G.R. No. 183626 ; October 4, 2010
SURIGAO DEL NORTE ELECTRIC COOPERATIVE, INC. (SURNECO), Petitioner, vs. ENERGY REGULATORY COMMISSION, Respondent.

FACTS

Petitioner SURNECO, a rural electric cooperative, was part of a consolidated petition before the Energy Regulatory Board (ERB) for approval of a Purchased Power Adjustment (PPA) formula to comply with Republic Act No. 7832 . The law established a phased reduction of the cap on recoverable system losses that electric cooperatives could pass on to consumers. The ERB granted provisional authority to use the PPA formula in 1997. Following the creation of the Energy Regulatory Commission (ERC), the case was re-docketed.
In 2003, the ERC issued an order clarifying that for future PPA computations, the power cost should be based on the “net” amount (after discounts from suppliers), not the “gross” amount. In a 2005 order, the ERC formalized this policy, stating the PPA is a cost-recovery mechanism, not revenue-generating, so only actual costs should be recovered. SURNECO challenged this 2005 order, arguing it constituted a new rule that impaired its existing contracts with power suppliers and violated the non-impairment clause. The ERC and the Court of Appeals upheld the order.

ISSUE

Whether the ERC’s 2005 Order, requiring the use of “net” power cost in the PPA formula, constitutes an invalid impairment of SURNECO’s contracts.

RULING

No, the ERC order did not unconstitutionally impair contracts. The Supreme Court affirmed the CA and ERC. The legal logic rests on the state’s police power and the nature of rate regulation. The power to regulate rates charged by public utilities is a legislative prerogative rooted in police power, exercised here through the ERC as a specialized administrative body. This power includes the authority to prescribe the methodology for computing rates to ensure they are just and reasonable.
The Court ruled that the PPA is a rate-setting mechanism, and the adjustment to use “net” cost merely ensures that the rates reflect the true and actual cost of purchased power, preventing utilities from profiting from discounts not passed to consumers. Any contract for the supply of power is necessarily subject to this overriding regulatory power. An impairment claim fails because the change was a valid exercise of police power for public welfare, and the contractual rights affected were not absolute but subordinate to the state’s power to regulate utilities. The order was a corrective interpretation to align the PPA formula with the statutory intent of R.A. No. 7832 and its successor law, the EPIRA, to establish rational and fair pricing.