Manila Electric Company vs. Public Service Commission

A public utility is entitled to earn a fair rate of return on the present or market value of its property actually devoted to public service, and the rate of return permissible depends upon existing conditions in the locality. The 12% rate of return, consistently adopted in Philippine jurisprudence for public utilities, was upheld as fair and reasonable under prevailing conditions, particularly the higher interest rates in the Philippines compared to the United States.

MERALCO is a domestic corporation operating electric light, heat, and power systems in the City of Manila and several cities and municipalities in Luzon. The case involves rate regulation under the Public Service Act (Commonwealth Act No. 146), which governs the PSC's authority to fix rates for public utilities. The proceedings began with MERALCO's voluntary rate reductions in 1955, followed by a PSC decision in 1957 directing further reductions, which was set aside by the Supreme Court in 1964 and remanded for further proceedings. The present controversy arose when MERALCO sought to withdraw its earlier rate reduction petitions and instead filed a new application for rate increases to finance an expansion program requiring foreign capital.

MERALCO is a domestic corporation operating electric light, heat, and power systems in the City of Manila and several cities and municipalities in Luzon. On March 10, 1955, it filed two applications with the Public Service Commission for reduction of rates for non-residential/commercial customers (PSC Case No. 85889) and residential customers (PSC Case No. 85890), both granted on September 24, 1955. On August 24, 1955, it filed a third application for reduction of general power rates (PSC Case No. 89893), provisionally approved on August 31, 1955.

Prior thereto, on June 9, 1954, Dr. Pedro Gil had applied for examination of MERALCO's books, which was undertaken by the General Auditing Office in May 1956. After the GAO submitted its report, the three cases were set for hearing on June 22, 1956, where an "informal hearing" was held. Dr. Gil submitted the cases relying on the GAO report and his letter suggesting an 8% return on invested capital. On December 27, 1957, the PSC rendered a decision directing MERALCO to reduce its rates: 16% for residential and domestic customers, 8% for commercial customers, and 6% for industrial customers. On appeal, the Supreme Court set aside this decision on June 30, 1964, and remanded the cases for further proceedings.

On October 22, 1964, MERALCO filed a new petition (PSC Case No. 64-5706) seeking approval of a revised increased rate schedule, together with "Terms and Conditions of Service" and "Standard Rules and Regulations," for the purpose of providing a fair return on the present value of its property devoted to public service and attracting foreign capital for expansion. The petition was opposed by the Republic, the City of Manila, Ricardo Rosal, and others. After hearing, the PSC rendered its decision on March 15, 1965, disapproving MERALCO's proposed schedule but authorizing modified rate increases: 23% for residential service, 24.99% for general services, and 24.90% for general power, subject to the condition that a substantial portion of the increased revenues be devoted exclusively to the acquisition of equipment.

On July 16, 1965, two orders were registered. One, signed by five members of the PSC, rejected, reconsidered, and reduced the rate increase with respect to residential customers only, exempting flat rate customers, hospitals, and metered residential customers consuming 1 to 30 kwh from any increase, and providing gradual increases for consumption from 31 to 100 kwh. The other order, signed by Commissioner Medina and concurred in by Associate Commissioner Panganiban, favored granting the motions for reconsideration. The PSC fixed MERALCO's fair return at 12% of the present value of its assets devoted to public service, computed the utility plant net value at P415,427,353.00, and determined the allowable revenue at P138,696,157.00, representing a 23.71% increase over actual operating revenue of P111,850,743.00.

The PSC accepted the "trending method" of valuation employed by MERALCO's appraiser, Gilbert Associates, Inc., which repriced basic peso and dollar costs in accordance with increases in material and labor costs, rather than the GAO's method of ascertaining cost of production per kilowatt based on the cost of Rockwell Station Unit No. 8. The PSC found the GAO's method unsatisfactory because it substituted theoretical facilities not in service for actual facilities in service and gave insufficient recognition to the purpose of present value determinations. The PSC also noted that the reasonableness of the valuation was attested by data from the U.S. Federal Power Commission showing comparable costs per kilowatt.

