RP represented by ERB vs Manila Electric Company

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G.R. No. 141314 November 15, 2002

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY ENERGY REGULATORY BOARD petitioner,
vs.
MANILA ELECTRIC COMPANY, respondent.

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G.R. No. 141369 November 15, 2002

LAWYERS AGAINST MONOPOLY AND POVERTY (LAMP) consisting of CEFERINO PADUA, Chairman, G. FULTON ACOSTA, GALILEO BRION, ANATALIA BUENAVENTURA,
PEDRO CASTILLO, NAPOLEON CORONADO, ROMEO ECHAUZ, FERNANDO GAITE, ALFREDO DE GUZMAN, ROGELIO KARAGDAG, JR., MA. LUZ ARZAGA-MENDOZA, ANSBERTO PAREDES, AQUILINO PIMENTEL III, MARIO REYES, EMMANUEL SANTOS, RUDEGELIO TACORDA, members, and ROLANDO ARZAGA, Secretary-General,
JUSTICE ABRAHAM SARMIENTO, SENATOR AQUILINO PIMENTEL, JR. and COMMISSIONER BARTOLOME FERNANDEZ, JR., Board of Consultants, and Lawyer GENARO LUALHATI, petitioners,
vs.
MANILA ELECTRIC COMPANY (MERALCO), respondent.

Facts:

The MERALCO filed with the energy Regulatory Body (ERB), an application for the revision of its rate schedules. The application reflected an average increase of 21 centavos per kilowatthour (kwh) in its distribution charge. The application also included a prayer for provisional approval of the increase pursuant to Section 16(c) of the Public Service Act and Section 8 of Executive Order No. 172.

On January 28, 1994, the ERB issued an Order granting a provisional increase of P0.184 per kwh, subject to the following condition. In the same Order, the ERB requested the Commission on Audit (COA) to conduct an audit and examination of the books and other records of account of the applicant for such period of time and to submit a copy thereof to the ERB immediately upon completion.

In February 1997, COA submitted its "COA Report" which contained, among others, the recommendation not to include income taxes paid by MERALCO as part of its operating expenses for purposes of rate determination and the use of the net average investment method for the computation of the proportionate value of the properties used by MERALCO during the test year for the determination of the rate base. Subsequently, the ERB rendered its decision adopting the above recommendations and authorized MERALCO to implement a rate adjustment. The ERB held that income tax should not be treated as operating expense as this should be borne by the stockholders who are recipients of the income or profits realized from the operation of their business.

On appeal, the Court of Appeals set aside the ERB decision insofar as it directed the reduction of the MERALCO rates by an average of P0.167 per kwh and the refund of such amount to MERALCO's customers beginning February 1994 and until its billing cycle beginning February 1998. Separate Motions for Reconsideration filed by the petitioners were denied by the Court of Appeals.

Issues:

1. Whether in ruling that income tax paid by MERALCO should be treated as part of its operating expenses and thus considered in determining the amount of increase in rates imposed by MERALCO; and

2. Whether in rejecting the net average investment method used by the COA and the ERB, it should adopt the average investment method used by MERALCO.

Held:

The regulation of rates to be charged by public utilities is founded upon the police powers of the State and statutes prescribing rules for the control and regulation of public utilities are a valid exercise thereof.

When private property is used for a public purpose and is affected with public interest, it ceases to be juris privati only and becomes subject to regulation. The regulation is to promote the common good. Submission to regulation may be withdrawn by the owner by discontinuing use; but as long as use of the property is continued, the same is subject to public regulation.

In regulating rates charged by public utilities, the State protects the public against arbitrary and excessive rates while maintaining the efficiency and quality of services rendered. However, the power to regulate rates does not give the State the right to prescribe rates which are so low as to deprive the public utility of a reasonable return on investment. Thus, the rates prescribed by the State must be one that yields a fair return on the public utility upon the value of the property performing the service and one that is reasonable to the public for the services rendered. While the power to fix rates is a legislative function, whether exercised by the legislature itself or delegated through an administrative agency, a determination of whether the rates so fixed are reasonable and just is a purely judicial question and is subject to the review of the courts.

The ERB was created under Executive Order No. 172 to regulate, among others, the distribution of energy resources and to fix rates to be charged by public utilities involved in the distribution of electricity. In the fixing of rates, the only standard which the legislature is required to prescribe for the guidance of the administrative authority is that the rate be reasonable and just.

In the cases at bar, findings and conclusions of the ERB on the rate that can be charged by MERALCO to the public should be respected. The function of the court, in exercising its power of judicial review, is to determine whether under the facts and circumstances, the final order entered by the administrative agency is unlawful or unreasonable. The ERB correctly ruled that income tax should not be included in the computation of operating expenses of a public utility. Accordingly, the burden of paying income tax should be Meralco's alone and should not be shifted to the consumers by including the same in the computation of its operating expenses.

The principle behind the inclusion of operating expenses in the determination of a just and reasonable rate is to allow the public utility to recoup the reasonable amount of expenses it has incurred in connection with the services it provides. Under the "net average investment method," properties and equipment used in the operation of a public utility are entitled to a return only on the actual number of months they are in service during the period.

The petitions are granted but the decision of the Court of Appeals is reversed. Respondent Meralco is authorized to adopt a rate adjustment in the amount of P0.017 per kilowatthour, effective with respect to MERALCO's billing cycles beginning February 1994. Further, in accordance with the decision of the ERB dated February 16, 1998, the excess average amount of P0.167 per kilowatt-hour starting with the applicant's billing cycles beginning February 1998 is ordered to be refunded to MERALCO's customers or correspondingly credited in their favor for future consumption.