539 Phil. 509
CHICO-NAZARIO, J.:
A. MERALCOWhile the aforesaid application was still pending, Republic Act No. 9136, otherwise known as the "Electric Power Industry Reform Act of 2001 (EPIRA)," took effect on 26 June 2001. It abolished the ERB and created ERC to succeed the former. Section 36 of EPIRA required all electric distribution utilities to file their application for the unbundling of their rates for the approval of the ERC.
- Whether or not the present rates are reasonable vis-á-vis;
a) the existing laws and jurisprudence
b) the international credit requirements;B. NASECORE
- Whether or not its present Return on Rate Base [RORB] adversely affects its cash flow;
- Whether or not its negative cash flow or deficit affects [its] capability to provide reliable, safe and efficient electric service to its customers;
- Whether or not its proposed rate schedules are reasonable; and
- Whether or not it is entitled to a provisional increase in rates.
C. ACAM
- What is MERALCO's rate base and what are its components;
- What is the income of MERALCO in relation to its RORB;
- Whether or not there is a negative cash flow; and
- What is MERALCO's present RORB.
D. OFFICE OF THE SOLICITOR GENERAL
- Whether or not the reversal of the decision of the Court of Appeals by the Supreme Court [in G.R. No. 141314] will affect the present application.
- Whether or not MERALCO's rate base is correctly computed; and
- Whether or not MERALCO's depreciation/operating expenses are correctly computed.[2]
WHEREFORE, the foregoing premises considered, it is hereby decided as follows;The oppositors and MERALCO filed separate motions for reconsideration of the ERC decision.
- To approve the unbundled schedule of rates of MERALCO as provided in Annex A of this Decision, to be effective on the next billing cycle after the date of this Decision;
- To approve MERALCO's net utility plant in service at sound value as of December 31, 2000 amounting to P61,649,407,957;
- To order MERALCO:
a) To discontinue charging the PPA upon effectivity of the approved unbundled rates; any change in the cost of power purchased shall be reflected as deferred charges or credits which shall be recovered through the Generation Rate Adjustment Mechanism (GRAM) approved by the Commission for implementation per ERC Order effective February 24, 2003;
b) To recover over a three (3) year period an amount equivalent of P0.0875 per kwh and to set up a separate account for facility of monitoring the collection of the total under recovered purchased power costs. A report should be submitted on or before the 20th day of each month on the actual collection of the P5.8B deferred purchased power cost to its customers/consumers and collection will be discontinued immediately upon full recovery thereof;
c) To bill its respective end-users using a billing format which contains at least the rate elements provided in annex B of this Decision upon effectivity of the approved unbundled rates;
d) To set the CERA at 12.41% upon effectivity of this Decision until such time that the Commission issues a notice for the implementation of a new CERA;
e) To submit within six (6) months from date of this Decision;i.) A new CERA formula that would be consistent with the new unbundled rate structure to be filed within six (6) months from the effectivity of this Decision;f) To set up a depreciation fund each year corresponding to the whole amount of depreciation that it has recorded on its books. The setting up of this fund should be done on a monthly basis corresponding to the monthly depreciation. MERALCO is required to strictly account for the expenditures out of this fund which should be used strictly for investment in electric plant and all withdrawals from this fund should be reported to the Commission within thirty (30) days from withdrawal;
ii.) Detailed components of the foreign debt service payments falling due in 2003;
iii.) Time when such loans were contracted and approved by ERB, if any, for these loan contracts; and
iv.) Loan details of each contract including utilization of proceeds.
g.) To bill P0.0168/kwh representing the missionary electrification portion of the Universal Charge in accordance with the Decision of the Commission in ERC Case No. 2001-165 (In the Matter of the Petition for the Availments from the Universal Charge the Share for Missionary Electrification, NPC-SPUG, Applicant);h) To submit within thirty (30) days from receipt of this Decision detailed and updated information on its affiliates as it affects its electric power business consistent with the requirements of Schedule "G" of the UFR;
i) To adequately inform the end-users within its franchise area of the approved unbundled rates not later than thirty (30) days after receipt of this Decision;
j) To submit detailed schedule on discounts granted to MERALCO's officers and employees for their electric bills from 2000 to 2002, and latest approved Collective Bargaining Agreement (CBA);
k) To submit on or before the 15th day of October 2003 a report on policies and procedures for cost cutting measures to be adopted by it.