• Timeliness of Appeals: MERALCO argued that the appeals of the Republic and the City of Manila were filed beyond the 15-day period prescribed in Section 36 of the Public Service Act (Commonwealth Act No. 146), which it maintained was controlling over the Rules of Court.
• Dismissal of Rosal's Appeal: MERALCO moved for dismissal of Ricardo Rosal's appeal, alleging that his motion for reconsideration was filed more than 15 days after he received notice of the decision, in violation of Section 34 of Commonwealth Act No. 146.
• Dismissal of Republic's Appeal: MERALCO moved for dismissal of the Republic's appeal on the ground that its brief was filed after the expiration of the reglementary period.
• Arbitrary Reduction: MERALCO alleged that the PSC acted arbitrarily in establishing exceptions and directing reduction in rates for residential customers as provided in the order of July 16, 1965.

• Appeal Period: The Republic and the City of Manila argued that they had 30 days to perfect their appeal under Rule 44, Section 1 of the Rules of Court, which should prevail over Section 36 of Commonwealth Act No. 146 because the Rule was subsequent in time to the statute.
• Rate of Return: The Republic, the City, and Ricardo Rosal argued that 12% was too high a rate of earning and should be lowered, citing that it was higher than rates prevailing in the United States.
• Rate Base: Ricardo Rosal urged that rates should be founded on the amount of investment made by MERALCO's stockholders or the "historical cost" formula, arguing that the market value theory may be acceptable under normal conditions but not under abnormal conditions when prices are high due to the exchange rate.
• Valuation: The Republic relied on the GAO report fixing the value of MERALCO's utility plants at P340,471,251.00, arguing that the PSC's assessment of present value was excessive.
• Jurisdiction: The City maintained that the appealed decision and order were null and void for lack of jurisdiction of the PSC to entertain MERALCO's application because the application included territories beyond the City for which MERALCO allegedly had no legislative franchise, and because MERALCO had no certificate of public convenience to operate in the City.

• Timeliness of Appeals: Whether the appeals of the Republic and the City of Manila were timely perfected within the 30-day period under Rule 44, Section 1 of the Rules of Court, or whether the 15-day period under Section 36 of Commonwealth Act No. 146 applied.
• Timeliness of Rosal's Motion for Reconsideration: Whether Ricardo Rosal's motion for reconsideration was filed within the 15-day reglementary period under Section 34 of Commonwealth Act No. 146.
• Propriety of Rate Increases: Whether rate increases were proper considering the circumstances obtaining in the case.
• Fair Rate of Return: What rate of earnings should be allowed to MERALCO.
• Rate Base: What shall be the basis for the computation of said earnings.
• Legality of Residential Rate Reduction: Whether the reduction of rates directed in the order of July 16, 1965 was legally justifiable.
• Jurisdiction of the PSC: Whether the PSC had jurisdiction to entertain MERALCO's application for revision of rates.

