Meralco vs. Lualhati

A COA audit is not a prerequisite to the ERC's approval of rate increases or rate unbundling; the audit is merely advisory and neither final nor binding, and the ERC's technical rate-base findings are accorded finality if supported by substantial evidence.

MERALCO is an electric distribution utility whose rates are regulated by the ERC, the agency created under the Electric Power Industry Reform Act of 2001 (EPIRA) to succeed the Energy Regulatory Board. Respondents are consumer and cause-oriented groups that opposed MERALCO's rate applications. The statutory backdrop includes the COA's audit authority over public utilities under the Administrative Code of 1987 and the ERC's rate-fixing power under EPIRA.

On 14 April 2000, MERALCO filed before the former Energy Regulatory Board an "Application for Approval of Revision of Rate Schedules and Appraisal of Properties with Prayer for Provisional Authority" which would result in an increase in its basic charge by about thirty centavos per kilowatt hour (Php 0.30/kwh). The application was docketed as ERB Case No. 2000-57, later re-docketed as ERC Case No. 2001-646. Several individuals and organizations opposed the application: Mr. Cesar Escosa and Mr. Genaro Lualhati; the Lawyers Against Monopoly and Poverty; the Alliance of Consumers Against Monopolies (ACAM); the Retired Judges Association of the Philippines; and the National Association of Electricity Consumers for Reforms, Inc. (NASECORE). The ERB conducted twenty-five hearings on the merits, and MERALCO presented seven witnesses who were cross-examined by the oppositors.

While the application was pending, Republic Act No. 9136, the Electric Power Industry Reform Act of 2001 (EPIRA), took effect on 26 June 2001. It abolished the ERB and created the ERC to succeed it. Section 36 of EPIRA required all electric distribution utilities to file their application for the unbundling of their rates for the approval of the ERC. On 30 October 2001, pursuant to Section 36, the ERC issued an order requiring all electric distribution utilities to file their application for unbundled rates. MERALCO filed its application with the ERC for approval of its unbundled rates and appraisal of its properties, proposing an increase of P1.1228/kwh in its electricity rates. The application was docketed as ERC Case No. 2001-900.

Acting on MERALCO's unbundling application, the ERC issued an Order and a Notice of Public Hearing setting the case for initial hearing on 11 and 12 March 2002. MERALCO was directed to cause publication of the notice at its own expense twice for two successive weeks in two newspapers of nationwide circulation, with the last date of publication not later than two weeks before the scheduled initial hearing. Copies of the order and notice were furnished to the Office of the Solicitor General, the Commission on Audit, the Committees on Energy of both Houses of Congress, and the Offices of the Municipal/City Mayors within MERALCO's franchise area. Several oppositors objected to the application, including Mr. Genaro Lualhati, Bagong Alyansang Makabayan (BAYAN), Kilusang Mayo Uno (KMU), Gabriela, Kalipunan ng Damayang Mahihirap (KADAMAY), and BAYAN MUNA. On 17 June 2002, the ERC issued an Order consolidating ERC Case No. 2001-646 with ERC Case No. 2001-900.

After conducting several public hearings with the oppositors given opportunity to participate, the ERC rendered its consolidated Decision. The ERC approved MERALCO's unbundled schedule of rates, approved its net utility plant in service at sound value as of December 31, 2000 amounting to P61,649,407,957, and issued various directives on purchased power costs, the CERA, depreciation fund, missionary electrification, and reporting requirements. The oppositors and MERALCO filed separate motions for reconsideration. In an Order dated 30 May 2003, the ERC modified its decision by approving MERALCO's Summary Schedule of Unbundled Rates and Schedule of Unbundled Rates Per Customer Class, and by approving MERALCO's adjusted rate base as of December 31, 2000 from PhP74,475,910,302 to PhP76,838,084,457.

In arriving at its rate-fixing, the ERC considered MERALCO's data and the oppositors' objections. Among the contested rate-base items were Leased Property on Customer Premises, Construction Work in Progress, Plants for Future Use, Utility Plant Appraisal, and Two-month Cash Working Capital. The ERC disallowed MERALCO's utility plant with a sound value of PhP394,009,693 found to be not directly related to its business, retired, or not used or useful in service. It excluded plant held for future use, reduced the cash working capital allowance by PhP92,363,390 after excluding purchased power costs, excluded PhP3,891,125,127 from the rate base as Construction Work in Progress, and reduced recoverable Operation and Maintenance Expenses by PhP356,533,946 for undocumented expenditures, non-utility expenditures, and over-amortization of cost.

Respondents alleged that MERALCO's data in support of both applications, particularly its rate base, was unsubstantiated and misrepresented, and that its records and accounts were false, misleading, and doctored. The ERC's decision and order became the subject of respondents' petition for review before the CA.