l) To submit on or before the 30th day of June 2003 and quarterly thereafter, a status report on the results of their negotiations with their IPPs in its effort to bring down its generation costs;
m) To submit for verification and confirmation purposes on or before the twentieth (20th) day of the month following the effectivity of the approved unbundled rates and every month thereafter; a) copy of bills from the generation and transmission companies; and b) M001 and M002 with all related schedules; and
n) To make a formal application to establish the rate of Reconnection Fees and Other Charges within one (1) year from date of this Decision using a format to be prescribed by the Commission;
o) To provide reasonable access to ERC for verification of sample bills for each customer class.[4]
WHEREFORE, the foregoing premises considered, the challenged Decision dated March 20, 2003 is hereby modified as follows:Respondents filed a petition for review before the Court of Appeals. Thereupon, the Court of Appeals directed the OSG to file a comment on the petition for review, which the former complied with.1) MERALCO's "Summary Schedule of Unbundled Rates" as provided in Annex "A" of this Order is hereby APPROVED to be effective on the next billing cycle after the date of this Order;Relative thereto, MERALCO is directed to:
2) MERALCO's "Schedule of Unbundled Rates Per Customer Class" as provided in Annex "B" of this Order is hereby APPROVED to be effective on the next billing cycle after the date of this Order;
3) MERALCO's adjusted rate base as of December 31, 2000 from PhP 74,475,910,302 to PhP76,838,084,457 as shown in Annex "C" of this Order is hereby APPROVED; anda) Discontinue charging the PPA upon affectivity of the approved unbundled rates; any change in the cost of power purchased shall be reflected as deferred charges or credits that shall be recovered through the Generation Rate Adjustment Mechanism (GRAM) approved by the Commission for implementation per its Order dated February 24, 2003;
b) Bill its respective end-users using a billing format that contains at least the rate elements provided in Annex "D" of this Order upon affectivity of the approved unbundled rates, including the refund scheme by the ERC;
c) Set the CERA at 11.87% applied on the Distribution revenue only upon effectivity of this Order until such time that the Commission issues a notice for the implementation of a new CERA;
d) Submit within six (6) months from date of this Order;i.) A new CERA formula that would be consistent with the new unbundled rate structure to be filled within six (6) months from the effectivity of this order.
ii.) Detailed components of the foreign debt service payments due in 2003;
iii.) time when such loans were contracted and approved by ERB, if any, for these loan contracts; and
iv.) Loan details of each contract including utilization of proceeds;
e) Set up a depreciation fund each year corresponding to the whole amount of depreciation that it has recorded in its books. The setting up of this fund should be done on a monthly basis corresponding to the monthly depreciation. MERALCO is required to strictly account for the expenditures out of this fund, which should be used strictly for investment in electric plant. All withdrawals from this fund should be reported to the Commission within thirty (30) days from such withdrawal;
f) Submit within thirty (30) days from receipt of this Order detailed and updated information on its affiliates as it affects it electric power business consistent with the requirements of Schedule "G" of the UFR;
g) Adequately inform the end-users within its franchise area of the approved unbundled rates not later that thirty (30) days after receipt of this Order;
h) Submit a detailed schedule on discounts granted to its officers and employees for their electric bills from 2000 to 2002, and the latest approved Collective Bargaining Agreement (CBA);
i) Submit on or before the fifteenth (15th) day of October 2003 a repost on policies and procedures for cost cutting measures to be adopted by it.
j) Submit on or before the thirtieth (30th) day of June 2003 and quarterly thereafter, a status report on the results of their negotiations with their IPPs in its effort to bring down its generation costs;
k) Submit the following data/information for verification and confirmation purposes on or before the twentieth (20th) day of the month following the effectivity of the approved unbundled rates and every month thereafter;
i.) Copy of bills from the generation and transmission companies; and
ii.) Reports M001 and M002 with all related schedules
l) Make a formal application to establish the rate of Reconnection Fees and Other Charges within one (1) year from date of this Order using a format to be prescribed by the Commission; and
m) Provide reasonable access to the Commission for verification of sample bills for each customer class.
The findings and conclusions reached in our March 20, 2003 Decision shall continue to have force and effect except as herein modified.[5]
Given the State policies enshrined in the EPIRA, the ERC should have appropriately addressed the concerns of the oppositors and granted their common plea for a COA audit of MERALCO's books and accounts.In the dispositive part of the questioned decision, the appellate court ordered the remand of the case to the ERC and directed the COA to audit MERALCO's books, records and accounts.
x x x x
In view of all the foregoing, this Court is of the opinion that a COA audit before approval by the ERC of both applications for rate increase and rate unbundling filed by MERALCO is necessary being an essential aspect of due process.
