Manila Electric Company vs. Public Service Commission

A public utility cannot be subjected to a rate-reduction order based solely on an audit report without being afforded the opportunity to present evidence and to cross-examine the officers who prepared the report, even in administrative rate-fixing proceedings before the Public Service Commission. The constitutional guarantee of due process — notice and the opportunity to be heard — binds administrative agencies no less than courts.

Manila Electric Company (Meralco) is a public service utility whose rates are subject to regulation by the Public Service Commission. Dr. Pedro Gil, a consumer-intervenor, had earlier petitioned the Commission to audit Meralco's books, prompting the General Auditing Office (GAO) to conduct an examination of Meralco's accounts. The Commission's rate-fixing authority over electric utilities derives from the Public Service Act, which requires "proper notice and hearing" before rates are revised. The dispute arose within the framework of multiple rate-reduction applications filed by Meralco itself and the intervenors' insistence that Meralco's authorized rate of return of 12% on invested capital be reduced to 8%.

Manila Electric Company (Meralco) is a public utility providing electric service in Manila and surrounding areas, its rates subject to regulation by the Public Service Commission. On March 10, 1955, Meralco filed two applications with the Commission for revision and reduction of its rates — one for commercial and other non-residential customers (P.S.C. Case No. 85889) and another for its residential meter rate, Schedule RM-3 (P.S.C. Case No. 85890). These were approved on September 24, 1955. On August 24, 1955, Meralco filed another application for revision of its general power rate, Schedule GP-2 (P.S.C. Case No. 89293), provisionally approved on August 31, 1955. Prior to these, Meralco had filed seven other applications for rate revision and reduction.

On June 9, 1954, upon the petition of Dr. Pedro Gil, the Commission requested the Auditor General to audit and examine Meralco's books of accounts. The General Auditing Office (GAO) conducted the audit and submitted a report dated May 11, 1956, which was received by the Commission on May 28, 1956. On May 30, 1956, Commissioner Feliciano Ocampo reset the hearing of the three cases for June 22, 1956 "for the purpose of considering such further revision of applicant's rates as may be found reasonable." On that date, the parties appeared before Atty. Venancio L. de Peralta, Technical Assistant and Chief of the Finance and Rate Division, who was authorized to receive evidence. He announced that the hearing was "informal" and preliminary in nature, intended to hear remarks from the parties and define the issues. Dr. Gil submitted the cases on the GAO report and a letter requesting that Meralco be allowed "a rate of return of only 8% on its invested capital." The Solicitor General likewise submitted on the same report and Dr. Gil's letter. Meralco's counsel, Atty. Carrascoso, objected to the admission of the GAO report without the officers who prepared it being made available for cross-examination, and insisted that the cases be set for a formal hearing where Meralco could present its own evidence.

The hearing officer directed Meralco to file a memorandum specifying the items in the audit report to which it objected and the reasons for objection, and stated that "on the basis of this memoranda the Commission will make decision." Meralco's counsel objected to this procedure, arguing that the case could not be submitted on memoranda alone and that the respondent was entitled to present its evidence. On July 31, 1956, Meralco filed its answer to the GAO report, specifying its objections and praying that the cases be reset for hearing to enable the parties to present their proofs, with Meralco prepared to present evidence on the present value of its property, plant, and equipment for rate-base purposes. Dr. Gil filed his reply on August 23, 1956, and the Solicitor General followed on September 15, 1956, with a manifestation asking that the 12% rate of return be reduced to 8% as recommended by the GAO.

Without resetting the cases for hearing, without giving Meralco the opportunity to cross-examine the GAO officers who prepared the May 11, 1956 report, and without allowing Meralco to present evidence in support of its answer, the Commission rendered its decision on December 27, 1957, ordering Meralco to reduce its rates effective January 1, 1958 — residential and domestic customers by 16%, commercial customers by 8%, and industrial customers by 6%. Meralco's motion for reconsideration, filed January 14, 1958, was denied on March 3, 1958 by a 2-1 vote, with Commissioner Aspillera dissenting. Aspillera found that no hearing had been held, that Meralco was not afforded the right to present evidence, and that the decision was not promulgated "upon proper notice and hearing" as required by law. Two of the Commissioners justified the denial by stating that cross-examination and oral testimony "may just lead to more years of protracted and delayed hearings" and that the procedure followed was the "usual practice long adopted" by the Commission.

