tax from customers for the franchise and business tax rates imposed by LGUs.
- ECs must file a formal request with the ERC together with a certified true copy of a valid tax ordinance and other relevant data for verification.
- The ERC issues an order authorizing ECs to recover the approved tax rates from customers.
- The same approval and authorization procedure applies when LGUs impose a new rate for franchise and business taxes.
- Within thirty (30) days from submission of complete documents under Article IV (4.1), the ERC must verify the accuracy and validity of the LGU-imposed taxes for recovery from consumers.
- After verification, the ERC must issue an order confirming the franchise and business tax rates to be levied to customers.
- If the ERC fails to verify within the period prescribed, the submitted franchise and business tax rates are deemed final and confirmed.
- ECs must calculate and recover franchise and business taxes from the effectivity of these Guidelines.
Recovery of prior arrearages using TRAC
- The Tax Recovery Adjustment Charge (TRAC) mechanism applies to franchise and business taxes paid prior to the implementation or effectivity of the franchise and business tax formula in Article II (2.1.1).
- TRAC formula (2.1.2): TRAC = (Lftᵃ + Btᵃ) / S (where the formula text is written as TRAC = Lftᵃ + Btᵃ / S with Lftᵃ, Btᵃ, and S as defined below).
- TRAC means Tax Recovery Adjustment Charge in PhP per kWh, applied to the customer’s monthly billing until the total franchise and business taxes paid to the local government are fully recovered.
- Lftᵃ means local franchise tax arrearages (excluding penalty and surcharge) paid prior to the implementation of the approved franchise tax formula.
- Btᵃ means business tax arrearages (excluding penalty and surcharges) paid prior to the implementation of the approved franchise tax formula.
- S means projected kWh sales for a particular proposed recovery period, or as determined by the ERC.
- TRAC computation must undergo prior verification by the ERC.
- ECs may recover only franchise and business tax arrearages that are (1) paid and computed based on the TRAC formula, (2) based on a valid local tax ordinance, and (3) such that consumers are not charged with taxes imposed prior to the effectivity of the contract of service with the electric cooperative.
- TRAC operates until franchise and business tax arrearages have been fully recovered.
- ECs may recover TRAC only for arrearages computed based on distribution charges.
TRAC verification and confirmation deadlines
- Within sixty (60) days from the effectivity of the Guidelines, ECs must calculate TRAC using the TRAC formula.
- TRAC calculation must be accompanied by prior verification.
- Within six (6) months from the submission of complete documents under Article IV (4.2), the ERC must verify the accuracy and validity of the taxes imposed by LGUs and paid by ECs.
- After completion of verification, the ERC must issue an order establishing the amount per kilowatt-hour to be recovered for taxes computed under Section 2.1.2.
- If the ERC fails to issue an order within the deadline in the prior paragraph, TRAC as computed by ECs is deemed final and confirmed.
Billing requirements and line-item placement
- ECs must bill customers with the corresponding franchise and business tax charges from the effectivity of the Commission Order.
- Franchise and business taxes must be reflected as a separate line item in the customer’s bill in the areas where those taxes are levied.
- The billing structure includes, among others, a “Government Revenues” section that contains Local Franchise Tax (% of sub-total II & III), Business Tax (% of sub-total II & III), Tax Recovery Adjustment Charge, Value Added Tax, Universal Charges, and the resulting sub-total and Total Bill.
- The Government Revenues section must include Tax Recovery Adjustment Charge as a line item alongside the local franchise tax and business tax percentages.
Supporting documents and Notices of Complete Submission
- For franchise and business taxes imposed under Section 2.1.1, ECs must provide the ERC:
- a certified true copy of the local tax ordinance; and
- other relevant documents as may be required by the ERC.
- Upon receipt of the supporting documents under Article IV (4.1), the ERC issues a Notice of Complete Submission (NCS) within fifteen (15) days if submission is complete.
- If submission is deficient under Article IV (4.1), the ERC must notify the ECs of the deficiency.
- For franchise and business taxes computed under Section 2.1.2, ECs must submit proposed computations and the proposed period of recovery together with:
- a certified true copy of prior years’ Tax Assessment issued by LGUs;
- certified true copies of Local Tax Ordinances;
- certified true copies of Official Receipts;
- projected kilowatt-hours sales for the proposed recovery period; and
- other relevant documents as may be required by the ERC.
- Upon receipt of documents under Article IV (4.2), the ERC must issue an NCS within fifteen (15) days, or it must notify the EC of deficiencies.
Monthly reporting, verification, and carrying charges
- On or before the twenty-fifth day (25th day) of each month, ECs must submit to the ERC:
- sample bills by customer class; and
- a summary of tax imposition and collection for every locality in their franchise area for taxes computed under Article 2.1.1.
- Any over/under recovery from the verification process must be collected or refunded in the next billing cycle.
- On or before the twenty-fifth day (25th day) of each month, ECs must provide the ERC all collections related to Article 2.1.2 for the prior month.
- If total TRAC collection results in over recovery, the over recovery amount must be subjected to a carrying charge.
- The carrying charge must be based on the 91-day T-bill rates plus 300 points.
- The carrying-charge-adjusted over recovery must be refunded to consumers within the period prescribed by the ERC.
Administrative sanctions for guideline violations
- Any violation of any provision of the Guidelines is subject to the imposition of fines and penalties.
- Fines and penalties must be imposed in accordance with the ERC Guidelines to Govern the Imposition of Administrative Sanctions in the Form of Fines and Penalties Pursuant to Section 46 of Republic Act No. 9136, promulgated on May 17, 2002.
ERC exceptions and alternative mechanisms
- Where good cause appears, the ERC may allow an exception from any provision of the Guidelines.
- The exception must be in the public interest and must not be contrary to any law, rules, or regulations.
- If an EC has a valid reason not to strictly comply, the EC must submit within fifteen (15) days from the effectivity of the Guidelines its proposed alternative mechanism/formula.
- Recovery/refund resulting from the alternative mechanism/formula is allowed only after ERC approval.
Separability and effectivity
- If any provision of the Guidelines is declared unconstitutional or invalid by final judgment of a competent court, the remaining provisions continue in full force and effect.
- The Guidelines take effect on the fifteenth (15th) day after publication in a newspaper of general circulation.