Without discounting the fact that public interest may be better served with a GAO audit of the applicant's valuation of its properties and equipment, we nevertheless find nothing in the phraseology of the above-quoted provision that makes such audit mandatory or obligatory. A GAO valuation is merely advisory. It is neither final nor binding, as illustrated in MERALCO v. Public Service Commission, where this Court upheld the decision of the Public Service Commission to fix rates on the basis of Meralco's own valuation of its properties, rather than on the assessment made by the GAO. Upon this premise, the appraisal made by respondent Hidalgo, which the respondent Board found to be fair and reasonable, can serve as proper basis for fixing the allowable rate of return and the corresponding increase in its charges.[9]The Court of Appeals ruled that the Municipality of Daet case was inapplicable to the case under consideration as it was rendered before the promulgation of the Administrative Code of 1987. The Court of Appeals, however, did not bother to explain how Section 22, Chapter 4, Subtitle B, Book V of the Administrative Code could have repealed Section 2 of Commonwealth Act No. 325. Perusal of the relevant provisions of these two statutes, viz -
readily shows that there is nothing in the cited provision of the Administrative Code which indicates that it bars the regulatory body from approving rates without prior COA audit, neither does it give a hint that it effectively repeals the pertinent provision of Commonwealth Act No. 325.Commonwealth Act No. 325
Sec. 2. In acting upon any proceedings, regarding the approval of basic rates of amendments of existing rates of any public service, the Auditor General shall assign auditors to assist the Public Service Commission and shall furnish such financial data as may be required by the Public Service Commission.The Administrative Code of 1987
Sec.22. Authority to Examine Accounts of Public Utilities. – (1) The Commission shall examine and audit the books, records and accounts of public utilities in connection with the fixing of rates of every nature, or in relation to the proceedings of the proper regulatory agencies, for purposes of determining franchise taxes.
II. c. 1.b.3. Utility PlantII.C.1.b.3.a. Asset Appraisal
Inasmush as the Commission ruled to strike out from the records of AACI's Appraisal Report, as well as the testimony of Ms. F. L. Tuazon on the revaluation of fixed assets (presented during the April 17, 2002 hearing for ERC Case No., 2001-900), the appraisal report considered in this case was the one submitted for approval by MERALCO in ERC Case No. 2001-646 (ERB Case No. 2000-57).
As per said AACI's report, the total cost of reproduction new and the sound value of MERALCO's existing assets as of December 31, 1998 were Php 85,734,410,000 and Php 60,169,011,000, respectively, to wit:
Cost of Reproduction, new | Sound Value | |
Transmission Plant | PhP 6,402,193,000 | 3,355,882,000 |
Distribution Plant | 68,764,595,000 | 47,995,051,000 |
General Plant | 10,567,622,000 | 8,818,078,000 |
GRAND TOTAL | PhP85,734,410,000 | PhP60,169,011,000 |
MERALCO's utility plant was last appraised in December of 1998. Utility plant net additions subsequent to the said appraisal amounted to PhP 4,096,386,580.
The Commission found that MERALCO's utility plant in service as listed and appearing in the AACI's Appraisal Report dated January 25, 2000 at a sound value amounting to PhP 60,169,011,000 (excluding land) were actually existing, owned by MERALCO, and being utilized in its power distribution. The Commission disallowed MERALCO's utility plant with a sound value of PhP394,009,693 found to be either not directly related in MERALCO's business operation, retired, or not used/useful in service. Out of the said amount, P50,412,948, represents the disallowance resulting from the inspection conducted.
Likewise, the Commission ordered MERALCO to provide detailed information on its meter count. On January 30, 2003, MERALCO submitted a Reconciliation of Meter Count to account for the decrease of 747,425 in the total number of meters from the previously reported total of 4,881,832 as of December 31, 2000. Based on the same document, the decrease was due to the sizeable number of retired meters still appearing in their books. The corresponding net book value of said retired meters amounted to PhP9,512,399.
The Commission noted an average increase of 0.4% in the number of customer per month. However, said increase in the number of customers does not justify the increase in the number of meters in MERALCO's inventory. Even taking into consideration said increase and adopting the two (2) month inventory allowed for utilities, MERALCO still has an excess meter inventory of 176,771 which is equivalent to PhP 334,144,092. Thus, the sound value of meters was adjusted downward by PhP343,656,491 representing the total sound value of retired and excess meter inventory.
Table 17 below shows the summary of such disallowance:
DISALLOWED UTILITY PLANT | Sound Value |
Per inspection | PhP 50,412,948 |
Retired/excess meter inventory | 343,656,491 |
Total | PhP 394,009,693 |
Of the PhP 588,610,673 sound value of its utility plant submitted for exclusion in its rate base, the Commission found that some of its utility plant had already been accounted for and excluded in the ERC inspection report. As such, the Commission excluded from the rate base the remaining utility plant with a sound value amounting to PhP560,797,947.
xxx
After considering the above deductions, MERALCO's sound value of its utility plant in service as of December 31, 2000 amounted to PhP62,536,326,777. The past practice of the former ERB was to reduce the adjusted (net of disallowances) plant, property, and equipment in service by 5% of the appraisal increase considering that appraisals are, by their very nature, estimates. Said 5% serves as an allowance for overstatement of values.
