EPIRA after 10 Years: SC order overturned under EPIRA (Part 2)

Butch Junia
6/20-26/2011



"Rate regulation is the art of reaching a result that is good for the public utility and is best for the public. Such rates must not be so low as to be confiscatory, or too high as to be oppressive."

In clear and concise language, then Associate Justice Reynato Puno in his landmark decision on the Meralco overcharges that led to the refund order in November, 2002, set for the Energy Regulatory Commission (ERC) the tone for rate regulation. And for the utility and its captive customers what, in effect, should be their reasonable expectations?

Public interest over profit?
Coming barely two years after the Electric Power Industry Reform Act (EPIRA), Justice Puno’s ponencia was a judicial affirmation of the consumer rights and interests promised by EPIRA, principal of which was consumer choice in power.

EPIRA was supposed to resolve Napocor’s debt problems and create the policy environment that would draw investments in generation.

More importantly, it would give consumers down to the household level the power of choice – on his electricity supply. In other words, the reform law promised liberation from the stranglehold of his distribution utility under open access and retail competition.

Ten years after EPIRA, consumers do not have the power of choice and there is no retail competition.

Justice Puno, with characteristic eloquence, said in his decision: “In third world countries like the Philippines, equal justice will have a synthetic ring unless the economic rights of the people, especially the poor, are protected with the same resoluteness as their right to liberty. ... In configuring the contours of this economic right to a basic necessity of life, the Court shall define the limits of the power of respondent MERALCO, a giant public utility and a monopoly, to charge our people for their electric consumption. The question is: should public interest prevail over profits?”

A fighting chance
The Supreme Court ruled in favor of Mang Naro and his group, disallowing Meralco’s tax claim, ordering a refund that reached almost P30 B and setting the criteria for expenses that can be charged to customers and assets that would be recoverable.

It was a landmark decision for consumers as it immediately reversed the old practice of utilities incurring exorbitant costs and simply charging everything to the captive customers without a by your leave, under the old RORB.

Under this decision, operating expense to be recoverable “should be a requisite of or necessary in the operation of a utility, recurring, and that it redounds to the service or benefit of consumers.”

With the clear criteria for cost recovery and very specific exclusions like the corporate income tax that ran into billions, consumers had a fighting chance to get a fair and reasonable rate under Return on Rate Base or RORB.

17-word verdict
But the consumer euphoria would be short-lived.

Under Sec. 43 (f) of EPIRA, Functions of ERC, an innocent sounding line in a sea of other related functions reads as follows: “The ERC may adopt alternative forms of internationally-accepted rate-setting methodology as it may deem appropriate.”

Those 17 words, surely put in there to give the regulators a measure of flexibility, have instead become the utilities’ weapon and means for raising their rates to unprecedented highs, and their profitability to unparalleled levels.

From those 17 words, the Energy Regulatory Commission has legitimized a revenue-fixing process as substitute for ratesetting, and has substituted cost projections for the cost recovery, which means captive customers , now provide, up front, all the costs for the utility – capital equipment, operating expense, system loss, depreciation, working capital, return on capital, return of capital, taxes, ad nauseam.

From those 17 words Performance Based Regulation or PBR sprang into life, to turn the rate-setting horizon inside-out. Through PBR, a Supreme Court decision, a landmark decision for consumers at that, was effectively overturned and reversed by a regulatory tribunal.


Stubborn stance
Justice Puno, in disallowing corporate income tax as recoverable from consumers, said: “income tax should be borne by the taxpayer alone as they are payments made inexchange for benefits received by the taxpayer from the State.”
Subsequently, in denying Meralco’s Motion for Reconsideration, Justice Puno would emphatically say: “we reject Meralco’s insistence that the non-inclusion of income tax payments as a legitimate operating expense will deny public utilities a fair return of their investment. This stubborn stance is belied by the report submitted by the COA.” (Underscoring mine).

Surprisingly, ERC has included corporate income tax as one of the so-called building blocks for the revenue requirements under PBR, making it a recoverable cost, contrary to the Court’s decision.

Meralco actually claims it did not charge the corporate income tax, but ERC stubbornly keeps it as a building block, in defiance of the SC decision.

It is high time that we revisit EPIRA and clip that ERC function under Sec. 43 (f) that gave rise to PBR and its very high rates, making ours the second most expensive electricity in the region, after Singapore.

Amend EPIRA, consumers demand, to abolish PBR.

(More on EPIRA next issue.)