Erc Comment

Republic of the Philippines
SUPREME COURT
Manila
BAYAN MUNA REPS. NERI JAVIER
COLMENARES ET AL.,
Petitioners.
- versus -
ENERGY REGULATORY
COMMISSION (ERC) ET AL.,
Respondents.
:x- - - - - - - - - - - - - - -- - - - - - - - - - - :x
NATIONAL ASSOCIATION OF
ELECTRICITY CONSUMERS FOR
REFORMS (NASECORE) ET AL.,
Petitioners,
COUR'f
OI?.:TICE O:f 'fill:. CLEH.J( OF COURT
ll:N l!ANC

G. R. No. 210245
I
""
co
..
- versus - G. R. No. 210255
MANILA ELECTRIC COMPANY
(MERALCO) ET AL.,
Respondents.
:x - - - - - - - - - - - - - - - - - - - - - - - - - -:x
MANIFESTATION AND MOTION FOR LEAVE
TO ADMIT THE ATTACHED COMMENT
Public Respondent ENERGY REGULATORY COMMISSION
(hereinafter, ERC), through the undersigned Counsels, unto this
Honorable Court, most respectfully states:
1. In a Manifestation and Motion dated 02 January 2014 filed
with this Honorable Court by the Office of the Solicitor General (OSG), a
copy of which was received by the ERC on 07 January 2014, the OSG
invoked the provisions of Section 5, Rule 65 of the Revised Rules of
1
(1
("
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-1':.
j1''
Court, as amended, alleging that the ERC is only a nominal party to the
case and that it is the duty of the Manila Electric Company (MERALCO)
as private respondent to appear and defend the ERC unless the latter is
specifically directed to do by this Honorable Court. The OSG, therefore,
prayed to be excused from filing the Comment on behalf of the ERC as
well as the Department of Energy (DOE).
2. Simultaneous with the filing of the aforesaid motion before
the Honorable Court, the ERC received a letter from the Office of the
Solicitor General (OSG) invoking the provisions of Section 5, Rule 65 of
the Revised Rules of Court, as amended.
3. In response thereto, on 06 January 2014, the Chairman in
representation of the Commission, wrote a letter (ANNEX 1) to the OSG
stating, in substance, that inasmuch as it agreed with its position, the
ERC noted that the issues elevated before the Supreme Court are
constitutional in nature and delved on the adjustment mechansim
utilized by the ERC in the normal approval of the generation cost
component of the electricity retail rate. An adverse decision thereon
will have an impact on the ERC's determination and current processes
and affect consumers at large who are the ultimate payers of the
generation charges pertaining to the electricity consumed.
4. To date no response has been received from the Office of
the Solicitor General. Thus, in the exigency of the circumstances and
cognizant of the importance of the issues brought forth before the
Honorable Court, the ERC respectfully moves that it be allowed to
submit the attached Comment in order to fully participate in the
proceedings for a clearer understanding of the ERC's regulatory
processes for the benefit of the public,
5. It is in this light that the ERC respectfully begs leave of
Court to submit the attached Comment in the meantime that the
Manifestation and Motion of the OSG remains under consideration of
this Honorable Court.
WHEREFORE, premises concerned, it is respectfully prayed of this
Honorable Court to admit the attached Comment of Public Respondent
Energy Regulatory Commission (ERC).
Other reliefs just and equitable under the premises are likewise
prayed for.
07 January 2014, Pasig City for Manila.
2
ENERGY REGULATORY COMMISSION
Public Respondent
16/F Pacific Center Bldg., San Miguel Avenue,
Pasig City, Metro Manila
Trunk Line. No.02-6895372
NINO C. JUAN
. 39610
IBP No. 951520, is. Or., 01/06/2014
MCLE Compliance No. IV - 0018441
7/03/2013
Contact No. 02-6315879
Email address: fscjuan@erc.gov.ph
DEBORA AN ll!!!i<.r. LAYUGAN

IBP No. 951519, Isabela, 01/06/2014
MCLE Compliance No. IV-0011052,
1/03/2013
Email address: dtlayugan@erc.gov.ph

-
IBP Lifetime Membership No. 04302, Q.C.
5/02/2013
Email address: glsantos@erc.gov.ph
3
Copy furnished by personal service:
1. SUPREME COURT
En Banc
Padre Faura, Manila
2. PUBLIC INFORMATION OFFICE
Supreme Court, Padre Faura, Manila
3. Atty. MARIA CRISTINA P. YAMBOT
Counsel for Petitioners in G.R. 210245
45 K-7th St., Brgy. West Kamias, Q.C.
4. Atty. RONNIE B. RODILLAS
Counsel for Petitioners in G.R. No. 210255
137 Libis Gochuico St., Circumferential Road 3,
Caloocan City
5. DEPARTMENT OF ENERGY (DOE)
c/o Secretary Carlos Jericho L. Petilla
Energy Center, Rizal Drive Bonifacio
Global City, Taguig City
6. Atty. RENE A.V. SAGUISAG
4045 Bigasan St., Brgy Palanan
Makati City
7. Atty. NELSON A. LOYOLA
Suite 201 Carreon Building 2746 Zenaida St.,
Brgy. Poblacion, Makati City
B. OFFICE OF THE SOLICITOR GENERAL (OSG)
Amorsolo St., Makati City
9. MANILA ELECTRIC COMPANY
Legal Department,
Lopez Bldg., MERALCO Center
Ortigas Ave., Pasig City
4
06 January 2014
FRANCIS H. JARDELEZA
Solicitor General
134 Amorsolo St., Legaspi Village,
Makati City, 1229
Re : G.R. Nos. 210245 and 210255
Bayan Muna Representatives, et al. vs. Energy Regulatory
Commission, et al.
NASECORE, et al. vs. Manila Electric Company, et al.
Dear Solicitor General Jardeleza:
We acknowledge receipt of the letter from the Office of Solicitor General (OSG)
dated 02 January 2014 relative to the petitions for certiorari and prohibition filed
before the Supreme Court docketed as G.R. Nos. 210245 and 210255. This is in
response to the request for legal representation made by the Commission in an
earlier letter dated 23 December 2013.
The OSG has called the attention of the Commission to Section 5, Rule 65 of the
Rules of Court, where it posited that the Commission is impleaded merely as a
nominal party and as such is not required to defend the alleged Commission
approval of rates, much less appear and file its comment on the petitions. The OSG
further stated that instead of filing a comment on the petition in behalf of the
Commission, the OSG deemed it prudent to file a Manifestation and Motion before
the Supreme Court praying that the Commission be excused from filing its comment
on the petitions and/or participating in the said proceedings.
While the Commission agrees with the OSG position, it notes that the issues
elevated before the Supreme Court involve the constitutionality of several provisions
of Republic Act No. 9136 and its Implementing Rules and Regulations (IRR) as well
as questions on the adjustment mechanism utilized by the Commission in the normal
approval of the generation cost component of the electricity retail rate. Inasmuch as
an adverse decision might gravely impact not only the determinations and current
processes of the Commission, but ultimately the public, it respectfully maintains that
there is an immense need for it to defend its position through participation in the
proceedings before the Supreme Court. The Commission further notes that there are
technical concerns raised in the petitions that are particular only to it and to allow it to
fully ventilate its cause before the Court would result in a better appreciation by the
Supreme Court and the public of the regulatory processes of the Commission.
With all due respect, may we be allowed to forward a copy of the preliminary draft
Comment on the petitions prepared by the Commission for your study and
consideration. This is not intended to pre-empt any position that the OSG may
further take on the matter but the copy of the draft Comment is respectfully being
provided for the guidance of the OSG as the Commission's statutory counsel.
Meantime, the Commission also awaits any action that the Supreme Court may take
on the Manifestation and Motion filed by the OSG.
Thank you very much in advance for your cooperation.
Very truly yours,
;,.
& CRUZ-DUCUT
Chairperson r
2014-A3-E-DD1
Cc: Vida G. San Vicente
Assistant Solicitor General
Pacific Center Building, San Miguel Avenue, Ortigas Center, Pasig City, Philippines
Website: http// www.erc.gov.ph Email: info@erc.gov.ph Phone: 68 -372 (ERC)
, , ; rl : :'i7ffJfl' .....
' ED S. ANGELES i

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
Bayan Muna Representatives
NERI JAVIER COLMENARES and
CARLOS ISAGANI ZARATE,
Gabriela Women's Party
Representatives LUZ ILAGAN and
EMMI DE JESUS, Act Teachers
Party List Representative ANTONIO
TINIO, and Kabataan Party List
Representative TERRY RIDON,
Petitioners,
-versus-
and MANILA ELECTRIC COMPANY,
Respondents.
x---------------------------------------------x
NATIONAL ASSOCIATION OF
ELECTRICITY CONSUMERS FOR REFORMS,
represented by Petronila L. Ilagan,
FEDERATION OF VILLAGE
ASSOCIATIONS, represented by
Siegfriedo A. Veloso, FEDERATION
OF LAS PIN-AS HOMEOWNERS ASSOCIATION,
represented by Bonifacio Daza,
I'':;
' '- ,,. " ..
,.,'..._.._
--------..._.... __
W/4,JM1-9 ~ B
I ic,, . 26
ll i
G.R. No. 210245
G.R. Nos. 210245 and 210255
Page 2of71
and RODRIGO C. DOMINGO, JR.,
Petitioners,
- versus-
MANILA ELECTRIC COMPANY,
ENERGY REGULATORYCOMMISSION
and DEPARTMENT OF ENERGY,
Respondents.
x-----------------------------------------------x
PREFATORY STATEMENT
G.R. No. 210255
"One of the landmark pieces of legislation enacted by
Congress in recent years is the EPIRA. It established a
new policy, legal structure and regulatory framework for
the electric power industry.
The new thrust is to tap private capital for the expansion
and improvement of the industry as the large government
debt and the highly capital-intensive character of the
industry itself have long been acknowledged as the
critical constraints to the program. To attract private
investment, largely foreign, the jaded structure of the
industry had to be addressed. While the generation and
transmission sectors were centralized and monopolistic,
the distribution side was fragmented with over 130
utilities, mostly small and uneconomic. The pervasive
G.R. Nos. 210245 and 210255
Page 3of71
flaws have caused a low utilization of existing generation
capacity; extremely high and uncompetitive power rates;
poor quality of service to consumers; dismal to
forgettable performance of the government power sector;
high system losses; and an inability to develop a clear
strategy for overcoming these shortcomings.
Thus, the EPIRA provides a framework for the
restructuring of the industry, including the privatization
of the assets of the National Power Corporation (NPC), the
transition to a competitive structure, and the delineation
of the roles of various government agencies and the
private entities. The law ordains the division of the
industry into four (4) distinct sectors, namely:
generation, transmission, distribution and supply."
(Freedom from Debt Coalition, et al. vs. ERC, at al., G.R.
No. 161113, 15 June 2004)
CONSOLIDATED COMMENT
Respondent Energy Regulatory Commission (ERC), by counsel,
1n compliance with this Honorable Court's Order dated 23
December 2013,1 respectfully states:
NATURE OF THE CONSOLIDATED PETITIONS
These are Petitions for Certiorari filed under Rule 65 of the
1997 Rules of Court. In the Petition filed by Bayan Muna et al.
i Copy received by the Office of the Solicitor General on 23 December 2013
G.R. Nos. 210245 and 210255
Page 4of71
(hereinafter Bayan Muna Petition for brevity), the petitioners therein
seek to nullify the act of Respondent ERC in approving the proposal
of Manila Electric Company (MERALCO) to pass on to consumers
the increase in the generation cost for November 2013 as contained
in a letter dated 09 December 2013
2
and to declare Sections 6 and
29 of Republic Act (R.A.) No. 9136 or the Electric Power Industry
Reform Act (EPIRA) as unconstitutional. The petitioners therein also
prayed for the issuance a Temporary Restraining Order (TRO)
and/or Preliminary Injunction to restrain Respondents from
implementing the rate hike during the pendency of the case.
On the other hand, in the Petition filed by National Association
of Electric Consumers for Reforms et al. (hereinafter NASECORE
Petition for brevity), the petitioners therein seek the nullification of
the amendment of Section 4 (e), Rule 3 of the EPIRA IRR, and the
ERC Resolutions and Orders pertaining to automatic adjustments
or increases imposed by MERALCO in its generation charges for
allegedly having been issued with grave abuse of discretion
amounting to lack or excess of jurisdiction. Specifically, the
Resolutions being assailed are Resolution 10-01,3 Resolution 10-
04,4 both of Series 2004, and the aforementioned letter dated 09
December 2013.
5
The petitioners therein also prayed for the
issuance of a TRO enjoining Respondents from implementing,
executing, and carrying out the execution of the above-mentioned
ERC Resolutions, and the 09 December 2013 ERC letter to
Respondent MERALCO. The petitioners further prayed for the
issuance of a Writ of Prohibitory Preliminary Injunction restraining
2 Annex 5 of the Comment
3 Annex 3-A of the Comment
4 Annex 3-B of the Comment
s Supra Note 2
G.R. Nos. 210245 and 210255
Page 5of71
the Respondents from implementing the said Resolutions and ERC
letter after due notice and hearing.
STATEMENT OF THE FACTS AND OF THE CASE
In a letter dated 05 December 2013 addressed to ERC
Chairperson Zenaida G. Cruz-Ducut, Respondent MERALCO,
through the First Vice President and Head of its Regulatory
Management Office, Ivanna G. Dela Pena, sought clearance from
the ERC to implement its proposed staggered collection of its
generation costs for the November 2013 supply month, invoking
Article VIII, Section 1 of the Automatic Generation Rate Adjustment
(AGRA) Rules, which provides that "ERC may allow an exception
from any provisions of these Guidelines, if such exception is found
to be in the public interest and is not contrary to law or any other
related rules and regulations." Particularly, it requested clearance
from the ERC to 1.) collect a generation charge of Php7.90/kWh in
its December 2013 billings to its customers; and 2.) defer to
February 2014 the recovery of Php 3 Billion, representing a portion
of the generation costs for the supply month of November 2013 not
passed on to customers in December 2013, subject to inclusion of
the appropriate carrying charge.6
For the easy reference of this Honorable Court, the reasons for
the proposed staggered collection of the increased generation costs
is explained by MERALCO in the same letter as follows:
Last 10 October 2013, MERALCO representatives
sought an audience with the Honorable Commission to
present the projected impact of the SPEX-Malampaya
6 Attached hereto as Annex 4
G.R. Nos. 210245 and 210255
Page 6of71
shutdown on MERALCO's blended generation charge.