• COA Audit as Prerequisite: MERALCO argued that a COA audit is not a prerequisite to an adjustment in rates; otherwise, COA would effectively take over a primary function and responsibility of rate-fixing vested in the ERC, and EPIRA has no provision requiring a COA audit prior to approval of any rate unbundling application.
• ERC's Discretion: The ERC maintained that Section 22, Chapter 4, Subtitle B, Title I, Book V of the Administrative Code of 1987 does not suggest that regulators tasked to fix rates are bound by COA audit results or barred from conducting their own audit; the provision merely extends COA's authority to audit non-government entities and allows penalties for refusal to submit to audit, and making COA audit mandatory and binding would flout the discretionary power granted to regulatory agencies.

• COA Audit as Verification: Respondents countered that the CA did not categorically declare a COA audit a prerequisite or procedural requirement in every rate unbundling application; the CA ordered it as a necessary means to verify MERALCO's documents, records, and accounts because respondents seriously alleged they were false, misleading, and doctored, and COA had not audited MERALCO contrary to the Administrative Code of 1987.

• COA Audit as Prerequisite: Whether a COA audit is a prerequisite and indispensable procedure before the ERC can approve rate increases and act on an unbundling application.
• ERC Rate-Fixing Findings: Whether the ERC's findings on MERALCO's rate base and operation and maintenance expenses are supported by substantial evidence and should be accorded respect and finality.
• Provisional Rate Approval: Whether the SC should approve MERALCO's rate increases provisionally pending a complete COA audit.

• COA Audit as Prerequisite: No. A COA audit is not a prerequisite; the GAO/COA audit is merely advisory and neither final nor binding, and the Administrative Code does not repeal Commonwealth Act No. 325 or bar the ERC from approving rates without prior COA audit.
• ERC Rate-Fixing Findings: Yes. The ERC's findings on the rate base and operation and maintenance expenses are supported by substantial evidence and fall within its technical expertise; the ERC adjusted MERALCO's proposals downward.
• Provisional Rate Approval: Yes. The SC approved the rate increases provisionally while directing the ERC to request a complete COA audit; the provisional increases remain subject to being reasonable and just until the ERC acts on the COA report.

• COA Audit as Prerequisite: The SC began with Municipality of Daet vs. Hidalgo Enterprises, Inc., where the Board of Power and Waterworks approved Hidalgo's rate increase without waiting for the GAO report despite requesting an audit. The SC ruled that the GAO audit was not a prerequisite in fixing rates; "A GAO valuation is merely advisory. It is neither final nor binding," and MERALCO vs. Public Service Commission upheld the Public Service Commission's fixing rates on MERALCO's own valuation rather than the GAO assessment. The CA said Daet was inapplicable because it predated the Administrative Code of 1987, but it did not explain how Section 22, Chapter 4, Subtitle B, Title I, Book V of the Administrative Code repealed Section 2 of Commonwealth Act No. 325. The SC compared the provisions and found nothing in the Administrative Code that bars the regulatory body from approving rates without prior COA audit or that repeals Commonwealth Act No. 325. The OSG's invocation of the 1987 Constitution failed to show any provision mandating a prior COA audit. Under the doctrine of stare decisis, the SC applied Daet. EPIRA also has no provision requiring a COA audit before approval of a rate unbundling application.
• ERC Rate-Fixing Findings: The CA merely echoed respondents' allegations that MERALCO's data on its rate base was unsubstantiated and misrepresented, including Leased Property on Customer Premises, Construction Work in Progress, Plants for Future Use, Utility Plant Appraisal, and Two-month Cash Working Capital. The ERC considered MERALCO's data and the objections and adjusted the rate base downward: it disallowed utility plant with a sound value of PhP394,009,693; excluded plant held for future use; reduced cash working capital by PhP92,363,390; excluded PhP3,891,125,127 of Construction Work in Progress; and reduced Operation and Maintenance Expenses by PhP356,533,946. MERALCO did not get the higher rate it prayed for. The established rule is that findings of administrative or regulatory agencies on matters within their technical expertise are generally accorded respect and finality if supported by substantial evidence; rate-fixing calls for technical examination and specialized review which courts are ill-equipped to enter, so the matter is primarily entrusted to the administrative or regulating authority. The SC found no reversible error in the ERC's decision and order.
• Provisional Rate Approval: The SC recognized that its ruling had far-reaching effects and was of utmost significance to the public, especially the poor, who face deeper financial distress once electricity rate increases are passed on to them. Better judgment called for tempering the rigidity of the decision. Although affirming the ERC's approval of rate increases, the SC did not close its eyes to social justice and the principle that "He who has less in life should have more in law." It approved the rate increases provisionally, with MERALCO to impose provisional rate increases while directing the ERC to seek COA's assistance in conducting a complete audit of MERALCO's books, records, and accounts to ensure the increases are reasonable and justified. The provisional increases remain subject to being reasonable and just until the ERC acts on the COA report.

