The SC issued its order to the ERC as the Lopez family-owned utility firm sought a reversal of the SC ruling upholding the ERC order.
The Supreme Court third division headed by Justice Reynato Puno gave the government 10 days to refute the allegations made by the country’s largest power distributor in its appeal submitted to the high tribunal early this month.
In their 47-page appeal, Meralco lawyers said they were misled by the Energy Regulatory Board (ERB), renamed ERC, and the Commission on Audit (COA) into believing that income taxes paid by the power company can be included in the firm’s operating expenses, which had become Meralco’s regular practice.
Retired SC Justice Camilo Quiason said it was "foul play" for both the ERB and COA to have allowed Meralco to use the rates they adopted in 1993 only to reverse themselves five years later. This reversal on the part of the ERB and COA became the basis for allegations that Meralco overcharged consumers. Quiason is Meralco’s legal counsel.
"It is foul play on the part of the ERB to lead Meralco, when it filed its rate application in 1993, to believe that the ERB recognized the Galveston formula, only to reverse itself in 1998," Meralco said in its motion for reconsideration.
Justices Puno, Artemio Panganiban, Angelina Sandoval-Gutierrez, Renato Corona and Conchita Carpio-Morales held that Meralco should pay back its four million Metro Manila consumers the P0.167 per kilowatt-hour it overcharged since 1994 in their monthly billing statements.
The COA, meanwhile, erred by "leading Meralco to believe that it could use the Galveston formula (then) reverse its stand, question the formula and oppose Meralco’s application in 1998."
Quiason said that when his client filed a rate application using the Galveston formula, which includes income taxes paid in the firm’s computation of operating expenses, "it merely followed the ERB’s decisions, recognizing the use of said formula."
The SC ruled that Meralco should not pass on to consumers the income taxes it paid and include these tax payments in computing its operating expenses. "Accordingly, the burden of paying income tax should be Meralco’s alone and should not be shifted to consumers by including the same in the computation of its operating expenses."
The five magistrates said allowing Meralco to use such a formula would be a dangerous precedent.
"It may create an undesirable precedent and serve as blanket authority for public utilities to charge their income tax payments to operating expenses and unjustly shift the tax burden to the customer," a portion of the 20-page, Nov. 15 SC ruling said.
"Meralco has not justified why its income tax should be treated as an operating expense to enable it to drive a fair return for its services. The Court cannot give in to the importunings of Meralco that we blindly apply the rulings of American courts on the treatment of income tax as operating expenses in rate regulation cases."
Meralco asked the SC to uphold the February 1999 ruling of the Court of Appeals, which was in the power firm’s favor. Meralco also said it is "not anti-poor" and lashed out at the ERB for giving "false hopes to the poor."
The firm warned that if the P28 billion refund is made final, the country may be in for financial chaos, as Meralco is suffering liquidity problems. Meralco cited, among others, its unpaid P31.74 billion short- and long-term loans and the P10 billion cut in their cash position after the government ordered them to reduce the power purchase adjustment (PPA) last April.
Meralco added that it is already "on the verge of bankruptcy."
"Prospects of an economic recovery may be thwarted by Meralco’s failure to provide the quality of electric service needed to power the industries and commercial establishments it serves," Meralco said.
"This will mean longer daily rotating (power) outages, which may last for weeks," the power firm said, as it added that a refund would "throw the country into financial turmoil, hence, the inevitable collapse of the economy."