The shutdown will affect the supply of natural gas to the
Ilijan, San Lorenzo and Santa Rita plants, which supply
an aggregate capacity of 2700MW to MERALCO's
franchise area. In addition, for the supply month of
November, the shutdown will coincide with the scheduled
maintenance of Pagbilao 2 and Sual 1. These plants
collectively contribute over 950MW to MERALCO's
require men ts.
xxx
MERALCO yesterday received the actual November
2013 power bills from its suppliers. Total cost of
generation to be passed on to captive customers stood at
P22.64 billion, translating into a generation charge for
December 2013 billing of P9 .1070 per kwh. This is an
increase of P3.44 per kwh from the PS.67 per kwh that
was billed to customers last month and higher by Pl.25
per kwh from the P7.86 per kwh that was presented last
October 10. Furthermore, since the generation charge
impacts other bill components, such as the system loss
charge, VAT and the local franchise tax, the resulting
effective total increase to a 200 kwh residential customer
is P4.15 per kwh.
Under Article III, Section 2 of the Guidelines for the
Automatic Adjustment of Generation Rate and System
Loss Rates by Distribution Utilities ("AGRA" Rules),
MERALCO is authorized to automatically reflect the full
generation cost of P22.64 billion in its December 2013
billing to its customers, as calculated in accordance with
G.R. Nos. 210245 and 210255
Page 7of71
the adjustment formula laid down in Article III, Section 1
of the same Rules. While MERALCO is prepared to reflect
the true cost of generation in its billings to customers
this December, it is cognizant of the financial burden
such rate spike will place on its customers during the
Christmas season and considering further that the prices
of other basic commodities have already registered
substantial increases.
To mitigate the effects of the abrupt increase 1n
generation cost, MERALCO proposes that instead of
reflecting the actual generation charge of Php9.1070 per
kWh in its December 2013 billing, it be allowed to
implement a lower generation charge of PhP7.90 per
kWh, a mere four centavos higher than the P7.86 per
kWh generation charge estimate presented to the
Commission last October 10. This would mean, however,
that of the total generation cost of P22. 64 billion incurred
in November 2013, P3 billion will have to be collected at a
later period. With the expectation that the generation
charge will normalize in February 2014, MERALCO
proposes to include the deferred amount of P3 billion in
the computation of the generation charge for February
2014 billing.
In response thereto, Respondent ERC, in a letter addressed to
Ms. Dela Pena and dated 09 December 2013, granted MERALCO
the clearance to stagger the implementation of its generation cost
recovery by way of an exception to the AGRA Rules. In part, the
letter states:
G.R. Nos. 210245 and 210255
Page 8of71
Accordingly, MERALCO is authorized to implement
a generation charge of PhP7.67 /kWh in its December
2013 billing and add to its calculated generation charge
for February 2014 billing the generation rate of
PhPl.00/kWh. The balance on the deferred generation
amount without any carrying costs shall be included in
MERALCO's generation charge for March 2014. Should
MERALCO seek to recover its carrying costs on the entire
deferred amount, it shall file a formal application for this.
The foregoing should not in any way be construed
as confirmation of MERALCO 's generation costs incurred
in November 2013, which shall remain subject of the
confirmation and post-verification proceedings 1n
accordance with the applicable ERC resolution on the
matter.
Finding the rate hike to be adverse to their interests as
subscribers and electricity consumers of Respondent MERALCO
and believing that the shutdown of the concerned power plants (as
related in MERALCO's request-letter dated 05 December 2013),
which increased MERALCO's generation costs, constitutes an anti-
competitive behavior, the above-named petitioners filed the present
Petitions, praying for the afore-stated reliefs.
On 23 December 2013, this Honorable Court issued an Order
granting a TRO effective immediately and for a period of sixty (60)
days, enjoining Respondent ERC from implementing its 09
December 2013 and acting further on Respondent MERALCO's
letter-request dated 05 December 2013, and Respondent MERALCO
from increasing the rates it charges to its consumers based on the
matters raised in its 05 December 2013 letter. The Order also
G.R. Nos. 210245 and 210255
Page 9of71
required the consolidation of the Petitions and directed
Respondents to submit their respective comments on or before 08
January 2013.
On 07 January 2014, respondent ERC received a copy of the
Manifestation and Motion filed by the OSG stating that public
respondents ERC and DOE, which are merely impleaded as nominal
parties in these cases, need not pro se, or by the OSG, submit their
respective Comments.
In its Manifestation and Motion for Leave to Admit Comment
filed on 08 January 2014, the ERC respectfully submits the need
for it to participate in the proceedings and defend its position to
provide clarification to the Honorable Court of its regulatory
processes and framework.
Hence, this Comment.
ARGUMENTS AND ISSUES RAISED IN THE PETITIONS
The arguments raised 1n the Bayan Muna Petition may be
summarized as follows:
a.) Respondent ERC committed grave abuse of discretion in
approving the staggered power rate increases on the basis only of
Respondent MERALCO's unverified letter and disregarding due
process of law. The ERC should have complied with Section 4 (e),
Rule 3 of the IRR of the EPIRA as outlined by this Honorable Court
in the earlier case of NASECORE v. ERC.
7
7 G.R. No. 163935, 02 February 2006
G.R. Nos. 210245 and 210255
Page 10of71
b.) Respondent ERC committed grave abuse of discretion in
approving MERALCO's proposal to pass on to consumers the
increase in the generation cost for November 2013 as it violates its
mandate under the EPIRA to protect the consumers from anti-
competitive practices and abuse of market behaviour of industry. It
approved the rate increase with haste and without exercising the
required regulatory role, which constitutes grave abuse of
discretion.
c.) Sections 6 and 29 of the EPIRA are unconstitutional. The
specific constitutional provisions violated are:
i.) Section 6, Article XII which provides that the use
of property bears a social function, and all economic
agents shall contribute to the common good. Individuals
and private groups, including corporations, cooperatives,
and similar collective organizations, shall have the right
to own, establish, and operate economic enterprises,
subject to the duty of the State to promote distributive
justice and to intervene when the common good so
demands.
This is violated by Sections 6 and 29 of the EPIRA
because the said provisions abandon the power of the
State to regulate the excessive impositions of power
generators and suppliers and, resultantly, this is not for
the common good of the Filipino people, the consumers
particularly.
ii.) Section 1, Article III which provides that no
person shall be deprived of life, liberty and property
without due process of law.
G.R. Nos. 210245 and 210255
Page 11of71
Sections 6 and 29 the EPIRA violate the due process
clause because they prohibit the regulation of prices
charged by generation companies and suppliers. This has
resulted in depriving the consumers of their hard earned
income in order to pay high electricity rates.
iii.) Section 9, Article II which states that the State
shall promote a just and dynamic social order that will
ensure the prosperity and independence of the nation
and free the people from poverty through policies that
provide adequate social services, promote full
employment, a rising standard of living, and an improved
quality of life for all.
The said EPIRA provisions violate this constitutional
provision because they condemn the people to poverty
instead of freeing them from poverty caused by high costs
of electricity.
d.) Sections 6 and 29 should also be struck down because the
generation sector has escaped accountability by virtue thereof as
they dictate that this sector is beyond the regulating power of the
ERC. Due to these provisions, the generation and supply sector,
especially since they are not considered public utilities, are
emboldened in manipulating the market and colluding with one
another in order to hike up electricity rates. The ERC, on the basis
of these provisions, is also emboldened in approving rate increases
in highly irregular and unjust rate cases.
Petitioners in the Bayan Muna Petition argue that the nature of
an entity as to whether or not it is a public utility is a judicial
G.R. Nos. 210245 and 210255
Page 12 of 71
function and not a legislative one, citing the case of North Negros
Sugar Co. v. Hidalgo. s
The NASECORE Petition, on the other hand, poses the
following contentions:
a.) Respondent ERC acted with grave abuse of discretion,
amounting to lack or excess of jurisdiction when it gave clearance
to MERALCO to collect the generation costs without first publishing
it as required by law and without due process of law.
b.) The amendment made in Section 4 (e), Rule 3 of the IRR of
the EPIRA, which provides that Section 4 (e) shall not apply to
Generation Rate Adjustment Mechanism (GRAM), Incremental
Currency Exchange Recovery Adjustment (ICERA), Transmission
Rate Adjustment Mechanism, Transmission True-up Mechanism,
System Loss Rate Adjustment Mechanism, Lifeline Rate Recovery
Mechanism, Cross-Subsidy Mechanism, Local Franchise Tax
Mechanism, Business Tax Recovery Mechanism, Automatic
Generation Rate Adjustment Mechanism, VAT Recovery
Mechanism, Incremental Generation Cost Adjustment Mechanism,
and Recovery of Deferred Accounting Adjustment for Fuel Cost and
Power Producers by NPC and NPC-SPUG, Provided that, such
adjustments shall be subject to subsequent verification by the ERC
to avoid over/under recovery of charges, is illegal for being violative
of due process as it dispenses with the requirement of publication.
c.) The said amendment is also void for being violative of the
declared state policy under Section 2 (c) of the EPIRA, which
provides that the State shall ensure transparent and reasonable
s G.R. No. L-42334, 31 October 1936
G.R. Nos. 210245 and 210255
Page 13of71
prices of electricity in a regime of free and fair competition and full
public accountability to achieve greater operational and economic
efficiency and enhance the competitiveness of Philippine products
in the global market.
This declared state policy can be accomplished through
publication as it ensures transparent and reasonable prices of
electricity.
Since the amendment on the IRR is illegal, all other
subsequent issuances made on the basis thereof, particularly ERC
Resolution Nos. 10-01 and 10-04, both of Series 2004, as well as
the 09 December 2013 clearance letter are null and void.
d.) Publication of the generation adjustments 1s also
necessitated by the commitments made by Respondent MERALCO
under its franchise law, R.A. 9209.
Particularly, Section 4 thereof provides that MERALCO shall
supply electricity to its captive market in the least cost manner. In
the interest of the public good and as far as feasible and whenever
required by the ERC, the grantee shall modify, improve or change
its facilities, poles, lines, systems and equipment for the purpose of
providing efficient and reliable service and reduced electricity costs.
The grantee shall charge reasonable, just and competitive power
rates for its services to all types of consumers within its franchised
area in order that business and industries shall be able to compete.
The grantee shall have the obligation to provide open and non-
discriminatory access to its distribution system and services for any
end-user within its franchise area consistent with Republic Act No.
9136, otherwise known as the "Electric Power Industry Reform Act
of 200 l ". The grantee shall not engage in any activity that will
G.R. Nos. 210245 and 210255
Page 14of71
constitute an abuse of market power such as but not limited to,
unfair trade practices, monopolistic schemes and any other
activities that will hinder competitiveness or business and
industries.
Section 5, also of R.A. 9209, states that the retail rates to its
captive market and charges for the distribution of electric power by
the grantee to its end-users shall be regulated by and subject to the
approval of the ERC. The grantee shall identify and segregate in its
bill to the end-users the components of the retail rate pursuant to
Republic Act No. 9136, unless otherwise amended. Such rates
charged by the grantee to the end-users shall be made public and
transparent. The grantee shall implement lifeline rate to
marginalized end-users as mandated under Republic Act No. 9136.
The above-stated commitments can only be done through
publication of its application for rate adjustments or increases and
by encouraging public participation in the process of its approval
rather than embedding it automatically in its consumers' billing.
d.) Even with the amendment made under Section 4 (e) of the
EPIRA IRR, Respondents ERC and MERALCO are not freed from
their obligations under the law to publish and conduct public
hearings or consultations thereon because of due process. It has
been ruled by this Honorable Court that due process is deemed
written into every statute, contract or undertaking.
e.) Automatic electricity rate adjustments or increases of
MERALCO are not only violative of due process but also amount to
G.R. Nos. 210245 and 210255
Page 15 of 71
regulatory failure on the part of ERC, an abject surrender of its
regulatory functions in violation of Section 25 of the EPIRA. 9
When ERC cleared and allowed MERALCO to automatically
adjust and increase its rate given the assailed Resolutions and
letter, Respondent ERC practically surrendered and delegated its
regulatory authority to MERALCO.
Moreover, its act of allowing an automatic rate adjustment or
increase amounts to delegation of its authority and regulatory
functions which is violative of the principle that delegated authority
cannot be further delegated-potestas delegate non delegare potest.
f.) Since the automatic rate adjustments made and imposed by
MERALCO are void for being violative of the due process clause, a
refund of all amounts collected by MERALCO should be ordered,
reckoned from 2004, which is the year when the Resolutions
became effective.
In fine, the issues may be summed up as follows:
I.
Whether or not Respondent ERC committed
grave abuse of discretion when it granted
Respondent MERALCO the clearance to
implement the staggered collection of the
9
Section 25. Distribution Retail Supply Rate. - The rates charged by distribution utilities for
the supply of electricity in their captive market shall be subject to regulation by the ERC based
on the principle of full recovery of prudent and reasonable economic costs incurred, or such
other principles that will promote efficiency as may be determined by the ERC.
Every distribution utility shall identify and segregate in its bills to end-users the components of
the distribution retail supply rate, as defined in this Act.
G.R. Nos. 210245 and 210255
Page 16 of 71
generation costs for November 2013 as
contained in its 09 December 2013
clearance letter
II.
Whether or not Sections 6 and 29 are
unconstitutional
III.
Whether or not the amendment made in
Section 4 (e), Rule 3 of the EPIRA IRR is
void for being violative of the due process
clause and of the EPIRA, particularly
Section 2 (c) thereof
Illa.
If the amendment made in Section 4 (e),
Rule 3 of the EPIRA IRR is void, whether or
not ERC Resolution Nos. 10-01, 10-04, both
of series 2004, and the 09 December 2013
clearance letter are also corollarily void
IV.
Whether or not the automatic electricity
rate adjustments or increases of
Respondent MERALCO amounts to
regulatory failure on the part of ERC
IV.a.
