Republic vs. Meralco [G.R. No. 141314. November 15, 2002.]; also Lawyers against Monopoly and Poverty (LAMP) vs. Meralco [G.R. No. 141369]
Third Division, Puno (J): 4 concurring.
Facts: On 23 December 1993, Manila Electric Company (MERALCO) filed with the Energy Regulatory Board (ERB) an application for the revision of its rate schedules. The application reflected an average increase of P0.21/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 172. On 28 January 1994, the ERB issued an Order granting a provisional increase of P0.184/kwh, subject to the condition that in the event that the Board finds that MERALCO is entitled to a lesser increase in rates, all excess amounts collected from the applicant’s customers as a result of this Order shall either be refunded to them or correspondingly credited in their favor for application to electric bills covering future consumptions. Subsequent to an audit by the Commission on Audit (COA), the ERB rendered its decision adopting COA’s recommendations and authorized MERALCO to implement a rate adjustment in the average amount of P0.017/kwh, effective with respect to MERALCO’s billing cycles beginning February 1994. The ERB further ordered that “the provisional relief in the amount of P0.184/kwh granted under the Board’s Order dated 28 January 1994 is hereby superseded and modified and the excess average amount of P0.167/kwh starting with MERALCO’s billing cycles beginning February 1994 until its billing cycles beginning February 1998, be refunded to MERALCO’s customers or correspondingly credited in their favor for future consumption.” 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” hence, should not be passed on to the consumers. Further, in applying the net average investment method, the ERB adopted the recommendation of COA that in computing the rate base, only the proportionate value of the property should be included, determined in accordance with the number of months the same was actually used in service during the test year.
On appeal (CA GR SP 46888), 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/ 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. Hence, the petition before the Supreme Court.
The Supreme Court granted the petitions and reversed the decision of the Court of Appeals. MERALCO was authorized to adopt a rate adjustment in the amount of P0.017/kwh, effective with respect to MERALCO’s billing cycles beginning February 1994. Further, in accordance with the decision of the ERB dated 16 February 1998, the excess average amount of P0.167/kwh 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.
1. Regulation of rates by public utilities founded on the State’s police powers
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.
2. Purpose and limitations in State’s regulation of rates
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. The fixing of just and reasonable rates involves a balancing of the investor and the consumer interests.
3. Rationale of a public utility; Southwestern Bell Tel. Vs. Public Service Commission (Dissenting Opinion of Justice Brandeis)
The thing devoted by the investor to the public use is not specific property, tangible and intangible, but capital embarked in an enterprise. Upon the capital so invested, the Federal Constitution guarantees to the utility the opportunity to earn a fair return. . . . The Constitution does not guarantee to the utility the opportunity to earn a return on the value of all items of property used by the utility, or of any of them. The investor agrees, by embarking capital in a utility, that its charges to the public shall be reasonable. His company is the substitute for the State in the performance of the public service, thus becoming a public servant. The compensation which the Constitution guarantees an opportunity to earn is the reasonable cost of conducting the business. (Southwestern Bell Tel. Co. v. Public Service Commission [1923])
4. Fixing rate may be delegated to administrative agency; Whether rates are reasonable justiciable
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.
5. Mandate of ERB to fix rates
The ERB was created under Executive Order 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.
6. Standard in fixing rates
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. It has been held that even in the absence of an express requirement as to reasonableness, this standard may be implied.
7. Determination of just and reasonable rates; else rate that is confiscatory
What is a just and reasonable rate is a question of fact calling for the exercise of discretion, good sense, and a fair, enlightened and independent judgment. The requirement of reasonableness comprehends such rates which must not be so low as to be confiscatory, or too high as to be oppressive. In determining whether a rate is confiscatory, it is essential also to consider the given situation, requirements and opportunities of the utility.
8. Factual findings of administrative bodies in technical matters accorded respect and finality unless evidence is insufficient to support their conclusion
Factual findings of administrative bodies on technical matters within their area of expertise should be accorded not only respect but even finality if they are supported by substantial evidence even if not overwhelming or preponderant. The courts “refrain from substituting their discretion on the weight of the evidence for the discretion of the Public Service Commission on questions of fact and will only reverse or modify such orders of the Public Service Commission when it really appears that the evidence is insufficient to support their conclusions.”