• COA Audit Is Not a Prerequisite to Rate-Fixing — A COA/GAO audit of a public utility's books is not mandatory or a condition sine qua non before a regulatory agency can fix rates; the audit is merely advisory and neither final nor binding. The SC applied this by upholding the ERC's approval of MERALCO's rate increases and unbundling without a prior COA audit.
• Stare Decisis — Follow past precedents and do not disturb what has been settled. The SC applied Municipality of Daet despite the CA's claim that it predated the Administrative Code, because the CA did not show that the later law repealed Commonwealth Act No. 325.
• Finality of Administrative Findings on Technical Matters — Findings of administrative or regulatory agencies on matters within their technical expertise are generally accorded not only respect but finality if supported by substantial evidence. The SC upheld the ERC's downward adjustments to MERALCO's rate base and operation and maintenance expenses.
• Rate-Fixing Is Primarily Entrusted to the Regulatory Authority — Rate-fixing calls for a technical examination and specialized review of specific details which courts are ill-equipped to enter; such matters are primarily entrusted to the administrative or regulating authority. The SC deferred to the ERC's technical evaluation.
• Social Justice in Rate-Fixing — Concern for the poor is recognized as a public duty, and the protection of marginalized members of society is pursued by the SC. The SC tempered its affirmance by approving the rate increases only provisionally and directing a complete COA audit.

• "A GAO valuation is merely advisory. It is neither final nor binding, as illustrated in MERALCO v. Public Service Commission, where this Court upheld the decision of the Public Service Commission to fix rates on the basis of Meralco’s own valuation of its properties, rather than on the assessment made by the GAO." — The SC quotes Municipality of Daet to establish that a COA/GAO audit is not mandatory in rate-fixing.
• "there is nothing in the cited provision of the Administrative Code which indicates that it bars the regulatory body from approving rates without prior COA audit, neither does it give a hint that it effectively repeals the pertinent provision of Commonwealth Act No. 325." — The SC rejects the CA's holding that the Administrative Code mandates a prior COA audit.
• "The established rule in this jurisdiction is that findings of administrative or regulatory agencies on matters within their technical area of expertise are generally accorded not only respect but finality if such findings are supported by substantial evidence." — The SC uses this rule to uphold the ERC's rate-base and operation-and-maintenance findings.
• "Although affirming the decision and the order of the ERC approving the rate increases for electricity, this Court is not closing its eyes to the fundamental principle of social justice so emphatically expressed by the late President Magsaysay in his statement: "He who has less in life should have more in law."" — The SC explains why it approves the rate increases provisionally and orders a COA audit.

• Municipality of Daet vs. Hidalgo Enterprises, Inc., 138 SCRA 265 — Controlling precedent, followed; held that a GAO audit is not a prerequisite to rate-fixing and that a GAO valuation is merely advisory.
• Commissioner of Internal Revenue vs. Trustworthy Pawnshop, Inc., G.R. No. 149834, 2 May 2006, 488 SCRA 538 — Cited for the doctrine of stare decisis.
• Radio Communications of the Philippines vs. NTC, 184 SCRA 517 — Cited for the rule that findings of administrative or regulatory agencies on technical matters are accorded respect and finality if supported by substantial evidence.
• Republic of the Philippines vs. Medina, 41 SCRA 643 — Cited for the rule that rate-fixing calls for technical examination and specialized review primarily entrusted to the administrative or regulating authority.

• Section 36, Republic Act No. 9136 (EPIRA) — Required all electric distribution utilities to file applications for unbundling of rates for ERC approval; MERALCO filed ERC Case No. 2001-900 pursuant to it. The SC noted that EPIRA has no provision requiring a COA audit prior to approval of a rate unbundling application.
• Section 22, Chapter 4, Subtitle B, Title I, Book V, Administrative Code of 1987 — Provides that COA shall examine and audit the books, records, and accounts of public utilities in connection with fixing rates or proceedings of regulatory agencies for franchise tax purposes. The CA relied on it; the SC held it does not bar the ERC from approving rates without prior COA audit or repeal Commonwealth Act No. 325.
• Section 2, Commonwealth Act No. 325 — Provides that in rate proceedings the Auditor General shall assign auditors to assist the Public Service Commission and furnish financial data. The SC held it does not make a GAO audit mandatory or obligatory; the audit is merely advisory.
• Rule 45, Rules of Court — The consolidated Petitions for Review filed by MERALCO and the ERC were brought under Rule 45.