• Timeliness of Appeals: No. The 15-day period under Section 36 of Commonwealth Act No. 146 governs only when the motion for reconsideration has been denied; it has no application when the motion is granted, because a new decision results, which may be reviewed within 30 days from notice pursuant to both the first part of Section 36 and Rule 44, Section 1 of the Rules of Court.
• Timeliness of Rosal's Motion for Reconsideration: Yes. The 15-day period expired on April 9, 1965, which was Bataan Day, a holiday; April 10 was Saturday when PSC offices were closed; and April 11 was Sunday. The first working day was April 12, 1965, when Rosal filed his motion, making it timely.
• Propriety of Rate Increases: Yes. The exigencies of the present and future, viewed in light of recent developments and experience with another public utility analogously situated, imperatively required measures to offset wear and tear and to acquire additional equipment, requiring a financial outlay MERALCO was incapable of making with its present resources.
• Fair Rate of Return: 12%. The rate of return permissible depends upon existing conditions, and Philippine decisions have consistently adopted the 12% rate for public utilities; the GAO report itself conceded that 12% is the fair rate of return for MERALCO.
• Rate Base: The present or market value theory. The present value theory adopted by the PSC is in consonance with the practice consistently adhered to in this jurisdiction and upheld in an uninterrupted line of decisions of this Court.
• Legality of Residential Rate Reduction: Yes. The order appealed from did not give specific figures to estimate the amount of reduction, and MERALCO did not supply figures to show the modifications were materially inconsistent with the basic principles established in the original decision; findings of administrative organs in matters within their peculiar competence should be respected unless clearly devoid of factual or legal foundation.
• Jurisdiction of the PSC: Yes. The alleged lack of legislative franchise and absence of a certificate of public convenience might affect not the jurisdiction of the PSC but MERALCO's cause of action; moreover, pursuant to Act No. 484 and Republic Act No. 150, MERALCO may operate in the "City of Manila and its suburbs," and Republic Act No. 4159 extended its authority for 30 years.

• Timeliness of Appeals: The Court reasoned that Section 36 of Commonwealth Act No. 146 provides a 30-day period for appeals from PSC decisions, with a 15-day period only when a motion for reconsideration has been denied. When the motion is granted, a new decision results in contemplation of law, reviewable within 30 days from notice under both Section 36 and Rule 44, Section 1 of the Rules of Court. In these cases, the motions for reconsideration of the Republic and the City were in effect granted, although not to the full extent sought, as the order of July 16, 1965 explicitly declared that the average rate increase was "rejected, reconsidered and reduced." Since the appeals were taken within 30 days from notice of the July 16 order, they were timely.

• Timeliness of Rosal's Motion for Reconsideration: The Court computed the 15-day period from March 25, 1965, when Rosal received notice of the decision. The period expired on April 9, 1965, which was Bataan Day, a holiday. April 10 was Saturday, when PSC offices were closed, and April 11 was Sunday. The first working day following the expiration was April 12, 1965, when Rosal filed his motion. The motion was therefore filed within the reglementary period, and his appeal was seasonably perfected.

• Propriety of Rate Increases: The Court quoted the PSC's finding that MERALCO's service had been adequate and satisfactory but would deteriorate without proper precautions due to wear and tear, population increase, and growing needs of industry and commerce. The Court noted that the financial outlay required for expansion was of such magnitude that MERALCO was incapable of making it with its present resources. While MERALCO could raise funds through increased capitalization or loans, the first alternative risked foreign control of an industry vital to the economy and national security. The only alternative left, consistently with the policy of nationalism, was to secure foreign loans, which required revenues sufficient to justify the expectation that MERALCO could meet its obligations. The Court also noted that MERALCO had never increased its rates before and had even volunteered to reduce them.

• Fair Rate of Return: The Court held that the rate of return permissible depends upon existing conditions. Philippine decisions have consistently adopted the 12% rate for public utilities, and the GAO report conceded that 12% is the fair rate of return for MERALCO. The Court declined to inquire into the wisdom of such jurisprudence, noting that prevailing rates of interest on loans in the Philippines are generally higher than those in the United States. If returns were fixed at a lower rate, nobody would lend funds to MERALCO, as capitalists would prefer to lend to other public utilities better positioned to pay higher interest rates. The interest due to lenders would have to be paid out of MERALCO's net earnings, requiring earnings somewhat higher than otherwise to warrant the borrower's ability to pay and still retain a margin sufficient to encourage investment.

• Rate Base: The Court upheld the present or market value theory as consistent with the practice consistently adhered to in this jurisdiction and upheld in an uninterrupted line of decisions. The Court rejected Rosal's argument that the market value theory may be acceptable under normal conditions but not under abnormal conditions, noting that the official rate of exchange of two pesos to a dollar was not the true rate in actual practice, and there was nothing to indicate that the prevailing rate would vary materially in the foreseeable future. The Court also addressed the argument that the present value theory was rejected in Federal Power Commission vs. Hope Natural Gas Co., clarifying that the U.S. Supreme Court did not reject the present value theory but merely refused to interfere with the Commission's application of the prudent investment theory, as the Commission was not bound to use any single formula.

