Not overcharging enough

"Public utilities cannot be allowed to overcharge at the expense of the public and worse, they cannot complain that they are not overcharging enough." – Third Division, Supreme Court

The highest court of the land has spoken with finality that Meralco had overcharged its three million customers since 1994 with an amount that could reach a staggering P28 billion.

That the Lopez-led distributor should refund the same and reduce its rates by 16.7 centavos per kilowatthour is welcome news to the public burdened by rising power costs.

But just exactly how such a huge amount of excess payment – almost equal to a third of the distributor’s capital – will be returned to eagerly waiting customers remains a big question.

The High Tribunal was silent on how the refund would be implemented, leaving such a crucial matter to the discretion of the Energy Regulatory Commission (ERC), the successor of the defunct Energy Regulatory Board (ERB).

The ruling

Before we tackle the complex challenge on how the P28 billion can be returned to consumers, let’s go first through the crucial points leading to the high court’s ruling.

On Dec. 23, 1993, Meralco filed an application with the ERB for a 21.1 centavos rate increase. A month after, the ERB granted a provisional authority for Meralco to increase its rates by 18.4 centavos per kilowatthour subject to an audit by the Commission on Audit (COA).

In 1998 however, guided by a COA report, the ERB ordered Meralco to refund excess payments it had collected since 1994. It further ordered Meralco to bring down its rates by 16.7 centavos.

In its decision, ERB disallowed the distribution giant from including income tax as part of its operational expense. The regulatory body argued that the company and its stockholders – not the public – should shoulder tax on earnings.

Meralco’s defense

Meralco immediately elevated the case to the Court of Appeals (CA), which responded by granting Meralco’s petition for a temporary restraining order (TRO) and issuing an injunction to implementing the 1998 ERB ruling.

Meralco argued that American jurisprudence allows the inclusion of income taxes in operation expenses. The utility company also cited that the Public Service Act was patterned after Act 2305 of the Philippine Commission, which in turn was borrowed from American state public utility laws.

Further, the distributor said ordering utilities not to include income tax in operation expense would effectively lower its Return on Rate Base (RORB) below eight percent. Incidentally, this is Meralco’s required RORB under covenants signed with its lenders.

The CA subsequently reversed and set aside the 1998 ERB ruling. This prompted the ERB to elevate the case before the Supreme Court. When the highest court of the land ruled last Nov. 15, 2002 in favor of the ERB, thus reversing the CA decision, Meralco made another appeal.

Responding with finality in its recent final ruling, the Supreme Court gave a stern statement that American decisions and authorities are not per se in control of local jurisdiction, adding that Philippine laws must be "construed to serve our own public interest."

COA debunks Meralco’s claim

Apparently, the Supreme Court gave a lot of weight to a COA report that puts to question Meralco’s own computations.

A COA audit of Meralco’s operations from February 1994 to January 1995 disputes Meralco’s claim that disallowing income tax as part of operation expenses will effectively lower its Return on Rate Base (RORB) below eight percent.

The Supreme Court cited this particular COA audit where the utility company was found to have earned an excess revenue of P2.448 billion or 8.15 percentage points higher than what it should earn under the 12-percent RORB limit. The report was based on COA’s position that income taxes should not be included as expenses recoverable from the public.

Even if, for the sake of discussion, income tax will be treated as operating expense and thus can be recovered from the public (the Meralco position), Meralco still exceeds the 12-percent RORB limit, the SC said based on the COA report.

Some nagging questions

Is this ruling for Meralco alone?

With the establishment of this legal jurisprudence on how income taxes should be treated in a utility’s financial book, it will be logical to say that consumers nationwide can expect or should demand reductions in their electricity bills from power utilities using the Meralco formula. I understand a number of power companies in the provinces are in this category.

What about other utility firms such as telephone and water companies? Someone should now check whether we can expect or demand some relief from these entities.

Meralco’s undoing

Recent pleas by Meralco of cash flow constraints and inability to finance capital expenditures should it refund the estimated P28 billion also raised some questions in the public’s mind.

Considering the substantial amount involved in the case, the question is being asked why did Meralco not put up a contingency reserve in case the provisional increase is reversed?

When the ERB ruled in 1998 to disallow the provisional increase previously granted, prudence should have dictated the setting up of a contingency financial plan or other safeguards to cope with possibility of reversals.

It also appears that Meralco depended heavily on the Court of Appeals ruling in its favor, and from previous experiences that a "provisional increase" is never reversed.

Is Meralco a victim of "changes" in the personalities involved both in ERB (ERC) and the courts?

Or, is this a case of over-confidence (or arrogance as some call it) on the part of Meralco?

‘El Niño’ on TV

"Isyung kalakalan at iba pa" on IBC-13 News (5 p.m. and 10:30 p.m., Monday to Friday) starting today will discuss the state of preparedness of the government and the agriculture sector as the weather phenomenon "El Nino" engulfs the Philippines. Watch it.

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