The elephant in the room: The Meralco refund ruling

My former student asked my opinion about the recent Energy Regulatory Commission (ERC) decision on the Meralco refund application. Having been assured that there is no pending case on the matter, I hereby oblige, as a teacher must.

Under the EPIRA, the ERC has the responsibility of ensuring a reasonable price of electricity and operational efficiency by establishing and enforcing a methodology for setting transmission and distribution wheeling rates and retail rates of a distribution utility, taking into account all relevant considerations enumerated in the law. Meralco is subject to the Performance Based Regulation (PBR) rate-setting methodology set by the ERC, which requires a regulatory reset process prior to the start of a regulatory period. It appears that due to the non-completion of the reset process and the subsequent failure to comply with the publication requirement for the modified Rules for Setting Distribution Wheeling Rates (RDWR) to govern distribution utilities under the PBR for the fourth regulatory period, a void was created in the rate-setting process from July 2015 to November 2020. This is referred to as the “Lapsed Period” because the period ended with no rules becoming effective. Big problem!

Without the rules for the fourth regulatory period, Meralco filed an application on June 11, 2015 (ERC Case No. 2015-112RC) for an Interim Average Rate (IAR) of P1.3939/kWh, which the ERC reduced to P1.3810/kWh in its provisional approval. On June 16, 2022, the ERC, after several hearings, decided to lower the IAR to P1.3522/kWh and mandated that this revised IAR shall be implemented as the final distribution rate for the period July 1, 2015 to June 30, 2022.

In December 2020, Meralco also filed an application (ERC Case No. 2020-043 RC) for the approval of a refund scheme where it proposed to true-up and compare its Actual Weighted Average Tariff (AWAT) as against the approved IAR.

Meralco offered to refund the difference to its customers. In a decision dated June 16, 2022 but promulgated on July 5, 2022, the ERC approved the application and directed Meralco to refund the additional amount of P21,769,496,221 to its customers covering the period July 2015 to June 2022. On the whole, the decision favored Meralco consumers with a refund of more than P40 billion.

In recently denying the Motions for Reconsideration, the ERC stressed that as a quasi-judicial body, it exercised its general rate-setting authority and the power to act on applications (like Meralco’s AWAT application) under the EPIRA and its IRR. This is in light of the lack of applicable rules that would govern the Lapsed Period. It also highlighted compliance with due process by conducting public hearings where stakeholders were given the opportunity to be heard and to present their evidence.

Interventions filed on behalf of the consuming public were also allowed.

Interestingly, the chairperson and one commissioner dissented, resulting in a 3-2 voting by the ERC en banc. The chairperson stressed that the ERC’s rate-setting authority “must flow from a set of rules by which the regulated entity can formulate its proposed rates.” Under normal circumstances, this would have been the set-up. Yet, the Commission was in an abnormal situation due to its failure to conduct a regulatory reset process that would have resulted to the rate-setting rules applicable to the lapsed period. Must the ERC instead dismiss Meralco’s AWAT application on the justification that it failed to issue the applicable rules for the fourth regulatory period and therefore, Meralco had no basis in establishing its rates? Was it not more logical for the Commission to resort, as it did, to its broad regulatory powers under the EPIRA, which partakes of the nature of delegated police power? Besides, quasi-judicial bodies have the implied power to formulate its own rules in resolving controversies brought before it. In other jurisdictions, agencies are even allowed to apply, to an extent necessary and appropriate, a similar or most relevant rule in the absence of a specific governing rule. The ERC would have failed miserably as a regulatory body if it did not act on the AWAT application.

The dissent suggests that the ERC should have instead considered the AWAT application as a rule-making petition and incorporated Meralco’s proposal into the Revised RDWR that was issued in 2021. However, the idea of formulating a rule to govern a regulatory period that already lapsed may not only violate non-retroactivity of rules but, more significantly, it also conflicts with the principles of the PBR scheme. This could adversely affect regulatory stability, efficiency and the broader interests of stakeholders in the electric power industry. The PBR regime is designed to foster efficiency and stability within the regulatory framework of the electric power industry. It aims to ensure that the regulatory environment is predictable and conducive to investment, thereby promoting the development of a reliable and economically efficient power supply. While there may be exceptions to the rule on prospectivity, the retroactive application of rules in the instant case will necessarily disrupt the established expectations of stakeholders, including investors, utility companies and consumers, which can deter investment in the sector that is crucial to ensure affordable electricity.

If Meralco did not voluntarily submit itself for “regulation” by filing its AWAT application, the ERC may not have been given the opportunity to resolve the issues arising from the lack of rate-setting rules during the lapsed period, until prescription would have set in. Speculatively speaking, there may be a possibility for Meralco to have been ordered to refund more than the P40 billion had a different course been adopted. Yet, considering possible legal challenges, the adverse effects of the unreasonable delay on the regulatory environment, and the chance that the different course may never happen, there is great wisdom in the ERC decision granting the refund scheme of Meralco.

At the end of the day, the decision provided a timely breathing space by alleviating the effects of the pandemic on the people. It is always better to have an actual refund, although not as big as others would have expected, than to expect a big refund that will not actually happen.

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Marciano Delson is dean of San Beda University’s College of Law.