9. Court’s exercise of power of judicial review; Separation of Power
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. Thus, to the extent that the administrative agency has not been arbitrary or capricious in the exercise of its power, the time-honored principle is that courts should not interfere. The principle of separation of powers dictates that courts should hesitate to review the acts of administrative officers except in clear cases of grave abuse of discretion.
10. Factors in determining just and reasonable rates charged by a public utility
In determining the just and reasonable rates to be charged by a public utility, three major factors are considered by the regulating agency: a) rate of return; b) rate base and c) the return itself or the computed revenue to be earned by the public utility based on the rate of return and rate base.
11. Rate of return defined; Basis
The rate of return is a judgment percentage which, if multiplied with the rate base, provides a fair return on the public utility for the use of its property for service to the public. The rate of return of a public utility is not prescribed by statute but by administrative and judicial pronouncements. This Court has consistently adopted a 12% rate of return for public utilities.
12. Rate base defined
The rate base is an evaluation of the property devoted by the utility to the public service or the value of invested capital or property which the utility is entitled to a return.
13. Operating expenses
Operating expenses are those which are reasonably incurred in connection with business operations to yield revenue or income. They are items of expenses which contribute or are attributable to the production of income or revenue. As correctly put by the ERB, operating expenses “should be a requisite of or necessary in the operation of a utility, recurring, and that it redounds to the service or benefit of customers.”
14. Income tax not included in computation of operating expenses of a public utility
Income tax should not be included in the computation of operating expenses of a public utility. Income tax paid by a public utility is inconsistent with the nature of operating expenses. Income tax is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by the State to the taxpayer, the government collects taxes as a source of revenue to finance its activities. By its nature, income tax payments of a public utility are not expenses which contribute to or are incurred in connection with the production of profit of a public utility.
15. Income tax payment should not be shifted to the customers of a public utility
Income tax should be borne by the taxpayer alone as they are payments made in exchange for benefits received by the taxpayer from the State. No benefit is derived by the customers of a public utility for the taxes paid by such entity and no direct contribution is made by the payment of income tax to the operation of a public utility for purposes of generating revenue or profit. Herein, 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.
16. Rationale behind the inclusion of operating expenses in determination of just and reasonable rate
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. It does not give the public utility the license to indiscriminately charge any and all types of expenses incurred without regard to the nature thereof, i.e., whether or not the expense is attributable to the production of services by the public utility. To charge consumers for expenses incurred by a public utility which are not related to the service or benefit derived by the customers from the public utility is unjustified and inequitable.
17. Public cannot be subjected to unreasonable rates for stockholders to earn dividends
The public cannot properly be subjected to unreasonable rates in order simply that stockholders may earn dividends. . If a corporation cannot maintain such a facility and earn dividends for stockholders, it is a misfortune for it and them which the Constitution does not require to be remedied by imposing unjust burdens on the public.
18. In rate-determination, government not hidebound to apply any particular method or formula
With regard to rate-determination, the government is not hidebound to apply any particular method or formula. The question of what constitutes a reasonable return for the public utility is necessarily determined and controlled by its peculiar environmental milieu. What is a just and reasonable rate cannot be fixed by any immutable method or formula. Hence, it has been held that no public utility has a vested right to any particular method of valuation.
19. Factors in determining rates
Aside from the financial condition of the public utility, there are other critical factors to consider for purposes of rate regulation. Among others, they are: particular reasons involved for the request of the rate increase, the quality of services rendered by the public utility, the existence of competition, the element of risk or hazard involved in the investment, the capacity of consumers, etc. Rate regulation is the art of reaching a result that is good for the public utility and is best for the public. With respect to a determination of the proper method to be used in the valuation of property and equipment used by a public utility for rate-making purposes, the administrative agency is not bound to apply any one particular formula or method simply because the same method has been previously used and applied.