MERALCO reported a total amount of PhP 575,697,192 as plant held for future use contained in schedule "B-5" (UFR filing dated December 26, 2001). Most of these plants or land pertain to real estate disallowed by per ERB Case No. 93-118. Out of this amount, PhP 106,901,000 pertains to the Rockwell Substation & Makati Branch Office. Said property had been consistently excluded from MERALCO's rate base considering that the same is not being used in its electric operations. In addition, the inspection team discovered that plant for future use in the amount of PhP 304,642,425 is now being used by MERALCO in providing electric service. As such, the Commission reclassified this amount as part of plant in service. The remaining plant held for future use has been excluded from rate base.x x x x
MERALCO included an amount equivalent to two(2) months cash operating and maintenance expenses including purchased power costs as allowance for cash working capital. The cash working capital allowance included in the rate base should approximate the actual cash requirements of MERALCO based on the estimated net lag in its cash flow. This is not an issue related to the actual timing of the recovery of a particular cost. The relevant factors to consider is a lead-lag analysis for purposes of determining cash working capital requirements are the following:In order to refine the application of the formula approach used in past proceedings, a more detailed review of the actual lag in cash flow associated with the payments for purchased power and the inflow of cash from MERALCO's customers was undertaken. With respect to outflow of cash associated with the payments for purchased power, it was determined that the time from the provision of service to the outflow of cash can be calculated as follows:
- The time MERALCO pays for the energy (kWh) sold to its customers; and
- The time MERALCO requires its customers to pay for the same energy (kWh).
Therefore, MERALCO waits on the average, thirty (30) days before it receives payment for the services provided.
Based on MERALCO's current billings and collection practices, there appears to be no cash working capital requirement associated with purchase power. The only potential finance costs associated with purchased power would be costs by customers who do not pay their bills in accordance with MERALCO's collection policies. MERALCO's customers who do pay on time should not be penalized because other customers failed to comply with MERALCO's payment schedule. If additional finance costs are incurred because of late payment of bills, these costs should be recovered in the form of penalties for late payment. Therefore, the formula for the calculation of the cash working capital allowance is modified by excluding purchases powers costs. This modification would reduce the cash working capital allowance for MERALCO by PhP 92,363,390 as shown below.
xxx
MERALCO's CWIP per book amounts to PhP 7,125,421,127 as of December 31, 2000. However submitted supplemental documents show that as of June 30, 2002, a total amount of PhP 3,234,296,000 were placed in service. As such, the Commission excluded the amount of PhP 3,891,125,127 from the rate base.Respondents also alleged that MERALCO's Operations and Maintenance Costs were inflated. The ERC, upon evaluating the documents presented by the parties, reduced MERALCO's recoverable Operation and Maintenance Expenses, thus:
Upon review of the components of the expenses included in the revenue requirement, the Commission reduced MERALCO's recoverable Operation and Maintenance (O&M) Expenses by the following amounts:Contrary to the Court of Appeals' insinuation that the ERC did not perform its legal mandate to protect the public, the foregoing disquisitions of the ERC speak otherwise. MERALCO's proposed revenue requirement and rate base for purposes of fixing its rates were, after having been assumed to be carefully considered, adjusted downwards. MERALCO did not get what it prayed for, which was a rate higher than that approved by the ERC.
PARTICULARS AMOUNTUndocumented expenditures
(PCIB Special Accounts)
PhP 62,528,661 Non-utility expenditures 154,512,578 Over amortization of cost 139,492,707 TOTAL PhP 356,533,946
Meralco is responsible for providing documentation to prove the reasonableness and prudence of all its expenditures. MERALCO was unable to provide adequate documentation for certain expenditures identified as PCIB Special Accounts amounting to PhP 62,528,661. As such, the proposed O&M expenses were reduced by this amount. MERALCO should ensure that procedures are put into place to ensure that in future filings, all expenditures that are included in the determination of revenue requirements are adequately documented and that such documentation is reasonably accessible to ERC.
The Commission also disallows the recovery of PhP 154,512,578 representing expenditures that the Commission believes are not required and relevant to the provision of electric power service. These types of expenditures include items classified as gifts and services commissioned for institutional or goodwill purposes.
Records showed that during the test year, MERALCO charged as expense, amounts pertaining to the use of company vehicles, i.e. maintenance of company vehicle which exceeded the actual costs incurred for the said expenditures by PhP 139,492,707. The Commission therefore excluded this excess amount from the calculation of MERALCO's revenue requirement.