Whether or not the automatic electricity
rate adjustments or increases of
Respondent MERALCO amounts to
G.R. Nos. 210245 and 210255
Page 17of71
delegation of regulatory power in violation
of the principle that delegated power
cannot further be delegated
ARGUMENTS AND DISCUSSION
I. Respondent ERC did not
commit Grave Abuse of
Discretion in Granting
Respondent MERALCO the
clearance to implement the
staggered collection of its
generation costs for
November 2013.
I.a. Respondent ERC did
not commit grave abuse of
discretion when it granted
MERALCO the clearance to
implement the staggered
collection because such
granting had a legal basis,
which is the AGRA Rules. It
must be noted that the AGRA
Rules, not having been
judicially set aside with
finality, stand as good and
valid law upon which ERC
can lawfully anchor its
action of giving such
clearance to MERALCO.
G.R. Nos. 210245 and 210255
Page 18of71
In a litany of cases, this Honorable Court has defined the term
"grave abuse of discretion" as "a capricious and whimsical exercise
of judgment so patent and gross as to amount to an evasion of a
positive duty or a virtual refusal to perform a duty enjoined by law,
as where the power is exercised in an arbitrary and despotic
manner because of passion or hostility." lo
In Tan v. Matsuura,
11
the Highest Tribunal also held that there
1s grave abuse of discretion when the respondent acts in a
capricious, whimsical, arbitrary or despotic manner in the exercise
of his judgment, as when the assailed order is bereft of any
factual and legal justification.
In the present case, it cannot be said that Respondent ERC
committed grave abuse of discretion when it granted Respondent
MERALCO the clearance to implement the staggered collection of its
generation cost because it had the legal basis to do so.
Pursuant to Section 43 (t), the Guidelines for the Automatic
Adjustment of Generation Rate (AGRA) and System Loss Rates by
Distribution Utilities or the consolidated AGRA Rules, were
promulgated.
10
Tan v. Spouses Antazo, G.R. No. 187208 (23 February 2011); Office of the Ombudsman v.
Magno, G.R. No. 178923, 27 November 2008, 572 SCRA 272, 286-287 citing Microsoft
Corporation v. Best Deal Computer Center Corporation, 438 Phil. 408, 414 (2002); Suliguin v.
Commission on Elections, G.R. No. 166046, 23 March 2006, 485 SCRA 219, 233; Natalia
Realty, Inc. v. Court of Appeals, 440 Phil. 1, 19-20 (2002); Philippine Rabbit Bus Lines, Inc. v.
Goimco, Sr., 512 Phil. 729, 733-734 (2005) citing Land Bank of the Philippines v. Court of
Appeals, 456 Phil. 755, 786 (2003); Duero v. Court of Appeals, 424 Phil. 12, 20 (2002) citing
Cuison v. Court of Appeals, G.R. No. 128540, 15 April 1998, 289 SCRA 159, 171.
11 G.R. Nos. 179003 and 195816, 09 January 2013. See also The Senate Blue Ribbon
Committee v. Hon. Majaducon, 455 Phil. 61, 71 (2003), citing Flores v. Office of the
Ombudsman, 437 Phil. 684, 691 (2002).
G.R. Nos. 210245 and 210255
Page 19of71
Under Article III, Section 2 of the Guidelines for the Automatic
Adjustment of Generation Rate (AGRA) and System Loss Rates by
Distribution Utilities or the consolidated AGRA Rules,
12
distribution
utilities, such as Respondent MERALCO, are authorized to
automatically reflect their generation cost for a particular supply
month in the subsequent month's billing.13
Hence, when Respondent ERC gave clearance to MERALCO to
implement the collection of its November generation cost in a
staggered manner, it did not act whimsically, capriciously, or
arbitrarily do so as it had legal basis to grant such clearance.
Moreover, it must be noted that the when ERC granted the
clearance to MERALCO in its 09 December 2013 letter, the AGRA
Rules, upon which such granting was anchored, stood as a good
and valid law as the same has not been judicially set aside. In this
regard, it is important to reiterate the constant ruling of this
Honorable Court that -
[a] dministrative regulations enacted by
administrative agencies to implement and interpret the
law which they are entrusted to enforce have the force of
law and are entitled to respect. Such rules and
regulations partake of the nature of a statute and are
just as binding as if they have been written in the statute
12
ERC Case No. 2004-322, entitled "In the Matter of the Adoption of the Guidelines for the
Automatic Adjustment of Generation Rates and System Loss Rates by Distribution Utilities."
13 Section 2. Billing of New Generation Rate - The Distribution Utilities shall bill their
customers the Generation Rates calculated in accordance with the immediately preceding
Section effective on the tenth (10th) day of each month.
G.R. Nos. 210245 and 210255
Page 20of71
itself. As such, they have the force and effect of law
and enjoy the presumption of constitutionality and
legality until they are set aside with finality in an
appropriate case by a competent court.14
In the instant case, the consolidated AGRA Rules have not
been set aside with finality by a competent court at the time the 09
December 2013 clearance letter was issued. This being the case, the
AGRA Rules thus enjoys the legal presumption of validity and
legality and constitutes valid legal basis for Respondent ERC to
issue the said clearance letter.
I.b. In view of the
amendment of Section 4 (e),
Rule 3 of the EPIRA IRR,
15
which excluded the
Generation Rate Adjustment
Mechanism (GRAM) and
AGRA from its coverage, the
requirements thereunder are
not applicable in the instant
case.
The allegation of the petitioner in the Bayan Muna Petition that
the ERC should have complied with the publication requirements
under Section 4 (e), Rule 3 of the IRR of the EPIRA as outlined in
14
Abakada Guro Party List v. Purisima, G.R. No. 166715 (14 August 2008); See also Eslao v.
Commission on Audit, G.R. No. 108310, 01 September 1994, 236 SCRA 161; Sierra Madre
Trust v. Secretary of Agriculture and Natural Resources, 206 Phil. 310 ( 1983); and People v.
Maceren, 169 Phil. 437 (1977).
1s Amendments to Rule 3, Section 4 (e) and Rule 18, Section 7 of the EPIRA IRR as agreed
during the JCPC hearing on 07 June 2007.
G.R. Nos. 210245 and 210255
Page 21of71
the earlier case of NASECORE v. ERC
16
is misplaced because the
said provision has already been amended on 07 June 2007, which
carved out the GRAM and AGRA from the ambit of Section 4 (e),
Rule 3 of the IRR. This amendment has been duly approved by the
Joint Congressional Power Committee (hereinafter JCPC). Such
being the case, coupled with the fact that the consolidated AGRA
Rules remain a good and valid law because the same have not been
judicially struck down to be illegal, Respondent ERC did not commit
grave abuse of discretion amounting to lack of jurisdiction when it
gave due course to the prayer of MERALCO that it be allowed to
stagger the collection of its November generation cost.
I.e. Respondent ERC did
not act with grave abuse of
discretion when it granted to
MERALCO the clearance to
carry out the collection of its
generation costs
staggered manner
in a
without
prior publication as its
action had legal basis, which
is the amendment to Section
4 (e), Rule 3 of the EPIRA
IRR.
Petitioners in the NASECORE Petition also attribute grave
abuse of discretion against Respondent ERC for the reason that it
gave MERALCO the go signal to execute the staggered collection of
its generation cost without prior publication.
16
Supra note 7
G.R. Nos. 210245 and 210255
Page 22of71
However, measured g i n ~ t the definition of grave abuse of
discretion as stated above, Respondent ERC cannot be deemed to
I
have committed grave abuse of discretion in doing so because,
I
again, it had the legal justification upon which its action was
I
grounded, which was the amendment to Section 4 (e), Rule 3 of the
I
EPIRA IRR.
Similarly, it bears stressibg that at the time that the ERC
issued the 09 December 2013 letter, granting MERALCO the green
light to carry out the collection of its generation cost in a staggered
fashion, the subject amendment has not been judicially set aside
with finality for being contrary to the law it seeks to implement or to
the Constitution. Hence, it enjoys the legal presumption of legality
and forms a concrete lawful basis for the act of ERC in proceeding
with giving MERALCO the clearance to collect its generation cost in
staggered with the prior publication requirements of Section 4 (e),
Rule 3 of the IRR.
At this juncture, it bodes well to emphasize that the
assumption of the petitioners in the NASECORE Petition that the
passing on of the generation cost to the consumers of MERALCO, or
any distribution utility for that matter, is immediate and automatic
and does not go through an evaluative process and publication at
all is erroneous.
As will be discussed in detail below, the generation costs
charged by generation companies, which are ultimately passed on
to the consumers, with distribution utilities acting as the collecting
agents, are in truth and in fact subjected to evaluation and hearing
by the ERC in two stages. In both instances, the ERC sends out a
G.R. Nos. 210245 and 210255
Page 23 of 71
notice of hearing to all interested parties 1n compliance with
substantive and procedural due process.
All these taken together, Respondent ERC cannot thus be
deemed to have acted with grave abuse of discretion amounting to
lack or in excess of jurisdiction, contrary to petitioners' allegations.
II. Constitutionality of
Sections 6 and 29 of the
EPIRA
II.a. The
constitutionality of Sections
6 and 9 of the EPIRA is not
ripe for judicial
determination.
Jurisprudence enumerates the legal requisites for judicial
inquiry, namely -
1. Actual case or controversy calling for the exercise of
judicial power;
2. The person challenging the act must have "standing"
to challenge; he must have a personal and
substantial interest in the case such that he has
sustained, or will sustain, direct injury as a result of
its enforcement;
3. The question of constitutionality must be raised at
the earliest possible opportunity; and
G.R. Nos. 210245 and 210255
Page 24of71
4. The issue of constitutionality must be the V:ery lis
mo ta of the case .17
The constitutionality of Sections 6 and 9 of the EPIRA is not
the very Zis mo ta of the case.
As a precondition to judicial review, lis mota "meaP.s that the
I
I
Court will not pass upon a question of unconstitutionality, although
I
properly presented, if the case can be disposed of on !some other
I
ground, such as the application of the statute or the general law. It
I
is essential for the petitioner to establish that the cannot be
I
legally resolved unless the constitutional question
1
raised is
determined."18
The alleged unconstitutionality of Sections 6 and 29 of the
I
I
EPIRA is merely ancillary to petitioners' argument that gravely
I
abused its discretion when it issued the assailed dated 09
I
December 2013. In Francisco, et al. vs. The
1
House of
Representatives,
1
9 the Honorable Court reiterated the well-settled
maxim of adjudication that an issue assailing the constitutionality
of a governmental act should be avoided whenever possible.
Adhering thereto, the Supreme Court ruled:
Thus, in the case of Sotto vs. Commission on Elections, the
Court held:
17
See Board of Optometry v. Colet, 260 SCRA 88, 103 (1996)
18 Garcia vs. The Executive Secretary, et al. G.R. No. 157584, 02 April 2009
19 G.R. No. 160261, 10 November 2003
G.R. Nos. 210245 and 210255
Page 25of71
x x x It is a well-established rule that a court
should not pass upon a constitutional question
and decide a law to be unconstitutional or invalid,
unless such question is raised by the parties and
that when it is raised, if the record also presents
some other ground upon which the court may rest
its judgment, that course will be adopted and the
constitutional question will be left for
consideration until a case arises in which a
decision upon such question will be unavoidable.
(Underscoring supplied)
The same principle was applied in Luz Farms vs. Secretary
of Agrarian Reform where this Court invalidated Sections
13 and 32 of Republic Act No. 6657 for being confiscatory
and violative of due process, to wit:
It has been established that this Court will
assume jurisdiction over a constitutional question
only if it is shown that the essential requsites of a
judicial inquiry into such a question are first
satisfied. x x x the resolution of the question is
unavoidably necessary to the decision of the case
itself.
20
Succinctly put, courts will not touch the issue of
constitutionality unless it is truly unavoidable and is the
very lis mota or crux of the controversy. (Underscoring
supplied)
20 Citing Association of Small Land Owners in the Philippines, Inc. vs. Secretary of Agrarian
Reform, 175 SCRA 343 ( 1989)
G.R. Nos. 210245 and 210255
Page 26of71
The policies enunciated in Sections 6 and 29 of the EPIRA,
which are to declare generation and supply as open for competition
and outside of ERC's rate regulation and to declare them not as
public utility operations, are not the lis mota of the case.
It must be noted that the petitioners in the Bayan Muna Petition
seek to have Sections 6 and 29 of the EPIRA nullified for being
unconstitutional so as to place the generation sector within the
regulatory authority of the State in order to prevent the alleged anti-
competitive behaviour among the generation companies,
particularly pertaining to collusion.
However, the declaration of Sections 6 and 29 as
unconstitutional is not the only legal remedy available to address
the alleged anti-competitive behaviour committed by the generation
companies.
The ERC, under Section 45 has been vested with the authority
to monitor and penalize any market power abuse C?r anti-
competitive or discriminatory act or behaviour by any participant in
the electric power industry.
In fact, towards this end, Respondent ERC is now conducting
its investigation of the possible anti-competitive behaviour in the
wholesale electricity spot market based on the ERC Competition
Rules and Complaint Procedures.
Hence, the declaration of the nullity and constitutionality of
Sections 6 and 29 will not provide the requisite redress petitioners
are seeking for.
G.R. Nos. 210245 and 210255
Page 27of71
Needless to state, trifling with the regulatory framework that
has been put in place by EPIRA for the past ten (10) years may
result to severe consequences both from the macro and micro
perspective of the whole industry, considering that the overall
framework of EPIRA encompasses the interest not only of the
consumers but also of those who will be responsible for the creation
of capital in a developing economy like the Philippines.
Towards this end, it has been the declaration of policy of the
State to ensure a transparent and reasonable prices of electricity in
a regime of free and fair competition and full public accountability
to achieve greater operational and economic efficiency and enhance
the competitiveness of Philippine products in the global market
21
and to ensure fair and non-discriminatory treatment of public and
private sector entities in the process of restructuring the electric
power industry.
A full and complete determination of the issues on the validity
of MERALCO's generation charge for its December 2013 billing can
be solved independently from the issue of the purported
constitutional infirmity of Sections 6 and 29.
