G.R. No. 226443 , October 08, 2019
National Association of Electricity Consumers for Reforms, Inc., Petitioner, vs. Energy Regulatory Commission, Manila Electric Company, and Commission on Audit, Respondents. Clark Electric Distribution Corporation, Dagupan Electric Corporation, Angeles Electric Corporation, Cagayan Electric Power & Light Company, Inc., San Fernando Electric Light & Power Company, Inc., Cabanatuan Electric Corporation, Tarlac Electric, Inc., and Olongapo Electricity Distribution Company, Inc., Movant-Intervenors.

FACTS

In a prior case, MERALCO v. Genaro Lualhati, the Supreme Court directed the Energy Regulatory Commission (ERC) to request the Commission on Audit (COA) to conduct a complete audit of MERALCO’s books relative to its provisionally-approved rate increases and unbundled rates. The ERC complied, and COA issued a Special Audits Office Report (COA Report). The COA Report, covering test years 2004 and 2007, used a Return on Rate Base (RORB) methodology. It found that using different rates of return (the ERC-approved 15.50% based on MERALCO’s Weighted Average Cost of Capital (WACC), the actual WACC for 2004 and 2007, and a 12% reasonable rate from jurisprudence), MERALCO earned excess revenues. The COA disallowed certain operating expenses (like employee pension and benefits) and excluded certain assets (like the MERALCO Theater and Museum) from the rate base, deeming them not recoverable from consumers or not used and useful in distribution operations. NASECORE argued MERALCO should refund excess profits. MERALCO countered that the ERC has final rate-setting authority and that the disallowed expenses and assets were legitimate. The ERC, in its Orders, affirmed its earlier approval of MERALCO’s unbundled rates and did not adopt the COA Report’s findings. It held that applying COA’s disallowances to the already-approved rates violated the principle against retroactive rate-making, that using historical cost and a 12% return was contrary to law and jurisprudence allowing present market value and WACC, and that COA’s analysis failed to account for incrementals. The Court of Appeals affirmed the ERC’s Orders, stating the ERC was not bound by the COA audit findings. NASECORE elevated the case to the Supreme Court.

ISSUE

1. Whether the ERC gave proper weight and credence to the findings of the COA audit.
2. Whether MERALCO’s operating expenses for employees’ pension and other benefits are recoverable from consumers.
3. Whether certain properties and facilities (e.g., MERALCO Theater, Museum) should be considered part of the rate base.
4. Whether costs recovered by MERALCO in excess of legal limits constitute “over-recovery” subject to refund.

RULING

The Supreme Court PARTLY GRANTED the petition.
1. On the COA Audit: The Court ruled that the ERC correctly exercised its discretion in not adopting the COA Report’s conclusions. The COA audit was conducted pursuant to a specific court directive, but the ERC, as the specialized regulatory body, possesses the primary authority and expertise to determine the reasonableness of rates. The ERC is not bound to accept COA’s findings, especially when, as it found, COA used a different test period, applied disallowances retroactively (violating the rule against retroactive rate-making), used historical cost instead of the present market value allowed by law, and failed to consider incrementals. The ERC’s rejection was based on valid technical grounds within its regulatory purview.
2. On Operating Expenses (Pension/Benefits): The Court remanded this issue to the ERC for determination. It held that while employee pension and benefits can be legitimate operating expenses, their recoverability from consumers depends on whether they are “reasonable and necessary” for the operation of the utility. The ERC must make this factual determination based on evidence presented in the proper rate-setting proceedings.
3. On Properties for Rate Base: The Court likewise remanded this issue to the ERC. Assets can be included in the rate base only if they are “used and useful” in the service of the public. The determination of whether specific assets like the MERALCO Theater or Museum meet this criterion is a factual matter for the ERC to decide, applying its expertise and the evidence on record.
4. On Over-Recovery and Refund: The Court ruled that if, after the ERC’s proper determination on the remanded issues (expenses and assets), it is found that MERALCO earned revenues exceeding the allowable rate of return, such excess constitutes over-recovery. In that event, the excess amounts must be refunded to the consumers, or alternatively, credited against future electricity charges.