• Denial of Due Process: Petitioner alleged that the Commission rendered its decision without a previous hearing, without giving Meralco an opportunity to present evidence in support of its answer, and without allowing it to refute the GAO report or cross-examine the officers who prepared it.
• Rate-Base Valuation: Petitioner contended that the Commission erred in using the appraised value of pre-war property as the present fair value for rate-base purposes.
• Inclusion/Exclusion of Properties: Petitioner argued that the Commission improperly excluded certain properties from the rate base.
• Method of Rate-Base Computation: Petitioner challenged the use of the net average investment rate base instead of the year-end rate base.
• Depreciation Reserves: Petitioner objected to the GAO's readjustment of depreciation reserves.
• Operating Expenses and Working Capital: Petitioner argued that the Commission disallowed legitimate operating expenses in determining working capital.
• Materials and Supplies: Petitioner maintained that the value of materials and supplies in stock should have been considered in the rate-base determination.
• Contract with Philippine Power and Development Company: Petitioner argued that the Commission failed to give effect to its contract with the Philippine Power and Development Company.
• Obsolete Facts: Petitioner contended that the decision was based on obsolete allegations of fact, the test year being 1955 while the decision was to take effect in 1958, during which span material changes had occurred.

• Administrative vs. Judicial Nature: Respondents advanced the theory that PSC proceedings are administrative, not judicial, and that in the Commission's legislative or rule-making function (which encompasses rate-fixing) there is no constitutional right to any hearing whatsoever.
• Compliance with Notice and Hearing: Respondents argued that the "proper notice and hearing" requirement under Section 16, paragraph (c) of the Public Service Act was satisfied not through an "auditory hearing" but through the submission of pleadings, briefs, and memoranda — the "canned method."
• Relaxed Rules of Evidence: Respondents contended that the Commission is not bound by strict rules of evidence and may rely on its own independent surveys, and that the GAO report was admissible as part of the official records of the Commission without need of presenting the auditors for cross-examination.
• Nature of Objections: Respondents maintained that Meralco's objections to the GAO report were essentially legal and not factual, dealing merely with the application of rate-making and accounting principles.
• Futility of Oral Testimony: Respondents argued that no amount of oral testimony could have changed the figures and matters appearing in the GAO report and Meralco's answer.
• Legislative vs. Judicial Functions: Respondents distinguished between the Commission's judicial functions, which require "proper notice and hearing" under Section 16, and its legislative functions under Section 17, which do not.

• Due Process: Whether the Public Service Commission denied Meralco due process of law by rendering its rate-reduction decision without a formal hearing, without allowing Meralco to present evidence in support of its answer, and without permitting cross-examination of the GAO officers who prepared the audit report upon which the decision was based.
• Rate-Fixing as Legislative Function: Whether rate-fixing by the Public Service Commission, being a legislative function, dispenses with the constitutional requirement of notice and hearing.

• Due Process: Yes. Meralco was denied due process. The Commission rendered its decision without holding a formal hearing after the preliminary hearing of June 22, 1956, without giving Meralco the opportunity to present evidence in support of its answer, and without allowing cross-examination of the GAO officers who prepared the report upon which the decision was predicated.
• Rate-Fixing as Legislative Function: No. The character of rate-fixing as a legislative function does not dispense with the constitutional requirement of notice and hearing. Even administrative agencies exercising legislative functions must bow to the constitutional mandate that no person shall be deprived of life, liberty, or property without due process of law.

• Due Process: The record established that after the "preliminary hearing" of June 22, 1956, no other hearing was held; the cases were never reset for formal hearing; and Meralco was not given any opportunity to present evidence to rebut the GAO audit report or to support its answer, in which it specifically prayed that the cases be reset for hearing. Meralco's counsel repeatedly objected to the submission of the cases on memoranda alone and insisted on the right to present evidence and to cross-examine the GAO officers. The GAO report, being a document, could not be cross-examined or confronted; only the persons who prepared it could be, and Meralco was not allowed to do so. The Commission's own hearing officer acknowledged that "we cannot merely fix a rate at the mere whim of the Commission or mere wish of any party" and that "there must be evidence on which the Commission must fix a reasonable rate of return." Commissioner Aspillera, in his dissenting opinion before the Commission, found that the decision was not promulgated "upon proper notice and hearing" as required by law. The Court found this persuasive. The Court further noted that the test year was 1955 while the decision was to take effect in 1958, and that during that interval material changes had occurred — government restrictions, higher rate base, higher cost of production — which Meralco should have been allowed to prove. The Commission's justification that its procedure was the "usual practice long adopted" was rejected: "If the practice of the Commission alluded to is what is revealed in the record of this case, then it is not a good practice, nay, it is unlawful, because it breaches the guarantees of due process."