The wisdom or propriety of a policy
adopted by the Legislature cannot be
adjudicated.
In Garcia vs. Corona et. al., 22 the Honorable Court spurned the
prayer to declare unconstitutional a prov1s1on of the Oil
21
Section 2 (c) of the EPIRA
22
G.R. No. 132451, 17 December 1999
G.R. Nos. 210245 and 210255
Page 28 of 71
Deregulation Law by according respect to the wisdom of Congress.
The Honorable Court ratiocinated in this wise:
For this Court to declare unconstitutional the ! key
i
provision around which the law's anti-trust measures are
clustered would mean a constitutionally interdicted
!
distrust of the wisdom of Congress and of ! the
!
determined exercise of executive power.
I
Having decided that deregulation is the policy to
I
follow, Congress and the President have the u t ~ to
I
set up the proper and effective machinery to ensure
I
that it works. This is something which cannot be
adjudicated into existence. This Court is only an umpire
of last resort whenever the Constitution or a law appears
to have been violated. There is no showing of a
constitutional violation in this case. [Emphasis supplied]
In Garcia vs. The Executive Secretary, et az.,23 involving the
same Oil Deregulation Law, the Honorable Court rejected the prayer
for it to resolve the constitutionality of the said law, as follows -
An actual case or controversy is one that involves a
conflict of legal rights, an assertion of opposite legal claims
susceptible of judicial resolution; the case must not be
moot or academic or based on extra-legal or other similar
considerations not cognizable by a court of justice. Stated
otherwise, it is not the mere existence of a conflict or
controversy that will authorize the exercise by the
courts of its power of review; more importantly, the
23Q.R. No. 157584, 02 April 2009
G.R. Nos. 210245 and 210255
Page 29of71
issue involved must be susceptible of judicial
determination. Excluded from these are questions of
policy or wisdom, otherwise referred to as political
questions:
As Tafiada v. Cuenca puts it, political questions
refer "to those questions which, under the
Constitution, are to be decided by the people in
their sovereign capacity, or in regard to which full
discretionary authority has been delegated to the
legislative or executive branch of government."
Thus, if an issue is clearly identified by the
text of the Constitution as matters for
discretionary action by a particular branch of
government or to the people themselves then it
is held to be a political question. In the classic
formulation of Justice Brennan in Baker v. Carr,
"[p]rominent on the surface of any case held to
involve a political question is found a textually
demonstrable constitutional commitment of the
issue to a coordinate political department; or a
lack of judicially discoverable and
manageable standards for resolving it; or the
impossibility of deciding without an initial
policy determination of a kind clearly for non-
judicial discretion; or the impossibility of a
court's undertaking independent resolution
without expressing lack of the respect due
coordinate branches of government; or an
unusual need for unquestioning adherence to a
political decision already made; or the potentiality
of embarrassment from multifarious
G.R. Nos. 210245 and 210255
Page 30 of 71
pronouncements by various departments on the
one question."
24
[Emphasis supplied]
Further, in the Garcia2s case, the Honorable Court declined to
pass upon the policy of full deregulation of the oil industry, by
ruling that -
Stripped to its core, what petitioner Garcia raises as
an issue is the propriety of immediately and fully
deregulating the oil industry. Such determination
essentially dwells on the soundness or wisdom of the
timing and manner of the deregulation Congress wants to
implement through R.A. No. 8497. Quite clearly, the
issue is not for us to resolve; we cannot rule on when
and to what extent deregulation should take place
without passing upon the wisdom of the policy of
deregulation that Congress has decided upon.
The foregoing rulings apply squarely to this case. The
Honorable Court cannot adjudicate the constitutional issue raised
by petitioners without violating the doctrine of separation of powers
enshrined in the Constitution.
11.b. Sections 6 and 29
cannot be considered as
unconstitutional on the
ground that they violate the
due process clause as
contained under Section 1,
24 Citing Integrated Bar of the Philippines vs. Zamora, G.R. No. 141284, 15 August 2000, 338
SCA 81, citing Tafiada vs. Cuenca, 103 Phil. 1051 and Baker vs. Carr, 369 U.S. 186
2s G.R. No. 157584, 02 April 2009
G.R. Nos. 210245 and 210255
Page 31of71
Article III of
Constitution.
the
Petitioners in the Bayan Muna Petition posit that Sections 6
and 29 of the EPIRA are unconstitutional for being violative of the
due process clause. They contend that, by removing generation
companies and suppliers within the ambit of the regulatory power
of the ERC, the consumers are deprived of their hard earned income
in order to pay high electricity rates.
With utmost respect, this particular argument of the
petitioners in the Bayan Muna Petition comes from an erroneous
assumption that the generation companies, particularly with
respect to the rates they charge, are fully outside the regulatory
jurisdiction of the ERC.
While it is true that Sections 6 and 29 of the EPIRA declare the
generation industry to be deregulated, as of date, deregulation is
not to be appreciated from a strict point of view. Firstly, when it
comes to the imposition of retail rates, which includes the
generation charge that will be passed on to a consumer in a captive
market, the ERC evaluates the same in a meticulous process of
approving power supply agreements entered into by distribution
utilities and their supplier-power generators as will be discussed in
detail below. Secondly, it cannot be said that the generation sector
is already fully deregulated because the power of choice has not yet
descended to the household level under the Retail Competition and
Open Access regime. Open access is only available, as of date, to
the contestable customers consuming at least one ( 1) megawatt
(MW).
G.R. Nos. 210245 and 210255
Page 32of71
For energy procured from the wholesale electricity spot
market, the ERC, before its operation, has approved the Price
Determination Methodology (PDM) pursuant to Section 30 of the
EPIRA.
26
26
SEC. 30. Wholesale Electricity Spot Market. - Within one (1) year from the effectivity of this
Act, the DOE shall establish a wholesale electricity spot market composed of the wholesale
electricity spot market participants. The market shall provide the mechanism for identifying
and setting the price of actual variations from the quantities transacted under contracts
between sellers and purchasers of electricity.
Jointly with the electric power industry participants, the DOE shall formulate the detailed rules
for the wholesale electricity spot market. Said rules shall provide the mechanism for
determining the price of electricity not covered by bilateral contracts between sellers and
purchasers of electricity users. The price determination methodology contained in said rules
shall be subject to the approval of ERC. Said rules shall also reflect accepted economic
principles and provide a level playing field to all electric power industry participants. The rules
shall provide, among others, procedures for:
(a) Establishing the merit order dispatch instructions for each time period;
(b) Determining the market-clearing price for each time period;
(c) Administering the market, including criteria for admission to and termination from the
market which includes security or performance bond requirements, voting rights of the
participants, surveillance and assurance of compliance of the participants with the rules and
the formation of the wholesale electricity spot market governing body;
(d) Prescribing guidelines for the market operation in system emergencies; and
(e) Amending the rules.
The wholesale electricity spot market shall be implemented by a market operator in accordance
with the wholesale electricity spot market rules. The market operator shall be an autonomous
group, to be constituted by DOE, with equitable representation from electric power industry
participants, initially under the administrative supervision of the TRANSCO. The market
operator shall undertake the preparatory work and initial operation of the wholesale electricity
spot market. Not later than one (1) year after the implementation of the wholesale electricity
spot market, an independent entity shall be formed and the functions, assets and liabilities of
the market operator shall be transferred to such entity with the joint endorsement of the DOE
and the electric power industry participants. Thereafter, the administrative supervision of the
TRANSCO over such entity shall cease.
G.R. Nos. 210245 and 210255
Page 33of71
It is to be noted that the objectives of the PDM are: 1.) to
provide the market participants with the specific principles by
which energy in the WESM will be priced; and 2.) to provide the
specific computational formula that will enable the market
participants to verify the correctness of the charges being imposed.
Thus, with the approval of the PDM, the ERC has exercised its
regulatory mandate to ensure the correctness of the charges that
will have to be imposed on the power bill that will be paid for by the
distribution utility, which will in turn be collected from the
consumer as part of its generation charge.
Moreover, with utmost respect, this particular argument of the
petitioners in the Bayan Muna Petition loses sight of the basic
principle in constitutional law that the Bill of Rights are intended to
be safeguards against the State and cannot be invoked against a
private individual or entity, unless so provided under a statute. As
held in the case of People v. Hipoz,21 the Constitutional proscription
enshrined in the Bill of Rights does not concern itself with the
relation between a private individual and another individual. It
governs the relationship between the individual and the State and
Subject to the compliance with the membership criteria, all generating companies, distribution
utilities, suppliers, bulk consumers/end-users and other similar entities authorized by the
ERC shall be eligible to become members of the wholesale electricity spot market.
The ERC may authorize other similar entities to become eligible as members, either directly or
indirectly, of the wholesale electricity spot market. All generating companies, distribution
utilities, suppliers, bulk consumers/end-users and other sin:iilar entities authorized by the
ERC, whether direct or indirect members of the wholesale electricity spot market, shall be
bound by the wholesale electricity spot market, shall be bound by the wholesale electricity spot
market rules with respect to transactions in that market.
21 G.R. No. 140549, 22 July 2003.
G.R. Nos. 210245 and 210255
Page 34of71
its agents. The Bill of Rights only tempers governmental power and
protects the individual against any aggression and unwarranted
interference by any department of government and its agencies.
Thus, in the instant scenario, assuming arguendo that indeed
the consumers are deprived of their hard earned income, due
process cannot be violated because it does not apply and cannot be
invoked against a generation company, which is a private entity.
Even if the due process clause finds relevance in this
particular case, jurisprudence requires that for substantive due
process to have been transgressed, the deprivation must be so
arbitrary, unduly oppressive and without reason.2s
In this case, the supposed deprivation of the consumers' hard
earned income, if at all it is indeed tantamount to deprivation,
cannot be said to be arbitrary because the taking of their hard
earned income is but a legal, reasonable, and valid consequence of
their consumption of their electricity.
Verily, there has been an exchange of money for services
rendered, which is the provision of electricity service.
While provision of electricity is a social and political good, it
cannot be divorced from the fact that for it to be provided, there is a
cost attached to it which is being measured in accordance with the
principle of full recovery of prudent and reasonable economic costs
incurred.2
9
28
Social Justice Society v. Atienza, G.R. No. 156052 (13 February 2008)
2
9 Section 25 of the EPIRA
G.R. Nos. 210245 and 210255
Page 35of71
For these reasons, Sections 6 and 29 are not unconstitutional
on the ground that they run counter to the constitutionally
guaranteed right to due process.
11.c. Sections 6 and 29 are
not violative of Section 6,
Article XII of the
Constitution. The same is
true with the alleged
violation of Section 9, Article
II of the Constitution.
The petitioners in the Bayan Muna Petition asseverate that
Sections 6 and 29 of the EPIRA violate Section 6, Article XII of the
Constitution because they abandoned the power of the State to
regulate the excessive impositions of power generators and
suppliers and thus defeat its goal to promote the common good of
the Filipino people, particularly the consumers.
To achieve the aspiration of promoting the common good of the
Filipino people, regulation has put in place the mechanics to ensure
that what is passed on to the consumers is prudent and reasonable.
Under pain of being repetitious, the State, through the ERC,
has not abandoned its right to regulate the generation sector,
particularly with respect to the generation supply provided to the
captive market. Also, while the prices at the spot market are
market-driven, these market-driven rates are guided by the PDM
which the ERC has approved prior to its operation. Be that as it
may, while at first blush, it may seem that a laissez faire system
has been put in place because prices are market-driven, the same is
not necessarily accurate considering that prior to the operations of
G.R. Nos. 210245 and 210255
Page 36of71
the WESM, there has been an approval of the PDM and cognizant
that there may be possible anti-competitive behaviour which may
occur in the market and in the energy industry, the ERC has
promulgated the ERC Competition Rules and Procedures pursuant
to Section 45 of the EPIRA. 3o
3o Section 45: Cross Ownership, Market Power Abuse and Anti-Competitive Behavior. - No
participant in the electricity industry or any other person may engage in any anti-competitive
behavior including, but not limited to, cross-subsidization, price or market manipulation, or
other unfair trade practices detrimental to the encouragement and protection of contestable
markets.
No generation company, distribution utility, or its respective subsidiary or affiliate or
stockholder or official of a generation company or distribution utility, or other entity engaged in
generating and supplying electricity specified by ERC within the fourth civil degree of
consanguinity or affinity, shall be allowed to hold any interest, directly or indirectly, in
TRANSCO or its concessionaire. Likewise, the TRANSCO, or its concessionaire or any of its
stockholders or officials or any of their relatives within the fourth civil degree of consanguinity
or affinity, shall not hold any interest, whether directly or indirectly, in any generation
company or distribution utility. Except for ex officio government-appointed representatives, no
person who is an officer or director of the TRANSCO or its concessionaire shall be an officer or
director of any generation company, distribution utility or supplier.
An "affiliate" means any person which, alone or together with any other person, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or is under common
control with another person. As used herein, "control" shall mean the power to direct or cause
the direction of the management policies of a person by contract, agency or otherwise.
To promote true market competition and prevent harmful monopoly and market power abuse,
the ERC shall enforce the following safeguards:
(a) No company or related group can own, operate or control more than thirty percent (30%) of
the installed generating capacity of a grid and/ or twenty-five percent (25%) of the national
installed generating capacity. "Related group" includes a person's business interests, including
its subsidiaries, affiliates, directors or officers or any of their relatives by consanguinity or
affinity, legitimate or common law, within the fourth civil degree;
(b) Distribution utilities may enter into bilateral power supply contracts subject to review by
the ERC: Provided, That such review shall only be required for distribution utilities whose
markets have not reached household demand level. For the purpose of preventing market
power abuse between associated firms engaged in generation and distribution, no distribution
utility shall be allowed to source from bilateral power supply contracts more than fifty percent
(50%) of its total demand from an associated firm engaged in generation but such limitation,
G.R. Nos. 210245 and 210255
Page 37of71
however, shall not prejudice contracts entered into prior to the effectivity of this Act. An
associated firm with respect to another entity refers to any person which, alone or together
with any other person, directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such entity; and
(c) For the first five (5) years from the establishment of the wholesale electricity spot market, no
distribution utility shall source more than ninety percent (90%) of its total demand from
bilateral power supply contracts.