• Legality of Residential Rate Reduction: The Court noted that the order of July 16, 1965 did not give specific figures to estimate the amount of reduction in revenues and returns, and MERALCO did not supply figures to show the modifications were materially inconsistent with the basic principles established in the original decision. Since findings of administrative organs in matters within their peculiar competence should be respected unless clearly devoid of factual or legal foundation, and no such flaw was shown, the Court deemed it improper to review the modifications. The Court added that if the modifications should prove unjust and unfair after being in operation long enough to ascertain their effects, the PSC could grant appropriate relief.

• Jurisdiction of the PSC: The Court held that the alleged lack of legislative franchise to operate in areas outside the City and the absence of a certificate of public convenience to operate in the City proper might affect not the jurisdiction of the PSC but MERALCO's cause of action. Pursuant to Act No. 484 of the Philippine Commission and Republic Act No. 150, MERALCO may operate an electric system in the "City of Manila and its suburbs." Although a PSC order in Case No. 23044 held that "suburbs" does not include territory outside the perimeter of the City, that order was set aside by the Supreme Court in G.R. No. L-21435. Moreover, Republic Act No. 4159 extended for 30 years the time within which MERALCO may operate "throughout the City of Manila and its suburbs," with its purpose being to extend MERALCO's authority to operate throughout the City and the cities and municipalities now being serviced by it. The Court also cited A. L. Ammen Transportation Co. vs. Golingco, holding that a certificate of public convenience is a prerequisite to operation of a public utility unless it was in operation when Act No. 2307 went into effect; MERALCO was then in operation, its franchise having been granted by Act No. 484.

• Present or Market Value Theory — The rate base for determining a public utility's allowable earnings is the present or market value of its property actually devoted to public service, not the historical cost of investment. The Court applied this doctrine in upholding the PSC's computation of MERALCO's rate base, rejecting the "historical cost" formula urged by Rosal, and clarifying that the U.S. Supreme Court in Federal Power Commission vs. Hope Natural Gas Co. did not reject this theory but merely refused to interfere with the Commission's choice of formula.

• Fair Rate of Return — The rate of return permissible for a public utility depends upon existing conditions in the locality, including prevailing interest rates, the character of the business, and the necessity of attracting capital. The Court applied this doctrine in upholding the 12% rate of return, noting that Philippine jurisprudence has consistently adopted this rate for public utilities and that lower rates would not attract the foreign capital needed for expansion.

• Administrative Findings — Findings of and determinations by administrative organs, in matters within their peculiar competence, should be respected by courts of justice unless clearly devoid of factual or legal foundation. The Court applied this doctrine in declining to review the PSC's modifications to residential rates, noting that no such flaw had been shown.

• "In short, the exigencies of the present and the future — viewed in the light of recent developments and the experience gained in connection with the operation of another public utility analogously situated — imperatively require, not only that measures be taken to offset the effects of the wear and tear upon MERALCO's lines, equipment and other facilities (already strained by the needs of the unprecedented increase of population and the rapid expansion of trade, commerce and industry in the City of Manila and its environs, and the impact of modern electric appliances) and to avoid a deterioration of the adequate and satisfactory services it has heretofore rendered, but also, that additional and improved equipment and facilities be acquired, installed and used to meet the ever growing demands for electricity in all field of endeavor." — This passage articulates the Court's rationale for upholding the rate increases, grounding them in the necessity of maintaining adequate public service and meeting future demands.

• "It is well settled, however, that the rate of return permissible depends upon existing conditions. In the Philippines, our decisions have consistently adopted the 12% rate for public utilities and the PSC has done no more than adhere to the established jurisprudence thereon." — This passage states the controlling doctrine on fair rate of return, establishing that the permissible rate depends on local conditions and that 12% is the established rate in Philippine jurisprudence.