20. The Court cannot blindly apply the rulings of American courts on the treatment of income tax as operating expenses
The Court cannot blindly apply the rulings of American courts on the treatment of income tax as operating expenses in rate regulation cases. An approach allowing the indiscriminate inclusion of income tax payments as operating expenses may create an undesirable precedent and serve as a blanket authority for public utilities to charge their income tax payments to operating expenses and unjustly shift the tax burden to the customer. To be sure, public utility taxation in the United States is going through the eye of criticism. Some commentators are of the view that by allowing the public utility to collect its income tax payment from its customers, a form of “sales tax” is, in effect, imposed on the public for consumption of public utility services. By charging their income tax payments to their customers, public utilities virtually become “tax collectors” rather than taxpayers.
21. Public utilities in the United States taxed differently from those in Philippines
Under American laws, public utilities are taxed differently from other types of corporations and thus carry a heavier tax burden. Moreover, different types of taxes, charges, tolls or fees are assessed on a public utility depending on the state or locality where it operates. At a federal level, public utilities are subject to corporate income taxes and Social Security taxes — in the same manner as other business corporations. At the state and local levels, public utilities are subject to a wide variety of taxes, not all of which are imposed on each state. Thus, it is not unusual to find different taxes or combinations of taxes applicable to respective utility industries within a particular state. A significant aspect of state and local taxation of public utilities in the United States is that they have been singled out for special taxation, i.e., they are required to pay one or more taxes that are not levied upon other industries. Within Philippine jurisdiction, public utilities are subject to the same tax treatment as any other corporation and local taxes paid by it to various local government units are substantially the same. The reason for this is that the power to tax resides in Philippine legislature which may prescribe the limits of both national and local taxation, unlike in the federal system of the United States where state legislature may prescribe taxes to be levied in their respective jurisdictions.
22. Determination of rate base
In the determination of the rate base, property used in the operation of the public utility must be subject to appraisal and evaluation to determine the fair value thereof entitled to a fair return. With respect to those properties which have not been used by the public utility for the entire duration of the test year, i.e., the year subject to audit examination for rate-making purposes, a valuation method must be adopted to determine the proportionate value of the property.
23. Rate base determination: Net average investment method
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.
24. Rate base determination: Average investment method
The “average investment method” computes the proportionate value of the property by adding the value of the property at the beginning and at the end of the test year with the resulting sum divided by two.
25. Soundness of the application of the net average investment method
The reasonableness of net average investment method is borne by the records of the case. In its report, the COA explained that the computation of the proportionate value of the property and equipment in accordance with the actual number of months such property or equipment is in service for purposes of determining the rate base is favored, as against the trending method employed by MERALCO, “to reflect the real status of the property.” 36 By using the net average investment method, the ERB and the COA considered for determination of the rate base the value of properties and equipment used by MERALCO in proportion to the period that the same were actually used during the period in question. This treatment is consistent with the settled rule in rate regulation that the determination of the rate base of a public utility entitled to a return must be based on properties and equipment actually being used or are useful to the operations of the public utility.
26. Computation of proportionate value of assets used in services vis-à-vis actual number of months in test year a more accurate method
Computing the proportionate value of assets used in service in accordance with the actual number of months the same is used during the test year is a more accurate method of determining the value of the properties of a public utility entitled to a return. If, as determined by COA, the date of recordal in the books of MERALCO reflects the actual date the equipment or property is used in service, there is no reason for the ERB to adopt the trending method applied by MERALCO if a more precise method is available for determining the proportionate value of the assets placed in service.
27. Evil that would result in the application of the “trending method”
If the “trending method” is to be applied, the public utility may easily manipulate the valuation of its property entitled to a return (rate base) by simply including a highly capitalized asset in the computation of the rate base even if the same was used for a limited period of time during the test year.
28. Presumption that rates are reasonable; Burden of proof to show otherwise
There is a legal presumption that the rates fixed by an administrative agency are reasonable, and it must be conceded that the fixing of rates by the Government, through its authorized agents, involves the exercise of reasonable discretion and, unless there is an abuse of that discretion, the courts will not interfere (Ynchausti S.S. Co. v. Public Utility Commissioner). The burden is upon the oppositor, MERALCO, to prove that the rates fixed by the ERB are unreasonable or otherwise confiscatory as to merit the reversal of the ERB. Herein, MERALCO was unable to discharge this burden.