For purposes of this Section, the grid basis shall consist of three (3) separate grids, namely
Luzon, Visayas and Mindanao. The ERC shall have the authority to modify or amend this
definition of a grid when two or more of the three separate grids become sufficiently
interconnected to constitute a single grid or as conditions may otherwise permit.
Exceptions from these limitations shall be allowed for isolated grids that are not connected to
the high voltage transmission system. Except as otherwise provided for in this Section, any
restriction on ownership and/ or control between or within sectors of the electricity industry
may be imposed by ERC only insofar as the enforcement of the provisions of this Section is
concerned.
The ERC shall, within one (1) year from the effectivity of this Act., promulgate rules and
regulations to ensure and promote competition, encourage market development and customer
choice and discourage/penalize abuse of market power, cartelization and any anti-competitive
or discriminatory behavior, in order to further the intent of this Act and protect the public
interest. Such rules and regulations shall define the following:
(a) the relevant markets for purposes of establishing abuse or misuse of monopoly or market
position;
(b) areas of isolated grids; and
(c) the periodic reportorial requirements of electric power industry participants as may be
necessary to enforce the provisions of this Section.
The ERC shall, motu proprio, monitor and penalize any market power abuse or anti-
competitive or discriminatory act or behavior by any participant in the electric power industry.
Upon finding that a market participant has engaged in such act or behavior, the ERC shall
stop and redress the same. Such remedies shall, without limitation, include the imposition of
price controls, issuance of injunctions, requirement of divestment or disgorgement of excess
profits and imposition of fines and penalties pursuant to this Act.
The ERC shall, within one (1) year from the effectivity of this Act, promulgate rules and
regulations providing for a complaint procedure that, without limitation, provides the accused
party with notice and an opportunity to be heard.
G.R. Nos. 210245 and 210255
Page 38of71
SEC. 46. Fines and Penalties. - The fines and penalties that shall be imposed by the ERC for
any violation of or non-compliance with this Act or the IRR shall range from a minimum of fifty
thousand pesos (PS0,000.00) to a maximum of Fifty million pesos (PS0,000,000.00).
Any person who is found guilty of any of the prohibited acts pursuant to Section 45 hereof
shall suffer the penalty of prision mayor and fine ranging from Ten thousand pesos
(Pl0,000.00) to Ten million pesos (Pl0,000,000.00), or both, at the discretion of the court.
The members of the Board of Directors of the juridical companies participating in or covered in
the generation companies, the distribution utilities, the TRANSCO or its concessionaire or
supplier who violate the provisions of this Act may be fined by an amount not exceeding double
the amount of damages caused by the offender or by imprisonment of one (1) year or two (2)
years or both at the discretion of the court. This rule shall apply to the members of the Board
who knowingly or by neglect allows the commission or omission under the law.
If the offender is a government official or employee, he shall, in addition, be dismissed from the
government service with prejudice to reinstatement and with perpetual or temporary
disqualification from holding any elective or appointive office.
If the offender is an alien, he may, in addition to the penalties prescribed, be deported without
further proceedings after service of sentence.
Any case which involves question of fact shall be appealable to the Court of Appeals and those
which involve question of law shall be directly appealable to the Supreme Court.
The administrative sanction that may be imposed by the ERC shall be without prejudice to the
filing of a criminal action, if warranted.
To ensure compliance with this Act, the penalty of prision correccional or a fine ranging from
Five thousand pesos (PS,000.00) to Five million pesos (PS,000,000.00), or both, at the
discretion of the court, shall be imposed on any person, including but not limited to the
president, member of the Board, Chief Executive Officer or Chief Operating Officer of the
corporation, partnership, or any other entity involved, found guilty of violating or refusing to
comply with any provision of this Act or its IRR, other than those provided herein.
Any party to an administrative proceeding may, at any time, make an offer to the ERC,
conditionally or otherwise, for a consented decree, voluntary compliance or desistance and
other settlement of the case. The offer and any or all of the ultimate facts upon which the offer
is based shall be considered for settlement purposes only and shall not be used as evidence
against any party for any other purpose and shall not constitute an admission by the party
making the offer of any violation of the laws, rules, regulations, orders and resolutions of the
ERC, nor as a waiver to file any warranted criminal actions.
G.R. Nos. 210245 and 210255
Page 39of71
To illustrate, the EPIRA law has provided under Section 25
that:
Retail Rate. The retail rates charged by
distribution utilities for the supply of electricity in their
captive market shall be subject to regulation by the ERC
based on the principle of full recovery of prudent and
reasonable economic costs incurred, or such other
principles that will promote efficiency as may be
determined by the ERC.
While Section 25 prescribes the standard by which the DUs'
retail rates or the different components thereof shall be regulated by
ERC, i.e. "full recovery of prudent and reasonable economic costs,"
it does not specify the manner or procedure by which such recovery
shall be effected.
Section 24 may have contemplated or required filing and prior
approval by ERC as the appropriate manner, but the same
specifically applies only to the DUs' distribution wheeling
charges.31
Insofar as the pass through of the DUs' energy costs, the
EPIRA requires only that for electricity supply coming from NPC, the
rate shall "not exceed the transition supply contract rates, as
In addition, Congress may, upon recommendation of the DOE and/or ERC, revoke such
franchise or privilege granted to the party who violated the provisions of this Act.
31 Sec. 4 (p): "Distribution Wheeling Charge" refers to the cost or charge regulated by the ERC
for the use of a distribution system and/ or the availment of related services;
G.R. Nos. 210245 and 210255
Page 40 of 71
I
updated monthly"32 and that for those coming from other
generation companies, the DUs' bilateral power supply contracts
with them shall be subject "to review by the ERC."33 'As for the
'
32 SEC. 67. NPC Offer of Transition Supply Contracts. - Within six (6) months from the
effectivity of this Act, NPC shall file with the ERC for its approval a transition supply contract
duly negotiated with the distribution utilities containing the terms and conditions of supply
and a corresponding schedule of rates, consistent with the provisions including
adjustments and/ or indexation formulas which shall apply to the term of contracts. The
term of the transition supply contracts shall not extend beyond one (1) :year from the
introduction of open access. Such contracts shall be based on the projected demand of such
utilities less any of their currently committed quantities under eligible IPP contracts as defined
in Section 33 hereof: Provided, That the total generation capacity of such si$ned transition
supply contracts shall not exceed the level of NPC owned, controlled or committed capacity as
I
of the effectivity of this Act. Such transition supply contracts shall be assignable to the NPC
I
successor generating companies.
Within six (6) months from the date of submission of the transition supply contract by NPC, the
ERC shall notify NPC of their approval of the rates contained therein.
The ERC shall maintain a record of the contract terms and rates offered by NPC. Likewise, the
ERC shall update monthly, the rates using the appropriate adjustment and/or indexation
formula.
Notwithstanding the provisions of Section 25 hereof, the rates charged by a distribution utility
for the generation component of the supply of electricity in their distribution retail supply rate
shall, for the term of the transition supply contracts, not exceed the transition supply contract
rates, as updated monthly. The recovery of costs incurred by a distribution utility for any
generation component in excess of the transition supply contract rates shall be disallowed by
the ERC, except for eligible contracts as defined under Section 33 hereof: Provided, That such
limitation on the recovery of generation component costs by a distribution utility shall apply
only to the equivalent quality and quantity of electricity still available to the distribution utility
from NPC.
33
Sec. 45 (b): Distribution utilities may enter into bilateral power supply contracts subject to
review by the ERC: Provided, That such review shall only be required for distribution utilities
whose markets have not reached household demand level. For the purpose of preventing
market power abuse between associated firms engaged in generation and distribution, no
distribution utility shall be allowed to source from bilateral power supply contracts more than
fifty percent (50%) of its total demand from an associated firm engaged in generation but such
limitation, however, shall not prejudice contracts entered into prior to the effectivity of this Act.
An associated firm with respect to another entity refers to any person which, alone or together
with any other person, directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such entity;
G.R. Nos. 210245 and 210255
Page 41of71
energy procured from WESM, the prices are determined based on
the price determination methodology as incorporated in the WESM
Rules, which was subject to ERC approval.
34
Guided by the foregoing EPIRA provisions, on 25 March 2004,
the ERC promulgated the Guidelines for the Recovery of Costs for the
Generation Component of the Distribution Utilities' Rates, a copy of
which is hereto attached as Annex "1 ".
The Guidelines (Annex "l") operationalize Section 67 of EPIRA
regarding the execution by NPC of transition supply contracts
(hereinafter, TSCs) with DUs, the recovery by the DUs of their
generation costs under these TSCs equivalent to the ERC-approved
TSC rates of NPC and the limitation imposed on the DUs'
recoverable generation costs for the energy under bilateral power
supply contracts when NPC still has excess power to sell to the
DUs.
The Guidelines (Annex "1 ") also incorporate the review
requirement under Section 45[b] of EPIRA for the bilateral supply
contracts entered into by the DUs for the supply to the captive
market prior to the inclusion of the costs associated with such
contracts in the calculation of the DUs' generation charges and the
use by the DUs of the cost adjustment mechanism then in force to
ensure full recovery of prudent and reasonable economic costs as
guaranteed by Section 25 of EPIRA.
At that time, the cost adjustment mechanisms in place were
the Generation Rate Adjustment Mechanism and Incremental
Currency Exchange Rate Adjustment Mechanism (GRAM and
34 Chapter 3, WESM Rules; Decision ERC Case No. 2006-007RC, 20 June 2006
G.R. Nos. 210245 and 210255
Page 42of71
ICERA). As alleged in the NASECORE Petition, the Honorable Court
has had the opportunity to pass upon the validity of the GRAM and
ICERA in G. R. No. 163935, entitled NASECORE vs. ERC and
MERALCO.
In its Decision dated February 2, 2006 in G. R. No. 163935,
the Honorable Court recognized the ERC 's authority to adopt a
methodology similar to GRAM for the DUs' recovery of their
purchased power costs as long as the requirements of pertinent
laws and of Section 4(e), Rule 3 of the IRR of the EPIRA, which it
ruled is applicable to both general rate proceedings and cost
adjustment mechanisms, are observed-
Section 4(e), Rule 3 of the IRR of the EPIRA could not be
any clearer with respect to its coverage as it refers to "any
application or petition for rate adjustment or for any relief
affecting the consumers."
xxx xxx xxx
The ERC is not, of course, precluded from promulgating
rules, guidelines or methodology, such as the GRAM, for
the recovery by the distribution utilities of their fuel and
purchased power costs. However, these rules, guidelines
or methodology so adopted should conform to the
requirements of pertinent laws, including Section 4(e),
Rule 3 of the IRR of the EPIRA. (Underscoring supplied)
On 13 October 2004, the ERC issued the "Guidelines for the
Automatic Adjustment of Generation Rate and System Loss Rates by
Distribution Utilities" (hereinafter, AGRA Guidelines). Some
amendments were subsequently issued to further refine the cost
adjustment mechanism prescribed therein, which was intended to
supersede GRAM and ICERA as cost adjustment mechanisms
G.R. Nos. 210245 and 210255
Page 43 of 71
'
applicable to the DUs. The AGRA Guidelines and its 8jmendments
are hereto attached as Annex "2".
'
The AGRA prescribes, among others, a straightfprward and
!
transparent methodology to calculate the DUs' monthl)f generation
I
charge. It is premised on the immutable fact t ~ t the DUs'
i
generation costs vary monthly depending on the actual quantities
I
they procure from their various generation sources, including
'
WESM, which started commercial operations in June 2006.
The allowable generation costs, which the DUs rhay recover
!
under their approved TSCs and bilateral power supply contracts,
I
are also affected by the fluctuating costs of fuel, indexation and
!
adjustment formulas embedded in the supply contractsJ the level of
I
utilization by the DU s of their contracted generation caJacities, and
several other factors and contractual stipulations. For 1WESM, the
I
prices therein, being market-driven, vary not just monthly, but
I
hourly, hence the DUs' generation cost associated with their WESM
purchases also vary depending, among others, on thJ volume of
energy they procured from the market and the timing thbreof.
I
Given that there are about 140 DU s whose retail rates require
I
I
upward or downward adjustments as often as monthly to effect the
1
recovery of actual generation and other pass-through costs, the
ERC resorted to the AGRA, a mechanism similar to the Purchased
!
Power Adjustment (PPA) Mechanism, which was put in place by the
ERC's predecessor, the Energy Regulatory Board.
Under the AGRA mechanism, the DUs calculate thdir allowable
I
I
generation rate (AGR) for the current billing month usipg previous
I
month's data on their actual allowable generation costs from all
G.R. Nos. 210245 and 210255
Page 44 of 71
their generation sources (GC i ... n) and their total kWh purchased
and generated (in case of own generation).
These data are to be duly supported by the DUs' monthly
reportorial submissions as required under the AGRA Guidelines,
among them, the invoices from power suppliers, sample bills to
end-users, and official receipts of payment of power supplier
1nvo1ces.
These allowable generation costs assume that they are based
on the ERC-approved NPC rate for NPC supply, ERC-approved
bilateral power supply contract for supply from generation
companies under bilateral supply contract, and the applicable
WESM market prices for energy procured from WESM.
The table below illustrates how the AG RA formula is applied -
Particulars
Previous Month's
Data (December)
GC
1
n (Net of TOU, SPL CUST, S4R)
!PP (90::!:)
p
22,033,845
WESM (10%)
p
3A75,994
Total (100%)
p
25,509,839
Total kWh Purchased & Generated (TPG couR)
!PP - PhP4.2345/kWh 5,203,411
WESM - PhP6.0122/ kWh 578,157
Blended Rate PhP4.41227/kWh 5,781,568
50% Net PPD
p
-
PCR (Pilferage Cost Recoverv) 0
Other Generation Adjustment (OGA) 0
GCr ... n - ( 50% Net PPD + PCR)
AGR= Total kWh Purchased & Generated
4.41227
Gen. Rate for January billing= PhP4.41227/kWh
Cognizant of the Honorable Court's Decision dated 02
February 2006 in G. R. No. 163935 and its far-reaching effects not
G.R. Nos. 210245 and 210255
Page 45of71
just on MERALCO but on all the DUs, the Secretary of the
Department of Energy approved the amendment of Section 4[e],
Rule 3 of the EPIRA IRR by taking out of its purview the cost
adjustment mechanisms put in place to allow timely recovery of the
DUs' pass-through costs. The Joint Congressional Power Committee
(hereinafter, JCPC)35 subsequently approved the amendment, which
reads -
35 SEC. 62. Joint Congressional Power Commission. - Upon the effectivity of this Act, a
congressional commission, hereinafter referred to as the "Power Commission", is hereby
constituted. The Power Commission shall be composed of fourteen (14) members with the
chairmen of the Committee on Energy of the Senate and the House of Representatives and six
(6) additional members from each House, to be designated by the Senate President and the
Speaker of the House of Representatives, respectively. The minority shall be entitled to pro rata
representation but shall have at least one (1) representative in the Power Commission.