• Rate-Fixing as Legislative Function: The respondents' theory that rate-fixing is a legislative function and therefore requires no hearing was rejected. The Court recognized that even if the Commission is not bound by the rules of judicial proceedings, it must bow to the constitutional mandate of due process, which binds not only the government but each and every one of its branches and agencies. Due process guarantees notice and the opportunity to be heard to persons who would be affected by the order or act contemplated. The cardinal right of a party in both trials and administrative proceedings is to be heard, which includes the right to present one's own case, submit evidence in support thereof, and have such evidence considered by the tribunal. There should be no short cuts in the application of the principle that no one should be deprived of life, liberty, or property without due process of law.

• Due Process in Administrative Proceedings — The constitutional guarantee of due process applies to administrative proceedings no less than to judicial trials. It requires notice and the opportunity to be heard, which includes the right of the party affected to present its own case, submit evidence in support thereof, and have such evidence considered by the tribunal. Even administrative agencies not bound by the rules of judicial proceedings must comply with the constitutional mandate that no person shall be deprived of life, liberty, or property without due process of law. In this case, the Commission's decision was set aside because Meralco was never given a formal hearing, was never allowed to present evidence, and was never permitted to cross-examine the GAO officers whose report formed the sole basis of the rate-reduction order.

• Right to Cross-Examine in Administrative Rate-Fixing — A party whose rates are subject to reduction based on an audit report has the right to cross-examine the officers who prepared the report. The report itself cannot be cross-examined or confronted; only its preparers can be. Where the decision is predicated entirely on such a report and the affected party is denied the opportunity to confront and cross-examine its preparers, due process is violated.

• "Even if the Commission is not bound by the rules of judicial proceedings, it must how its head to the constitutional mandate that no person shall be deprived of right without due process of law" — This passage articulates the fundamental principle that administrative agencies, regardless of their functional classification, remain bound by constitutional due process guarantees.

• "Due process of law guarantees notice and opportunities to be heard to persons who would be affected by the order or act contemplated" — This is the Court's canonical formulation of the due process requirement in administrative proceedings, citing Halili vs. Public Service Commission.

• "There should be no short cuts in the disposition of the time-honored principle that no one should be deprived of his life, liberty and property, without due process of law." — This passage rejects the Commission's defense that its procedure was the "usual practice long adopted," establishing that long-standing administrative practice cannot override constitutional guarantees.

• "the cold fact remains, after a panoramic perusal of the record and circumstances surrounding these cases, that the petitioner had not been given its day in court." — This sentence crystallizes the Court's ultimate finding after reviewing the respondents' elaborate theories defending the Commission's procedure.

• Commissioner of Immigration vs. Fernandez, L-22696, May 29, 1964 — Cited for the proposition that the cardinal right of a party in trials and administrative proceedings is to be heard, including the right to present one's own case and submit evidence in support thereof and to have such evidence considered by the tribunal.
• Halili vs. Public Service Commission, 49 O.G. 825 — Cited for the formulation that due process guarantees notice and the opportunity to be heard to persons who would be affected by the order or act contemplated, drawing from 16 C.J.S. 1141, 1149.

• Section 16, paragraph (c), Public Service Act (Commonwealth Act No. 146) — Requires "proper notice and hearing" in the exercise of the Commission's judicial functions. The respondents invoked this provision to argue that the requirement was satisfied through submission of memoranda rather than an auditory hearing; the Court rejected this interpretation.
• Section 17, Public Service Act — Pertains to the Commission's legislative functions. Respondents argued that rate-fixing falls under this section and therefore does not require "proper notice and hearing." The Court did not accept this distinction as a basis for dispensing with due process.
• Constitutional Guarantee of Due Process — The constitutional mandate that no person shall be deprived of life, liberty, or property without due process of law was held to bind administrative agencies including the Public Service Commission, regardless of whether the function exercised is characterized as legislative, judicial, or administrative.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Regala, and Makalintal, JJ., concurred.