• "The present or market value theory adopted by the PSC is in consonance with the practice consistently adhered to in this jurisdiction and upheld in an uninterrupted line of decisions of this Court." — This passage affirms the present value theory as the established rate base doctrine in Philippine public utility regulation.

• "Since the findings of and determinations by administrative organs, in matters which are within their peculiar competence, should be respected by courts of justice, unless clearly devoid of factual or legal foundation, and no such flaw has been shown in the cases at bar, we deem it improper, at this time, to review the modifications thus effected by said order." — This passage articulates the doctrine of respect for administrative findings, which the Court applied in declining to disturb the PSC's residential rate modifications.

• Federal Power Commission vs. Hope Natural Gas Co., 320 U.S. 591 — Distinguished. The Court clarified that this U.S. Supreme Court case did not reject the present or fair market value theory but merely refused to interfere with the Commission's application of the prudent investment theory, as the Commission was not bound to use any single formula and it is the result reached, not the method employed, that is controlling.

• A. L. Ammen Transportation Co. vs. Golingco, 43 Phil. 286 — Followed. Cited for the proposition that a certificate of public convenience issued by the PSC is a prerequisite to operation of a public utility in the Philippines, unless the utility was in operation when Act No. 2307 went into effect; MERALCO was then in operation, its franchise having been granted by Act No. 484.

• Inchausti vs. Public Utility Commission, 42 Phil. 621 — Followed. Cited in the uninterrupted line of decisions upholding the present or market value theory as the basis for determining rates.

• Metropolitan Water District vs. PSC, 58 Phil. 397 — Followed. Cited in the line of decisions upholding the present value theory.

• Municipality of Pagsanjan vs. Cacho, G.R. No. 36544 (1933) — Followed. Cited in the line of decisions upholding the present value theory.

• Philippine Railway vs. Asturias, 72 Phil. 454 — Followed. Cited in the line of decisions upholding the present value theory.

• Halili vs. Ice & Cold Storage, 77 Phil. 823 — Followed. Cited in the line of decisions upholding the present value theory.

• City of Manila vs. Public Service Commission, 58 Phil. 517 — Followed. Cited for the proposition that MERALCO's franchise was carried into effect by Ordinance No. 44 of the City in 1903.

• Section 36, Commonwealth Act No. 146 (Public Service Act) — The Court interpreted this provision to mean that the 15-day appeal period applies only when a motion for reconsideration has been denied; when the motion is granted, a new decision results, reviewable within 30 days from notice.

• Section 34, Commonwealth Act No. 146 (Public Service Act) — The Court applied this provision in determining the timeliness of Rosal's motion for reconsideration, computing the 15-day period with allowance for holidays and weekends.

• Rule 44, Section 1, Rules of Court — The Court held that this provision, which specifically refers to appeals from final awards, orders, or decisions of the Public Service Commission, provides a 30-day period for appeal, consistent with the first part of Section 36 of Commonwealth Act No. 146.

• Act No. 484, Philippine Commission — Cited as the source of MERALCO's legislative franchise to operate an electric system in the "City of Manila and its suburbs," approved and effective on October 20, 1902.

• Republic Act No. 150 — Cited as extending MERALCO's authority to operate in the "City of Manila and its suburbs," approved on June 14, 1947.

• Republic Act No. 4159 — Cited as extending for 30 years the time within which MERALCO may operate "throughout the City of Manila and its suburbs," with the purpose of extending MERALCO's authority to operate throughout the City and the cities and municipalities now being serviced by it.

• Act No. 2307 — Cited in connection with the holding in A. L. Ammen Transportation Co. vs. Golingco that a certificate of public convenience is a prerequisite to operation of a public utility unless it was in operation when this law went into effect on December 19, 1913.

Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, and Castro, JJ., concurred. Barrera, J., was on leave.