The Commission shall, in aid of legislation, perform the following functions, among others:
(a) Set the guidelines and overall framework to monitor and ensure the proper implementation
of this Act;
(b) Endorse the initial privatization plan within one (1) month from submission of such plan to
the Power Commission by PSALM Corp. for approval by the President of the Philippines;
(c) To ensure transparency, require the submission of reports from government agencies
concerned on the conduct of public bidding procedures regarding privatization of NPC
generation and transmission assets;
(d) Review and evaluate the performance of the industry participants in relation to the
objectives and timelines set forth in this Act;
(e) Approve the budget for the programs of the Power Commission and all disbursements
therefrom, including compensation of all personnel;
(f) Submit periodic reports to the President of the Philippines and Congress;
(g) Determine inherent weaknesses in the law and recommend necessary remedial legislation or
executive measures; and
(h) Perform such other duties and functions as may be necessary to attain its objectives.
G.R. Nos. 210245 and 210255
Page 46 of 71
This Section 4(e) shall not apply to Generation Rate
Adjustment Mechanism (GRAM), Incremental Currency
Exchange Recovery Adjustment (!CERA}, Transmission Rate
Adjustment Mechanism, Transmission True-up Mechanism,
System Loss Rate Adjustment Mechanism, Lifeline Rate
Recovery Mechanism, Cross-Subsidy Mechanism, Local
Franchise Tax Recovery Mechanism, Business Tax Recovery
Mechanism, Automatic Generation Rate Adjustment
Mechanism, VAT Recovery Mechanism, Incremental
Generation Cost Adjustment Mechanism, and Recovery of
Deferred Accounting Adjustment for Fuel Cost and Power
Producers by NPC and NPC-SPUG, Provided that, such
In furtherance hereof, the Power Commission is hereby empowered to require the DOE, ERC,
NEA, TRANSCO, generation companies, distribution utilities, suppliers and other electric power
industry participants to submit reports and all pertinent data and information relating to the
performance of their respective functions in the industry. Any person who willfully and
deliberately refuses without just cause to extend the support and assistance required by the
Power Commission to effectively attain its objectives shall, upon conviction, be punished by
imprisonment of not less than one (1) year but not more than six (6) years or a fine of not less
than Fifty thousand pesos (PS0,000.00) but not more than Five hundred thousand pesos
(PS00,000.00) or both at the discretion of the court.
The Power Commission shall adopt its internal rules of procedures; conduct hearings and
receive testimonies, reports and technical advice; invite or summon by subpoena ad
testificandum any public official, private citizen or any other person to testify before it, or
require any person by subpoena duces tecum to produce before it such records, reports,
documents or other materials as it may require; and generally require all the powers necessary
to attain the purposes for which it is created. The Power Commission shall be assisted by a
secretariat to be composed of personnel who may be seconded from the Senate and the House
of Representatives and may retain consultants. The secretariat shall be headed by an executive
director who has sufficient background and competence on the policies and issues relating to
electricity industry reforms as provided in this Act. To carry out its powers and functions, the
initial sum of twenty- five million pesos (P25,000,000.00) shall be charged against the current
appropriations of the Senate. Thereafter, such amount necessary for its continued operation
shall be included in the annual General Appropriations Act.
The Power Commission shall exist for period of ten ( 10) years from the effectivity of this Act and
may be extended by a joint concurrent resolution.
G.R. Nos. 210245 and 210255
Page 47 of 71
adjustments shall be subject to subsequent verification by
the ERC to avoid over/under recovery of charges.
On 13 July 2009, the ERC adopted the "Rules Governing the
Automatic Cost Adjustment and True-Up Mechanisms and
Corresponding Confirmation Process for Distribution Utilities," a copy
is attached hereto as Annex "3". The said Rules were intended to
consolidate all cost adjustment mechanisms adopted by the ERC
under previous issuances and provide for a uniform and systematic
confirmation process for all the DUs' pass-through charges to
determine any over- or under-recoveries in their implementation.
All the foregoing actions taken by the regulator acting for the
State is a testament of how it has developed a methodology that will
guarantee that what is passed on the consumer passes the test of
prudence and reasonableness because these are tools employed by
the State in the promotion of the common good.
Next, petitioners assert that these provisions are anti-poor and
condemn the people to poverty in contravention of Section 9, Article
2 of the Constitution because, as a result of the deregulation, the
generation companies have an unfettered ability to raise their prices
at whim.
It bodes well to recollect that generation, although not
considered a public utility, is still imbued with public interest under
the law, which goes to show that it has not been acquitted from the
regulatory ambit of the State through the ERC. As earlier pointed
out, the evaluation of the generation component goes through the
rigorous process of being approved initially on the generation cost
as culled and evaluated from the data provided in the power supply
agreements (PSA) submitted to the ERC for its approval. Thereafter,
G.R. Nos. 210245 and 210255
Page 48of71
the DUs passing on of these generation charges which are revenue
neutral as they are not at all allowed to earn from these is
submitted for confirmation process where the ERC may at times
require the refund to consumers in cases of over-recovery or
collection in cases of under-recovery as part of the implementation
of the consolidated AGRA Guidelines.
Essentially, the generation charges go through twice in the
evaluation mill in order to ensure that what is recovered from the
consumer is reflective of the purchased energy.
Moreover, it can be gleaned from Sections 6 and 29 that
competition is encouraged in the generation sector in order to
incentivize new players in the market. It is envisaged that robust
competition in the generation industry will result to lower prices in
the long run. Hence, these EPIRA provisions cannot be said to be
anti-poor and antithetical to Section 9, Article 2 of the Constitution.
III.a. The amendment made
in Section 4 (e), Rule 3 of the
EPIRA IRR conforms with
the due process clause.
Petitioners 1n the NASECORE Petition argue that the
amendment in Section 4 (e), Rule 3 of the EPIRA IRR which
removed the GRAM from the coverage thereof is illegal for being
violative of the due process clause and Section 2 (c) of the EPIRA.
For purposes of clarity, the pertinent prov1s1ons are quoted
herein below:
Section 4 (e).
G.R. Nos. 210245 and 210255
Page 49of71
Any application or petition for rate adjustment or
for any relief affecting the consumers must be verified
and accompanied with an acknowledgment of receipt of a
copy thereof by the LGU Legislative Body of the locality
where the applicant or petitioner principally operates
together with the certification of the notice of publication
thereof in a newspaper of general circulation in the same
locality.
xxx
The amendment reads:
This section 4 (e) shall not apply to x x x
AUTOMATIC GENERATION RATE ADJUSTMENT
MECHANISM, xx x
Petitioners contend that the above amendment dispenses with
the requirement of publication and is therefore void for being
violative of due process. However, this is an incorrect appreciation
of the regulatory process.
An inquisition for the rationale behind the exclusion of AG RA
is instructive.
Admittedly, AGRA has been carved out from the ambit of
Section 4 (e) but the ERC has not dispensed with the confirmation
of the generation charges that were passed on to the consumers.
There is good reason why it is automatically passed on first prior to
its confirmation by the ERC. It should be noted that, in reality, the
actual billing of a power supplier to a distribution utility for a
current month will not yet be available as it would only be billed
after the current month had passed. The distribution utility, on the
.
G.R. Nos. 210245 and 210255
Page 50of71
other hand, must appropriately be given away by which it will be
able to promptly pay the power supplier's billing for the same
current month.
Cognizant of the manner by which suppliers are paid by
the distribution utilities, under Article 2, Definition of Terms of the
Magna Carta for Residential Electricity Consumers (MCREC), a
month shall mean the elapsed time between two (2) succeeding
meter readings, at least twenty-eight (28) days apart but not to
exceed thirty-one (31) days.
If the distribution utility is deterred from passing on the
generation cost as soon as it becomes due by way of prior
approval from the regulator, similar to the facts obtaining
herein, in all likelihood, additional costs will have to be incurred
both by the supplier and the distribution utility. At the end of
the day, the additional costs in the form of carrying cost which
is equivalent to at least six percent legal interest will have to
be shouldered by the consumer. This is what is being avoided in
the regulatory process put in place by the ERC. Hence,
confirmation process under the consolidated AGRA Rules was
put in place as this is more in keeping with the mandate
enshrined in Section 41 of the EPIRA which states that the ERC
shall protect the interest of the consumer.
How is the confirmation process undertaken? Similar to the
approval of the power supply agreements entered into by the
distribution utilities with power supplier for the captive market
and purchases from the Wholesale Electricity Spot Market,
there is a hearing undertaken by the ERC where the notices for
the public hearing are duly published in a newspaper of general
circulation and notices are furnished to the Senate of the
G.R. Nos. 210245 and 210255
Page 51of71
Philippines, House of Representatives, Office of the Solicitor
General, the relevant Local Government Units. During the
hearing itself, intervenors and oppositors are welcome to
participate actively in order to protect their property right.
Dovetailing the proceedings readily manifest that the observance
of due process is sacred and complied with by the ERC In
regulating the rates passed on to the consumers.
To recapitulate, the generation charges imposed by the
distribution utility goes through a twin passage initially,
during the application for the approval of the power supply
agreement and lastly, the confirmation process of the
implemented generation charges. It IS pristine clear that
observance of substantial and due process has been duly
complied with. The compliance is seen through a continuing
prism of regulation. What can be more lucid than the letter of
the ERC expressing that its approval of the staggered generation
charge Is without prejudice to the confirmation and post-
verification proceedings under existing ERC regulation.
Mindful of the ruling of this Honorable Court in the earlier
case of NASECORE v. ERC,
3
6 the Congress tasked the DOE
Secretary to promulgate the EPIRA IRR with approval by the
JCPC.3
7
It was not disputed that the amendment to Section 4[e],
36 Supra note 7
37 SEC. 77. Implementing Rules and Regulations. - The DOE shall, in consultation with
relevant government agencies, the electric power industry participants, non-government
organization and end-users, promulgate the Implementing Rules and Regulation (IRR) of the
Act within six (6) months from the effectivity of this Act, subject to the approval by the Power
Commission.
G.R. Nos. 210245 and 210255
Page 52of71
Rule 3 of the EPIRA IRR was promulgated by the DOE Secretary
and approved by the JCPC.
As an administrative issuance, the EPIRA IRR must conform to
EPIRA. It cannot depart from it or expand it. "So long as the rules
and regulations are germane to the objects and purposes of the law
and conforms to the standards prescribed there by, they are deemed
to have the force and effect of law." (Freedom from Debt Coalition, et
al. vs. ERC, et al., G.R. No. 161113, June 15, 2004).
Section 4[e], Rule 3 of the EPIRA IRR lays down certain
requirements and prescribes a particular procedure to be observed
in connection with rate applications or other petitions for relief
affecting the consumers filed with ERC, particularly on the issuance
of provisional rate orders. According to the Honorable Court, it
seeks to implement Section 43(u)
3
8, as well as Sections 44 and 80 of
EPIRA-
Section 4(e), Rule 3 of the IRR, outlining as it does the
approval process for an application or petition for
provisional rate adjustment, enforces not only Section 43(u)
thereof but also Sections 44 and 80 which, as earlier
stated, refer to the powers of the ERB passed on to the ERC
and found in other prevailing laws, such as Section 16(c) of
the Public Service Act. (Freedom from Debt Coalition, ibid.)
38
The ERC shall have the original and exclusive jurisdiction over all cases contesting rates,
fees, fines and penalties imposed by the ERC in the exercise of the abovementioned powers,
functions and responsibilities and over all cases involving disputes between and among
participants or players in the energy sector.
All notices of hearings to be conducted by the ERC for the purpose of fixing rates or fees
shall be published at least twice for two successive weeks in two (2) newspapers of nationwide
circulation
G.R. Nos. 210245 and 210255
Page 53of71
The EPIRA prov1s1ons, which Section 4[e], Rule 3 seeks to
implement, uphold the ERC's jurisdiction "over all cases contesting
rates, fees, fines xxx." These provisions do not impose any specific
procedure or rate-fixing methodology to be observed. What it only
expressly requires is that "(a)ll notices of hearings to be conducted
by the ERC for the purpose of fixing rates or fees shall be published
at least twice for two successive weeks in two (2) newspapers of
nationwide circulation." (Section 43, last paragraph)
EPIRA did not prohibit the adoption of cost recovery
mechanisms like the AGRA. It left it to the ERC how the regulation
of the generation component of the DUs' retail rates will be
undertaken. However, given that Section 4 [ e], Rule 3 of the EPIRA
IRR did not distinguish between general rate proceedings and pass-
through mechanisms, in NASECORE vs. ERC, 39 the Honorable
Court ruled that the latter could no longer be automatic unless
Section 4[e] is amended.
"Taking cue from the holding of the above-stated Resolution of
this Honorable Court in the above-said case of 'NASECORE, et. al.
VS. ERC and MERALCO' to the effect that '[It] should be made
clear that, unless Section 4 (e), Rule 3 of the IRR of the EPIRA
is amended, the adjustments of rates based on purchased
power or fuel adjustment costs shall not or in no case be
'automatic", the Department of Energy amended Section 4 (e),
Rule 3 of the IRR EPIRA xxx." (NASECORE Petition, paragraph 36,
citing NASECORE vs. ERC, G.R. No. 163935, 16 August 2006)
39 G.R. No. 163935, 16 August 2006.
G.R. Nos. 210245 and 210255
Page 54of71
To be clear, the amendment did not do away with the
publication requirement in Section 43 of EPIRA. It continued to
apply to NPC's application for approval of its Time-of-Use rates and
to the DUs' applications for approval of their bilateral power supply
contracts. These applications determine what generation costs can
be recovered in the DUs' monthly generation charges. This is how
the regulation of the generation component of the DUs' retail rates
is undertaken.
The amended Section 4 (e), Rule 3 of the EPIRA IRR remains
consistent with the EPIRA provisions it intends to carry out.
IV. No regulatory failure can
be attributed to ERC in
granting clearance to
MERALCO to stagger its
collection of November
generation cost.
Petitioner NASECORE is of the view that ERC's approval of
the staggered implementation of the automatic electricity rate
adjustments constitutes regulatory failure in violation of its
mandate under Section 25 of the EPIRA.
This is farthest from the truth.
As exhaustively discussed earlier, the generation component of
the retail rate has been subjected to rigorous evaluation when
MERALCO's power supply agreements were heard by the ERC in a
full-dress hearing in the same manner it has done in all the power
supply agreements filed by other distribution utilities assiduously
G.R. Nos. 210245 and 210255
Page 55of71
studied and thereafter approved by the ERC. Further to that, as
contained in the consolidated AGRA Guidelines, there is a
confirmation and post-verification process that will be undertaken
by the ERC notwithstanding its approval of the staggered
implementation. In fact, under the last paragraph of its 09
December 2013 clearance letter, the ERC categorically stated that
the granting of such clearance is without prejudice to the
mentioned process of confirmation.
Reasons have been put forward why an automat.ic adjustment
mechanism has been allowed under the existing consolidated AGRA
Guidelines. By the very nature of electricity which cannot be stored
and the billing cycles which are observed in the payment for the
supply of electricity to power generators, the rationale for the
automatic adjustment cannot be made more lucid.
The AGRA Guidelines govern the determination by DUs of
their monthly generation charges. The DUs calculate their
generation charge for the current billing month based on their
previous months' allowable generation costs. As these generation
costs vary on a monthly basis, there is necessity for a cost recovery
mechanism to ensure timely recovery of these costs.
This cost recovery mechanism avoids the incurrence by DUs of
additional carrying costs, which they will otherwise incur if they are
compelled to advance for these costs. These additional carrying
costs are then passed on also to the DUs' customers. The
adjustment mechanism also prevents the duplication of legal
proceedings on the determination of what compose these allowable
generation costs, in the light of the existing framework for the
regulation of the generation component of the DUs' retail rates
(Annex " 1 ").
G.R. Nos. 210245 and 210255
Page 56of71
This is not to say that the DUs have the unfettered discretion
to determine their monthly generation charges and that ERC in
effect gave them blanket authority to fix their own rates.
The DUs may only include in their calculation generation
costs, which the ERC previously allowed after due notice and
hearing. For their generation costs incurred under bilateral supply
contracts with generation companies, before the DUs can include
the same in their generation charge calculation under the AG RA
mechanism, there has to be first an authority granted by ERC in
their application for the approval of said supply contracts as
required by Section 45[b] of the EPIRA.
Such applications for approval of the DUs' supply contracts
observe strictly the requirements of Section 4[e], Rule 3 of the
EPIRA IRR. In fact, the ERC even devotes a specific Rule in its Rules
of Practice and Procedure
4
o on applications of this nature and the
required supporting documents and information, which must
accompany the DUs' application, in the interest of full disclosure to
the DUs' customers who will be affected by the application.
40 Rule 20[B] provides -
B. Applications for Approval of Power Supply Contract
Section 1. Applications for Approval of Power Supply Contract. - Applications for approval of
power supply contract between a distribution utility and power producer, other than those
covered by the Guidelines for the Setting and Approval of Electricity Generation Rates and
Subsidies for Missionary Electrification Areas (ERC Resolution No. 11, series of 2005, dated 6
July 2005), shall include a statement of the salient provisions of the said contract, including
the stipulations on the pricing, and a statement of its impact on the overall rates of the
applicant-utility once said contract is approved.
G.R. Nos. 210245 and 210255
Page 57of71
Needless to state, such application gives the DUs' customers
the opportunity to participate in the legal proceedings for the
determination of the DUs' allowable generation costs under the
bilateral supply contracts that they execute.
"Due process of law" contemplates notice and opportunity to
be heard before judgment is rendered, affecting one's person or
property (Lopez vs. Director of Lands, 47 Phil. 23, 32). The legal
proceedings required for determination of what generation costs
may be included in the generation component of the DUs' retail
rates, i.e. the proceedings for approval of NPC's rates and of
bilateral power supply contracts, satisfy these twin requirements of
due process.
As for WESM, the EPIRA itself mandates that pricing therein
be competitively determined following a price determination
methodology to be incorporated in the WESM Rules. By legislative
fiat, therefore, the DUs' WESM-related generation costs are treated
as allowable costs.
Moreover, the adoption of the AGRA mechanism is consistent
with Section 25 of EPIRA. Section 25 of EPIRA does not require
prior approval by ERC for the imposition of the DUs' monthly
generation charge or that the ERC shall fix the DUs' monthly
generation charges. What it declares only is that the DUs' retail
rates to its captive market, of which the generation charge is a
component, is subject to regulation by ERC.
No specific form or procedure is prescribed in Section 25 for
the regulation of the generation charge component of the retail
rates. It only calls for the application of the "principle of full
G.R. Nos. 210245 and 210255
Page 58of71
recovery of prudent and reasonable economic costs incurred" to
which the AGRA mechanism adheres.
There is nothing new in the AG RA mechanism. There is also
nothing therein that violates the law.
The Honorable Court has had the occasion to discuss at
length its precursor, the PPA formula, and the confirmation process
that ERC adopted to verify any over- and under-recoveries enjoyed
or sustained by the DUs in the implementation of their PPA
adjustments. Borrowing the words of the Honorable Court in
Association of Southern Tagalog Electric Cooperatives, Inc., et al. vs.
ERC, G.R. No. 192117, 18 September 2012-
The PPA formula is an adjustment mechanism the purpose
of which is purely for the recovery of cost. In National
Association of Electricity Consumers for Reforms
(NASECORE) v. Energy Regulatory Commission, this Court
noted the explanation of the ERC on the nature and
purpose of an adjustment mechanism:
It is clear from the foregoing that "escalator" or
"tracker" or any other similar automatic
adjustment clauses are merely cost recovery or cost
"flow-through" mechanisms; that what they
purport to cover are operating costs only which are
very volatile and unstable in nature and over which
the utility has no control; and that the use of the
said clauses is deemed necessary to enable the
utility to make the consequent adjustments on the
billings to its customers so that ultimately its rate
of return would not be quickly eroded by the
G.R. Nos. 210245 and 210255
Page 59of71
escalations in said costs of operation. The total of
all rate adjustments should not operate to increase
overall rate of return for a particular utility
company above the basic rates approved in the last
previous rate case (Re Adjustment Clause in
Telephone Rate Schedules, 3 PUR 4th 298, N.J. Bd.
of Pub. Util.Comm'rs., 1973. Affirmed 66 N.J. 476,
33 A.2d 4, 8 PUR 4th 36, N.J., 1975). [Underscoring
supplied]
Rural electric cooperatives cannot therefore incorporate
1n the PPA formula costs that they did not incur.
Consumers must not shoulder the gross cost of purchased
power; otherwise, rural electric cooperatives will unjustly
profit from discounts extended to them by power suppliers.
In the Consolidated Comment of the ERC, the Solicitor
General correctly pointed out:
Second, the ERC's PPA confirmation policies
were in consonance with the rule that electric
cooperatives may only recover costs to the extent
of the amount they actually incurred in the
purchase of electricity. The PPA remained to be
the difference between the electric cooperative's
actual allowable power costs as translated to
PhP /kWh and the electric cooperative's approved
Basic Rate. This was also how the Cost
Adjustment Formula was defined in the IRR of
R.A. No. 7832.
Contrary to petitioners' assertions, therefore, the
policy did not deviate from the ERB 's
provisionally-approved PPA formula but merely
G.R. Nos. 210245 and 210255
Page 60 of 71
implemented the policy set out in R.A. No. 7832,
that is, it is strictly for the purpose of cost
recovery only. Obviously, if the PPA is computed
without factoring the discounts given by power
suppliers to electric cooperatives, electric
cooperatives will impermissibly retain or even earn
from the implementation of the PPA.
Further, the PPA mechanism had long been
recognized as valid in this jurisdiction. In Santos
vs. MERA.LCD, 41 the Honorable Court ruled -
The issue of validity of the PPA was settled in Concerned
Women of the Philippines, et al. v. National Power
Corporation, et al; and Perla C. Bautista v Board of Energy,
et al. (G.R. Nos. 63354 and 63267, January 30, 1986):
"Insofar as Meralco is concerned, the increase in its basic
rates was, therefore, brought about by the increase in rates
of NPC where it purchases power for distribution to its
customers. The formula used and its application allows the
recovery of increases in the cost of the power purchased
from NPC. In other words, the PPA clause is only a 'cost
pass-through' device.
xxx xxx xxx
"This purchased power adjustment clause which has since
been abandoned in favor of a more publicly understandable
scheme provided a formula which avoided the necessity for
the respondent Meralco to file successive petitions for
41 G.R. No. 58828, 21 April 1988
G.R. Nos. 210245 and 210255
Page 61of71
corresponding rate increases every time NPC increases the
cost of the electric power it generates and sells to Meralco
and other customers."
Whether under the PPA regime wherein electricity rates were
bundled or under the restructured power industry under the EPIRA
wherein the DUs' rates were required to be unbundled,
42
the
rationale behind the automatic adjustment mechanism remains the
same, i.e. to allow DUs to recover their actual allowable purchased
power costs. This is a mandate of the law and is observed in several
other jurisdictions. This is not just some inventioq of ERC to favor
certain market participants to the prejudice of the electricity
consumers.
For a detailed discussion on pass through regulation, attached
as Annex "6" is a Discussion Paper entitled, Pass Through of
Purchase Power Costs, Regulatory Challenges and International
42
SEC. 36. Unbundling of Rates and Functions. - Within six (6) months from the effectivity of
this Act, NPC shall file with the ERC its revised rates. The rates of NPC shall be unbundled
between transmission and generation rates and the rates shall reflect the respective costs of
providing each service. Inter-grid and intra-grid cross subsidies for both the transmission and
the generation rates shall be removed in accordance with this Act.
Within six (6) months from the effectivity of this Act, each distribution utility shall file its
revised rates for the approval by the ERC. The distribution wheeling charge shall be unbundled
from the retail rate and the rates shall reflect the respective costs of providing each service. For
both the distribution retail wheeling and supplier's charges, inter-class subsidies shall be
removed in accordance with this Act.
Within six. (6) months from the date of submission of revised rates by NPC and each
distribution utility, the ERC shall notify the entities of their approval.
Any electric power industry participant shall functionally and structurally unbundle its
business activities and rates in accordance with the sectors as identified in Section 5 hereof.
The ERC shall ensure full compliance with this provision.
G.R. Nos. 210245 and 210255
Page 62of71
Practices. 43 It discusses the various methodologies on the subject
and cites the practices in other jurisdictions. One of the
methodologies cited, the ex-ante review of power supply contracts,
is similar to what the ERC employs in its regulation of the
generation charge component of the DUs' retail rates, consistent
with Sections 25 and 45[b] of the EPIRA.
As an intrinsic feature of the ERC's adopted methodology, the
AGRA Guidelines incorporate a post-verification and confirmation
process. Under this process, DUs are required to periodically file
their applications for verification of the pass through adjustments
during the covered test period and for confirmation of their over- or
under-recoveries 1n the implementation of the same. These
applications and the notices of hearing issued are duly published.
Public hearings are conducted wherein any interested party may
intervene.
In this confirmation process, the DU's revenue from actual
implemented generation rate (drawn from previous month's data) is
compared with the recoverable purchased power and generation
cost incurred by the DU for the current month. Only purchased
power and generation costs associated with power supply contracts
duly approved by the ERC are allowed full recovery. Confirmation
is dependent on DU showing that the supply of electricity is
obtained in the least cost manner as required under Section 23
44
of
43
Arizu, B., Maurer, L., Tenenbaum, B. [February 2004] Pass Through of Power Purchase Cost
Regulatory Challenges and International Practices.
(http:/ /www.globalregulatorynetwork.org/ Resources I IPPmaterials I Presentations /WBCostPape
rNolO.pd!) The World Bank Group, The Energy and Mining Sector Board. Cited January 8,
2014.
44
SEC. 23. Functions of Distribution Utilities. - A distribution utility shall have the obligation
to provide distribution services and connections to its system for any end-user within its
G.R. Nos. 210245 and 210255
Page 63of71
EPIRA. The recovery of cost incurred from ineligible supply
franchise area consistent with the distribution code. Any entity engaged therein shall provide
open and non-discriminatory access to its distribution system to all users.
Any distribution utility shall be entitled to impose and collect distribution wheeling charges
and connection fees from such end-users as approved by the ERC.
A distribution utility shall have the obligation to supply electricity in the least cost manner to
its captive market, subject to the collection of retail rate duly approved by the ERC.
To achieve economies of scale in utility operations, distribution utilities may, after due notice
and public hearing, pursue structural and operational reforms such as but not limited to, joint
actions between or among the distribution utilities, subject to the guidelines issued by the
ERC. Such joint actions shall result in improved efficiencies, reliability of service, reduction of
costs and compliance to the performance standards prescribed in the IRR of this Act.
Distribution utilities shall submit to the ERC a statement of their compliance with the
technical specifications prescribed in the Distribution Code and the performance standards
prescribed in the IRR of this Act. Distribution utilities which do not comply with any of the
prescribed technical specifications and performance standards shall submit to the ERC a plan
to comply, within three (3) years, with said prescribed technical specifications and performance
standards. The ERC shall, within sixty (60) days upon receipt of such plan, evaluate the same
and notify the distribution utility concerned of its action. Failure to submit a feasible and
credible plan and/ or failure to implement the same shall serve as grounds for the imposition of
appropriate sanctions, fines or penalties.
Distribution utilities shall prepare and submit to the DOE their annual distributions
developments plans. In the case of electric cooperatives, such plans shall be submitted through
the National Electrification Administration.
Distribution utilities shall provide universal service within their franchise, over a reasonable
time from the requirement thereof, including unviable areas, as part of their social obligations,
in a manner that shall sustain the economic viability of the utility, subject to the approval by
the ERC in the case of private or government-owned utilities. To this end, distribution utilities
shall submit to the DOE their plans for serving such areas as part of their distribution
development plans. Areas which a franchised distribution utility cannot or does not find viable
may be transferred to another distribution utility, if any is available, who will provide the
service, subject approval by ERC. In cases where franchise holders fail and/ or refuse to service
any area within their franchise territory and allowed another utility to service the same, then
the status quo shall be respected.
Distribution utilities may exercise the power of eminent domain subject to the requirements of
the Constitution and existing laws.
G.R. Nos. 210245 and 210255
Page 64of71
contracts is capped at actual cost or NPC average grid rate,
whichever is lower. Purchase power discounts and pilferage
recovenes realized by the DU, which it did not include in its
previous generation charge calculations, are considered so these are
also passed on to benefit the DU's customers. Finally, the verified
and confirmed over- or under-recoveries of the DU are subject to a
refund or further recovery to/ from its customers to ensure the
revenue-neutrality of the implementation of the pass through
charges on the DU.
All told, the ERC respectfully submits that the AG RA
mechanism upholds the principle of full recovery of prudent and
reasonable economic costs as established in Section 25 of EPIRA.
Moreover, conscious of the implications that the rate implications
may have on the pockets of the most number of consumers who are
indeed heavily burdened and true its mandate to protect the
interests of the consumers gave clearance for the collection of the
generation cost in a staggered manner without prejudice to the
confirmation and post-validation process which will include a
finding of whether the generation was procured in the least cost
manner. Therefore, regulatory failure cannot be imputed to the
ERC's manner of addressing MERALCO's request for clearance.
IV.a. Respondent
MERALCO's recovery of its
generation cost through the
AGRA mechanism does not
constitute delegation of
regulatory power in violation
of the principle that
delegated power cannot
further be delegated.
G.R. Nos. 210245 and 210255
Page 65of71
Finally, the petitioners in the NASECORE Petition claim that
ERC delegated its regulatory authority to MERALCO when it
allowed an automatic rate adjustment or increase.
Again, for clarity, MERALCO's letter dated 05 December 2013
is not a rate application.
In its 05 December 2013 letter, MERALCO sought the ERC's
clearance to implement a generation charge in its December 2013
billing that is lower than the PhP9.1070/kWh rate it was able to
derive using the AGRA mechanism.
Notably, MERALCO did not need the ERC's approval for it to
implement the PhP9.1070/kWh rate. It already earlier sought the
ERC's approval for it to include in its generation charge the costs
associated with its purchases under its existing bilateral power
supply contracts and the ERC already issued its authority, after
due notice and hearing, on MERALCO's recoverable generation
costs under these supply contracts. As for its WESM purchases,
considering that prices therein are market-driven and outside of
ERC's rate-fixing authority, MERALCO's WESM costs incurred in
the November 2013 supply month also formed part of its allowable
generation costs in computing for its December 2013 generation
charge.
MERALCO derived the PhP9.1070/kWh rate using its actual
purchased power cost incurred and the total kWhs purchased for
the previous month, the two basic inputs to the AGRA formula.
Attached as Annex "7" is the summary of MERALCO's AGRA
calculation for its December 2013 billing as submitted to the ERC.
- G.R. Nos. 210245 and 210255
Page 66of71
MERALCO's November generation cost amounted to about
PhP22.64 Billion, a huge increase from its previous month's cost of
PhP 13.69 Billion. Based on Annex "7", MERALCO's effective
PhP/kWh rate for its WESM purchases reached PhP 33.22/kWh.
Had it implemented this PhP9.1070/kWh rate in its December
2013 billing, MERALCO would have collected an amount that
approximates its total generation cost in November of PhP22.64
Billion. This would have enabled it to fully pay its generation
suppliers out of the proceeds of its December billings to its
customers. Such is the nature of a pass-through charge.
This PhP9.1070/kWh rate, however, represented a
PhP3.44/kWh increase from MERALCO's November generation
charge of PhPS.67 /kWh. To cushion its impact, invoking the
exception clause of the AGRA Guidelines, MERALCO proposed to
ERC the staggered implementation of its generation cost recovery
for December 2013, by deferring recovery of about PhP3 Billion out
of its total generation cost of PhP22.64 Billion to its February 2014
billing. With such deferral, MERALCO's generation charge for
December would be reduced from PhP9.1070/kWh to PhP
PhP7.90/kWh.
This in essence is MERALCO's letter dated 05 December 2013.
It is not an application for authority to charge PhP9.1070/kWh or
the reduced rate of PhP 7.90/kWh. Under the existing regulatory
framework for the determination of the generation component of the
DUs' retail rates, like all other DUs that calculate their monthly
generation charges using the AGRA formula, MERALCO may
already implement the generation charge of up to PhP9.1070/kWh
in its December 2013, subject only to the confirmation and post-
verification process prescribed in ERC's existing rules.
G.R. Nos. 210245 and 210255
Page 67 of 71
To stress, ERC's letter dated 09 December 2013 only allowed
MERALCO's implementation in its December billing of a generation
charge lower than the calculated PhP9.1070/kWh.
The ERC's letter dated 9 December 2013 reads in part-
The ERC therefore grants MERALCO the clearance it seeks
to stagger implementation of its generation cost recovery
by way of an exception to the AGRA Rules. Accordingly,
MERALCO is authorized to implement a generation charge
of PhP7.67/kWh in its December 2013 billing and add to
its calculated generation charge for February 2014 billing
the generation rate of PhPl .00/kWh. The balance on the
deferred generation amount without any carrying costs
shall be included in MERALCO's generation charge for
March 2014. Should MERALCO seek to recover its
carrying costs on the entire deferred amount, it shall file a
formal application for this.
The foregoing should not in any way be construed as a
confirmation of MERALCO's generation costs incurred in
November 2013, which shall remain subject of the
confirmation and post-verification proceedings in
accordance with the applicable ERC resolution on the
matter.
The ERC's action on MERALCO's request for clearance for the
staggered implementation of its generation cost recovery alleviates
the impact of the huge increase in MERALCO retail rates. At the
same time, it provides timely and substantial recovery to MERALCO
to enable it to pay its suppliers and WESM.
G.R. Nos. 210245 and 210255
Page 68of71
As evidently stated in the letter, it does not amount to
confirming MERALCO's generation charge incurred in November
2013. In the confirmation and post-verification proceedings that
MERALCO is required to file in accordance with the ERC's rules
(Annex "3"). It does not excuse MERALCO's generation suppliers
from any contract violation, which MERALCO may still pursue as a
remedy if indeed there is such a violation. It does not absolve
MERALCO from its duty to provide supply to its captive market in
the least cost manner. This can still be raised as an issue in the
confirmation and post-verification proceedings of MERALCO's
implemented generation charges.
More importantly, ERC's letter dated 09 December 2013 does
not affect the on-going investigation into the behaviour of certain
market participants in WESM.
Petitioners in the Bayan Muna Petition accuse the ERC to have
"reneged on its duty to protect public from anti-competitive
practices and market abuse." This is utterly baseless.
Relevantly, the ERC is not shirking from its duty under
Sections 43 and 45 of EPIRA and its action on MERALCO's request
does not render nugatory the investigation being undertaken on the
behaviour of the market participants as the investigation into the
alleged collusion and market power abuse is actually a work in
progress. Needless to state, the recovery of MERALCO's generation
cost is independent from the outcome of the investigation. For that
matter, the cost recovery by all DU s who sourced part of their
requirements from WESM in November and December 2013 and
who were similarly exposed to the high WESM pnces will still be
subject of circumspect evaluation.
G.R. Nos. 210245 and 210255
Page 69 of 71
Should the finding of the investigation yield that there was an
anti-competitive behaviour in the market committed by any of the
market participants, this may result to a downward price
adjustment in the WESM and in MERALCO's allowable generation
cost for November 2013. As a necessary consequence, the affected
generation companies will be made to refund MERALCO any excess
payments they may have received. Thus, in such eventuality,
MERALCO then will have to refund the same to its customers
through the AGRA mechanism during that month it receives
payment or is credited with the excess billing.
Besides, a market participant found liable may be meted fines
and penalties by ERC, regardless of what generation charge
MERALCO implements in its December 21013 billing.
Obviously, in issuing the assailed letter, the ERC has not in any
manner abdicated its duty to investigate any possible anti-
competitive behaviour in the market.
In view of the foregoing, as NASECORE's allegation that
delegation of authority was committed by ERC when it granted
clearance to MERALCO is devoid of legal and factual moorings,
its accusation of regulatory failure must necessarily fail.
PRAYER
WHEREFORE, premises considered, the ERC respectfully
prays of this Honorable Court to DISMISS the Bayan Muna and
NASECORE Petitions for lack of merit.
G.R. Nos. 210245 and 210255
Page 70of71
Other reliefs just and equitable under the premises are
likewise prayed for.
08 January 2014, Pasig City for Manila.
Public Respondent
16/F Pacific Center Bldg., San Miguel Avenue, Pasig
City, Metro Manila
Trunk Line. No.02-6895372
FRANCIS SA
Roll
IBP No. 951520, Mis. Or., 01/06/2014
MCLE Compliance No. IV - 0018441
7/03/2013
Email address: fscjuan@erc.gov.ph
DEBORA ANASTACIA T. LAYUGAN
Roll No. 41988
IBP No. 951519, Isabela, 01/06/2014
MCLE Compliance No. IV-0011052, 1/03/2013
Contact No.' 02-6895307
Email address: dtlayugan@erc.gov.ph
G.R. Nos. 210245 and 210255
Page 71of71
Roll
MCLE Compliance No. IV-0019776, 5/02/2013
Email address: glsantos@erc.gov.ph
1. SUPREME COURT
En Banc
Padre Faura, Manila
\
4. Atty. RONNIE B. RODILLAS ('x;fJ
Counsel for Petitioners in G.R. No. 210255 ~ t n ~ ~ d i
11
'-5
137 Libis Gochuico St., Circumferential Road 3, \- i-1y lf '. ll' PM
Caloocan City
6. Atty. RENE A.V. SAGUISAG
Makati City
8. OFFICE OF THE SOLICITOR GENERAL (OSG)
Legal Department,
1. SUPREME COURT
En Banc
Padre Faura, Manila
4. Atty. RONNIE B. RODILLAS
137 Libis Gochuico St., Circumferential Road 3,
Caloocan City
\ ',, (' ' I' " '\I ' ,. "' ' ' ( ' 6 Atty RENE A v SAGUISAG
L . , ,
Makati City
8. OFFICE OF THE SOLICITOR GENERAL (OSG)
Legal Department,
AFFIDAVIT OF COMPLIANCE
WITH A.M. No. 11-9-4-SC
I, GRACE V. LU-SANTOS, hereby declare that the document/s
and annexes thereon hereto submitted electronically in accordance
with the Efficient Use of Paper Rule are complete and true copies of
the documents and annexes filed with the Supreme Court.
TOS
At rney Ill
Energy Regulatory Commission
Roll No. 45912
5/02/2013
SUBSCRIBED AND SWORN TO before me on thiq

January 2014, affiant exhibiting her Integrated Bar of the Philippines
(IBP) Identification Card as competent evidence of identity. Details
thereof are as provided above.
Doc. No.:
Page
Book No.: ,2_
Series of 2014.

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Quezon City )
AFFIDAVIT OF SERVICE
(Compliance with Section 13 Rule 13 of the Revised rules of court, as amended)
I, RYAN B. RICAFRANCA, under oath, depose and state:
1. I am one of the messengerial staff at the ENERGY REGULATORY
COMMISSION, with office address at 18
1
h Floor Pacific Center Bldg., San
Miguel Ave., Pasig City.
2. I served copies of the COMMENT dated 00 January 2014 by personal
service on the following parties at their respective addresses and on the
dates indicated below:
I
Name
I
Address
Date of
I
Mode of Service
Service
Atty. Maria Cristina P. 45 K-7
1
h St., Brgy. West
r
1/j/2014
Yambot Kamias, Quezon City
Personal Service
Counsel for Petitioners
in G.R. No. 210245
Atty. Rene AV. 4045 Biagsan St., Brgy.
1/j/2014(-r
0
Saguisag Palanan, Makati City
Counsel for Petitioners
Personal Service
in G.R. No. 210255
.
Nelson A. Loyola
Suite 201 Carreon Bldg.,
Counsel for Petitioners 2746 Zenaida St., Brgy. 1/j/2014 Personal Service
n G.R. No. 210255 Poblacion, Makati City
Atty. Ronnie B. 137 Libis Gochuico St.,
1/i/2014 Service
Rodillas Circumferential Road 3,
Counsel for Petitioners Caloocan City
in G.R. No. 210255
Department of Energy Energy Center, Rizal
c/o Secretary Carlos Drive
1/f/2014 r Personal Service
Jericho L. Petilla Bonifacio Global City,
Taguig
Manila Electric Lopez Bldg., Ortigas
/ 1 /.{12014 Service
Company (MERALCO) Ave., Pasig City
The Solicitor General 134 Amorsolo St.,
I 11g2014 Service
Legaspi Village, Makati
City
Public Information
'Supreme Court, Padre
I
1/i?2014 Yi'
Personal Service
Office Faura, Manila
fl \ JI, n . . '
lJ . '' ' ; k
IN WITNESS WHEREOF, I have hereunto set my hand this _th day of
January 2014 in Quezon City, Metro Manila.
RYAN 1"::::!.ANCA
SUBSCRIBED AND SWORN TO before of January 2013
in Quezon City, Metro Manila, affiant exhibiting to me his ERC identification card
bearing No. C-08-04 issued by the Energy Regulatory Commission, Pasig City,
Metro Manila.
qq
Doc. No. __ ,
Page No. ?q
Book No. __g_;
Series of 2014.

NG i/,t\ Y f'UB\ I(
Decernb1.:r 2011\
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t'i.tr,APTfO

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